By Allan Barber*
No wonder the deal between Silver Fern farms and Shanghai Mailing took so long to conclude, but from all appearances it was worth waiting for.
Not that you would necessarily think so, if you read about the disappointment of some shareholders and the MIE group about the board’s unwillingness to give serious consideration to an alternative farmer offer of $40 million or some of the business commentary.
Going back several years, SFF wanted $120 million from its shareholders, hoped for $80 million and actually received $22 million.
Nothing has really changed since then – good and bad years have followed each other, as livestock numbers and market prices fluctuated and the business struggled under a huge debt burden.
Farmers have had the opportunity for years to stump up capital, but realistically this was a forlorn hope when dollar shares quite quickly declined to well under 40 cents. It is amazing anybody, even the most incorrigible optimist, would expect farmers to pursue such an investment strategy purely and simply out of misguided loyalty to the principle of cooperative ownership.
Apart from the warm and fuzzy feeling of being a member and part owner of ‘your’ company, there isn’t a lot to recommend a member supply-based as distinct from purchase-based cooperative in these days of consumer power. A study by Auckland research company Coriolis into the Chinese infant formula market found New Zealand farmers and processors contributed 40% of the asset value to the value chain, but only captured 12% of the profits. This is the unpalatable truth about commodity markets.
Cooperatives are not necessarily any worse than other ownership structures for capturing value, but the cost of developing added value is usually better carried by a business which doesn’t have to keep thousands of shareholders happy. Fonterra’s supporters may argue differently, but it is entirely possible the company would be more successful if it wasn’t constrained by the need to maximise the milk payout to shareholders.
Silver Fern Farms has apparently secured the best of both worlds, cooperative and corporate, with the injection of $261 million of new equity and the formation of a JV partnership to promote the branded ‘plate to pasture’ business model which the company has been struggling to develop on its own.
Some commentators are convinced this allows the Chinese Trojan Horse (if that’s not a contradiction in terms) to enter the New Zealand food and red meat sector with the inevitable outcome that it will culminate in further processing being transferred to the lower wage economy in China and New Zealand farmers will remain peasants in their own land. In the short term there will be a period of prosperity for farmers while Chinese dominated Silver Fern Farms pays over the odds for livestock in order to drive competitors into the ground.
I have a couple of questions to ask about the perspective of these commentators, because I’m not convinced it is actually realistic.
The first question is why this deal should be any different in theory from Japanese majority ownership of ANZCO or Taiwanese ownership of Universal Beef Packers; the second question is whether the extra margin would all flow back to the farmers as a result of ownership of more of the value chain. My third question is whether Shanghai Maling’s statement of its intent to act strictly as a 50/50 partner in the management and governance of SFF is believable or not.
I am not convinced Shanghai Maling are any less trustworthy than other existing overseas investors or intend to revert to the bad old days of Vesteys and Borthwicks when New Zealand had genuine freezing works without the ability to add value. Equally it is very doubtful that ownership of the value chain would result in higher margins being paid to farmers, unless they are prepared to invest serious money in controlling that value chain. In response to the third point, it is up to the SFF Cooperative directors and shareholder suppliers to ensure the continued desire of the Chinese partner to act like a genuine partner. The ability to withhold livestock supply is a powerful weapon.
Shanghai Maling proposes to invest a large sum of money in the company and appears genuine in its desire to build the business of SFF in cooperation with its partners. It is perfectly possible to be cynical about the longer term intentions, but in the meantime the debt laded cooperative doesn’t have many if any other options.
The mood of shareholders to the proposal seems to be generally favourable, although there are still groups and individuals who are unhappy about this loss of control. Assuming the vote is positive, I believe this deal will be good for New Zealand and the meat industry and can’t see how the OIO or responsible Ministers could possibly turn it down.
If they did reject it, our FTA with China might not be worth the paper it’s written on and the prospects for rescuing our largest meat company would take a major hit to the detriment of shareholders and staff.
To subscribe to our weekly Rural email, enter your email address here.
