AA Co warns of COVID-19 impacts on bottom line

Jon Condon, 20/04/2020

THE Australian Agricultural Co has issued warnings this morning over impacts being seen on the business from COVID-19, and a range of measures the company will take to manage the situation.

Much of this is apparently being brought on by AA Co’s heavy exposure to high-cost Wagyu beef, and the premium food service hotel and restaurant markets it is predominantly targeted at.

The company will temporarily stand-down a small number of sales and marketing staff, this morning’s statement said. All corporate staff have been asked to reduce their working week to four days until 31 July 2020 to assist the company through its difficult period.

While the COVID-19 pandemic has presented unprecedented challenges to the beef industry, AA Co chairman Don McGauchie said the board saw this as an opportunity to examine everything it did as a company, to ensure that it could meet the ‘challenges and opportunities’ of a post-COVID world.

“Over the past month, as the situation has unfolded, management, in consultation with the board of directors, reviewed all aspects of the company from the bottom to top, to determine what it needs to do to survive this health and economic crisis and come out of this as a company positioned for success in the future,” Mr McGauchie said.

He said the board had determined that AA Co’s current sales and marketing priorities ‘must be ‘modified’ to adapt to the changing conditions.

“As the situation is fluid, we will continue to pivot as necessary and adjust the company to create an organisation that is as flexible as possible to manage through this fast-changing situation,” Mr McGauchie said. “We are taking numerous actions in response to the worldwide economic slowdown and medical emergency.”

“As government directives around the world have forced most of the restaurants which buy AA Co beef to close temporarily, we are accelerating our allocation of product to the retail markets where we already have a strong presence across our geographically diverse customer base.  We are also testing direct to consumer initiatives,” he said.

The company’s executive team had taken several steps aimed at optimising cashflow and reducing operating costs to meet these changed circumstances.

In addition to reduced hours and stand-downs mentioned above, executives including managing director and CEO Hugh Killen will reduce their salaries by 20 percent over the next three months, and the AA Co board will follow suit and forego 20pc of their directors’ fees over the same period.

“While all these steps are being taken to position ourselves to rise to the challenge of this historic event, we would like to stress that AA Co is well capitalised, has significant headroom remaining across its debt facilities and the balance sheet is strong,” Mr McGauchie said.

Increases in value

A recent independent valuation by CBRE Valuations, pending audit, was expected to result in an increase in the carrying value of AA Co’s pastoral properties of 8-10pc at 30 March 2020, over balances reported at 30 September and 31 March 2019.

In addition, pending audit, the company is expecting a material increase in the value of its herd over values held at 30 September and 31 March last year.  This expected increase in value was primarily due to higher cattle prices, despite lower overall herd numbers that had resulted from the company’s strategic destocking decision made in response to the adverse seasonal conditions experienced in 2019, and the loss of cattle in the Gulf flood event in early February last year.

“This may well be one of the biggest challenges that AA Co has faced, however the company is adapting to the changing circumstances to ensure it continues to prosper for another 200 years,” Mr McGauchie said.

Wagyu impact

AA Co said it could not enlarge on today’s statement when approached by Beef Central, citing its ‘blackout period’ under publicly-listed corporate rules in the lead-up to the company’s full year financial results disclosure on 20 May.

While the word, ‘Wagyu’ is not mentioned once in AA Co’s statement issued this morning, it is clearly at the heart of the market and financial headwinds the company discusses.

The large numbers of Wagyu that AA Co has on feed only amplifies the current problems outlined in today’s statement. Emphasis in certain customer markets, including the US, is only making that worse, as North America goes through its own extreme control measures.

There’s now a widely-held industry view that given their heavy exposure to the premium end of the food service market, including hotels, restaurants, resorts and conferences, the Wagyu and longfed Angus beef segments are doing it particularly tough under current COVID-19 industry changes.

