• Silver Fern Farms tells shareholders to "ignore mystery underwrite" as some seek to overturn board's push to partner with Shanghai Maling

    Content supplied by Silver Fern Farms

    The recent media statements from shareholder John Cochrane suggesting there is an alternative funding arrangement waiting in the wings should shareholders turn down the Shanghai Maling partnership, is a total unknown and should be treated with extreme caution says Silver Fern Farms.

    Silver Fern Farms Chairman Rob Hewett says the board remains unanimous in its endorsement of the Partnership with Shanghai Maling due the significant value it brings to the co-operative.

    “The board is unanimous in our support for the Shanghai Maling partnership. It will bring us a secure future as a co-operative which addresses our long-term financial future, supports our global plate to pasture strategy, gives us privileged access to China, the fastest growing red meat market in the world, and provides returns to our shareholders and suppliers,” Mr Hewett said.

    “We have met with over 2,000 of our suppliers and shareholders in the last 10 days right around the country. Their support is strongly in favour of the partnership.”

    The Board has not been presented with any details of the suggested $100 million underwrite which Mr Cochrane is asking shareholders to back.

    “The Board has not received a proposal. We do not know any details, we do not know who the mystery underwriters are, nor who the supposed bank is.

    “Going from media reports, the potential underwrite would be significantly disadvantageous to shareholders financially, strategically and very likely from a governance perspective,” Mr Hewett says.

    “Mr Cochrane, although well meaning, is playing a very dangerous and irresponsible game in advising shareholders to vote down the Shanghai Maling partnership without providing details of the alternative.

    “The Board has considered all available alternatives, has provided shareholders with over 100 pages of detail on the recommended investment in the Notice of Meeting, including an Independent Expert Report from a qualified firm in Grant Samuel.  That Report concludes that the proposed Shanghai Maling investment is both fair and reasonable to Silver Fern Farm shareholders.”

    “Mr Cochrane states in the media that under his alternative, suppliers will get to retain control of the company. In the Board’s opinion there is no evidence that shareholders will invest all of the $100m in the company. Based on the last time Silver Fern Farms raised capital from shareholders, we sought over $100m and only raised $22m. Therefore it is misleading to say that supplier shareholder control is retained, as it will be the underwriters that will take control.

    “If shareholders do not elect to invest new capital, then the underwriters will own nearly 70% of the company. If shareholders invest a similar $22m as last time, then the unknown underwriters would own 57% of the co-operative.

    “There is no visibility as to who these underwriters are; for all we know, a competitor like Alliance could be in the mix.”

    “If the underwriters do end up owning such a controlling stake, they will undoubtedly want the right to influence or control the governance of the company. Currently shareholders appoint farmers to the majority of the Board, who in turn appoint the independent directors. Will the underwriters require their own directors?”

    “Further Mr Cochrane is suggesting the shares are issued at 40c each. This is a share price that is around 1/7th of the fair value opined by Grant Samuel, and 1/7th of the price being paid by Shanghai Maling.  Given the high probability that most of these new shares would end up being taken up by the underwriters, shareholders would be selling control of their company for 40cps. That is clearly not in the best interests of the company. And to who?”

    “It is incorrect and totally misleading of Mr Cochrane to say there is bank approval for his scheme. We understand he is referencing a letter of interest from one bank to consider participating in a refinancing. That is not bank approval. Whereas, the Shanghai Maling partnership has the full support of our entire bank group and we have committed facilities for the coming season.“

    Mr Hewett says a no vote will place the co-operative’s finances in a very uncertain situation.  “We have financing for the coming season based on a yes vote, but not for a no vote.”

    “The Board will not play Russian roulette by entertaining a totally unknown option which would take the Co-operative into a period of significant financial uncertainty - especially when there is bank approval for the Shanghai Maling transaction. Whereas, that is exactly what Mr Cochrane is suggesting.”

    “The Shanghai Maling partnership is not just about the money.  It will give us unique market access into the fastest growing red meat market in the world. That is of enormous value. What value do the mystery underwriters provide?”

    “With our Shanghai Maling partnership we have worked together to build a strong package of controls to protect shareholders and farmer supplier interests in the co-op. We have pre-emptive rights around shares, a set of co-operative governance principles, and protections to maintain a 50:50 share in the operating company.

    “With the Cochrane option we don’t have these protections– those underwriters would come  in at a very low entry price, likely gain control of the company and be able to sell their shares to whomever they like. There are no controls over what happens next.

    “There is a lack of accountability from Mr Cochrane – shareholders have not elected him, he has no fiduciary duties to our Company and shareholders. He’s providing financial advice to shareholders when he’s in no position to do so. What if he’s wrong? What do you get as a shareholder – an apology? – this is a dangerous game.”

    Dean Hamilton, Silver Fern Farms Chief Executive says the Shanghai Maling transaction has significant financial upside compared to the sketchy details in the underwrite.

    The Shanghai Maling investment values Silver Fern Farms’ equity at $311m. This equates to $2.84 per ordinary share, which has been assessed by experts Grant Samuel as being fair value.

    “Raising $100m through a share offer at 40cps would require the company to issue 250 million new shares – that is 2.5x the number of shares on offer today. The sheer weight of issuing 250 million shares would mean the Silver Fern Farms share price would be destined to trade at $40c. This is a significant downside for shareholders when compared to the Shanghai Maling partnership.”

    “Pro-forma earnings per share under The Maling Partnership (28c per share) are almost twice that of Mr Cochrane’s (15c per share). The dividend return under the underwrite will also be lower for exisiting ordinary shareholders given the 8.25% preferential dividend that will be paid to the underwriters.

    “The underwrite suggestion would see shareholders having to put in $1.00 per existing share, whereas the Shanghai Maling partnership will see shareholders actually receive $0.30 per share as a special dividend.”

    “The Shanghai Maling Partnership will give us a unique opportunity in the China market, the resources to accelerate our global value added and through these initiatives create additional value for farmers.”

    “Mr Cochrane, and his colleagues Messrs Richardson, Shaw and Gardyne are asking shareholders to vote down a game-changing opportunity with a known party that has the unanimous support of the Board, in return for a speculative underwrite, with an unknown group of investors, at a price that is materially below fair value and that does not have a committed banking solution. Their 5 minutes to midnight suggestion creates significant risk to the company and to its shareholders.”

