2011 - a rough year for meat packers

Monday, January 2, 2012

Several Ontario abattoirs ran into financial trouble last year after investing heavily to meet federal licensing requirements. But so far the loss has not affected the province's cattle industry.

by MARY BAXTER

If packers were pin-ups, then Holly Park Meat Packers Inc. at one time would have been as close to the farmer's ideal as you could get.

Until recently, this operation, which specializes in beef, veal and lamb processing and is headquartered in Cookstown, paid on time, offered a good dollar and understood quality, according to Vince Stutzki, a Paisley area lamb producer. "Pioneering" is the word the Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) uses on its website to describe the company's traceability program.

But, a little over a year ago, Holly Park's sterling reputation faltered. Payments arrived late, then even later, recalls Stutzki, one of 60 producers who shipped lambs to the packer via Ontario Lamb Marketing Inc. In September, payment problems were so common that the Ontario Cattlemen's Association warned its members to be cautious in their dealings with the company.

Then, on Sept. 28, Holly Park filed for 30-day bankruptcy protection in a Toronto court. It owed more than $5 million to secured creditors such as Farm Credit Canada, Royal Bank of Canada and Toronto-based developer Baghai Development Limited, plus a further $5 million to about 50 unsecured creditors. In November, the company successfully convinced the court to extend its protection to Jan. 3.

Holly Park was not the only abattoir to experience challenges in 2011. In Kitchener, Arnold Meat Packers Inc. floundered just months after opening, losing its cattle dealing license in August after falling behind in payments to cattle producers. The company processes cull cows and serves export markets. In November, the Waterloo Region Record reported that cheques to 40 of Arnold's employees had bounced.

As of press time, 300 claims had been filed against the company under the Ontario Beef Cattle Financial Protection program and petitions of receiving orders were filed with the Office of the Superintendent of Bankruptcy Canada against the company's owners, Claudiu and Mihaela Ciuciureanu. Claudiu Ciuciureanu did not respond to a request for an interview.

Farther north in Mount Forest, Frey's Custom Meats Inc. listed its facility for sale in July and ended slaughter operations. A company representative declined to speak on the record about what motivated the decision to sell.

All three plants obtained federal slaughter licenses within the past three years. All three received federal money within the past two years for upgrades required for the licenses.

Holly Park obtained a loan of more than $1.5 million under the federal slaughter improvement program and claimed nearly $1.4 million of those funds; Arnold was approved under the same program for a loan of a similar amount and claimed $1.258 million. Frey's received a grant of $34,000 from the federal abattoir competitiveness program.

Stutzki fears the companies' troubles after investing heavily in infrastructure to obtain federal licensing reflect broader problems. "It does not bode well for the red meat sector," he says.

It has been a rough year for packers. High prices for livestock and pressure from the appreciation of the Canadian dollar affecting wholesale prices have meant negative profit margins, says Kevin Grier, senior market analyst with the George Morris Centre in Guelph. That's particularly hard for smaller companies to absorb because they can't take advantage of efficiencies of scale.

Conforming to government food safety regulations, like the 2007 enhanced feed ban that required operators to remove ruminant tissues associated with the spread of BSE (brains and spinal chords, for example), has meant higher costs than U.S. competitors, though these are not new burdens, Grier observes.

The few details available about the companies' troubles suggest that investing their resources into expansion, even with the assistance of government money, left them vulnerable to other pressures. In August, Claudiu Ciuciureanu attributed his company's financial woes to a high Canadian dollar, poor spring weather that delayed the barbecue season, falling beef retail prices in the United States and increased competition. "Cargill went in our business (buying cull cows) almost a month ago," he said at the time, noting that it immediately became more difficult to source animals.

Holly Park spent $3 million to make the structural changes necessary for federal licensing, says Allan Rutman, president of Zeifman Partners Inc., Holly Park's Trustee in notice of intention to file a proposal under the Bankruptcy and Insolvency Act.

Downtimes related to construction, problems with materials meeting federal requirements and a fire affected the company's ability to generate income. Then, a business relationship with Paradise Farms Caledon Incorporated, an organic farm owned by Baghai Development, landed in court.

However, the potential loss of slaughter capacity is not of great concern to the province's cattle industry. There are other plants in Ontario, Quebec and the United States that accept cull cows, noted LeaAnne Hodgins, communications manager with the Ontario Cattlemen's Association, shortly after Arnold's cattle dealing license was pulled.

