From the Farm: Great southern losses

By Jonathan Underhill

What do Silver Fern Farms and Alliance Group have in common apart from being meat companies from the great south? They both made losses in the latest year and both admit they paid too much for livestock.

Alliance Group, which processes some 7 million lambs, 1 million sheep, 150,000 cattle and 130,000 deer a year through its nine plants, reported a 7.2 percent decline in sales to $1.37 billion in the 12 months ended Sept. 30. The net loss widened to $50.8 million from $9 million

Silver Fern’s annual revenue dropped 3.3 percent to $2.03 billion for a net loss of $31.1 million.

“Through this period, Silver Fern Farms had to manage business continuity – supplying to customers and operating processing assets – which meant we had to compete for livestock at unsustainable prices which further contributed to the problem,” chief executive Keith Cooper said.

Alliance chairman Owen Poole said: “We accept that many exporters and processors like ourselves did not respond to the changing economic environment fast enough, and in an intensely competitive industry, continued to pay too much for livestock for too long.”

Both of these comments could’ve been uttered 10 years ago. An industry with processing overcapacity, plants to run, markets to deliver to and no one company brave enough to offer less for livestock. A case of who will blink first.

Both companies have surprisingly little control over pricing in export markets even though Alliance alone accounts for about 15 percent of the world's cross-border sheepmeat trade and Silver Fern is trialling sales of fully branded lamb into 250 Tesco stores in the UK.

Aligning with a major retailer is a key part of both companies’ export strategy. Alliance picked up the contract for six months’ supply of chilled NZ lamb to UK chain Marks & Spencer from Silver Fern, which was unable to supply organic lamb as part of the tender.

Surplus processing capacity is something both companies are working on slowly. Alliance shuttered its sheep processing lines at its Mataura plant and close its Sockburn plant

Silver Fern Farms acquired Wallace Corp’s meat processing plant at Waitoa in May and the Frasertown Meats sheep processing plant in the Northern Hawkes Bay in September part of the aggregation it says is necessary to create a sustainable red meat sector.

These two companies have pondered merging in the past but haven’t yet managed to crowd all the egos into one room for any kind of agreement. As long as they stay apart, farmers will be able to benefit with short-term gains as they outbid each other for livestock.

The last semi-serious attempt at a merger was in October 2010, when Silver Fern chairman Eoin Garden made a direct approach to Alliance’s shareholders seeking support for an independent evaluation of an amalgamation, creating a company with about half the nation’s red meat market.

Alliance’s Poole said at the time such a deal lacked merit. Even with 50 percent of the market Poole doubted the business would be big enough to change market behaviour “onshore or offshore.” History had shown that aggregation of insufficient size has been tried and failed, he said.

Progress is being made, though slowly, says Jeanette Maxwell, Federated Farmers Meat & Fibre chairperson. A surprisingly large 62 percent to 65 percent of farmers are committed to various meat company loyalty schemes, where they agree to supply and in return get crucial feedback from export markets on what’s wanted and when.

“It is slow but I believe a slow change is a more permanent change,” Maxwell says. She’s bullish on the long-term prospects for meat because of rising global demand for protein. But the global financial crisis and its aftermath has played havoc with demand and pricing and New Zealand farmers could be looking at another 10-15 years of more volatility.

Decommissioning meat factories causes short-term pain for long-term gain. Meat company balance sheets have been splashed with such red ink for years.

Alliance says there are signs stability is returning to export markets. China continues to show strong growth, especially for higher-value products, and the company recently landed its first shipment of Pure South lamb in Brazil.

A recovery in export markets, though, can’t be a signal for complacency at home.

(BusinessDesk)

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