IS the Australian red meat processing sector entering a new rationalisation phase due to livestock supply difficulties and market conditions squeezing margins?
The question has arisen following the dramatic closure of three small but significant regional abattoirs in the past fortnight.
The indefinite closure of Leitch Pastoral Co's Killarney and Pittsworth abattoirs are the first significant plant closures in Queensland since Teys Innisfail and South Burnett near Murgon both shut their doors in 2007. They followed the collapse of the Burrangong Meat Processing export plant in southern NSW a week earlier.
The unusual confluence of a high A$, livestock supply shortage, and poor demand and prices in key export markets are being tagged as the biggest influences in the current 'perfect storm' being ridden-out by processors.
Presenting the 2010 Beef Industry Projections briefing in Sydney this morning, Meat and Livestock Australia economist Tim McRae offered a basket of reasons why processing had come under considerable operating stress in the past year. The top of this list was the performance of the A$, which had appreciated 35 percent in the 12 months, diluting the competitiveness of Australian beef on the world stage.
The impact of the global credit crisis on demand in key markets like the US and Japan, and shortages of slaughter stock caused by successive droughts and diversion into live export were also significant contributors.
Teys Brothers managing director Brad Teys said the processing environment during 2009 had been as bad as he could recall at least for the past 25 years.
The shortage of slaughter cattle, an uncompetitive exchange rate and a bearish international beef market have been compounded by other factors like low hide and offal values. Cow hides were worth as little as $3-$4 each during periods last year.
While such challenges were present for most of 2009, it took time for financial difficulty to accumulate and be manifested in plant closures such as those seen recently. "It often takes time for cash-flow to dry up. It's a war of attrition," Mr Teys said.
He would not speculate about the likelihood of further closures during 2010, despite his forecast that kill rates would remain low for the near future.
Small operators were not the only ones being hit by pressures, however. Some of the nation's biggest factories are showing signs of difficulty in the current environment.
Teys' Lakes Creek plant at Rockhampton only started its 2010 kill on Tuesday last week, operating on a four-day week, while Biloela will drop this year from 750 head/day to 550.
For the 2009 calendar year just completed, Teys produced at least 15pc less beef by volume than in stronger years like 2005 and 2006, with a 'lot of days off' recorded during the season, Mr Teys said.
"This year is not shaping up to be a lot different, in fact we think it could be a little worse in terms of total numbers killed," he said. "There should be a run of cattle in May-July as a result of the recent rain, but it's likely to be tough outside that period."
Last week's Queensland cattle kill of 43,700 head was 40pc below the same week last year. The extreme low rates of kill are also reflected in industry statistics showing that for the three months ended January 30, Australian beef exports to the US reached just 38,000 tonnes, a far cry from the same period in 2008/09 of 70,000t.
The nation's largest processor, Swift Australia is also winding back its killing operations in 2010. The company's Stuart plant near Townsville is the country's northernmost beef plant of any scale, and the most directly exposed to competitive pressure for livestock from live export.
Stuart has put off 267 employees this year, dropping weekend shifts and reducing kill by about one-third. Swift pointed out that that the move would strip about $14 million in wages annually out of the local economy and $70 million when the flow-on effect was added. Even Swift's flagship Dinmore plant near Brisbane will drop from 11 to 9 shifts over a five-day week this year, in light of the livestock supply and demand challenges.
Mr Teys said recent widespread rain had given some greater cause for optimism about prospects for 2010 than he had back in December, when things were desperately dry. "The weather will eventually produce a positive when it is translated into weight in slaughter cattle later in the season, and the year after. It should deliver more killable cattle out of the Channel Country and northern NSW than we have seen recently, for example. But while the season is a big improvement on December's outlook, there certainly won't be the killable numbers available that we saw three or four years ago."
While the national herd did not appear to have declined as much as anticipated due to drought, there had been a general 'run-down' in killing younger and younger cattle that would create a deficit this year.
The recent relief seen in the value of the dollar would also provide some support to export processors if it continued, Mr Teys said. A decline from recent highs to US87c on Friday last week translated into a 6pc increase in revenue, all other things remaining equal.
"A lower dollar helps us stay competitive, and helps ensure producers get adequately rewarded for livestock, in Aussie dollars," he said.
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