    “Shareholders should read the Notice of Meeting Information Pack and if needed seek independent financial advice.”

  • The Weekly Dairy Report: TPP disapoints for dairy but four positive auctions in a row sees whole milk powder on the way to $3000/tonne

    Fierce winds introduced October and again exposed minimal soil moisture reserves, with North Otago reporting conditions as the driest for ten years and temperatures unable to ignite the spring pasture flush.

    On the lighter soils irrigators have started watering in what could be a long season in a still predicted dry east El Nino year and although the Opuha dam is all but full, dam managers have a 50% restriction imposed ahead of time to ensure stored water will be avaliable later in the season.

    Many dairy farms in the south are still supplementing pasture with some silage to maximize production, even at the reduced stocking rates as a result of the heavy cull, as managers focus on preparing for mating with tail painting.

    While in the North Island most farms are growing surplus pasture and will be soon conserving supplements to fill gaps of any future summer shortages, and advisers suggest heat detection is important in mating management and dedication and skills in this area only take time and care, not borrowed money.

    The market has responded to the heavy cull and dry seasonal forecast that could see production fall by as much as 10%, by moving milk future contracts well ahead of past auction levels and analysts predict more prices rises should occur at this months events.

    And overnight the auction rose for the 4th consecutive time with the event average prices rising by 9.9%, and most importantly whole milk powder prices closed in on the $3000/tonne benchmark that commentator's use as a breakeven parameter for the predicted payout.

    By years end, the challenge may not be the international dairy prices, but farm production levels that need to be enough to cover the debt and high costs structures many farms are operating under.

    Last week Westland announced a $4.95 payout for last year and improved the predicted payout to $4.90-$5.30, now closing in on the $5.50 level necessary to pay all the bills without further borrowing.

    Farmers are grumpy with Fonterra’s unexpected pke restriction announcement especially in such a tough year financially, and are also cynical at the CEO wage freeze offer in the face of increased staff being made redundant.

    Dairy access has proved to be the sticking point for New Zealand trade negotiators, and real concerns are being expressed on the plight of Fillipino dairy workers caught up in the immigration document scam, and who will do the work if they are sent home.

    But again overnight a deal has been agreed by the partners of the TPP and while Fonterra has expressed disapointment more advantages have not been able to be achieved for the dairy sector, some progress has been made and the trade deals are an improvement on the past.

    The Taranaki District Council have announced their intention to sell their extensive dairy investments in Tasmania as they look to cash up their profits from a different investment for a regulatory body.

  • MFAT says TPP effectively prevents future ban on foreign buying of property; TPP rules also apply to non-TPP countries such as China; TPP also doubles threshold for Overseas Investment Act rules; Labour worried

    Labour Finance Spokesman Grant Robertson. Photo by Lynn Grieveson for Hive News.

    By Bernard Hickey

    As the details emerge from Tuesday morning's Trans-Pacific Partnership (TPP) deal, it's becoming clear it will prevent any future Government from banning foreign buyers of land and existing houses.

    The Government is yet to highlight the effects of the TPP on foreign investment, but MFAT spelt it out clearly in this briefing note on the TPP, which said it would block any future ban on foreign buyers of property and would double the threshold for Overseas Investment Act rules on the assessment of the experience and character of buyers of 'sensitive' land purchases to NZ$200 million.

    MFAT said existing regulations inconsistent with TPP obligations had been 'carved' out of the agreement, which would allow Australia, for example, to keep its existing ban on foreign buyers of existing properties. But it means New Zealand's current open door approach could not be changed, even if there was a change of Government.

    "New Zealand will therefore continue to screen foreign purchases of sensitive land, including farmland, through the Overseas Investment Office and require that these meet a “benefit to New Zealand” test," MFAT said.

    "New Zealand also requires foreigners who make investments in significant business assets to meet business experience and good character tests. Under TPP, the threshold above which an investor must get this approval will increase from NZ$100 million to NZ$200 million," it said.

    "The non-discrimination provisions in TPP would prevent the Government banning TPP nationals from buying property in New Zealand. New Zealand retains the ability, however, to impose some types of new, discriminatory taxes on property."

    "Some provisions in the TPP investment chapter – including the higher, NZ$200 million screening threshold – will also flow through to New Zealand’s FTAs with China, Chinese Taipei and Korea, in which there are “most favoured nation” provisions."

    This appears to rule out a future ban on foreign buyers, including China and other non-TPP members, and doubles the character and experience test threshold for Overseas Investment Office approval to NZ$200 million. But it doesn't rule out the stamp duty or land tax on foreign buyers that Prime Minister John Key floated in July. See our article on that from then.

    Economic Development Minister Steven Joyce said he did not believe the Government had sought during the negotiations to preserve a future Government's right to impose a ban.

    "With these deals, you start with your current domestic positions and it's much harder to carve out new positions than maintain existing positions, and Australia had a long-standing position, which I would argue and most commentators would agree has not worked," Joyce told Morning Report.

    "My understanding is they will be able to keep that position," he said.

    Labour equivocates, while Green and NZ First still opposed

    Labour has yet to declare whether it fully supports or opposes the deal, but Finance Spokesman Grant Robertson came out the strongest of the various Labour commenters against the deal, saying it failed two of Labour's bottom lines for support -- whether it gave meaningful gains for dairy and whether it allowed bans on foreign buying of property.

    Robertson said the TPP failed those two tests and focused in particular on the initial MFAT comments on what the TPP meant for future foreign buyer restrictions.

    "National needs to be clear whether this deal will stop a future government from further restricting land and housing purchases by overseas buyers," Robertson said.

    "Early reports indicate that this has been traded away. Giving New Zealanders a fair go at owning our land and fulfilling the Kiwi dream of owning a home are core principles for Labour," he said.

    "We reserve the right to regulate and legislate to make this happen."

     However, Robertson stopped short of saying Labour would oppose it, or try to reverse it in Government.

    "On first impressions, this deal falls well below National’s rhetoric of a gold-standard trade pact, and leaves many questions unanswered," he said.

    Joyce said Labour had also opposed a similar provision in New Zealand's trade deal with Korea that locked in New Zealand to not banning property sales, but then voted in favour of the legislation.

    Joyce defended foreign buyers investing in existing houses.

