Opinion: Cockies may be cock-a-hoop but sheep farmers are bleating

By NZPA

Friday 15th June 2007

While cow cockies are basking in booming world prices, most sheep and meat farmers are struggling and the companies that process their stock are doing even worse.

Farmers say the $5 billion export industry is in deep malaise and there is a need to rationalise the 19 meat exporters to one dominant player -- as dairy has with Fonterra -- plus a few smaller, nimble, niche operators.

A fortnight ago Hamilton-based slaughterhouse Affco Holdings reported an $18.4 million loss half-year loss. Cashflow was nearly $100m negative and it said trading conditions were "extremely difficult".

This week, bonds in Dunedin-based PPCS jumped in yield to 20%, which financial analysts say is a red light warning signal.

Investment adviser Chris Lee of Project Resources said it wasn't a good sign for the bonds of a company with $2 billion in annual turnover to trade near 20%.

Yesterday, PPCS admitted it would be in breach of banking covenants by its August 31 year-end.

In response to a stock exchange query about why the bond yields had risen 6.5 percentage points since May 1, it said an unfriendly exchange rate had made trading conditions difficult.

Chief financial officer Rob McFarlane said PPCS would request waivers from the bank at year-end balance date, August 31.

Westpac is PPCS's main bank and a bank source told NZPA it was keeping close tabs on PPCS and had "several heavy hitters" working on the company's account.

The good news is McFarlane said PPCS's operating costs had been below budget and the 2006/7 accounts were expected to show significantly improved equity, debt and cashflow on a year earlier.

In the wake of its bitter seven-year battle to buy Hawke's Bay's Richmond for $140 million plus many millions in legal costs, PPCS's equity to debt ratio blew out to 25%.

It has since improved to 30% and McFarlane said the recently introduced stock procurement scheme had further improved the position.

PPCS, which traditionally has poor first half cashflow, was also in breach of its covenants after last year's half-year accounts.

But Westpac continued to lend to it -- probably not wanting to alienate PPCS's 9000 odd farmer-owners -- and the position turned around at the full year.

Bond trading specialist David Speight of Direct Broking said when bank covenants are breached it doesn't necessarily mean finance can be withdrawn, but the terms may be altered.

He said yesterday's statement could be read as mildly positive.
"They said life isn't that good, but they were also pointing out that over a season they are making some dough."

A few of PPCS's farmer-owners spoken to by NZPA said they saw tough times ahead, but don't expect PPCS to experience major trouble.

They all, however, want further rationalisation of the industry with the most obvious option being a merger of PPCS with Southland-based Alliance Group.

Some of PPCS's problems are specific to it -- such as the debt built from buying Richmond -- but others relating to the fall in meat prices and the exchange rate are industry-wide.

PPCS, like other companies, has been caught with too much stock on its hands at a time when the currency has turned against it.

Nationally, 1.8 million lambs more than usual were killed at all freezing works because of the east coast drought and what proved to be a mistaken signal from processors to kill early.

An early season surge in prices was not sustained and PPCS and other meat companies were caught in the middle.

Rick Cameron, who has farmed sheep on 4060ha near Milton in Otago for over 30 years, said he was considering buying PPCS bonds at their current discount of 85% of face value.
"That really sums up what I think."

He agreed the extent of the rise in PPCS's bond yields was a warning signal and PPCS had paid too much for Richmond.

"It's tough going out there, but sometimes the tough have got to get going," Cameron said.

"The flame is at its hottest now, but we take a long-term investor attitude -- a 10-year view."

David Botting, a PPCS owner/supplier who is also an Otago Federated Farmers representative, said it was just a matter of trading through.

"I don't know how much pressure the bank is putting on (PPCS), but I would sooner see the lambs stuck on their books than selling them at a loss.

"The worst thing they can do is dump that in the marketplace at loss just to get the money."

Botting said few sheep farmers were making money at present and they would be grumpy if at year-end rebates were minimal or even negative.

Another PPCS shareholder, who declined to be identified, said PPCS should not be particularly affected by a strong dollar.

The main risk was taken by suppliers, not meat companies which operated in the middle.

"It's basically over-capacity, unfortunate circumstances in the marketplace, coupled with inept marketing across the industry."

He said given that Affco had half PPCS's turnover and double the loss, PPCS in the circumstances had had "a bloody good result".

Like the other farmers spoken to, the Hawke's Bay farmer said there was a strong need for further industry rationalisation.

"Just look at the Fonterra performance versus the meat company performance -- it's the ability of a strong farmer-owned entity to take a position in the marketplace and not be dicked around by anybody else."

The southern sheep farmers' Meat Industry Action Group wants Alliance and PPCS to get together, at least in marketing.
However, divisions between companies are deep as was shown in the Richmond takeover.

Neither Agriculture Minister Jim Anderton nor Federated Farmers will lead any rationalisation.

Anderton said it was not his place to intervene until farmers had supplied him with the evidence.

Farmers vice-president and Southland sheep farmer Don Nicolson told the Otago Daily Times that if he had a mandate to take a prescription to the co-operative, he would.

He said the dairy industry achieved change by the charismatic leadership of John Roadley and latterly Henry van der Heyden.

In 23 years of farming he had five years of healthy profits and farmers could not go on enjoying the occasional good year and living in hope.

"I believe this is the last shot. If we can't get this prescription on the table before next killing season, then we've got a major problem."

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