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Allan Barber respects the 'glass half full' approach of meat industry execs, but looks at recent customer demand trends and wonders how full it will be by season end. Your view?

Rural News
Allan Barber respects the 'glass half full' approach of meat industry execs, but looks at recent customer demand trends and wonders how full it will be by season end. Your view?

By Allan Barber

After my column last week about meat industry debt levels, Keith Cooper, CEO of Silver Fern Farms, took me to task for incorrectly reporting the situation with Silver Fern Farms’ debt facility.

I stated that these expired in September 2012 and therefore the company was operating on a temporary extension.

The correct position was that the debt facility was originally negotiated for two years from September 2010 and consequently due to expire in September 2012. This remained the position at balance date in September 2011.

However in the 2012 annual report, the facility was stated as expiring on 31 December 2012. Clearly the company had arranged a three month extension at some point before the original two year facility expired and this was not a temporary facility, as I implied.

Nevertheless it was no more than a three month extension, while the next longer term arrangement was being negotiated. I apologise for any incorrect interpretation, but still maintain the company’s current debt level at balance date was higher than could be considered comfortable.

However in an interview with Jamie Mackay on the Farming Show last week, when asked to comment on the industry’s debt level, Cooper gave his opinion that the debt was a good thing.

Because it was tied up in inventories, it would ensure the industry acted responsibly.

This is almost exactly what I wrote last week, although I saw the discipline on the companies as a necessity, not a virtue.

In his radio interview he stated after record prices last year, meat companies are reining things in. "It's a damn good thing we do have stock in store and we do have high debt because that means meat companies are acting responsibly, and are feeding the product to market to create stability of price. I'm quite happy that us and other companies have debt because that means they've got stock in store and that means we're managing markets well."

I must give Keith credit for being unreservedly a ‘glass half full’ kind of guy which you have to be to survive in what I believe is New Zealand’s toughest industry.

He promises farmers that things will improve.

"We are living in volatile times. There will be volatility, but through the volatility we will see a steady increase in the price we will receive from offshore," and he expects meat companies will pay farmers around 90 dollars per lamb this year.

I’m not sure the glass is quite as half full as Keith Cooper suggests, especially in the sheep meat market.

Although lamb leg prices in the UK are holding fairly well, especially for chilled product, prices for middle cuts, like racks, loins and tenderloins in North America and Europe are under pressure.

The price of loins and tenderloins have dropped by as much as 30% in the last couple of months, while there are fears of another collapse in lamb rack prices because of competition from low priced Australian product.

As a result importers are not placing orders for New Zealand lamb, because they remember the last time prices collapsed.

The Middle East has gone quiet on lamb shoulders because of cheaper Australian product, although China is still firm.

Here it appears New Zealand exporters benefit from less Australian competition with fewer China licensed plants in Australia.

All this explains why the New Zealand consumer is able to buy plenty of well priced lamb available on the domestic market.

But this won’t provide more than a minimal contribution to managing the existing inventory levels and it certainly won’t cope with next year’s peak production.

The industry will be keeping its fingers and toes crossed for an early economic uplift in our main markets, UK, Europe and North America, because otherwise the glass won’t have much in it at all.

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Current lamb prices from all processors and saleyards are here »

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or read his blog here »

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8 Comments

I cannot recall ever having GOOD DEBT.

It only became GOOD DEBT after it was paid off and then technically i had no DEBT.

I am confused i must be drinking too much of that outstanding Hollandia brew.

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Yes it must be that rubbish beer you are drinking. Learn to make your own :-) http://www.howtobrew.com/sitemap.html

http://www.forum.realbeer.co.nz/forum

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Hi Ngakonui Gold

I agree, but I'm only quoting what Keith said! The good thing appears to be that it hamstrings you completely, so you can't spray money around to buy more livestock which then gets turned into inventory.

Not much else that's good about it.

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Alan, MPI's updated Situation and Outlook supports your views regards lamb:

 

LAMB
New Zealand lamb export revenue is expected to decrease 17 percent to $1.91 billion in the year ending 30 June 2013. This is mainly due to lower export prices compared with the previous year.

 

Weakening demand in the EU saw lamb export prices in the September 2012 quarter fall 27 percent from their peak in the December 2011quarter. This resulted in a build-up of frozen lamb cuts in New Zealand and overseas, which is now starting to clear with lower in-market prices.

 

China became New Zealand’s largest market for frozen lamb cuts during the six months to 30 June 2012 (accounting for 33,200 tonnes, or 31 percent of export volume). A high proportion of these were lower value cuts; the average price of lamb sold to China is about half that obtained in the EU.

 

 

Increased lamb exports from Australia and weak economic conditions in global lamb markets are expected to keep prices subdued over the next two years.

 

Favourable climatic conditions since autumn mating contributed to an estimated 1.6 million more lambs born in late winter to early spring 2012, compared with last year. Total sheep numbers are estimated to be up 1.7 percent to 31.7 million as at June 2012.
 

Having a lot of high cost, debt funded inverntory at the moment sounds like a very good way for a meat processor to make big losses.

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"I must give Keith credit for being unreservedly a ‘glass half full’ kind of guy which you have to be to survive in what I believe is New Zealand’s toughest industry."

 

FIRST question:

Was the glass full or empty to begin with?

I'm so sick of this stupid FLAWED quote being used to explain optimism/pessimism, positivity/negativity.

Half full? half empty? what was it to start with (the precursor)

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Ditto.

 

But I think you can be sure the glass is draining fast.

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"are feeding the product to market to create stability of price"

Translated into, 

a) NZ consumers are paying more than they should be.

b) demand is soft as consumers are hurting but we have screwed ourselves over too much debt...

Thats doesnt bode well.

I dont buy silver ferns as I consider it grossly over-priced, that will continue.

regards

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Well debt can be a great discipliner - many shareholders want to constrain management by ensuring they are loaded with debt to stop management running off and investing in stupid stuff...  

But in the context of the meat industry I'm no so sure...  seems that the industry is way too keen to overinvest in inventory and then watch the bottom fall out of the market - if they didn't have access to so much debt in the first place then they wouldn't ahve the problems they have today...

I see the large meat processors as basically unruly children.  Might be wrong but I don't see the discipline of debt as being of any use in controlling their excesses....

 

 

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