    "If you're going to welcome investment in housing ... let's say somebody buys an existing house, they buy it off a New Zealander, a New Zealander goes off and builds a new houses - what's the crime?," he said.

    Robertson later said Joyce's comments were a "damning indictment on a Government that appears to care little for our sovereignty or for the wealth of future generations."

    “Under the carve-outs they negotiated, Australia can still restrict foreign buyers of its homes. Malaysia will still ban foreign ownership of affordable housing, Singapore and Vietnam will still restrict foreign investment," Robertson said.

    “But it seems that in the Government’s failed attempt to gain better access to dairy markets around the world we have given away the right to protect our land. Mr Joyce’s arrogant dismissal of this fundamental error in the negotiations by saying non-resident foreign investors will ‘grow housing supply’ is simply incorrect," he said.

    “We have an Auckland housing market where too many Kiwis are shut out by high prices and speculators who are paying far less for their loans overseas are given an unfair advantage over those who fully commit to our country. This was always about more than just trade. This is about retaining the right to govern in our own interests."

    'Tenants in our own land'

    New Zealand First Leader Winston Peters attacked the doubling of the threshold for the character and experience tests for foreign buyers, saying it made it a lot easier for foreign investors to buy businesses.

    “We have foolishly agreed to the lifting of the background check threshold opening us up even more to dubious investment practices,” Peters said.

    “That threshold of NZ$100 million was already far too high and the doubling of it proves just how much international corporates, through puppet negotiators, have been able to circumvent the will of sovereign nations," he said.

    “At a time when huge sums of ill-gotten money are transferred around the world, and our checks through the Overseas Investment Office are already weak, we should be raising the bar against unscrupulous money merchants, not lowering it."

    Green Co-Leader James Shaw said the TPP would make it more likely that New Zealanders would become tenants in their own land.

    “The TPPA is a bad deal because the costs will be worn by everyday New Zealanders while the benefits will go to private companies,” Shaw said.

    “New Zealanders are more likely to become tenants in our own land, because the TPPA slackens the overseas investment rules and takes away our right to limit overseas speculators from buying up our land."

    (Updated with comments from Joyce confirming TPP blocks future bans on foreign buying and Robertson response.)

  • ANZ economists see 'further impetus' for milk price forecasts to move above $5; less urgency seen for further immediate RBNZ interest rate cuts

    By David Hargreaves

    ANZ economists see "further impetus" for milk price forecasts to move back above $5 per kilogram of milk solids - but also see less urgency for the Reserve Bank to keep cutting interest rates - following more strong gains in global dairy prices overnight.

    Westpac economists have raised their forecast milk price for this season to $5.30 from $4.30.

    The rise in global dairy prices overnight, which saw the GDT Index climb another 9.9% and Wholemilk Powder (WMP) firm 12.9%, was the fourth consecutive gain in the GlobalDairyTrade auction after prices had fallen at 10 consecutive auctions and bottomed in early August. This had sent milk price forecasts for the season ahead tumbling.

    But on September 24, after the previous GDT auction, giant dairy co-operative Fonterra revised its forecast milk price to farmers for this season up to $4.60 from the previous forecast of $3.85. However, Fonterra also updated and revised down its prediction of milk production, having earlier forecast a drop of 2-3% on last season's output.

    Chairman John Wilson said on September 24 the co-operative was now picking a drop of "more than 5%" in the current season.

    “We are 5% behind last season to date and are currently tracking 8% down on last season on a weekly basis. Farmers are responding to the tough economic conditions and with cow numbers down, less supplements being fed and challenging weather conditions for much of the country..."

    ANZ rural economist Con Williams said the "price jockeying" on the futures market for WMP prior to the announcement of this week’s GDT volumes signals that the powder market remains hyper-sensitive to New Zealand supply conditions and GDT offer volumes.

    "The slow start [to production] means peak milk supply is unlikely to be as strong as previous years, which will weigh on annual production. Nevertheless, early season comparisons can often be misleading. Market expectations are for a 5-10% decline in annual milk supply, and we are currently at the lower end of this range. Ultimately, the weather will have a greater say this season, given lower use of supplementary feed and an industry focus on pasture as the lowest cost feed source. Lower cow numbers in milk this season will also have an impact."

    Williams said there continued to be concerns about the possible impact of El Nino this summer too.

    "At this stage it is a risk. It has to be remembered under a ‘typical’ El Nino pattern this would affect around 40% of New Zealand’s milk supply - a large proportion of which is irrigated in the Canterbury region. Therefore, the effects could be quite localised and might not have an outsized impact on national supply."

    Williams said that "all up", the slow start and limited GDT offerings were expected to continue to be price supportive for now, especially while it was current the European seasonal lull for milk supply and seasonal high period for Chinese milk imports.

    "From a monetary policy point of view we have the RBNZ in temporary 'pause and reflect' mode for the time being before a further [Official Cash Rate] cut is delivered next March. 

    "We view rebounding dairy prices as challenging the need for further immediate OCR cuts given that low dairy prices were a huge reason behind the RBNZ cutting rates in June, July and September."

    The OCR is at 2.75%, having been cut from 3.5% since the start of the year.

    But Williams said that irrespective of the timing of OCR moves, two points were still relevant:

    "First, we see rates remaining low for an extended period.  Second, the risk profile for the OCR is skewed beyond simply one further cut.  That reflects the global scene, with the IMF cutting its global growth forecasts and saying the risks remain to the downside."

    AgriHQ dairy analyst Susan Kilsby said the The NZX Dairy Derivatives market indicated that WMP prices would reach US$3,000/t before the end of 2015 and remain above this level for the remainder of the season.

    “This is good news for dairy farmers as US$3,000/t is about the price required for most farms to break even”.

    The AgriHQ 2015-16 Farmgate Milk Price has increased 74c to $5.39/kgMS. This is nearly 80c above Fonterra’s current 2015-16 milk price forecast of $4.60/kgMS.

    “The lift in the AgriHQ 2015-16 Farmgate Milk Price is primarily driven by market expectations of further gains in dairy commodity prices through the rest of the season,” Kilsby said.

    The US$2824/t price achieved for WMP in the latest GDT auction is some 77.6% above the US$1590/t price in early August when the market hit lows.

    Prices have now regained most of that which was lost during the 10 consecutive falls. At the beginning of March the WMP price was US$3272/t.

