Processors brace for restocking pain

Processors brace for restocking pain


Beef Cattle
ENERGY-INTENSIVE: The action in Australian Lamb Company's boning room.

ENERGY-INTENSIVE: The action in Australian Lamb Company's boning room.

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Supply shortages when drought breaks will exacerbate cost creep in processing sector.

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RED meat processors are bracing for another round of cutbacks and closures when the drought breaks and restocking kicks off in earnest, with industry leaders warning the threat to rural economies will be significant.

Exacerbating the looming supply shortage is operating cost creep, with energy top of the bill.

The sector is getting its ducks in line to seek government help with a comprehensive report about to be made public detailing its cost structures in relation to those of competing beef nations.

Chief executive officer of the sector’s research and development arm the Australian Meat Processor Corporation, Peter Rizzo, says the extraordinary costs that have been driven into the Australian processing sector are alarming.

Asked at a senates estimates hearing in Canberra this week whether he would open a new processing plant in Australia if he won the lotto, Mr Rizzo said: “In the current environment, no.”

Plant bosses told Fairfax Media that sums up the grossly unfair situation they are battling in regards to energy whereby increasing costs, limited competition and limited ability to implement cheaper and more sustainable options are crippling their operations.

When that collides with the supply pressure headed their way as rains arrive, many said their plants would not be able to to continue to operate at the same level.

FURTHER READING: More rain, more cattle market lift.

Mr Rizzo told senators the sector was already reducing capacity.

“We’re predicting processing numbers, which at 7.5m are at an ideal number for us, are headed towards 6.8m,” he said.

A new plant was proposed for Queensland, with some “exciting renewable energy options to go with it,” but it would not be at the ready-to-go stage until end of next year, he said.

“What happens when the drought breaks is a tremendous issue for us,” Mr Rizzo said.

AMPC boss Peter Rizzo.

AMPC boss Peter Rizzo.

“The threat to our rural communities is significant, and obviously to governments also, as a result of our processing plants not being able to continue to operate.”

The long-term implications to Australian beef were very serious, he explained.

“What will happen is our competitors, particularly for grassfed beef, will pick up some of our market opportunity while we can’t supply those important markets,” he said.

The sector has flagged it would be “looking towards the government” for help, with a major report about to be released.

“We’ve interrogated the cost of our energy comparative to Brazil, Argentina and the United States and we’ve looked at the cost of our labour component as well, along with the issues around availability of labour,” Mr Rizzo said.

“Anecdotally we’d consider a country like Brazil to be a very expensive energy country because it doesn’t have the resources we do but I can tell you our energy costs are akin to Brazil’s.

“I’ve had 30 years experience in agribusiness and I can tell you that is a real concern where a country like Brazil has an energy cost similar to us.”

Off the grid

The processing sector wants to “go off the grid.”

“We simply can’t not have electricity in a place like South Australia, because we have chillers and freezers and millions of dollars of meat in transit,” Mr Rizzo said.

Australian Meat Industry Council chief executive officer Patrick Hutchinson said the development of government policies that ensured the reliable availability of energy to all sectors of the Australian economy, not just red meat processing, was urgently needed.

Processors were coming to AMIC every day with concerns around energy supply and cost, he said.

“A reliable supply of affordable energy is a national necessity and should be a priority for the Federal and State Governments. Endless squabbling and backflips serve no one. We need good solutions and we need certainty.”

ALC’s solar solution

Victorian lamb and mutton processor Australian Lamb Company says its electricity and gas costs increased by more than 100 per cent from 2016 to 2017. This represented an increase of more than $1.2m in cost to the bottom line.

ALC has a workforce of 820 across two sites in Colac and Sunshine.

The company operates an export-accredited, fully-integrated processing facility with a capacity of 60,000 lambs per week. More than 80pc of ALC product is exported to 60 countries.

Chief financial officer Dale Smith said to help mitigate the rising electricity costs, ALC implemented a $3 million solar panel project across both sites, which is covers 25pc of electricity needs.

“The payback on this investment is six to seven years, which is well below the payback on other projects we could invest in,” he said.

“However, we felt as a business we need some certainty, which is not available in the current regulatory environment.

“We can’t incur continued unanticipated price increases.

“Increased energy costs means there will be more times during the course of the year we will need to reduce hours and therefore jobs as the company cannot make the margins we need to continue operating.”

Mr Hutchinson said processors like ALC were competing against countries such as New Zealand where the price of gas was approximately a third.

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