Alliance Group chief executive Grant Cuff
With its end of the financial year balance date of March 31, the small Southland company of Blue Sky Meats was first cab off the rank of meat companies to balance its books on a difficult season.
Other meat companies still have that task to look forward to later in the year as the majority have balance dates in September or October.
Blue Sky Meats’ announcement of a before tax loss of $604,576 for the year ending March 31, 2012, was a dramatic turnaround from its windfall before tax profit of $6.5 million the previous year, when meat companies and their suppliers cashed in on a season out of the box.
But nothing stays the same for long in the meat industry and sources say the turnaround in fortunes this year was one of the fastest they had ever witnessed.
With so many economies around the world under pressure, customers pushed their wallets deeper into their pockets and prices for New Zealand’s export meats plummeted in the second half of the season.
Blue Sky Meats after-tax loss this year was $449,149, down from an after tax profit of $3.7 million the previous year despite an overall increase in revenue from $101 million to $114 million.
Blue Sky’s board chairman Graham Cooney said a combination of circumstances last season produced “a perfect storm” for the Southland company.
Meat companies had no choice but to match the initial opening schedule set by companies “further north even though we knew at the time it was completely out of line with the market,” he said.
“That often happens with the opening schedule as people scrap for the first animals available.
Normally it comes into line with the market quite quickly but this year was unique because it never did.”
The market then fell at such a rate that the schedule never caught up and meat companies were left with stocks that were decreasing in value all the time.
On top of that, unusually dry conditions in Southland in December, January and early February added to Blue Sky Meats’ woes with the exodus of large numbers of store stock to areas further north that had plenty of feed.
Mr Cooney said the last two seasons clearly demonstrated the extremes of what could happen with a rising schedule and declining market.
He blames unrealistic expectations in schedule prices and said neither Blue Sky Meats nor the meat industry could afford to see a repeat of these circumstances without “another sort out.”
He said the first challenge for all meat companies was to reduce stocks of finished products to manageable levels.
Last year in Europe there was an overhang of product sold, paid for but not consumed and little demand, so buyers were bound to take a bath on price.
“I don’t think there was any doubt price levels overshot on the way up and overshot on the way down,” he said. “That always happens on a rising or falling market.”
“There was still demand for chilled lamb but it was reduced on previous years and of course everyone was running for cover on a falling market as they always do.”
The second challenge for the industry was to link prices to what markets could sustain.
Meat companies had been talking to each other for some time, but it was debateable how long it would take for them to reach agreement on that count.
“I should emphasise our balance sheet is still strong,” Mr Cooney said.
“This is not life threatening stuff, but we have to take stock of our situation and we need to make some changes in the way we manage things we can control.”
In April, Silver Fern Farms’ chief executive Keith Cooper warned meat companies were paying procurement premiums for too long early in the season and would pay for that through currency depreciation and a decline in demand for red meat in European markets.
Alliance Group chief executive Grant Cuff agreed with Mr Cooney’s comments in Blue Sky’s annual accounts that early schedule prices paid last season were too high.
Mr Cuff said the same rules applied to everyone in the industry but in hindsight schedule prices paid for lamb in the first four months of the season from October to January were “far too optimistic”.
“Effectively the person with the most optimistic view of life sets the price,” he said.
Schedule prices were usually based on very few animals killed in the October/November period for specific Christmas contracts around the world and other meat companies had to follow suit to secure stock.
After such a difficult season, past experience suggested common sense would prevail this season and meat companies would be more cautious, he said.
On a broader international front, Mr Cuff said markets for the meat industry were very volatile with huge uncertainty in Europe and the United States and unanswered questions over the implications of slowing growth in the Chinese economy.
The meat industry had increasingly shifted its focus from west to east, diversifying from traditional markets in Europe, the United Kingdom and North America into new markets in Asia and particularly China.
Mr Cuff said the Alliance Group’s strategy for the last decade had been to work with key customers around the world who were stable long-term suppliers with a strong foothold at the top end of their own markets.
China had been an important market for the company and would continue to be a good market in future, he said.
In the last five or six years, he said China had become the second largest market for New Zealand sheep meats and it was possible it would overtake the United Kingdom in the next year or two.
The Alliance Group sells significantly more product into China than its share of the market in New Zealand “so we think we are further advanced than most,” Mr Cuff said.
He added that didn’t mean the outlook for meat on world markets was rosy “but we think we are as well placed as anybody.”