    The overall GDT Index is some 62.8% up on the August trough, but still 13.3% below the level in early March.

    Westpac senior economist Michael Gordon said that the lift in forecast milk price to $5.30 by the Westpac economics team was based on assumptions of:

    • a further modest bounce in the next couple of GDT auctions, "given that momentum is clearly on their side",
    • an El Niño-induced drought of moderate severity, and
    • a pullback in prices early next year, once the drought threat has passed its peak.

    "With global milk production still ample and demand subdued, we remain sceptical about a sustained rebound in dairy prices. Our milk price forecast of $5.20/kg for next season remains unchanged," Gordon said.

  • NZIER's John Ballingall says it is the long term impacts from the TPP that will matter more than the short-term gains

    By John Ballingall*

    Today’s announcement that the Trans-Pacific Partnership agreement (TPP) has been concluded is good news for Kiwi firms and households.

    It’s not perfect, and the dairy sector in particular will naturally be frustrated. But TPP offers valuable benefits – and limited costs – across the economy.

    Achieving full tariff elimination over time, aside from beef into Japan and some dairy products, on all of New Zealand’s exports to some of the largest economies in the world, is a very positive outcome.

    That and the likely gains to New Zealand firms from lower costs of doing business in Asia-Pacific regional production networks and from enhanced investment flows, will positively contribute to lifting Kiwis’ living standards.

    On the wider stage this New Zealand-initiated process has delivered the first large scale improvement in the global trading environment for years. It shows that globalisation’s support for improving world standards of living can continue. This is one more step in the long road to further integration in the AsiaPacific region and puts pressure on others not involved to make similar adjustments.

    Considering the negotiating challenges facing New Zealand…

    All policy analysis starts with a policy imperative. In relation to the TPP, the challenge can be summarised as: what can we do about the following developments?

    • Asia-Pacific regional integration rules will change as a result of the TPP, the Regional Comprehensive Economic Partnership (RCEP) and potentially the Free Trade Area of the Asia Pacific (FTAAP).

    • The growth potential of New Zealand’s agricultural exports is reduced by being highly sensitive and thus highly protected by larger economies in the TPP (US, Japan, Canada, Mexico).

    • It is “unthinkable”1 that New Zealand should not be part of any such changes – this would be detrimental to Kiwis’ living standards. We need to be ‘insiders’ on world trade and the TPP assists this effort.

    And this is subject to the practical constraints that:

    1. New Zealand is a small economy with low trade barriers. We offer limited additional market opportunities for TPP partners.

    2. We are dealing with countries in which there are often multiple, conflicting vested interests and stakeholders with warped views on how economies operate, all of whom take considerable convincing about how any negotiation can deliver a mutually acceptable outcome.

    In short, New Zealand needed to ask some of the world’s largest economies to give our exporters and investors additional opportunities in their most protected and sensitive sectors, with the promise of very little in return. So TPP – as with all trade negotiations for New Zealand – was very much a ‘constrained optimisation’ problem.

    …the TPP agreement is an excellent outcome for us

    Our negotiators have delivered a good deal, given the hand they have been playing. Their skill and the way they have clearly respected the fundamental interests of the community, while gaining real returns, is now evident.

    The end result is that, outside of some dairy products and beef into Japan, all of New Zealand’s goods’ exports to all TPP countries will see tariffs completely removed over time.2

    New Zealand’s exports of fruit, vegetables, wine, seafood, forestry products, wool and manufactured goods, which account for around 65% of our $20 billion of goods exports to TPP countries, will all enjoy tariff-free access to TPP markets over time.

    On dairy, there are modest gains. Tariffs will be eliminated over time in the US on infant formula, milk powders and some cheese, and where tariffs are not reduced, New Zealand exporters will have greater quota access. Clearly this is a disappointment relative to an ideal outcome for New Zealand, but an ideal outcome isn’t a sensible comparator. The dairy sector is better off today than it was yesterday, and certainly better off compared to a scenario where New Zealand is excluded from the TPP.

    On meat, sheepmeat will be tariff free when the agreement is implemented, apart from in Mexico where tariffs will be phased out over eight years. Beef exports to the US will face no tariffs or quotas after five years, and beef tariffs into all other TPP countries will be eliminated. And let’s not forget that beef into Japan has not been excluded altogether from liberalisation. Japan has agreed to gradually reduce tariffs from 38% to 9% over 15 years.

    Officials estimate the tariff reductions on our goods exports equate to tariff savings of some $260 million per year once fully implemented.3

    It’s about more than tariffs; it’s about competitiveness

    But it’s important to remember that the real gains from the TPP are not short-run tariff savings for goods exporters – although these are clearly welcome. Rather, a concluded TPP will help New Zealand firms remain competitive over the medium- to long-term. And the TPP is a helpful shot in the arm of a flagging global trade liberalisation patient. As Minister Groser has stated, “long after the details of this negotiation on things like tons of butter have been regarded as a footnote in history, the bigger picture of what we’ve achieved today will be what remains.”

    The Government estimates gains to the New Zealand economy of $2.3 billion per year by 2030. Of course, such modelling estimates are subject to uncertainty, but even if they are a fraction of the expected amount, it’s still a big number. And previous estimates of the gains from trade liberalisation have typically understated the benefits, as the ‘dynamic gains’ that come from new market-opening opportunities are usually not included.

    Kiwi exporters’ competitiveness will be enhanced relative to non-TPP competitors, and they will be on a more level playing field compared to those firms with which they compete within the TPP. Improvements in areas such as customs, non-tariff barriers and food safety processes will reduce the cost of doing business and encourage greater participation in regional production networks. There is also an untested but potentially path-breaking new chapter on ‘Regulatory Coherence’ covering the role of Regulatory Impact Analysis, which can be important in minimising nontariff barriers over time.

    So TPP will remove some of the grit in the wheels of Asia-Pacific supply chains. This will lower transaction costs for Kiwi firms, again boosting competitiveness and opening new avenues.

    There will likely be small benefits for Kiwi services exporters, although the detail is yet to be released.

    For New Zealand investors seeking to invest in TPP countries, the investor state dispute settlement provisions to the investment chapter will provide protection from discriminatory, unfair or unjust government actions. New Zealand firms’ assets will not be able to be expropriated without compensation. This all reduces the risk premium associated with overseas investment from New Zealand, helping New Zealand better integrate into the Asia-Pacific economy.