Curtis Royal, the association's president, notes that, with the decline in cattle numbers in North America in recent years, it's become tougher for businesses to source cattle. If the United States bows to pressure to change its controversial Country of Origin Labelling legislation, there will be even more competition to acquire cattle from plants across the border. 

With strong lamb prices, sheep producers are also unaffected financially, says Bill McCutcheon, Ontario Lamb Marketing's president. Holly Park doesn't owe lamb producers money because Ontario Lamb Marketing reimbursed them. (Holly Park does owe Ontario Lamb Marketing $12,548.45).

Yet lost is a value chain that motivated many to embrace accelerated production – an approach to management that allows sheep to reproduce more than once a year. By using both accelerated and annual flocks, the marketing company supplied Holly Park with about 250 lambs a week that were grown to the processor's specifications. In turn, producers received premiums for above-average muscling and discounts for lambs that were either overweight or had too much fat.

Other meat packers are keen to establish such an arrangement, says McCutcheon, but with high lamb prices, there's little incentive for producers to embrace another contract. Once lamb prices begin to fall, however, producers may become more interested in value chains to secure pricing.

Stutzki notes that federal licensing is crucial to the success of such a venture because international buyers are needed for the parts of the lamb not used in niche products. Now, however, the ability to get product slaughtered locally within a two-hour range at a federally licensed plant has been "crippled," he says. "There are federal plants outside the province, which means a product would have to leave live before it actually could come back into the province to be sold. Obviously, those become logistical issues. Economically, it makes no sense anymore."

The possibility of other provincial abattoirs involved in custom slaughter being interested in obtaining federal status is unlikely. To do so, they would have to put more animals through "and there are so many limitations in terms of the cooler capacity and everything else," points out Laurie Nicol, executive director of the Ontario Independent Meat Processors Association. In an existing facility, "it's probably not feasible, specifically for beef where you've got a longer hanging time," she says.

Strong market prices means Ontario's veal producers have also found other buyers, says Jennifer Haley, executive director of the Ontario Veal Association. But Holly Park's troubles have highlighted an unsettling problem: the terms of coverage under the Ontario Beef Livestock Financial Protection program, which veal producers pay into, work against the realities of the industry.

The program compensates producers for 95 per cent of their losses if a provincially licensed dealer defaults on payment. The board requires dealers to pay farmers within nine days of purchase if the transaction is less than $15,000 and within six days if it's more than that amount. Producers must file claims within 30 days of sale.

It's the program's timelines that concern veal producers, explains Haley. To comply, veal producers can't extend credit. That means they can't send a second load until the first one is paid for. At that point, the animals may no longer qualify as veal calves because they may exceed weight requirements. In Holly Park's case, one producer went months without being paid because he trusted he packer. The producer won't qualify for claims.

"We've been back and forth with the Ontario agriculture ministry for the past year, well before this situation with Holly Park came up," Haley says. No resolution is in sight. "It has been a very frustrating period for producers because they feel that no one is listening to them."

To date, five producers have filed claims totalling $300,000 against Holly Park. The company continues to hold a livestock dealing license, but it must submit weekly reports about the purchases made the week before and proof of payment, as well as monthly financial statements to the program's manager. It cannot owe more than $125,000 in outstanding payables for the livestock covered and must provide the ministry two days notice of bankruptcy.

The conditions have been in effect since mid-September. Mary Vacca, a member of the Ontario Livestock Financial Protection Board since 2006, resigned that same month. The board oversees the program's fund and Vacca is a manager with Holly Park and sister of its president, Tony Facciolo. No reason was given for her resignation, says Susan Murray, a ministry spokesperson, in an email.

Despite the problems, Holly Park's former suppliers appear to be supportive of the company. "We hope Tony can recover from this. He's an important player in the veal business," says Haley. "We hope he comes back with a proposal that is fair to everybody. It's an unfortunate situation for everybody."

Rutman is hopeful about the survival of the business. Currently, the company is working on a restructuring proposal. Other parties have contacted him expressing interest, "but they want to see the business plan." The company will need additional investment to reduce its debt, but with its federal licensing there is "significant potential for increased business going forward," he says. BF