Friday, March 29, 2024

Meat firms losing cash on lambs

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A $20 a head disconnect between global market prices and New Zealand procurement prices for lamb are hurting processing companies, Alliance chief executive David Surveyor told North Canterbury shareholder-suppliers.
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There are signs of push-back from consumers in markets over lamb prices, Surveyor said after the Cheviot meeting, the first of the group’s new season shareholder roadshows.

Global prices flattened out but the companies kept pushing prices up for winter and spring supply.

Companies are losing money as margins disappear. 

“It’s not commercially sensible.”

Alliance has started pulling prices back though they remain at elevated levels.

They are about $8/kg as the group works to fill orders for the European Christmas chilled market. 

Once through that, prices are likely to fall to the mid-$6s/kg after Christmas, livestock and shareholder services general manager Heather Stacy said 

Sheep prices will be $4.50/kg to $4.95/kg. 

She also spoke about customer resistance to prices and the need to realign procurement pricing though the Australian drought is affecting international supply of lambs and might keep prices higher.

Surveyor warned a small number of shareholder/suppliers at the meeting that the co-operative will report lower profits for the year ending September 30. 

At this stage it is less likely that pool payments will be made.

“For absence of doubt, the company is profitable and the balance sheet is incredibly strong to fund our growth,” he said.

A bonus issue of shares will be made later in the year to put increased group equity into shareholders’ hands while retaining cash.

Alliance has also passed on increased value gains to shareholders in farm-gate prices, he said. 

Revenue has increased by $174 million this year but price payments to farmers have gone up by $211m, a $37m up-front benefit.

“Your gains have come at the farm-gate and our profits are captured in those gains.”

The year had been challenging with economic ill-winds.

They included putting on earlier capacity to meet climate-driven processing demand and the capacity had been maintained when demand eased back. 

In autumn new pasture feed levels meant farmers held back on cattle processing by about a month so the season coincided with the cow cull then the start of Mycoplasma bovis kill. 

The group didn’t have enough capacity to meet demand, leading to considerable overtime costs at Pukeuri and Mataura, shipping 4000 cattle from the South Island to Levin for processing and making offers to farmers to keep their stock grazing longer.

The company has built a new venison processing plant at Lorneville and has potential to process cattle there as well, Surveyor said.

Alliance made a pre-tax operating profit of $20.2m in the September 2017 year, ahead of a substantial one-off gain on the sale of its Makarewa venison processing site. Those earnings allowed an $11.38 pool payment to shareholders

A board decision on pool payments will be made as the accounts are finalised and audited.

Though earnings have fallen, processing plant efficiency gains and product yield improvements have been achieved.

Alliance is in the third year of a major business transformation process. 

“Every time we go looking we always keep finding opportunities to get more value back to you,” he said.

No plan is perfect or gains achieved in a straight line but the directors have confirmed their belief in the strategy and their confidence in the business as part of a move away from being a commodity business.

The programme also includes a new logo, highlighting Alliance as a farmers’ produce business and with a farm-gate design to link farmers to consumers.

There were no questions about the logo or marketing message in question time and shareholders spoken to afterwards indicated it wasn’t a priority issue for them.

There are several positive initiatives in the business plan, Surveyor said.

The food service project in Britain, targeted at top-end restaurants, is profitable and had lifted revenues from start-up to $10m in less than two years. Sales will double next year. 

A similar programme  is now planned in the United States, initially on the west coast. The business will not compete with the NZ Lamb Company in the US, in which Alliance is a shareholder.

New work in blood and pharmaceutical products produced $4m in sales during the year. 

The group is also talking to a large, multi-national household retailer about potential markets for skins and hides products and beyond that for meat products.

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