    New Zealand will also become a more attractive destination for foreign investment from TPP economies, and from those countries with whom we have existing free trade agreements.4 The threshold above which foreign investors must meet business experience and good character tests (i.e. bear additional costs to get approval to invest here) has risen from $100 million to $200 million.5 Policy space around foreign investment in sensitive land has been retained.

    There will be costs but earlier concerns are largely unwarranted

    As the negotiations have unfolded, most concern in New Zealand has centred on a few high-profile areas of the agreement. Although we are yet to see all of the details, from material released to date it appears these concerns have been over-stated:

    • Investor state dispute settlement – tobacco claims have been carved out, meaning that a tobacco company could not, for example, lodge a plain packaging claim against the New Zealand Government. Policy space to legitimately and in good faith regulate in the interests of health and the environment seems to have been retained. It is hard to see how New Zealand’s sovereignty will be materially affected.6

    • Costs of medicines – the core of Pharmac’s operating model has not been dismantled. Additional processes to encourage greater transparency in its purchasing will cost $4.5 million upon implementation, and then $2.2 million per year thereafter. This is small in the context of an $800 million annual Pharmac budget. And relative to gains elsewhere, it is trivial. The $2.2 million cost is less than half the expected tariff savings on New Zealand’s exports of offal, for example.

    • Intellectual property – copyright terms will be gradually extended from the current 50-year period to 70 years. This is expected to cost $55 million in foregone savings once fully implemented after 20 years. This is about the same amount as the tariff savings on our cheese exports.7

    • Biologics – it does not appear that data exclusivity for biologics in New Zealand will be extended past the current five-year term, though the details here are not yet clear.

    • Parallel importing – there will be no change to New Zealand’s laws in this area.

    • Imposition on Internet Service Providers to manage copyright – there will be no requirement for ISPs to terminate accounts for copyright infringements. New Zealand is left to manage its own regime – subject, of course to lobbying by the usual suspects.

    • Decreased tariff revenue – given New Zealand’s already-low level of applied tariffs, MFAT expects a reduction in tariff revenue of around $20 million per year. But New Zealand does not look to tariffs as a serious source of government income.

    And on the world stage this shows that trade negotiations are not dead

    On a pragmatic note, the WTO has been working on a major output since tentative beginnings in 1998 were turned into the Doha round in 2001. And despite the significant and useful advances made in 2013’s Bali package, the underlying WTO mechanism has been unable to do one of its central jobs – delivering a large scale improvement in the world trading environment.8

    So New Zealand started looking at alternatives and with three other like-minded countries (Singapore, Chile and Brunei-Darussalam – the P4) commenced the journey that closed in Atlanta last night. The demonstration effect of this achievement cannot be overstated. An enormously complicated deal was pulled and pushed into being. It shows what can be done if the political will is strong enough.

    In sum: TPP is an important step in the right direction for regional integration

    In the coming weeks and months, we will get a better idea of the details of the TPP agreement for New Zealand firms and households. No doubt there may be some devil in these details, but based on what we have seen to date, we suggest that TPP will be highly net beneficial for New Zealand.

    While there may be more trials and tribulations to come as TPP is subjected to ‘legal scrubbing’ and goes through the US Congress, today is a good day for the New Zealand economy, and our negotiators deserve a celebratory drink and a decent sleep.

    1. As Helen Clark correctly stated last week.
    2. MFAT. (2015). ‘Overview of sector outcomes’. _Outcomes.pdf
    3. Note that it is doubtful that tariff savings will all accrue to Kiwi firms. Rather they are likely to be split between exporting firms and households in our key markets who can now buy imported goods at lower cost. But the outcome is the same: our exporters are more competitive and get better returns. Tariff savings are used in this article as a point of comparison with expected costs.
    4. This is because of the ‘Most Favoured Nation’ clauses of our FTA investment chapters with those countries, which ensure they are not treated less favourably than countries in trade agreement signed subsequently (i.e. TPP).
    5. Australia already has a higher threshold.
    6. Also see NZIER. (2015). ‘ISDS and sovereignty: The use of investorstate dispute settlement mechanisms in trade agreements and their impact on national sovereignty’. Report to ExportNZ, 17 September 2015. 4ba2-8cf7-2f90fd5c6909/isds_and_sovereignty.pdf
    7. This doesn’t mean that US corporate demands around intellectual property more broadly will go away now that TPP is signed. We can expect pressure to continue to be applied through other channels, such as direct lobbying of Ministers.
    8. Although it has continued to be important for resolving trade disputes.

    John Ballingall is the Deputy Chief Executive at NZIER. For further information you can contact him at

  • TPP deal finally done; PM says deal eliminates tariffs for 93% of NZ exports to US, Japan, Canada, Mexico and Peru; Dairy companies disappointed with deal; Beef tariffs removed; drug costs to rise

    By Bernard Hickey

    A Trans-Pacific Partnership Agreement (TPPA) between 11 countries covering 40% of global GDP has finally been agreed after 25 years of talks that were initially led by New Zealand.

    Prime Minister John Key hailed the deal has New Zealand's biggest ever trade agreement which would give exporters better access to 800 million customers across Asia and the Pacific.

    “In particular, TPP represents New Zealand’s first FTA relationship with the largest and third-largest economies in the world – the United States and Japan. Successive New Zealand governments have been working to achieve this for 25 years," Key said.

    The deal would eliminate all tariffs on 93% of exports to New Zealand's new trade agreement partners, including the United States, Japan, Canada, Mexico and Peru, he said.

    However, dairy exporters would only get access to those markets through newly created quotas, in addition to tariff elimination on a number of products, Key said. Trade Minister Tim Groser subsequently said tariffs would remain on New Zealand wholemilk powder exports to the United States for 25 years.

    Beef export tariffs to all TPP markets except Japan would be eliminated, Key said. 

    “We’re disappointed there wasn’t agreement to eliminate all dairy tariffs, but overall it’s a very good deal for New Zealand,” Key said.

    “We’ve seen with China how a free trade agreement can boost exports of goods and services and deepen trade and investment links," he said.

