Meat company results impressive, but hard to maintain

The 2008 season’s meat company profits all follow a consistent pattern, with AFFCO’s result released last Thursday confirming what Silver Fern Farms (SFF) and Alliance had already shown. It was a year for the processors to recover from the trauma of 2007 and reintroduce some strength to their respective balance sheets.

 

But as with all annual results, the period they cover has passed and, apart from the beneficial effects of higher levels of equity, what happened last year is already ancient history. The world has changed beyond recognition in the two months since the end of last season. The only market that retains recognisable shape is the European pre-Christmas chilled lamb trade, but nobody knows how well the retailers’ business will hold up.

 

The three meat companies that publish annual results have all delivered profits that exceed expectations, while past history suggests ANZCO will also have achieved a much improved result on the previous year, when it made an after tax profit of $5.1 million, compared with Alliance’s $3.1 m profit, AFFCO’s $1.8 m loss and SFF’s loss of $79.3 m . What these figures show very clearly is the extreme volatility of meat industry profitability.

 

ANZCO doesn’t publish its annual result and is not required to submit accounts to the Companies Office until the end of March, but over the five years from 2001-2005 ANZCO posted the highest return of the big four. 2006 was the only year since the millennium when ANZCO failed to hold the top spot which it regained in 2007. ANZCO’s performance suggests, as a private company, it has been able to get on without undue interference or intervention from major shareholders or co-operative members, so it will be interesting to see how much advantage it was able to take in a good year and, more important, how it copes with the inevitably tougher season we’re in right now.

 

The most reassuring aspect of the 2008 results is the strength of the companies’ respective equity ratios – AFFCO 71.6%, Alliance 69% and SFF 40% – which means shareholders in the two co-operatives can breathe more easily, as can all suppliers who remember the demise of Weddel, Fortex and Hawkes Bay Farmers Co-op. Although shareholders in Alliance and SFF received increased pool payments this year, farmers are still expecting their meat companies to deliver them further substantial improvement. In the present state of global uncertainty, this may be hard to achieve.

 

Much of the focus has gone on getting more money for lambs which should be possible, but there are several uncertainties out there, especially the level of demand for a premium product from recession hit markets. Then there’s the weather outlook which looks very dry in some regions – too many light lambs in December and January must be frozen and will inevitably depress the price. The market returns for lamb after the Christmas and Easter shipments have finished, which is just when our peak season’s kill hits the plants, are unlikely to satisfy suppliers.

 

The outlook for beef is even more uncertain with Asia, where most of our prime beef goes, suffering the same as the rest of the world. It’s very difficult for exporters to get a bid at the moment because buyers can’t fund their normal inventories and there are instances of contracts being renegotiated at lower prices. So what is better – to accept a lower price or risk not selling anything at all?

 

It’s pretty obvious now there won’t be any more mad rush to dairy conversions in the short term, because of uncertainty of price and payout, and sheep farmers who sold the flock and took up dairy grazing will be struggling to earn as much as last season. It won’t be easy to buy back into sheep either, with several million less ewe hoggets and lambs around. So surprise, surprise, there aren’t any magic answers!

 

If prices to farmers don’t meet expectations this year, I’m sure the meat processors will get the blame as usual, but they will be doing their best in tough conditions and they will be operating with greater financial strength. Suppliers must get used to the fact it’s not going to get any easier, but at least the dollar has finally gone the right way.

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