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Allan Barber thinks the delays in announcing an industry-wide restructuring means the entrenched difficulties are not being overcome

Allan Barber thinks the delays in announcing an industry-wide restructuring means the entrenched difficulties are not being overcome

By Allan Barber

If there was ever a compelling reason for the meat companies to sort out the problems of procurement competition and excess capacity, the debt levels on the balance sheets of the big three at the end of last season provide one.

Between them they stacked up combined current and non-current borrowings of $710 million, 45% of these on Silver Fern Farms’ books, 28% on Alliance’s and 27% on ANZCO’s.

No wonder they can’t afford another loss-making year like 2011/12 which makes this year so important for getting back into as healthy a condition as possible.

The forecast livestock volumes, especially sheep and lambs, for the next four years place a great deal of pressure on the companies to find a solution urgently before procurement competition breaks out yet again.

MPI’s Situation and Outlook Report which came out in June predicts a gradual recovery in values, but livestock numbers and export tonnages are virtually static or declining, because of the effects of the drought, herd and flock rebuilding and the impact of dairy on land use.

Although hopes for a successful conclusion to the discussions between the companies are high, solid facts are hard to come by.

Efforts to find out what’s going on and when some positive news might be forthcoming have so far been unsuccessful.

The longer it takes, the more suspicious I become that the talks must have gone off the rails without it being possible to reach an agreement.

There can only be three topics for discussion: procurement, capacity and international markets, and the most pressing of these are the first two which are inextricably linked.

Rumour suggests the concept of tradable slaughter rights (TSR) is under serious consideration as a solution to the excess capacity issue, but there may be some disagreement about the basis of allocation of the rights or the level of competition this will provide.

Another problem may be a split down a line between the large multi plant companies which favour TSR and the smaller operators that see less justification for them.

However getting back to the balance sheets and quantum of debt carried by SFF, Alliance and ANZCO, the position is unlikely to have improved much since last September.

Keith Cooper has been quoted as saying this season’s result is ‘neutral’ which could be taken to mean roughly breakeven and tends to confirm the not much improvement scenario. Alternatively ‘neutral’ could mean similar to last year’s $42 million pre tax loss; if that is the case, the pressure to do something becomes even more compelling.

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Even if the industry’s position is a bit better than that, it won’t be enough to strengthen those balance sheets markedly before the procurement battle starts up again.

The single and two plant operators are generally in better financial shape than the big boys, so may be better able to weather the storm.

Under Talley’s ownership AFFCO no longer has public scrutiny of its performance and also, more importantly, has removed itself from the risk of under capitalisation.

The best solution to the meat industry’s problems is a combination of sufficient capacity to cope with a normal seasonal range, satisfactory levels of capital and contractual supply arrangements based on fair and transparent livestock prices.

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Here are some links for updated prices for
lamb
beef
deer
wool

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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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6 Comments

If they fail, let them go broke, like the rest of us would, someone will pick up the pieces and the debt will have been extinguished. Thats fine with me.
 It is an industry that has been plagued with debt for as long as I remember.

There can only be three topics for discussion: procurement, capacity and international markets, and the most pressing of these are the first two which are inextricably linked.
 
It would certainly be ugly if international markets was the most pressing of those three.

Yep, too much capacity, not enough innovation and yesterday thinking. Not to mention over-size ego's! Death by a thousand cuts. If the worlds biggest supermarkets were smart (and they  are), they would be working out a way to sure up supply and control processing, they have the customer and they understand the customer.
Lamb needs a Fonterra model or it will die which would be a disaster given what a great product it is! 

Although your sentiment is true, can you be more specific when you suggest lamb needs a Fonterra model? It is something that is often suggested, but a Fonterra model is alot more than just scale and control of procurement and marketing. How to add value? Reduce input costs, which includes the cost of procuring lamb.
 

I seem to recall comments that as we had to pay international prices for milk products setting cheeses etc over $10 a kilo was perfectly acceptable.  Dunno about others but I know buy a lot less cheese etc...even though $8 a kilo seems more normal.  So sure lets make the meat "system" a monopoly and charge accordingly...and lets see where sales go.
regards

I don't think that major meat industry decisions, have been made without a banker in the room for a long time. merging processing capacity gives the industry a guaranteed return which the banks would be much happier with. All they have to do is say, processing cost per head + %20, thankyou very much.  Great plan if your are owed money by meat companies.
  Fonterra is moving away from being a cooperative, they must see advantages for shareholders or someone in the food chain.