Worldwide, there has been a dramatic decline in food service operations, and particularly at the higher end of the restaurant and hotel trade – one of AA Co Wagyu’s key target markets.

Wagyu suffered a similar dramatic decline in value during the Global Financial Crisis in 2008, when premium beef sales suffered more than most as austerity measures set in.

There has been a significant drop in Wagyu sales into worldwide foodservice markets, the extent depending on restrictions imposed country by country.

Typically, higher value loin cuts make their way into foodservice, balancing out the overall value of the carcase for Australian processors. With loin sales down, it will remain a constant challenge for the industry to move the entire carcase while minimising the impact to overall value of the carcase.

AA Co is now heavily exposed to the Wagyu beef segment, running one of the largest Wagyu herds in the world, now making up more than 50pc of the company’s beef sales each year.

A spokesman for one of the nation’s largest Wagyu and longfed Angus brand programs emphasised that these segments had been particularly hard-hit under COVID-19 market shutdowns.

“Who would have predicted in a risk analysis that all 15 or 16 of the leading export markets in the world for Wagyu would collapse overnight, at virtually the same time?” he said.

The opportunity to ‘effectively sell’ Wagyu and longfed Angus loin cuts had for the timebeing at least, virtually ‘gone,’ the supply chain manager said. The exception was a few premium retail outlets in areas like the Middle East and Singapore. Some of those businesses had switched to some form of home delivery, or an online sales model.

“But there’s a limit on how many homes a high-end product like this can be put in. It would be unrealistic to suggest that Wagyu can simply transpose what it has traditionally sold into higher-end food service restaurants around the world, into the retail/home consumption space,” he said.

“It means there is going to be a period where these premium-beef-producing segments need to sustain some drop in value – across loin cuts, particularly – to get a portion of them into retail.”

“All beef can be sold, at a price, but the challenge is going to be finding homes for all Wagyu production at a price that reflects its production cost,” he said.

Wagyu middle meats like tenderloins, striploins and cube rolls, under normal circumstances should be worth $70-$100/kg wholesale, for higher-marbled products marbling score 8 and up.

‘Where does product like that go in the current market conditions, when restaurants and hotels are closed?” the trade contact asked.

“Such products are still worth different amounts in different markets, but it’s finding homes for cuts like that which is now proving extremely difficult – especially when trying to preserve as much of its value as possible. Otherwise it becomes a race to the bottom.”

“Some of this product is being offered to existing customers at discounted rates, to keep product moving. Some is being sold as part of revived fullset trading, especially into North Asian markets like Japan and Korea. Fullset business covering 12-18 cuts or more tends to ‘average out’ prices across all cuts, but loin cuts are almost inevitably discounted under the practise.”

Traditionally, Japan and Korea are not strong loin cut markets, but given recent price movements and trading conditions, more premium Wagyu and longfed Angus loins are now being consigned, as part of a ‘renegotiated’ fullset price, the contact said.

Other high quality Wagyu beef is in fact being placed back into ‘shortfed’ type beef programs, with no Wagyu identity attached, Beef Central was told.

“It appears a lot of Australian Wagyu supply chains are ‘re-modelling’ what they are doing,” the contact said.

“I suspect most are still selling some product at reasonably good rates to well-established international customers, driven by strong retail demand both internationally as well as in Australia.

“But on the rest – perhaps another 50pc or more of their production, they are having to look for new homes for it. You can’t just ‘not kill them’, and leave them on feed,” he said.

“All of us in the Wagyu supply chain need to find a way to work through this episode – whether it takers three months, six months, or whatever.”

Asked how significant trade into the domestic market could be as a solution, he said some mid-marbling score 5-6 product could find a home in the domestic trade, but it was much harder to place score 8-9 Wagyu in domestic retail, in volume, at any realistic price.

“The best we can hope for is that two or three months down the track, there is some re-emerging food service market in Australia, which would be very helpful,” he said.

There is also evidence that rate of Wagyu slaughter has started to decline in recent weeks.

