Alliance puts positive spin on disappointing result

It was a profit, but, as Alliance chairman Murray Taggart told me, “we don’t budget to make $8 million on turnover of $1.8 billion.” The just announced 2018 result compared with the previous year’s operating profit of $20.2 million, although after pool payments the 2017 profit was only 11% higher than the latest year.

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Unravelling the schedule gap between North and South Islands

Every year when livestock numbers pass their peak in the North Island, there is a constant stream of trucks carting stock across the Cook Strait to plants for slaughter. There are two obvious reasons for this – either there isn’t enough South Island capacity at the time or the cost of procurement plus transport is less than the price in the North Island.

 

These two explanations are two sides of the same coin, because there is no need for South Island processors to pay more than they have to when their plants are full. This is even more evident from the species with the largest price gap which is cull cows, possibly wider than it has ever been. However there is absolutely no point in paying dairy farmers over the odds for what is a fully depreciated asset they have to get rid of.

 

But the price gap isn’t restricted to cull cows, because the same applies at the moment to bulls and prime. Admittedly there aren’t very many of these species being slaughtered at this time in the South Island, but the current NZX Agrifax Farm Gate report shows a gap of 48 cpk on prime and 68 cpk on bull, $144 and $214 per head respectively at 300 kg.

 

So I decided to do some research into the variation between the two islands to find out if there was a more fundamental reason for the difference. All the companies spoken to were very willing to discuss the issue and provided plenty of logical explanations.

 

Alliance’s Livestock General Manager Murray Behrent reckoned the gap is almost entirely procurement driven, although he added the South Island pays lower levies than the North.

However there is plenty of evidence South Island farmers get lower rewards than their North Island counterparts, especially at certain times of the season.

 

There was general agreement from Silver Fern Farms, ANZCO and AFFCO on the importance of procurement competition in determining the main reason for the divergence between the two islands. But other factors mentioned include the seasonality of the South Island, a flatter kill profile in the North, relative plant operating and processing costs, differing union agreements and cartage costs, and a higher proportion of chilled production in the North Island.

 

Plants in the North have more ability to recover fixed overheads because of the kill profile which allows better utilisation of plant and employment of labour. Keith Cooper highlighted the respective scale and efficiency of Silver Fern Farms plants across the country: three times as many cattle processed in the North Island, but the same number of slaughter facilities, while two ovine slaughter plants process the same volume as four southern plants.

 

Conversely the shorter killing season in the South Island means higher labour costs and larger facilities capable of handling the peaks. Nor at this stage do sheepmeat operations in the South have the benefit of an extended bobby calf kill when lambs are not so readily available.

 

The lamb kill has changed markedly in recent years with both islands having a similar number of lambs to slaughter, compared with 20 years ago when the South Island had up to 50% more. Over the same period, but especially since the formation of Fonterra, the land use profile has changed dramatically to dairy, boosted by the increased dairy payout and rise in the amount of irrigation.

 

In spite of plant rationalisation, notably at Belfast and Mataura, carried out by both SFF and Alliance, they have found it a challenge to handle the change of processing configuration dictated by today’s land use. There is less opportunity to dedicate South Island plants to specific types of production and certain customers, while it is also harder to justify installation of machinery to save co-products which are an important source of revenue.

 

SFF operates on a regional basis within each island rather than on a North and South Island pricing structure, although the company continues to publish only two separate schedules which Cooper reckons are ‘pretty close to the mark.’

 

Another factor mentioned to me is the fact there is more contracting in the South Island, with the contract price generally being quite a lot better than spot prices. But North Island procurement prices are more volatile and are adjusted up or down faster than in the South.

 

The inevitable conclusion is South Island farmers suffer a price disadvantage because of a shorter season leading to the need to recover overheads over a shorter period and the resulting peak kills which cause backlogs at the very time farmers must get livestock slaughtered. They also suffer from being serviced by plants which are generally older than the North Island plants and which were originally built to handle a different mix of species. This must adversely affect the processing margin and procurement price.

 

Even taking all these factors into account, suppliers must question the justice of companies with operations in both islands paying more, in some cases substantially more, to their North Island suppliers. But judging by the reasons given to me, South Island procurement prices are unlikely to improve to the point where they match those across the Cook Strait. In that case raids by North Island processors are unlikely to stop any time soon.

