Farmers held back lambs on their farms to take advantage of plentiful feed but the company had to maintain staff levels during the downtime to make sure they were there when supply eventually came through, co-chairman Rob Hewett said.
“That marginal cost of running the plants is what cost us mainly. We staffed up for normal livestock flows and the stark reality is they did not happen.
“It was an issue for the industry, not just Silver Fern.”
December is typically the most volatile month for the industry’s procurement/marketing mix and 2018 was the worst for that month in 10 years.
SFF’s situation was compounded by December also being the final month of the financial year.
“We went from pretty good to pretty average in those weeks,” Hewett said.
Sheep meats performed well for Silver Fern in 2017 but last year’s strong farmgate prices for lamb and mutton did not reflect the in-market returns at crucial times of the season when processing volumes were low.
That eroded operational efficiencies.
The Silver Fern group is now two distinct entities, the Silver Fern Farms Co-operative and the operating business Silver Fern Farms. The co-operative and Chinese group Shanghai Maling each own 50% of the operating business. The co-operative does not control SFF so its profits are equity accounted rather than being consolidated into its own accounts.
The co-operative will distribute returns to its supplier-shareholders, paid from a dividend received from SFF.
SFF had sales of $2.4 billion in the year ended December 31, achieving operating earnings (Ebitda) of $32.4 million, a pretax profit of $6.3m and an after-tax profit of $5.8m, well down on the previous year.
The company increased investment in capital expenditure by $8m to $29m for the year.
SFF chief executive Simon Limmer said prices for beef and venison products held up well throughout 2018 and returns to both farmers and processors equitably reflected market realities.
During the year the company made a slight gain in beef procurement market share with sheep meat and venison static.
The SFF after-tax profit was not at the level the business was aiming for, Limmer said.
“We must lift the profitability of the business in order to sustain our aggressive capital reinvestment programme and to more actively progress our in-market investment in sales and marketing to grow value in the market.”
Hewett, also chairman of the Silver Fern co-operative, said the business is consolidating with intensive capital investment across infrastructure and systems.
“While the level of profitability is lower than desirable as it goes through this process we have an expectation that we will be in a position to derive future value from our equal share in the company.”
Farmers were getting strong farmgate sheep meat prices and that continued in the first quarter of the new financial year even though supply is now strong and the plants are full, Hewett said.
“The processors are making acceptable margins and farmers are continuing to be well paid.”
Farmers were getting the gains directly rather than through the co-operative’s profits but Hewett describes the ownership model as a red herring.
“The business needs to be profitable to make the reinvestment it needs and farmers understand that.”
Silver Fern was getting better prices for better products as it moved up the value chain in recent years and that trend has to be repeated and built on every year.
The Chinese market has been a major gain for the group, putting competitive tension on sheep meat prices as Brexit issues affect the British market.
Shanghai Maling wants greater profit from SFF, just as co-operative does, he said.
The joint-venture relationship is working very well.
The group has internal targets on where profit levels should be but Hewett wouldn’t disclose those, saying “It’s significantly higher than this year”.
While sheep meats have been a struggle, beef and venison have performed well with lean beef for manufacturing in the United States being well-received and Silver Fern’s reserve grade prime beef going gangbusters in that market.
The co-operative reported a profit before tax of $2.4m for the year and an after-tax profit of $0.9m. At year-end it had cash and near-cash of $18.1m, no borrowings and total shareholder equity of $283m.
SFF is paying a $1.7m cash dividend, without tax credits, split equally between the two owners.
The co-operative will pay its share, $874,000, as a patronage reward to qualifying supplying shareholders, based on livestock supply criteria. The payment, also without tax credits, will be 3c a share. It will be paid on April 26 on shares held on December 31.
The co-op’s earnings report did not include details on operating cashflows and debt levels in the operating business. They should be made public in the written annual report on April 12.
The period leading up to the December balance-date is a high point for SFF’s seasonal debt as it buys stock for processing. That debt is not included in the co-operative accounts. SFF doesn’t have term debt, just seasonal debt for procurement cost and there were savings on that because of the low lamb supply, Hewett said.
In the December 2017 year, SFF reported an after-tax profit of $15.4m on revenue of $2.2b and after one-off charges of $10.2m, mostly for the closure of its Fairton plant in Mid Canterbury.
For the 2017 year, covering 15 months, the co-operative made a bottom-line loss of $5.6m.
