Alliance Group set to report profit lift

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Invercargill-based Alliance Group's farmer shareholders have been through a less-than-stellar season for sheep meat prices but they at least have an improved financial performance from their co-operative to look forward to, says chairman Murray Taggart.

The company's result for the September 30 financial year, due in early November, will show a big improvement in percentage terms from last year's $7.8 million profit, Taggart said.

In addition, Alliance - New Zealand's biggest sheep meat processor - had made inroads into its debt and its costs over the year.

Taggart said Alliance would report a "significantly improved" balance sheet.

"Profitability is up and we will be making a distribution to farmers this year, subject to audit," he said.

On the plus side, farmers were facing lower interest rates, lower fertiliser costs and lower fuel costs.

"Costs are down too, but not enough to offset the decline in returns, but it certainly could be a lot worse."

Alliance set out to bank $34m in cost savings in the financial year just ended, but instead the number came in at $56m, he said.

Taggart, who with management completed a "roadshow" for farmers last week, said much of the company's presentations had been taken up with explaining why the season had not been up to expectations.

He said the key themes were market and exchange rate volatility, particularly around Britain 's decision in June to leave the European Union.

"Obviously the United Kingdom is an important market for us and so is Europe, but frankly no-one has got any ideas about what the outcome of it all is going to be," he said. "There is lots of speculation but we don't think that anyone knows."

Sheep meat prices have strengthened in most offshore markets of late, and in the UK it's been ok as well, but the trouble is that we are significantly worse off from an exchange rate perspective than we were before the Brexit vote, so prices have lifted but the exchange rate has more than negated that lift," he said.

Sheep meat prices had gained by 7 to 8 per cent in the UK this season but the NZ/sterling exchange rate had gone up by 15 per cent.

The New Zealand meat processing industry has grappled with overcapacity issues in recent years and Taggart said Alliance was comfortable with the seven plants it has now.

Alliance's far bigger rival, Dunedin-based Silver Fern Farms, is in the process of shutting down two small plants - the Frasertown mutton processing plant at Wairoa and its South Island Mossburn venison plant.

In 2012, Alliance closed its Sockburn plant in Christchurch, and announced it was moving sheep meat processing from its Mataura plant to its Lorneville plant near Invercargill. The cooperative's beef processing facility remains at Mataura.

In October this year, Alliance said its venison operations would be transferred to Lorneville from the current processing site at nearby Makarewa, resulting in a 30 per cent reduction in deer processing costs.

The new facility is expected to be operational for the new processing season in July next year. Alliance is responsible for about 30 per cent of the sheep meat kill and 10 per cent of the national cattle kill.