Strong balance sheet helps Blue Sky Meats

Blue Sky Meats has weathered another difficult year for meat processors, announcing an after-tax loss of $3.88 million for the year ended March 31, 2013, just its second loss in 27 years of trading.

The Southland-based company suffered comparatively light losses of $449,149 in the year to March 2012 on the back of a strong balance sheet and profit of $3.69m in the 2011 trading year.

Other meat processors, most of which have a later balance date than Blue Sky Meats, posted cumulative losses estimated by the industry at $200m in their last financial year.

In his annual report for 2012/13, Blue Sky Meat's founder and chairman Graham Cooney attributed this year's loss to reduced demand for sheepmeat and an alarming drop in prices on international markets between December 2011 and December 2012.

"In that period international market prices for almost all items that the company sells reduced at an alarming rate," Cooney said. "Some items had no significant market for considerable periods of time."

Meanwhile, he said all meat companies continued processing stock and products held in storage lost value at alarming rates.

"The prices paid to farmers reduced over the 2012 calendar year, but that reduction was at a much slower rate than the market price reduction."

Cooney said there were some positives in a year notable for conditions he hoped would never be repeated.

He said Blue Sky Meat's strong balance sheet from two years ago had got it through a disastrous year and was planned to cover such an event.

Since Christmas, he said trading conditions had returned to historical levels and the company's cash flow to date this year had been very strong.

The whole meat industry was increasingly reliant on markets in China and, correspondingly, China was now Blue Sky Meat's largest market by both volume and value.

"So we've come through a difficult year in a sound position and we are trading profitably again," Cooney said. "There's no reason that should not continue unless we go through a period of extreme competition for livestock, which was part of the problem last season."

Turning to meat industry restructuring, Cooney said he was not a party to talks between the four largest meat companies or whether those talks dealt with stock procurement or the possibility of a merger between meat companies.

He accepted that the meat industry was broken and added that the solutions were likely to be found here in New Zealand rather than in the marketplace.

"To have a viable industry in future we must move from the present production-led model to a market-led industry," he said.

Under the production-led system, farmers held on to stock to take them through to target weights regardless of the size and specifications required by markets.

Meanwhile, meat processors needed throughput to keep their chains working so grabbed whatever stock was available. During seasons with plenty of feed, they sat and waited for stock to be submitted at heavier weights and conversely in drought years, stock was killed regardless of weight.

"Markets want certain sizes and specifications and two seasons out of three we're giving them the wrong size," Cooney said. "I've never seen a successful manufacturing industry in the world where you supply the market something different to what they've asked for."

He said on one hand farmers may need to change their farm management to handle seasonal differences and meat processors may need to change their attitude to work one on one with the specific needs of individual clients.

"At the moment companies need throughput so they grab whatever stock is going whether it's what their markets want or not."

Cooney said he would like to see meat industry reform driven by strategy rather than structure.

"There is a lot of effort by some farmers going into structure, such as mergers, but I think that's a complete and utter waste of time unless you have a strategy in behind it," he said.

He said in principle Beef+Lamb NZ's proposal of tradeable slaughter rights (TSRs) made sense in terms of maximising returns and using meat processing plants to their full capacity, but he had doubts about its practicality and the legislation required to make it work.

"I'd be very surprised if it gets over the line because it would require dispensation from the Commerce Act and it would be quite difficult to administer," he said.

Cooney said it was hard enough for meat companies to predict sheep numbers coming forward at the start of each season and became even more difficult for processors with excess capacity all scrapping over a declining national flock.

Straight Furrow