Farms For Sale: the most up-to-date and comprehensive listing of working farms in New Zealand, here »
Here are some links for updated prices for
- lamb
- beef
- deer
- wool
P2 Steer
Select chart tabs
Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ». This article first appeared on the Sharing Shed blog, and is here with permission.
18 Comments
A good airing of issues pertinent to the entire agri-commodity sector. The anxiety about being 'peasants in our own land', or the exploited ones in the product value chain, is widely current within the agricultural and horticultural sectors and a fundamental issue in cooperative thinking.
You highlight 'the cost of developing added-value' and the 'constraints of the need to maximise shareholder pay-outs'. These frameworks tend to pit the primary producers against the business builders, and the outcome is that both lose. Producers are naturally risk-averse - they have sufficient risk on the farm or in the orchard, etc, and desire security of return before anything else. The desire for security - keeping things simple - is the basis of commodity strategies. The problem is that commodity markets are inherently unstable and thus risky.
The entire development of added value strategies - of intangible value in all its forms - has been to mitigate risk. Premium pricing, margins, loyalty, leadership, product differentiation, etc, are all focused on raising and smoothing income, on creating and capturing out-performance over commodities and undifferentiated product strategies. Trying to do both - value and commodity - companies do neither. Indeed they appear to forget what running a competent business actually involves. Fonterra shows this to the world.
Maybe, with secure financing, SFF can solve this. If it does, it will provide a model for New Zealand agriculture. The fact is that those putting dreams of income security above realisable added value are daily diminishing New Zealand's potential product differentiation, along with our entire agricultural ecology, via this short-term and deluded business thinking.
It will be interesting how our existing meat companies can compete with a company that is owned by the Chinese government. Is that a level playing field? Currently we are sending approx. 40% sheep meat to China how long before that grows to 60%? How will that affect price stability? The government did not need to push for this deal. They are in effect setting a time bomb in the industry as a means of trying to sort out problems with over capacity.
One of the myths that Allan loves to perpetrate is that SFF are broke. While it is true they have had to dig themselves out of a major hole they have made giant strides recently under new management and governance. One thing they have done well is invest in value add over the last 6 years, that strategy is now really starting to gain escape velocity. It is utter madness to sell that opportunity to an entity that has not a bean of interest in making NZ farmers wealthy. If this goes through it is an incredibly short sighted move by shareholders who would do well to consider the lessons of history when there wasn't co ops sufficiently in the mix to protect their interests. Ironically in Aussie they are currently holding senate enquiries into the potential to set up co ops to protect their farmers from the predatory nature of the large multinationals that dominate their industries. If the reports today are correct there seems to be an NZ inc white knight saddling up so hopefully it materialises and cuts this stupidity off at the pass.
You may think it's a myth, but if you read the information pack to shareholders with the Grant Samuel valuation, you will realise that it has been and still is a realistic possibility, if the recapitalisation doesn't happen.
The investment so far in value adding will only bear fruit with much more investment and a supply chain which unfortunately New Zealand companies and farmers cannot create without outside assistance.
If New Zealand agricultural companies cannot obtain sufficient investment and build a supply chain 'without outside assistance', something is the matter with the prevailing models. Either the models the companies choose to operate under, or the macro-economic model determined by the state, or both of these, are seriously at fault.
These are the issues that New Zealand needs urgently to get to grips with. Choosing to remain dependent on Chinese rescue, on soothing and placating a new colonial power and trailing after its business-buying cheque-books, is choosing to remain victims of our own, self-created, adverse circumstances. This is a position no self-respecting business - or country - should accept.
Perhaps one successful added value agri-business model - perhaps in this case inevitably and regrettably funded by Chinese interests - will show what we should be doing ourselves and shake up not just this whole sector but our misguided, property-focused, national financial policies.
