Plant closures as financial losses bite

Jon Condon, 30/06/2011


It goes to show how quickly circumstances are turning in the Australian beef processing industry at present.

Just a fortnight ago Beef Central was assured by several processing sector stakeholders that there was ‘little immediate chance’ of the trend towards skipping occasional kill shifts to better-align supply and demand developing into longer-term plant closures.

But as the economics of export processing continue to sour, that ‘unlikely’ prospect turned into reality this week, with lengthy down-time announced for several plants, and more likely to follow.

JBS Australia announced yesterday that its flagship dedicated grainfed plant, Beef City, outside Toowoomba, will shut its doors for a fortnight due primarily to the adverse trading conditions for grainfed beef in Japan.

Beef City’s last kill date is tomorrow, Thursday, with boning winding up on Friday, July 1. Processing will recommence on July 15 and boning, July 18. The closure will take 1100/day capacity out of the JBS system, according to statistics on the company website.

In a statement, JBS said it was the first time in Beef City’s 35-year history that the plant had had to close because of poor trading conditions. Other factors leading to the decision included the impact of a high A$, and ever-increasing labour costs without corresponding increases in productivity.

Significantly, and for the first time, another factor raised by JBS was higher Federal Government charges such as increased AQIS fees. Despite a vigorous Government lobby by the processing industry and supported by Beef Central, from July 1 AQIS inspection fees and costs will rise by the equivalent of $6-$8 a head (AQIS’s own estimate). The broader industry has already accepted that those costs will ultimately be borne by producers, in the form of lower livestock returns.

The combined effect on Beef City and grainfed production in general has been to make Australian grainfed beef much less competitive on international markets. At the same time that the industry is faced with these challenges in Australia, cheaper US beef is rapidly supplanting Australian Beef on shelves across the North Asian markets.

“This week’s bigger national beef kill will not last long,” one major processor contact said this week.

“There’s only one way the rate-of-slaughter trend will now go, and that’s down. The way the numbers stack up at present, many export processors will be considering a series of ‘dark days’ (scheduled non-kill days), or longer term closures,” he said.

He agreed that there could be financial advantages to processors by closing for a ‘block’ of time, rather than a sprinkling of days, to more effectively clear-out stock.

“The big problem is the huge backlog of meat in the system at present, that has to be cleared. Some of it (chilled) is now running out of shelf-life, or alternatively is being frozen-down and put into cold storage, which itself devalues the product,” Beef Central’s contact said.

Demonstrating the huge effect that currency movement has had on competitiveness in North Asia, Japan has increased its US beef imports 53pc over the past six months (although this is from a much lower tonnage base), while Australian beef intake year-to-date has risen only 3pc.

Contrary to expectations linked to the earlier Tsunami/earthquake/nuclear contamination episode, Japan has in fact imported about 13pc more beef calendar year-to-date than it did for the same period in 2010. 

Unlike northern export processing plants that tend to close for several weeks for annual maintenance around Christmas, many southern factories tend to schedule their annual closures around mid-winter, when supply of killable cattle is short.

These closures “will not come soon enough” this year, one southern operator said. He would not rule-out extension beyond normal maintenance closure periods, given current market circumstances.

Teys Naracoorte will close for three weeks from today-week (maintenance and refurbishment of the by-products area), and plants like JBS Brooklyn (5200 beef and lamb/day, according to the company website) will close for ‘at least a week’ from tomorrow, sources say.

Negative processor margins

As reported last week, serious negative processor margins are being sustained, particularly in export cattle, due to the combined effects of the high A$, and flat demand in Japan and the US. 
“More processors are deciding to take production capacity out, rather than incur such big losses,” a senior export processing stakeholder said.

Last week, processors quoted losses on grassfed Jap ox at $80 a head, but 100-day grainfed ox, being killed last week, based on a forward price back in March around 390c-400c, represented a massive loss of $200-$250 per head in the current market.

A prolonged period of trading like that could put serious financial pressure on all export processors, but could also jeopardise the existence of smaller single-site operators.

Making matters worse is the extremely flat demand for beef within the Australian domestic market. Whether that is due to the general oversupply of beef on the domestic front out of diverted export kills, or from some degree of consumer backlash over recent live export events, it is impossible to say.

Feedback from the domestic wholesale trade attending last Sunday’s National Retail Expo on the Gold Coast suggested that current consumer demand was still ‘extremely weak.’ Most retailers in attendance said, however, that the ‘live export effect’ on their business had been minimal, or non-existent.

See associated story, ‘Weekly kill shows big rise’


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