Meat processing co-operative Alliance Group is warning its farmers the goal of remaining a 100% farmer-own co-op depends on getting their support

The Chairman of meat giant Alliance Group says outside capital might have to come into the co-operative if it does not get strong support from its farmers.

A similar process happened to its big rival, Silver Fern Farms, some years ago, when 50% of the one-time 100% farmer owned co-op was taken over by the Chinese firm Shanghai Maling. 

Mark Wynne says he wants Alliance to remain a 100% farmer-owned co-operative, but he needs real commitment from farmers to make that strategy work.  

Without it, an infusion of outside capital would be considered. 

In its last annual report, a pre-tax loss of $97.9 million was announced by Alliance. Silver Fern Farms also made a loss.  

Wynne was speaking in the wake of an announcement last week that Alliance farmers would have to meet an extra $3 per head of livestock processed, along with acquiring more shares per livestock unit than previously.     

Wynne also suggested total meat processing capacity at Alliance’s seven factories would be adjusted to reflect the supply of stock, but it was not clear if any of its plants might close or whether there would be less processing at each one. 

Wynne spoke to Eric Frykberg of interest.co.nz. 

INTEREST:  There has been some criticism of your decision to raise capital from farmers – they say it will be hard to find the money – what is your response to that?

WYNNE:  Well, first of all, I acknowledge that farmers are doing it really tough, and so this is a very bad time to be raising money. Having said that, the whole sector is doing it tough, and Alliance is no exception for that. So, we need to strengthen our balance sheet, and as a cooperative, our primary source of capital is from farmers.   

We have indicated that our best estimate of the capital we need to strengthen our balance sheet is somewhere in the range of $100 million to $150 million over two to three years, and I want to be clear that not all is coming from farmers. So, we are pulling levers in terms of reducing our working capital requirement, such as reducing our inventory, accelerating our receivables and taking a really hard line on cost reduction. And of course, we are going back to our farmer shareholders and requesting more capital.   

INTEREST:  So, is that how you arrived at the figure you chose, it was based on how much you needed?   

WYNNE: It was our best guess, you know the season is very peaky, and if we can reduce that peak by pulling those levers I've just mentioned, then the total amount we need will be on the lower end. If we are less successful, then it will be on the higher end.

INTEREST: Does that mean the final amount of money that farmers will pay could vary in the end?

WYNNE: It could do, and it primarily will depend on, again, reducing that working capital requirement as much as we can, and on the support that we get from farmers.

INTEREST: Support in what way?

WYNNE: Well, if farmers decide not to supply stock to Alliance, then clearly that will mean the deductions (per head of stock) are not available to us, and so as a co-operative, when we look to raise capital, it takes us back to our farmer owners.

INTEREST: Could there be another capital raising from farmers anytime soon?

WYNNE: In our product disclosure statement, we’ve said our best guess is that we need $100 million to $150 million. However. we've also indicated in the product disclosure statement that we will consider other possibilities such as (an issue of) preference shares and/or external capital, depending on how the farmers respond. But our strong preference is absolutely to remain a 100 % co-operative and that’s where it takes us back to our farmer shareholders.

INTEREST: You say you will make a modest profit this year. Can you give any more details about that?

WYNNE: No, I'm not going to give a number.  Our forecast year is for a modest profit. The big unknown again is stock supply over the tail end of this fiscal year. Typically, July, August and September are really hard to predict, based on stock flow, capacity, pricing etc. One of the biggest questions is how much stock is actually still out there and that, in itself, is a little bit challenging to work out.

INTEREST: You mentioned the possibility of outside capital. Have you ever been approached by a big potential cornerstone shareholder such as Silver Fern Farms was by Shanghai Maling?

WYNNE: Not in my time, no. But what we put in our product disclosure statement is those are potential scenarios, subject to all our other preferred approaches not working.  So, we're not, you know, sitting with an offer in the background or anything like that, if that's what you're thinking. Our preference is to remain 100% co-op and we're trying as hard as we possibly can to do that.

INTEREST: Is that co-op model viable long term, do you think?

WYNNE: Yes, absolutely. I get asked this question a lot. In my career I have worked as an executive for a couple of co-ops and a listed American company, and for me the philosophical choice between a corporate and a co-operative is literally that, it's a choice. Both can thrive and both can be very successful business models. To create a high-performance company, you need full alignment between your shareholders, your board and your customers. You need to be absolutely on your game, you need to be exciting and delighting your consumers, because they’re the ones that ultimately pay for everything.  

