The meat industry has proved yet again that it is not for the faint-hearted investor. But the resounding fall in Affco's share price after it released its annual result 10 days ago suggests that there are a number of just such investors on its share registry.
On the face of
it the drop in profit from $58 million the previous year to $21 million fully merited the market's reaction. But it shows a total lack of understanding of those factors which dominate the meat industry and suggests very short memories. It also suggests that no one read the signs that were evident in the PPCS and Alliance results published before Affco's.
An analysis of PPCS's pre-tax profit of $21 million on twice the turnover would have revealed a substantial contribution from the sale of its Islington plant and above-schedule payments of $10.4 million to suppliers. In fact, it recorded an operating loss.
Alliance reported an operating surplus of $16.5 million before pool distributions to suppliers of $11.6 million. This was better than PPCS, but hardly a satisfactory result. In contrast, Affco actually did pretty well and got caned by the market as its reward.
The dramatic influence of the weather, more than any other single factor, was responsible for the sharp change in meat exporters' fortunes during the season just ended.
After all, 2003-2004 was an exceptional year when everything - weather patterns, market prices, livestock volumes and supply - conspired to provide a near-perfect set of conditions. All companies took full advantage of them to turn in record profits. The combined pre-tax profits of the three companies before pool payments to suppliers amounted to more than $130 million.
In stark contrast, the year just ended, exacerbated by the continued strength of the dollar, lambing losses in the South Island and a sharp drop in the number of cattle available for slaughter, has seen the combined pre-tax operating profits fall to less than $60 million.
But the impact of the weather made it much easier for farmers to control the supply of livestock to match processing capacity. This, in the end, is what dictates how income is shared between farmer and processor, much more than market prices and currency. In an ideal season for exporters, livestock supplies would be processed in an extended peak while satisfying market demand.
But this seldom happens and last season the lower cattle volumes in the North Island (11 per cent below the previous year) meant that processors were competing aggressively for stock throughout the season. However, in the South Island the processors could not start to exert much influence over prices paid to suppliers.
During the past year PPCS experienced problems in getting the Richmond business under control, especially difficult when there were fewer cattle around and more competitors in the lamb market. There is strong evidence that PPCS lost market share in both main species, added to the impact of lower cattle volumes which took several million dollars in margin alone. At the same time the tougher market conditions in the South Island made it impossible for PPCS to compensate for the North Island difficulties.
The very strong impression is that while the increase in size across both islands may have doubled turnover, it has also doubled the problems encountered. Twice the number of meat plants now need investment in maintenance with less money available to do it.
In contrast, Affco has largely upgraded its plant configuration with the rebuilds at Imlay and Horotiu. It not only has very low debt, but it has competitive, possibly even industry leading, cost structures, and a stable majority shareholder base. Talley's and Peter Spencer own nearly 65 per cent of Affco, so the "nervous nellies" who drove the share price down are relatively irrelevant to the company's future.
Looking into the future, the main markets have now come off their peak and this trend will have an even greater influence on the new year's farming performance. The bright spots for the coming season are a good lambing percentage, with relatively little loss to bad weather, and an extra 100,000 cattle in the North Island.
At least three of the major meat companies, Affco, Alliance and ANZCO, have strong balance sheets and plants in good condition. PPCS has a challenge on its hands to complete the integration of its North and South Island businesses, continue the programme of essential plant upgrades, keep suppliers happy by competing for livestock, and make a decent profit, all in the face of vigorous competition on all fronts.
The meat industry provides an intriguing mix of ownership and governance structures, with public, private and co-operative companies represented. The jury is still out on which is the most tolerant of the inevitable uncertainty from year to year.
The big three by the numbers
* Revenue
Affco: $969 million
Alliance: $1.1 billion
PPCS: $2.0 billion
* Pre-tax operating profit
Affco: $21.1 million
Alliance: $16.5 million
PPCS: $21 million
* Allan Barber is a freelance writer and business consultant and former chief operating officer at Affco.
* The regular Rural Delivery column returns next week.
<EM>Allan Barber:</EM> Weather hits meat export profits
AFFCO has a stable majority shareholder. Picture / Amos Chapple
Opinion by
The meat industry has proved yet again that it is not for the faint-hearted investor. But the resounding fall in Affco's share price after it released its annual result 10 days ago suggests that there are a number of just such investors on its share registry.
On the face of
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