Tradable slaughter rights idea useful but may not be the answer

The Tradable Slaughter Rights concept, raised by me several weeks ago and promoted last week by Mike Petersen, was first proposed by Pappas, Carter, Evans and Koop in 1985. But its purpose was specifically to solve the problem of an industry that consisted of a lot of weak competitors with little innovation or variation in killing charges. The report identified excess costs between farmgate and shipside of $100 million or 8%.

Meat industry lacks leadership according to Cooke

The National Meat Workers Union’s General Secretary Grahame Cooke stated last Monday the large loss published by Alliance Group would be the first of several for the 2012 year. His point is fairly accurate, confirmed by Silver Fern Farms’ loss announced on Tuesday.

Alliance posts $50.8 million loss for last season

Alliance posted its annual result on Friday which was every bit as bad as predicted, a net after tax loss of $50.8 million for the 12 months ended September. The result included restructuring costs of $13.5 million associated with the closure of the company’s Mataura sheep and lamb processing operations which followed similar costs of $19.4 million the previous year from the closure of its Sockburn plant.

Season just ended could produce messy results.

The two largest processors and exporters, Silver Fern Farms and Alliance, have captured the headlines in the last couple of weeks.

Hot on the heels of its announced intention to close its sheepmeat chain at Mataura, Alliance has come out with an offer to suppliers of $20 in November per lamb contracted before the end of October.

From the other cooperative camp Keith Cooper, CEO of SFF, last week sent an email out to suppliers which highlighted the disappointing financial result for the year ended 30 September because of the exchange rate and declining sheepmeat values in January and February not being reflected in procurement prices.

The final results will be declared in about two months when the market will be able to see just how disappointing the performance of the two companies actually was. Rumours of multi million dollar losses have been prevalent, but rumour is just what they are until we see the actual figures. There is no doubt the problem has been almost entirely with sheepmeat in spite of the exchange rate, because exporters have been far more successful at reining in beef procurement costs.

It doesn’t take an Einstein to work out that the shortage of lambs for Mataura and the procurement competition are just two aspects of the same problem. The lowest national lamb kill for 51 years at 18.6 million, 15% down on the five year average will have made it very difficult for any company to get sufficient capacity utilisation to come close to making a profit. With Alliance’s largest sheep plant outside Invercargill, Mataura just over 50 km up the road was always under threat from declining volumes.

Blue Sky Meats which balances in March presaged the 2011/12 season’s problems in its declared annual result, a pre-tax loss of $604,000 and no dividend paid. The company termed this the most disappointing result in its history and drew attention to the excessive prices paid for stock through the turn of the year, both because of the high dollar and the drought in Southland.

It will be interesting to see how successful Alliance will be in securing committed lambs from suppliers stimulated by the $20 cash advance. Keith Cooper’s reaction was to say SFF had tried it six years ago with no success because some suppliers were affronted by the implication they were short of cash and didn’t want to close out their slaughter options. He prefers to rely on the company’s suite of supply plans rather than to repeat the cash in advance offer.

In his email to suppliers Cooper sounds quite bullish about the new season’s prospects with a ‘fully configured operating platform’ and some exciting new marketing initiatives, even being bold enough to state that realistic livestock values are being established. If that is the case, it will either be because there’s enough livestock around to satisfy all processors or he is confident SFF’s overhead structure is competitive enough to guarantee filling their requirements.

Either way that is a big call in spite of the gains SFF has made in recent years, notably the closure of the Belfast sheep chain, improvements to its Finegand sheep processing and the rebuild of Te Aroha in the heart of the dairy farming Waikato/Bay of Plenty region. There are expected to be another 1.5 million lambs, but not enough to change processing dynamics much, while the market is another factor.

The meat industry is unique in that it has to compete at both ends of its supply chain. While livestock procurement has the most obvious impact on company profitability, demand from the market is also critical. Last season’s disappointments and losses have been as much about carrying too much inventory which the market couldn’t digest as the cost of the livestock to produce it.

When companies fail to manage both ends of the chain properly, things get messy. Just how messy they were last season will become clearer at the beginning of December when Alliance and Silver Fern Farms publish their results.