    Key said the overall benefit of TPP to New Zealand had been estimated to be at least NZ$2.7 billion a year by 2030. He said consumers would not pay more for subsidised medicines and the Pharmac model would not change, although Groser later said drug costs would rise because of the deal.

    'Not gold plated for dairy'

    Groser later told Morning Report the deal meant all tariffs on cheese exports to Japan would be removed over time, while it would take 10 years for US infant formula tariffs to be removed and 25 years for wholemilk powder tariffs on exports to the United States to be removed.

    "It's much less than what we would have wanted on some of our dairy products, but it's the best we could get," Groser said.

    Groser said parts of the deal could be described as the 'gold standard' for trade agreements.

    "There are other bits that fall far short of a gold standard in the dairy area, but it still leaves us miles ahead," he said.

    "It was as good as we could get and a big step forward for New Zealand."

    Groser said New Zealand now had trade agreements with its top five trading partners -- Australia, China, the United States, Japan and Korea.

    "We've seen from previous FTAs, including the China FTA, how positive they have been for New Zealand trade and investment, and therefore in supporting jobs and growth for New Zealanders," Groser said.

    "Not being in TPP, on the other hand, would put New Zealand at a competitive disadvantage compared to other countries."

    Groser estimated the changes would ultimately reduce tariffs on New Zealand exports by NZ$259 million a year, which was double the initial forecast savings from the China trade deal.

    Beef does much better than dairy

    Groser said tariffs on beef exports to TPP countries would be eliminated, with the exception of Japan where tariffs would reduce from 38.5% to 9% per cent.

    Tariffs on all other New Zealand exports to TPP countries - including fruit and vegetables, sheep meat, forestry products, seafood, wine and industrial products - would be eliminated, he said.

    Groser said the most significant change for intellectual property rules was an extension of New Zealand's copyright period from 50 years to 70 years.

    "The cost of this to consumers and businesses will be small to begin with and increases gradually over a 20-year period," he said.

    "Other potentially far-reaching or costly proposals raised earlier in the negotiations were not included in the final agreement. Consumers will not pay more for subsidised medicines as a result of TPP and few additional costs are expected for the Government in the area of pharmaceuticals. There will also be no change to the PHARMAC model," he said.

    "Regarding data protection for biologic medicines, New Zealand's existing policy settings and practices will be adequate to meet the provisions we have finally agreed on."

    Groser said the TPP also contained a provision that allowed the Government to rule out Investor State Dispute Settlement challenges over tobacco control measures.

    Groser said he expected the TPP to be in force within two years. MFAT has more detail here.

    Here is a break-down on the likely tariff savings by types of export.

    Dairy exporters disappointed

    The Dairy Companies Association of New Zealand (DCANZ) said it was disappointed the agreement had not delivered a more significant opening up of TPP markets.

    “It was always going to be very hard given the starting point for dairy as one of the most protected sectors globally” said DCANZ Chairman Malcolm Bailey.

    “While further market opening is needed to help address price volatility in the global dairy market, the deal does contain some useful improvements," he said.

    Fonterra Chairman John Wilson said the TPP deal was a "small but significant step forward."

    “While the dairy outcome is far from perfect, we appreciate the significant effort made by Minister Groser and his negotiators to get some gains in market access for our farmers," Wilson said.

    “Dairy has been very hard to resolve and New Zealand has managed to get some progress against the odds. Our team has done well to lift the deal from where it stood at the Ministerial meeting in Maui. While I am very disappointed that the deal falls far short of TPP’s original ambition to eliminate all tariffs, there will be some useful gains for New Zealand dairy exporters in key TPP markets such as the US, Canada and Japan," he said.

    Wilson said entrenched protectionism in the US dairy industry in particular ensured the deal failed to reach its potential.

    Political reaction

    Labour acting Leader Annette King said the Government appeared to have failed to deliver meaningful gains for dairy while adding costs for Pharmac.

    “Tim Groser has been left in the dust on this deal despite the big promises made of a “gold standard agreement’," King said.

    "The deal falls well below expectations with only disappointing crumbs for our dairy industry and extended patents on new drugs which will cost the taxpayer millions and leave New Zealanders without life-saving drugs," she said.

    “If the best Tim Groser can say is it sets a ‘direction of travel’ then it looks like a failure. We’ve missed the bus on our biggest export."

    King said the Government needed to say what the 'devil in the details' concessions, including whether the government had traded away rights to further restrict foreign ownership of housing or farm land and what agreements have been made to allow foreign corporations to sue New Zealand for regulating in the public interest.

    “The Canadian and US Governments are planning long and open debates in their parliaments over the details of the deal. New Zealand’s Government must commit to the same – an open consultation with public and a full parliamentary debate including the complete text of the agreement," King said.

    “Labour supports free trade, but the TPPA is more than just a trade agreement. We have been very clear that we will not support it if it does not meet our bottom lines including meaningful gains for farmers, the ability to restrict house and land sales, protecting Pharmac and the ability to govern in the interests of New Zealanders.”

    (Updated with political reaction)

  • The Sheep, Deer and Cattle Report: Spring arrives in many northern areas but slow in the west and south

    Lamb schedule prices now move ahead of the similar stage last year and while processors report some stocks are still too high, there have been some signs the market is starting to understand next year’s volumes will be lower, and  Alliance is reporting in it's road show, prices may lift.

    South Canterbury farmers report good survival rates as they work through tailing mobs, as the lack of cold storms during the birth period has helped, but the continuing lack of rain in North Otago worries managers on how they will finish these lambs.

    Prices have now reached spring contract levels, and with Christmas chilled demand strong and many areas suffering from a slow spring, spot prices could rise even further, although at the saleyards good prime lambs in both islands are failing to move much out of the $120/hd range .

    North Island local trade lamb schedules lead the charge as the earlier kill is now 10% ahead of last year and has created a short supply situation, and predicted to tighten further unless the weather warms up rapidly.

    There has been little improvement in the weak lamb and sheep skin market, but strong wool values has helped balance these poor prices earned for this important by product.

    Alliance has started it’s road shows for the new season with a strong message of co-operative ownership, attractive loyalty payments, better communication on market price signals, and a big investment in robotic processing technology.

    Further comments from Silver Fern Farms illustrates how vulnerable they were to financial pressure pre this Chinese deal, as some of the bankers were keen to exit funding this company, and could have put real pressure on it's future.