The largest portion of Wagyu beef produced in Australia is processed through just two sites – John Dee at Warwick in southern Queensland, and Northern Cooperative Meat Co near Casino in NSW. At least one of those site is now reducing Wagyu kills each week, Beef Central was told.

Wagyu numbers on feed in decline?

While there is now clear evidence that overall cattle numbers on feed across Australia are in decline, the challenge with longfed Wagyu was that decisions made today about refilling pens as they close-out will not be reflected in Wagyu meat supply until at least the middle of next year.

“It’s a difficult position. Stop placing Wagyu feeders now, and the supply chain potentially does not have enough meat in a year and a half’s time, when markets may have hopefully fully recovered,” the supply chain contact said.

“The challenge for those Wagyu supply chains that are not in such a strong position that they can make commitments to feed current numbers out in front, is that they are thinking more about survival over the next few months.”

Longer time on feed

Those chains with strong brands and good customer loyalty would try to look to the future, and work their way through this difficult period as best they could. In some cases that might involve feeding cattle a little longer to temper the entry and exit numbers each week, beef Central was told.

“A longfed Angus program might go out to 250 days or more, or a Wagyu F1 program might go beyond 400 days. A lot of longfed cattle exiting feedlots now were placed on feed back during the drought last year, often at lighter entry weights. So they are perhaps better placed to feed-on beyond normal feeding periods.”

Cold storage concerns

As stocks build up, there are mounting concerns also about cold storage availability for meat, both within Australia, and in key export markets.

International reports out of China, Korea and Japan suggest that cold stores are currently at capacity with beef, and Wagyu is inevitably a part of that.

Airfreight access disruptions have also added to export logistics problems in the past month.

There were still a lot of unknowns about what shape the higher end beef market would be in after COVID-19 clears, the supply chain contact said.

“Fine dining may come back with a vengeance after this is all over, but is COVID-19 going to fundamentally change the way consumers purchase product? Is the tourism sector going to be that hard-hit that we don’t see international visitors in some of these markets, consuming high-end product like Wagyu in the same numbers that that did previously?

“It’s difficult to see any sort of international travel before the end of the year. There are still so many unknowns,” he said.

“On the flipside, we’re going into the northern hemisphere summer which is traditionally a more challenging period for Wagyu in some of our export markets. But those markets might actually be OK this year, because people are trapped at home. Wealthy consumers in the Middle East, for example, will be spending Ramadan at home this year, instead of travelling to Europe over summer, as they often do.”

“That may boost Wagyu demand somewhat over summer in the Middle East.”






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  1. Mike Introvigne, 20/04/2020

    Maybe its time for a new board at AACo. Many industry participants would agree that such a one dimensional marketing approach is flawed. Particularly one that has such a negative environmental footprint as feeding cattle for more than 120 days. Where is the morality in feeding cattle for up to 400 days to produce fat. Maybe this current COVID-19 situation will help the board see the light especially when the rest of the production sector is being rewarded with the best prices we have ever seen. I don’t think there are many produces in Australia, besides AACo, complaining at the moment.

  2. Ron Jones, 20/04/2020

    Looking at the current situation both here in New Zealand and Australia i am a long time shareholder of the company ., i still maintain confidence in the Managment and staff of the company through these very difficult times and feel in the long run we all will see reasonable results start coming through. KEEP UP THE GOOD WORK all of youKind Regards Ron Jones

    • David Connellan, 21/04/2020

      Seriously, Ron?
      Have you even looked at the financial performance of AA Co since the float in 2003? Every year, there is another excuse during the AGM for poor financial performance, despite having some of the best large-scale cattle properties in Australia. How long must shareholders wait?

  3. Leigh harry, 20/04/2020

    The board keep on making smart decisions hey , add this to their abattoir idea .
    Here’s an idea , just concentrate on growing & breeding cattle .
    The board’s judgment always effects down the line to the stations .

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