You need to be making sure you’ve got efficiency all the way through the value chain. And you know, my intention is not to point the finger at anybody, but it wasn’t that long ago that everyone was saying Fonterra is doomed as a co-operative and look at it now, it’s in a fantastic position.   Then, on the flip side, Synlait was the listed darling, and that was the future, but look at it now, it’s in a really challenging position. Companies go through cycles. I think the co-operative versus corporate debate is a red herring.  At the end of the day, we need to be a high performance company and that’s what we’re going to be.

INTEREST: On another matter, is there still an issue with staff?  And do you still have a beef, if I can put it that way, with Immigration NZ?

WYNNE: Well, the labour market has changed significantly over the last 12 months and continues to soften, and so the pressure that we experienced post COVID, which was incredibly expensive and brutal, has eased considerably, so no we’re not having that that problem to any great extent at all at the moment.

INTEREST:  We saw information from Stats NZ last week which shows sheep numbers have fallen 3% in a year. It’s now down 16 million in the last 20 years. What does that say about the long-term viability of all of your plants? Could any have to close down do you think?

WYNNE: Declining stock supplies is a challenge and it’s happening for two main reasons. One is the financial profitability of a sheep now compared with 20 years ago. That has significantly changed. Wool used to be the primary income source, and now it can cost you more to shear a sheep than what it is worth, so that needs to turn around. Similarly with red meat, we have gone through cycles we’ve had couple of good years and then a bad year, so that puts pressure on. Then there are land use changes, with carbon farming in particular being driven largely by a government policy setting, which is quite frustrating.  

But farmers will make rational decisions, and declining stock supply will ultimately impact processing capacity.  So, one of the things that Alliance has done very successfully over the last 5 years is invest very heavily into its processing efficiency.  We benchmark off international players, and we’ve driven efficiency through data management, automation, cultural change, health and safety etc.  So, we have got ourselves into quite a good position where we can fix chains and we can flex between species, ovine and bovine in particular. We are changing from the principle of, ‘We will build the plant, you supply the stock’, to ‘We will flex our plants to meet the supply of stock.’

INTEREST:  There are some graphs that suggest the global price of meat has ticked up slightly from its low of last year.  Has that been your experience?

WYNNE: Beef and lamb are quite different. Let’s talk lamb first, because that is obviously the primary product from Alliance. So, China has failed to lift in price and that’s quite frustrating, given that they are really the price setter and they take a significant volume – the price hasn’t lifted but demand continues to be quite strong.  So, that’s the good news. We do need to get a price lift out of the of the Chinese, but their economy is just not firing the way it used to. In the other markets, in the US and some of the rest of Asia, lamb has started to lift and that is been reflected in our higher schedule price in very recent times. Beef has gone particularly well, driven nicely by the United States. So, beef is up above its five-year average price, but unfortunately, lamb is still behind its five-year average price.

INTEREST:  I’ve often been surprised at your ability to sell beef to the US, given the iconic status of US cattle ranches in places like Texas. I would have thought selling beef to the US would be coals to Newcastle?

WYNNE:  Well, they love their burgers and their steaks, and my understanding is that they have had quite a drought in the US over the last few years and that’s impacted their herd sizes. So, right now, there’s a gap in the market and the international suppliers, Australia, New Zealand, Brazil and Argentina, are filling that gap.

INTEREST: In your last annual report, you complained of 20 regulations imposed on the farming sector in the last six years.  What difference, if any, has been made by the current government since it is bent on what it calls regulation busting?

WYNNE: It just comes back to common sense.  We have centralised legislation, but, you know, one-rule-fits-all really doesn’t work in a biological system. I don’t think there are many farmers who want to operate like in the old days. They all acknowledge they need to get better, they need to be aware of the changes required around greenhouse gases, water, animal welfare and all those all those things.  I don’t think that is an issue. The issue is the pace of change and the practicality of the rules.   

We just need to go at a sensible pace with sensible rules, so that we can meet the objectives of all parties in a time frame that works for all.   If we can wind back the legislation to make it more practical, more local, more common sense, but still achieve the same results, then I think everyone will be pretty happy about that.