    The Meat Industry Excellence team are still hopeful a New Zealand "white knight offer" may emerge that will allow retention of full co-operative status, but industry commentators suggest it is unlikely to offer the financial opportunities of the May Ling deal.

    This weeks North Island auction saw values ease on the finer end of the crossbred clip, but rise to yearly highs for coarser wools, and nearly all of the sale met the market to keep stocks on hand low, which will be helpful moving into the main shear period.

    Prices have now reached levels only last seen in 2011,  but with the US currency significantly weaker against the kiwi at present, these prices should be more sustainable this time around.

    Processors report that New Zealand’s beef quota into the US for 2015 has now been filled, and product for that market will either be stored or sold to markets with lower prices, and some adjustment for cow and bull product has already been seen.

    Against that Indonesia has done a u turn on baning beef imports from NZ, with this important market re-opening early next year, and just announced without detail at this stage, the TPP agreement will offer significant tariff reductions for beef from the partnering countries.

    Strong prime values at both island saleyards for finished stock has given clear margins for replacements that at this stage is only held back by lack of surplus grass from the slow spring.

    Some South Island cattle are appearing in saleyards in the Manawatu but cooler conditions along the west coast of the North Island has hampered their appeal, but further north good rains and warmer temperatures have activated a bouyant grass market for store cattle.

    Venison schedules appear to have peaked with this weeks prices stable as the chilled season moves into full production, and managers will be monitoring weights regularly so they can achieve targets for this lucrative trade.

    Positive vibes are coming out of the Cervena marketing trial into Europe during the summer period, as the industry tries to reduce it's reliance on the game season and promote venison as an all seasons meal.

    Velvet growth responds rapidly to warm spring weather as early heads will soon be ready to harvest and early indications suggest it will be another strong priced season.

    The first signs of tarrif reductions for velvet out of the Korean free trade deal should be evident for the early harvest, with more easing of taxes early next year that should encourage buyers from that country to deal direct from NZ.

  • Keith Woodford delves into and behind the official Fonterra disclosures for the 2014-15 year and finds some unsettling developments

    By Keith Woodford*

    The release of Fonterra’s annual report on 24 September coincided for me with a long plane trip back from China. I used the time trying to work out what all the numbers really mean.  It was not an easy task.

    Fonterra’s annual report – like most reports from large companies –provides masses of numbers. Some are clearly there for public relations purposes. Others are there to meet the required rules of the International Financial Reporting Standards (IFRS). And then there is another set of numbers which Fonterra constructs according to its own rules. These are called non-GAAP measures; i.e. ‘non-generally accepted accounting measures’. Fonterra itself acknowledges that these measures are not standard between companies, so comparison must be made with caution.

    Some might say that none of these sets of numbers are designed to illuminate the true kernel of the situation. So interpretation can be challenging. To get to that kernel, one has to do lots of fossicking.

    Along the way one comes across cash and profit measures, pre-finance and post-finance numbers, pre-tax and post-tax profit, and normalised and non-normalised items.  No wonder most people get confused.

    To further complicate matters, definitions change throughout the report. For example the term ‘Greater China’ sometimes includes China farming operations and sometimes does not, depending on whether Fonterra is referring to an ‘operating segment’ or a ‘strategic platform’. And the ‘Asia segment’ actually includes Africa and the Middle East but excludes ‘Greater China’.

    Borrowing jumps

    One notable figure – which is not highlighted - is that borrowings have increased from $4.9 billion at 31 July 2014 to $7.6 billion at 31 July 2015. Clearly, big things have been happening.

    Throughout the report, comparisons are made between 2014/15 and the preceding year. This is normal procedure.  However, neither year could be described as a typical year for Fonterra, so the foundation for comparison is wobbly.

    In 2013/14, record prices were achieved for both whole and skim milk powder. This made it an excellent year for farmers who are paid the commodity returns minus the cost of processing. But it was a very difficult year for corporate Fonterra.

    The key reason why 2013/14 was such a bad year for corporate Fonterra was that high commodity prices squeezed the margins on value-add consumer and food service products.   As a consequence, Fonterra made a profit of only $179 million on assets of $15.5 billion and shareholder equity of $6.5 billion. Indeed Fonterra would have made a loss if farmers had been paid the full milk price using the pricing formulae as set out in the Milk Price Manual.

    At the time, both commentators and investors cut Fonterra some slack for the poor performance. The message from Fonterra was that it was just a short term thing and that profits would soar once commodity prices dropped.

    In contrast to one year earlier, 2014/15 has been disastrous for milk powder prices. Accordingly, farmers are suffering greatly. In theory, the flip side of this should have been that the 2014/15 year would have been outstanding for Fonterra’s profit from consumer and food service goods. In practice, it has not turned out that way.

    The reported after tax profit for 2014/15 is $506 million. Somewhat surprisingly, this is $82 million more than the pre-tax profit.  Yes, that is right: Fonterra is not liable for tax this year and the Profit and Loss Account shows a tax credit of $82 million. Last year there was also a tax credit, but only of $42 million.

    Four versions of return on capital

    Fonterra provides four different versions of its return on capital: 9 percent, 8.9 percent, 7.5 percent and 6.9 percent.  The 9 percent figure is the one Fonterra highlights, but it is the 6.9 percent figure in fine print that takes all of the equity capital into account. On a per share basis, the return is 29c. Fonterra is committing to pay 25 cents to shareholders leaving 4c for reinvestment.

    This retention of 4c per share is consistent with Fonterra’s track record that it typically retains only a small amount of profit. Most companies retain a greater percentage of profits as a growth driver.

    Given that Fonterra’s corporate profits are so modest in what should have been a good year, I decided to drill down and see what went well and what went poorly.  To do so, one has to look at the pre-finance and pre-tax numbers which are known as EBIT (earnings before interest and tax). This is because interest is only charged and tax is only calculated at the overall company level and not for individual segments.

    This year, Fonterra has made an EBIT profit of $974 million after normalisation. Using the ‘strategic platform’ figures, ingredients and operations contributed $973 million.  In contrast, consumer and food service contributed $408 million.   However, this leaves some $363 million of unallocated costs, plus $44 million of losses from international farming. 