Dead right Workingman, there should be absolutely no reason why NZ companies shouldn't be able to create viable value chains, that's exactly what we need an NZ inc approach. The opportunities have never been greater we just have to get much smarter as a country at seizing them, which clearly requires a step change in thinking and funding. Selling out the value chain to foreigners at this point is throwing the baby out with the bathwater. In this instance Shanghai Maling have no interest whatsoever in making kiwi farmers wealthy, once you grasp that reality you then its an easy decision not to sell out to them.
You're in this business, Sheep Shagger, I'm not. But I see that SFF has a big call to make. And once made, I can't see that there'll be any going back.
The promised upsides, in repairing the balance sheet, assisted market access, etc, are one thing. But there are other issues that concern me, although an outsider. It looks to me like another step downwards in loss of self-belief and business capability in New Zealand, another choice made to live with incompetence and its consequences, another avoidance of true national value creation, in favour of old-style, look-after-us-please, colonial thinking.
I simply don't accept that New Zealand can't develop, support and build internationally successful, widely respected, added-value businesses in the agricultural sector. If we don't know about agriculture - in its widest compass - what do we know about? The current systems of thought and operation seem designed to create and lock-in failure.
Applegate seems to provide an otherwise example.
http://www.interest.co.nz/rural-news/77883/allan-barber-sees-stronger-s…
In theory NZ ought to be able to develop value added businesses, although evidence doesn't support that theory. I suspect it has a lot to do with the small domestic market and the need to export 80%+ of what the country produces - this produces a focus on sales and distribution rather than market development and investment in the market.
what would be an example of a value added business you wish for?
http://www.comvita.co.nz/
http://www.tatua.com/
Allan, what I, and I believe Workingman above are advocating is to not just wave the white flag as soon as the first foreign offer presents itself. For example I know from previous presentations by SFF that they had approximately 2 staff permanently in China. They have recently teamed up with some other NZ companies to share some office space and logistics and seek to create joint supply chains. That is all good but incredibly piecemeal in the grand scheme of things. That's why the Shanghai Maling deal appeals to many because it claims to provide those linkages.
I would argue that is a massive fail in regard NZ inc strategy from our govt and business community. Why has NZTE not been massively up scaled to help leverage these companies into this market of literally limitless potential (and others). Keith Woodford talks of having an NZ inc online portal for food and beverage which makes complete sense to me. Why wont the govt seed fund such a proposal in much the same way it does with the irrigation schemes. Rod Oram wheels out an incredible stat around how much NZ primary product is worth to NZ companies landed in market and how much it retails for, I don't have a link sorry but it is around $40b landed and 180b retail from memory, an extraordinary gap. If we could fill that just a bit it would make a huge difference to our national income. That's the sort of thinking I would like to see happening and why I think we should be playing the long game with SFF instead of taking the short term easy money.
Memo:- Allan Barber, Workingman, Sheep Shagger
A different point of view
I think you are all on the wrong tram
NZ Super Fund should be buying Shanghai Maling and Bright Foods
Why?
Repost from December 2010 - 5 years ago
GBH. Your point resonates. It is serious. The grocery chains learned their history lessons well. The Chinese have learnt their history lessons well. From Anthony Sampsons book "The Seven Sisters". In 1850 John D Rockefeller demonstrated that "owning" the distribution of oil was more powerful than "owning" the production of oil. The same lesson was played out again in 2006 in the dispute between Russia (producer) and Ukraine (distributor) over the means of distribution of Russian gas. Russia capitulated in one day. The same contest exists in the search engine space. The product is incidental. Fonterra, an organisation that is larger than the largest company on the NZX displays the same characteristics. It doesnt own farms. It controls the means of distribution
http://www.interest.co.nz/opinion/51812/thursdays-top-10-nz-mint-9-mont…
Go back and have a close look at that post and see how much interest it didn't stimulate
This new age paradigm is manifesting itself in Sovereign Wealth Funds buying up distribution chains - Like Canadian Pension Funds, Calpers, Temasek, while China uses state owned or backed SOE's
If anything if NZ.INC had continued building up the National Super Fund it should now be buying up Shanghai Maling and Bright Foods - which, you know they can't, even if they had the resources to do so - and therein lies the problem
Because
Shanghai Maling controls 600 supermarkets while Bright Foods controls 800 hypermarkets,
http://www.interest.co.nz/rural-news/77607/shanghai-maling-invest-261-m…
Allan, I don't understand the point you're making when you say that the small domestic market and the congruent need to export 80%+ of what the country produces leads to a focus on sales and distribution rather than market development and investment in the market.
