How Darwin abattoir closure helped AACo dodge fate's bullets

AACo abattoir shutdown and supply chain rethink pay dividends

Farm Online News
Australian Agricultural Company managing director, Hugh Killen.

Australian Agricultural Company managing director, Hugh Killen.


A tough season and revived live export markets have proven Hugh Killen's decision to change course was correct


As live cattle export markets rebound, the Australian Agricultural Company's contentious decision to shut its new Darwin meatworks last year has proven a somewhat prophetic step for managing director, Hugh Killen.

Extreme seasonal events and market trends have transpired to vindicate the bold cost cutting move by the big beef business, which also took a butcher's knife to some of its notable beef production structures.

Just months into his role as AACo chief executive, former Westpac currency trader, Mr Killen, was in the spotlight last May announcing the three-year-old $100 million meat processing gem, Livingstone Beef, would be mothballed, putting 200 people out of work.

AACo had just recorded a $102.6 million loss for the trading year to March 31, with Livingstone posting $22.4m in losses to earnings before interest, tax, depreciation and amortisation.

"I definitely still think there's value in the asset, but it will require us looking at doing things a bit differently if we are the right people to operate it," said Mr Killen pondering the plant's future.

Among other changes last year, the company also suspended a grain feeding program for the 100-day fed "1824" beef brand, which largely sourced young cattle from its Gulf of Carpentaria properties.

Fortunately, as it turned out they were really good decisions - Hugh Killen, Australian Agricultural Company

AACo, which has 21 properties spread over 7 million hectares, had relied on outside feedlot contracts to help maintain beef supplies to 1824's local and overseas customers.

"I had to make some definitive decisions for the company," Mr Killen said.

"Fortunately, as it turned out they were really good decisions."

Horrific flooding in north western Queensland three months ago killed about 42,000 AACo grown cattle - more than half the beef herd, plus calves, on four Gulf country properties which serviced the 1824 supply chain.


At the same time, severe drought across much of eastern Australia, including AACo's Queensland and Northern Territory stations, has sent feed grain and fodder prices rocketing in the past year.

"We'd have had really big issues if the previous supply chain arrangements and feeding regimes were still operating today - they'd already been consuming significant cash and working capital," Mr Killen said.

"Apart from the phenomenal impact of the flood, and the drought pressures on our herd, our feed costs would have become pretty horrendous.

"The margin on 100-day cattle is very tight.

"Our total feed costs in the second half of 2018-19 could have been more than double the $26m disclosed in our first half."

Confidence returning

AACo will report its trading results later this month, but already investor confidence in the 195-year-old company has rejuvenated somewhat following its share price dive to an all-time low of 90c when the floods hit in February.

The past month saw the price revive to $1.18 a share, although that was still about half its mid-2016 peak of $2.12.

A year on from the big cost saving restructure, AACo's Bos Indicus-based weaners and grown steers are no longer required as 100-day fed branded beef, so instead are destined for live export or conventional cattle markets.

AACo also has Australia's biggest Wagyu herd and has continued to expand its premium beef brands - Westholme, Wylarah, Darling Downs Wagyu, Master Kobe and Kobe Cuisine - into top end markets in North America, Europe, and Asia where a serving of steak can cost $150-plus.

Meanwhile, with live trade demand and prices performing robustly, Mr Killen was thankful Livingstone meatworks no longer competed with the boat trade for the 1000 cattle a day it ideally needed to keep its processing chain busy and profitable.

"When you had to buy cattle at $1.80 a kilogram, but the boats were paying $3.30/kg, it was a pretty hard road - Hugh Killen

Australian live cattle exports grew 21 per cent year-on-year for the first three months of 2019 to 271,000 head.

That followed last year's 27pc rise to more than 1.1m head after China emerged as a new importer of feeder steers.

Tight boat trade competition

"When you had to buy cattle at $1.80 a kilogram, but the boats were paying $3.30/kg, it was a pretty hard road," Mr Killen said.

High fixed costs, energy costs and wage bills, and the difficulty of finding qualified tradespeople in the Top End, had undermined the good returns AACo made from Livingstone's primal cuts selling to Asia and the US.

Cull cows, once a key reason for building the northern meatworks, are now sold off when market and station management conditions suit.

"We sell when we want. We don't need to hold culls any more for the abattoir - it's much more efficient," he said.

Mr Killen said AACo had already made "some pretty big strides", before he took the helm in December 2017, as it transformed from mainstream cattle business to prominent name in premium branded beef.

Premium beef business

"It's about building a global supply chain and the best brands from almost 200 years of breeding heritage," he said.

"We see our production system as delivering unequivocally the best beef in the world - whether it's Wagyu or not."

Livingstone was significantly underperforming and we needed to make changes to our supply chain - Hugh Killen

But it was a big company to transform, and "some things had not gone so well".

"We've got amazing cattle, unbelievably good people and some great assets, but Livingstone was significantly underperforming and we needed to make changes to our supply chain," Mr Killen said.

The long term fate of the Darwin meatworks continues to be on hold as the company considers the best options for shareholders, including, possibly, a joint venture management or ownership structure.

"It's suspended in a turnkey state. All the equipment and licences are still ready to go - we'd just need to recruit the staff," he said.

"At the moment it's a very low cost asset to have on my balance sheet and to have that opportunity available to re-start it when we wish.

"However, of late we've had some other big issues to concentrate on instead."

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