Poor profit margins in the live cattle export trade have convinced farm services business, Elders, to quit its live shipping operations.
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Elders, a pioneer in the export of breeder cattle and stock for processing in Asia, has confirmed it has immediately halted its long haul live export business to China and is selling its short haul shipping operation, and its sheep and cattle air freight service.
The “managed divestment” will sell the short haul and air freight business as a going concern, with those businesses continuing while prepared for sale.
Elders managing director, Mark Allison, said a comprehensive review of the company’s live export business had decided the “poor margins and capital inefficiency in the long haul business warrants an immediate cessation of that business”.
“While we continue to support our clients who participate in the live export industry, the export, logistics and shipping of live cattle to long haul destinations is no longer central to Elders’ strategy,” he said.
Elders reported a $2.9m loss in its live export division in the first six months of 2015-16, primarily due to $3.8m lost by its long haul business.
Other key live export players include big cattle shipper Wellards, and farm services player, Ruralco, have reported a dramatic drop in revenue from the trade, partly because of the soaring cost of sourcing livestock in Australia in the past year.
Most of Elders’ long haul business currently involves sea shipments of dairy and beef breeder cattle to China.
“That business is not producing a return on capital or margins at levels that meets Elders’, or its shareholders’, expectations,” Mr Allison said.
Elders’ short haul business, the North Australian Cattle Company, involves buying and sea freighting live feeder and slaughter cattle to Indonesia, Vietnam and Malaysia.
Elders’ air freight business flies live breeder sheep and slaughter cattle to China.
The exit decision will result in restructuring costs totalling around $6m, but the company expects to gain about $25m in working capital it can later deploy elsewhere across its business when the process is finalised.
Elders has also tipped it will report an underlying pre-tax earnings for 2015-16 of $54m to $57m after adjusting for non-recurring live export restructure and exit costs and accounting for current good seasonal conditions in its rural marketplace.
This compares with $45.8m last financial year.
Mr Allison said Elders became active in developing its live export activities when demand for live cattle from foreign markets provided key marketing options for the company’s producer client base at a time when domestic markets were soft.
However, with the introduction of additional specialist providers in the live export services business – many of which Elders had commercial relationships with – meant the strategic rationale for retaining its own long haul live export business has diminished.
Mr Allison said the company believed its participation in live export no longer lay in the logistics of shipping live animals.
Elders’ strategic and operational strengths in the live export supply chain were in finding opportunities with live exporters for its producer clients and accumulation of cattle for exporters.
“Our performance in the long haul business has continued to be poor and we believe that margins are unlikely to recover in the near to medium term”, Mr Allison said.
“In addition, we do not see that the China feeder and slaughter trade, which is yet to fully open, will deliver margins or a return on capital at levels that meets our, and our shareholders’, expectations.
“As a result, we consider that the long haul of live cattle is best suited to specialist logistics operators.”
However, the company’s review of its short haul sea export of feeder and slaughter cattle to Indonesia, Vietnam and Malaysia showed it remained viable notwithstanding the tight pressure on margins caused by “extremely high Australian cattle prices” which has placed pressure on margins.
“We enjoy very good relationships with end user customers in our short haul business. Those relationships have ensured that business has remained viable even in an environment of constrained margins.”
Mr Allison also noted that Elders has significant expertise in the air freight of slaughter cattle and breeder sheep to China and that it would continue to undertake profitable air consignments while it investigated the potential of sale of this business.
Meanwhile, he noted the interests of the company’s livestock clients were “of the highest priority”.
Elders remains absolutely committed to the needs of its livestock producer clients and will continue to offer access to a range of marketing options, including sale to live exporters, for their cattle.”
