At first glance Silver Fern Farms’ interest in being part of Alliance’s future sounds like a potentially positive outcome to the problem of too much capacity chasing too little livestock. The Dunedin based processor’s chief executive Dan Boulton has signalled that company’s willingness to be part of a constructive solution, although both parties recognise it is too early in the process for this option to be explored.
Boulton was reported as saying in his view Silver Fern Farms’ support was the only way to create long term value for both parties and the sector as a whole, because of their shared challenges both internationally and domestically. In response to my question regarding what type of support he had in mind Boulton replied “While we are confirming our intention to be constructively involved, it would be premature to speculate on the potential specific outcomes of our involvement. That detail and those conversations will come in time. However, we wouldn't be signalling our intent to be constructively involved if we didn't believe there was opportunities to create truly long-term value for both parties and the broader sector.”
As far as I can see, this proposal has several fishhooks which suggest it will be hard to knock into a viable shape. In the first place it is unclear whether this approach is an initiative of the main company which has adequate capital reserves supported by its 50% shareholder Bright Foods or the farmer-owned Cooperative which holds the other 50%. In view of Boulton’s recent comments about the need to cut $80 million from the cost base and reduce capital expenditure by $50 million to address a particularly hard final quarter, it is unlikely the Chinese part owner would be keen to invest further in meat processing, especially a loss making competitor.
The Cooperative’s purchase of 12.5% of scouring company WoolWorks indicates an appetite for investing in other businesses, but the Cooperative’s available cash is unlikely to be sufficient to solve Alliance’s balance sheet problems. Nor would investment in another meat processor be a good use of spare funds, because it breaks all the rules of diversifying investments.
Strategically SFF does not require further processing capacity, unless it intends to increase its share in declining sheepmeat and static cattle markets. The last thing it needs is to acquire a share of ageing assets from Alliance. The main objective ought to be to invest continually in its own plant infrastructure to ensure it is able to match more efficient and lower cost competitors at the direct cost level.
In comparison with other companies SFF also has a high fixed cost business model based on the employee numbers considered necessary to support its plate to pasture strategy both domestically and overseas. For example Boulton referred to the 20 strong staff numbers in China required to promote the company’s products in its part-owner’s home country. This level of overhead demands a consistently large quantity of product sold at a good profit margin over and above the competition which in most cases does not have a similar structure.
Alliance chairman Mark Wynne appeared to welcome the approach from SFF, but said the cooperative had engaged Craigs Investment Partners to identify capital raising options from domestic and international partners, as well as awaiting the outcome of shareholders’ capital contributions deducted from livestock payments. It is worth remembering SFF’s efforts to attract money from shareholders in 2015 came up well short of what was needed, resulting in the sale of half the company to Shanghai Maling Aquarius, now Shanghai Bright Foods.
While initial indications from the capital raising process looked encouraging, Wynne said it would ultimately be up to shareholders to make the final decision. In all probability this means discussions between the two meat companies will not occur until the external fundraising options have been exhausted and shareholders have voted in favour of talking to the erstwhile enemy up State Highway 1. Another problem with cooperation is the cultural difference between the companies, much like the tribal support for competing football teams in the same city, such as Glasgow, Manchester and Liverpool.
Alliance has released its September year end result which is an even larger loss than 2022, although the pre-tax loss before one-off write offs including the closure and redundancy payments following the closure of Smithfield was $69.5 million, an improvement on last year’s $97.9 million. However the improvement was mainly the result of a slightly better gross margin, partly offset by a 31% increase in finance costs. Without substantial capital injection, this situation is unsustainable.
Comments from SFF about the difficult season and actions taken indicate that company too is likely to incur another loss for the calendar year. Smaller competitor Blue Sky reported a reduced profit of $1.9 million for its year to June, compared with $3.5 million for 2023, down from $17.7 million the previous year. This suggests the poor performance may have been a South Island sheep meat related issue, although this may be too simplistic.
Meat processing and exporting is not for the faint-hearted, nor apparently for farmer-owned cooperatives which struggle to build enough reserves in good years to cope with the inevitable downturns. The difficult conditions for farming sheep have merely increased the challenge. Anecdotal evidence suggests privately owned companies, some but not all exclusively processing cattle, have remained profitable in the present trading conditions. This is because of low debt levels, continuous investment in processing assets, and tight control of overheads.
It will not be possible to get a real gauge on the true position until next year, when we see how successful Alliance’s equity raising and restructuring efforts have been and whether Silver Fern Farms has the capacity or appetite to be part of an industry solution.
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2 Comments
Silver Fern is stronger because, despite the acrimony of its clumsy takeover of Richmond, the resultant acquisition of beef processing has bolstered its balance sheet and likely enabled its survival. Sheep and lamb meat is an altogether more negative story. It has been in a consumption decline ever since Britain entered the EEC and the hoi polloi started eating KFC & Big Macs instead of lambs fry, leg roasts & shepherds pie. Add to that, slipe wool and pelts are not much sought globally either, the poor old lamb carcass barely returns sufficient to cover its processing cost. Ever since the misguided attempt of Muldoon’s SMPs there has been increasing sheep meat plant, capacity closures and the surviving processors have repeatedly had to resort to raising capital, by all sorts of means, to keep themselves operating. Every time that capital is eventually run off by unprofitable trading thus requiring another sortie of the same. Alliance is demonstrating exactly that cycle right now. The author is correct, amalgamating the two concerns would not be useful. It is only in algebra that two minuses make a plus.
Good summary Allan, about how I think the job is. Over the years I have always wondered why any investor would take on meat processing. As I remember it there have been very few years of good profitability.
Many conversations with farmers have ended with "the meat works are ripping us off". I always come back with, why would you keep farming if there was no processors.
The solution is we have to work together.
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