To my mind, the fact that we need to export is the very basis of required market investment and development. Distribution and sales - or, better put, sales that are determined by a credible strategy - follow market development. And this is where brand - which means holding a mirror up to determined customer groups, so they can see their own values in the offer - is key to market influence.
As to examples of such added value agri-related businesses, which Henry Tull requests, one which I'm aware of would be ziwipeak (I have no financial interest in this), www.ziwipeak.com, which produces a range of super-premium New Zealand pet foods for global markets. Ziwipeak is one of the most expensive pet food ranges in the world, if not the most expensive, has its New Zealand origins and environmental qualities as key propositions, and has high and accelerating demand. There was a news item about Lady Gaga sending a flunkey out to buy it for her pets somewhere in the world.
As Sheep Shagger says, and in my own experience, it is eminently possible for New Zealand firms - and without great resources - to create and capture significant added value. But when Fonterra wipes the floor with our reputation, via its mishandling of its botulism fiasco, when our dairy industry is fast destroying our environmental promise, and other companies grasp at Chinese money for rescue, we are going backwards, destroying value fast.
My point about the difficulty of capturing added value and margin relates to our largest companies (Silver Fern, Fonterra) who appear to have enormous difficulty in doing this without overseas partners. The successful companies (Tatua, Comvita, smaller private meat companies) have much less problem in specialising on niche areas from which they are successful in capturing value.
Another perspective about large cooperatives (Silver Fern, Alliance, Fonterra) is that they are supply based, not purchase based (CRT/Farmlands, Foodstuffs, Mitre 10). Silver Fern and Alliance have a problem in sourcing all their livestock from shareholders or indeed all their shareholders' livestock which leads to spot market procurement. In Fonterra's case the contrast with Tatua is informative - 12,000 shareholders earning $4.40 per kg of milk solids versus 120 earning $7+.
Allan, in my experience we capture added value by creating it. Put otherwise, if we do not offer added value we will not obtain it in return. This is the essence of a value transaction.
I am convinced that the enormous difficulty which you assert that large companies that Fonterra and SFF have in capturing this added value is a difficulty of their own and our nation's making. And together they and our nation are making things worse, harder to repair.
Immense added value has been created in products that are common in themselves, seen as basic product types, and thus as replicable as most commodities. Take Carlsberg in beers, Bombay Sapphire in gins, or Lycra in spandex. There are many other examples.
In every case, the added value rests on some added promise to defined consumer groups. These products / brands obtain premium producer prices, and premium margins all the way through distribution chains, via the quality of their particular consumer or customer promise (in Lycra's case, when owned by du Pont, also via added value customer services).
Anyone can brew a beer, produce a gin, make spandex. As bare products, plenty of countries can produce Fonterra's commodity portfolio, plenty can produce what SFF offers. What we fail to do is make our products compelling, indispensible, consequential for any defined market - which is the essence of creating persuasive brand differentiation. We do not, in other words, identify customer values and work to support, enhance and serve those. And what dismays me, as a NZer, though I'm not in the agri-sector, is that we are fast destroying the environmental and reputational qualities capable of providing this differentiation.
I appreciate the distinction you draw between supply and purchase dynamics. And Tatua's offer, I understand, is based on highly specialised fractions, involving considerable waste product. It is not a volume model of great use in considering Fonterra.
I agree with everything you say about our inability to develop a premium position, but our commodity trading mentality usually takes precedence, especially where large volumes of product are involved. I don't have any real answer to this conundrum, apart from suggesting that building a unique brand takes total vision and commitment, consistency of approach and substantial investment of time, resource and money.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.