Allan Barber says meat companies will be successful if they don't involve paying too much for livestock, focuses on markets, their cost base, and suppliers

By Allan Barber*

After many years competing for livestock without compelling suppliers to invest in the full number of shares required in principle, Alliance Group has seized the opportunity offered by Silver Fern Farms’ likely shareholding change to review its capital base.

The uncharitable observer would presume this action is necessary to raise more capital for balance sheet or investment purposes.

However Alliance chairman Murray Taggart is adamant this move is all about correcting the imbalance between those suppliers who are fully shared up and those who have made a lesser commitment.

The adjustment will take place gradually in line with the rate of supply with deductions of 50 cents per lamb, sheep or calf, $2 per deer and $6 per head of cattle.

The company has also made a change in the basis of calculating the required shareholding. This used to be 11 shares per livestock unit up to 5000 stock units, then 4.5 shares up to 25,000. The rate of 11 shares per unit will now apply to all stock units supplied on a three year rolling average with a cap on the number of shares held increasing from 145,000 to $1.35 million shares.

According to Taggart the amount of money raised from the restructure will not be large, particularly as the majority of suppliers send less than 5,000 stock units for processing each year. The Board has also decided to increase the allowable retention of annual profits or pool payments from a third to a half in the event of a share shortfall.

Although this season is proving difficult for suppliers and exporters, Alliance felt the inequity implicit in its previous behaviour needed to be addressed immediately. The gap would only get bigger and there would never be a right time to introduce the changes. It will be interesting to see how many stock units find an alternative slaughter destination, sent by farmers who would previously supplied Alliance.

It is now evident the catalyst for Alliance’s move was SFF”s successful capital raising exercise which will result in a significant improvement in its balance sheet, as well as a change of company ownership from pure cooperative status. Alliance is able to occupy the cooperative high ground in isolation and consequently this move is a no brainer. There have been criticisms for a long time of meat companies for being only too willing to pay premiums to secure supply as well as use third party agents.

In times of rampant procurement competition when suppliers were ready to switch for a 50 cent premium, companies found themselves compelled to indulge in price based competition to secure supply. Finally the processors seem to have got the message this is a zero sum game and are now intent on making more constructive competitive moves.

Alliance has clearly reached some key conclusions: firstly it must address its cost base to ensure it can match the best, secondly it must be proud of its cooperative status and make heroes of its shareholders and thirdly it must add value to its product range sensibly and strategically.

Recently the company has made much of its newer international relationships in China, India and South America, although it is not certain the latter two markets actually take much product yet. It also made clear it had accepted some margin pain on behalf of its suppliers, foregoing profit in favour of accepting livestock which could not be sold at an acceptable price, thus reinforcing its position as a farmer owned company. It has committed to the expenditure of $125 million over three years on a capital expenditure programme, as well as implementing more than 100 projects to cut costs by $85 million.

This all suggests the constant pressure by Meat Industry Excellence to implement a wrong headed merger of Alliance and SFF, under discussion for nearly five years, had taken its toll on the logical strategic decision making process. It was impossible for Alliance to concentrate on doing what it needed to, as long as the merger was still a possibility, however little it wanted one.

We should all keep our fingers crossed for a positive OIO decision on Shanghai Maling’s investment in SFF, because at last, in spite of MIE’s laughable attempt to screw money out of B+LNZ and get two board members appointed to that organisation, the meat industry finally seems to be getting its act together. Each major company now has a clear strategy which does not involve paying too much for livestock, but focuses on its markets, cost base and suppliers.

As long as farmers’ livestock returns are less than desired, there will be complaints about the meat companies.

But don’t be fooled into thinking the earnings can come from anywhere other than the market place and operating efficiencies.

Alliance has come to this conclusion at last and, provided it treats its suppliers equitably and communicates with them, it will be successful.

*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 in Farmers Weekly and is here with permission.