Analysis

Today's processor losses will need to be offset tomorrow: Over the Hooks

By Stephen Martyn
Updated April 7 2022 - 12:57am, first published 12:00am
Survival of the fittest: How processors are staying afloat

Historically when meat processors have been making good profits, producer returns for their livestock have been low. When livestock prices have been high, the reverse has occurred and in many instances processors are forced to operate at a loss for long periods to ensure plants keep running, their valuable staff are retained and their established customer base both domestically and on the international market can be serviced.

Seldom do both producers and processors experience supernormal profits at the same time.

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When the cost of livestock can easily be 70 per cent of a processor's variable costs, it is not hard to understand why. Being able to manage both ends of the marketing cycle while minimising costs and maximising returns on an international market they have little control over, is one of the challenges of longevity in the business.

Media reports of recent times have been covering what are historically near-record prices for livestock in Australia with forecasters seeing demand for red meat continuing to support them.

With herd rebuilding underway, processors have found themselves at the wrong end of the pricing cycle and while producers have been experiencing very positive times, processors have been facing the red ink that can come from continuing to operate in a market with a very expensive raw material that is in short supply.

This is not a recent phenomenon.

Industry analyst Agrinfo says that national cattle slaughter trends since 2020 have reflected the fall in throughput since then with national slaughter numbers dropping from over 140,000 head per week in early 2020 to between 90,000 and 100,000 head over recent times.

The cost issue here is that reduced throughput against existing processing capacity only further increases processing costs per unit.

But the processing sector has not only been facing losses as a result of high livestock prices and reduced supply, they have also found themselves facing a range of more recent uncertainties and aberrations that have only added to the red ink.

Recent weather events and floods have only exacerbated throughput problems for a number of both large and small export meat plants.

This has been coupled with general inflationary cost pressures in fuel, energy, packaging,transport and labour especially with COVID restrictions plus skyrocketing seafreight cost increases and logistics problems that have just added further uncertainty.

Unprecedented delays in global shipping schedules, port congestion and an ongoing shortage of food grade reefer containers has added unpredictability to marketing plans.

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Aussie dollar

If the operating environment has not been difficult enough, the appreciation of the Australian dollar from around US$71.9 a month ago to a range around US$75 at present just strips returns from exporter revenue when international prices are stable, let alone as key market prices show any weakness.

In the current difficult trading environment with an election on the horizon, the processing sector has been lobbying the Australian Government on issues it believes will be essential to the sector's ongoing competitiveness.

Central to current concerns are policies that will try and ease the drastic labour shortages in the Australian processing sector which Australian Meat Industry Council chief executive officer Pat Hutchison believes is around 5000 people nationwide at any one time.

As slaughter levels increase in future years, labour shortages will only escalate in importance as a limitation to throughput and therefore efficiency.

The sector welcomed the funding increase in skills training and apprenticeships in the recent budget but a more fundamental rethink by the government on how to address the ongoing issue of labour shortages in the medium to long term would appear essential as it will impact on the returns for the whole red meat supply chain.

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One hundred fold the worth

Trade modernisation and efficiency initiatives and investment in regional infrastructure were important announcements in the budget but the increased investment announced in biosecurity is essential.

A very important part of Australia's comparative advantage as a meat exporter lies with our biosecurity status. Any investment that protects that status is worth anything up to 100 fold the cost that might likely eventuate if something like foot and mouth disease, rinderpest or lumpy skin disease was to ever enter Australia.

Our whole export trade could be in jeopardy and that would be immediately reflected in livestock prices.

Missed opportunities

Opportunities for cost relief for the processing sector that were missed in the budget include a request for a $300 million extension of the International Freight Assistance Mechanism to provide exporters with some level of certainty in airfreight until mid 2023.

Before COVID, most air freighted meat went by passenger aircraft as the cost of dedicated air freighters for a heavy dense product like red meat was just too high.

Since the pandemic, the IFAM program has made an important contribution to the export of top end mostly high value chilled products at a time when initially airfreight was unavailable and when it did become available, at prices that would have made our high quality exports uncompetitive. Current funding commitments for IFAM run out in June/July 2022.

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Also the opportunity to address the perennial issue of the cost of meat inspection in this country that is fully cost recovered from processors has been passed over again.

Most of our global competitors get meat inspection as a free public service. Meat processors in the US only pay for overtime. The normal USDA meat inspection service is free. The Australian industry was looking for $70 million over four years to at least freeze proposed export inspection cost increases.

While meat processing and export has always involved the survival of the fittest, producers also need to be conscious of the fact that the processing and export sector is their national sales and marketing team.

Two-way street

Processors and producers need each other.

Sheepmeat processor Roger Fletcher has always said he doesn't have a business without producers.

Processor losses made in the current environment will have to be covered by future profits when supply increases.

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That will be essential if the whole sector is to continue to be globally competitive over the medium to long term.

Producers also have a part to play in ensuring that a competitive, efficient and experienced processing and export base continues to operate in Australia in order to market their product around the world.

Market parameters

National cattle slaughter rose slightly this week as more plants got back to normal processing levels after disruptions with floods, inclement weather and associated transport issues but also looking to cover the upcoming sequence of three short killing weeks generated by Easter and Anzac Day.

The Indicator USDA price for 90cl imported frozen Australian boneless beef was 310 US cents/lb reflecting a slump in Australian arrivals in the US for week 13 at only 629 tonnes, no doubt in part a reflection of production and transport issues a month ago.

March beef exports in total were down to 73,348 tonnes, 11pc below the same month last last year, a trend apparent for the whole first quarter.

Only Japan at 20,083 tonnes for March held to similar levels as last year.

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