Allan Barber: Back to normal in meat market

Last season the North Island meat companies' performance for the first half-year gave no clue to the enormously profitable second half, although Richmond and Affco were confident that things would get better.

Richmond's pre-tax profit, consolidated into the PPCS annual result, was $37.9 million and Affco's $58 million, both unimaginable riches compared with more normal years.

This season, things have returned to normal, although it is harder than it was to interpret the publicly available information with the same degree of certainty. Richmond is now a wholly owned subsidiary of PPCS, therefore the parent company, which does not normally publish a half-yearly result, now has to do so because of the bonds issued by Richmond.

However, the straight comparison between the two listed, substantially beef-driven North Island processors is no longer possible.

Looking at the available half-yearly results, even the periods differ between PPCS and Affco. PPCS's half year ended on February 28, but included only one month of Richmond's performance because the amalgamation of the two companies did not occur until January 31.

Including one good month for Richmond, but excluding five less good ones - remember Richmond's six months were only just in the black last year - PPCS reported a trading profit before extraordinary items of $7.83 million.

PPCS has rightly pointed out that its second half is traditionally much better than its first and this will certainly be true for its business in the South Island this season, where more lambs will be available.

This is also true in the North Island, but to nothing like the same extent as last year.

Better lamb numbers will be more than offset by a drop in the number of cattle available, which has already resulted and will undoubtedly continue to result in greater competition and higher buying prices to secure supply.

Affco has reported a better first-half profit than last year, $14.8 million against $11.2 million. However, the timing of its year means that March, always a good month, is included in the first half, whereas September, which is a dreadful month (no livestock of any species to speak of), comes into the second.

Affco has flagged that the second half will be nowhere near as good as last year and I imagine if it could repeat its first half to produce an annual profit of around $30 million it would be happy. It's still in the fortunate position of paying hardly any tax because of previous losses.

This season, with the reduction in cattle numbers and a continuing strong dollar, will provide a sterner test of management's nerve when deciding on what to pay to gain each company's desired market share. The grapevine suggests that a number of Richmond suppliers in the north have defected to Affco, although PPCS states that it is pleased with the uptake of its rebate system by North Island suppliers.

The big question is whether the meat industry is heading towards another period of cut-throat competition resulting in another company collapse or just back to more normal trading conditions.

The people most affected are the farmers who supply the companies and have an ownership stake in the industry.

On balance, it appears to be a more normal, therefore, tougher year than last year. All processors will be fighting to secure supply at an acceptable cost and the balance of power has swung back to the farmers. Last year is now just a memory.

* Allan Barber is a freelance writer, business consultant and former chief operating officer at Affco.