    Using the ‘operating segment’ information, ingredients and operations contributed $699 million of the $974 million total EBIT. But this is clearly an underestimate given that not all ingredients are included in the ingredients segment.

    All we can say for sure in relation to ingredients (essentially commodities) and operations, is that they contributed something more than $699 million to EBIT. In contrast, the rest of the business (including consumer goods, food service and international farming) contributed something less than $275 million to EBIT. 

    When interpreting these figures, it is important to remember that finance costs totalling $517 million have still to be deducted.


    On the surface, the profit dominance of ingredients and operations is remarkable. Recall that earlier I said that corporate Fonterra is expected to do well when commodities are low in price, but that is because of the increased margins on consumer and food service goods. But here we are seeing excellent profits from the commodities themselves. There are two reasons for this.

    The first reason is that Fonterra calculates the returns to its farmers from five reference products. These are whole milk powder, skim milk powder, butter, buttermilk, and anhydrous milk fat. Fonterra then deducts processing costs from the sale prices for these products, and pays its farmers on the assumption that all milk was converted to these products. However, the reality can be quite different, and Fonterra also produces other commodity and ingredient products called non-reference products.

    This year Fonterra has done well from these non-reference products, including cheese and casein. The prices have not been good, but they have been better than the prices for milk powders. And for corporate Fonterra, in contrast to the farmers, it is this relativity that matters. Fonterra has also been buying lactose cheaply from overseas, which it adds to the milk powder and thereby increases its margins.

    The second reason is that the processing charges that Fonterra deducts from the market price of the reference products include an allowance for return on capital. Therefore, Fonterra makes considerable profit each year simply by toll-charging for processing of commodities. By definition, this part of the business is very low risk, given the commitment to supply by farmers, and the automatic charging of a return on capital.

    Struggling overseas

    There are two business segments where Fonterra is struggling badly. One is Australia. The other is international farming.

    In Australia, Fonterra purchases about 19 percent of Australia’s milk. To do this, it has to pay market prices as its Australian farmers are not bound to the company like New Zealand farmers. Quite simply, Fonterra is making a loss on these operations. Given the way Fonterra bundles NZ and Australian operations together, it is impossible to be precise, but it is probably of the order of $200 million for 2014/15 once ‘one-offs’ are included.

    The Australian operations have been problematic ever since Fonterra was formed. Fonterra took over poor quality Australian assets from the NZ Dairy Board, and then compounded those problems with further strategic errors.

    Fonterra’s international farming operations are almost totally in China. Two years ago, things looked rosy, but somehow the wheels have fallen off since then.  This last year the losses are $44 million EBIT. Once interest on borrowed capital is added in, the losses become much greater.

    In this last year, Fonterra’s farms in China produced about 160 million litres of milk and 12 million kg milksolids from 25,000 milking cows. Those production figures would be good if they were from New Zealand pastoral style farming, but from intensive housed free-stall farms they are awful.

    Chinese farmers are currently receiving about 3.4 RMB per litre for milk of about 3.5 percent fat and 3 percent protein. This equates to about $NZ 0.85 per litre.

    Fonterra’s China farms will be getting paid more than this. My estimate is that they will be getting at least $NZ1 per litre for milk of about 7.5 percent milksolids. So they are getting about $13 or a little more per kg milksolids. Yet they have still made a loss of $3.67 per kg milksolids, with interest still to be accounted for. 

    Plenty to worry about

    The overall message from Fonterra’s accounts is that once one scratches below the surface there is plenty to worry about.  The operating returns at the corporate level have depended on an imbalance between powder prices relative to cheese and casein. Purchasing cheap lactose has also helped. Australian operations remain a worry with much still to be sorted out. And the China farms are bleeding profusely.

    Another issue of note is the extent to which Fonterra is building inventory. The accounts show that in 2013/14, Fonterra’s NZ operations produced 138,000 tonnes more product than were sold. And in 2014/15 Fonterra produced 126,000 more tonnes of NZ product than were sold. This suggests that at 31 July 2015 there were 264,000 tonnes of additional inventory compared to the same date two years earlier.


    Keith Woodford is Honorary Professor of Agri-Food Systems at Lincoln University. He combines this with project and consulting work in agri-food systems. His archived writings are available at

  • Allan Barber sees a stronger SFF stimulating the whole meat industry to focus on value added production destined for higher paying markets, which will necessitate paying suppliers for performance

    By Allan Barber*

    The Shanghai Maling Aquarius offer for 50% of Silver Fern Farms may not be the restructuring catalyst that MIE and some shareholders of both cooperatives were hoping for, but it certainly presages a dramatic change in the industry’s dynamics.

    Assuming a positive shareholder vote on 16th October, for the first time in years all the major processors will have relatively strong balance sheets and will be in a position to compete on an equal basis.

    This is unlikely to bring about an immediate change in livestock procurement calculations, but different companies will progressively move to payments based on quality and specifications supplied for individual markets.

    For too long the meat industry has been affected by an excess of processing capacity, under-capitalisation, procurement battles, inadequate market returns and, as a consequence of all this, falling livestock volumes. The recapitalisation of the country’s largest meat company potentially provides a solution to several if not all of these problems.

    At least one commentator has already predicted the Shanghai Maling deal as potentially the death knell for Alliance and other smaller players, as a result of the financial strength of the new SFF and its value chain link to the Chinese market. I believe and hope this forecast will prove to be unduly alarmist because a growing strength of the red meat sector has increasingly been companies’ different areas of market and product specialisation.

    At the moment this differentiation has not been great enough to enable one company to pay a perceptible premium to all or some of its suppliers, but this has been mainly the result of procurement competition. All processors have developed measurement systems capable of rewarding suppliers for supplying product at certain times and to required standards. Pre Christmas early season lamb contracts are the most obvious example.

    Inevitably, as these contracts all target the same market, there is a lot of similarity between them. Because of competitive pressures the contract price sets the benchmark for spot market schedules and the element of differentiation tends to be lost as soon as seasonal supply frees up.

    The deal SFF has been able to conclude with a major Chinese investor is a real coup for the company and the New Zealand red meat sector.

    On the face of it Shanghai Maling has put up $311 million for a 50% share in the company which gives it the right to share any profits remaining after all operating costs including livestock, but no exclusive rights to product for distribution through its supply chain.

    The principle of market supply remains, as it has always been, to sell to the highest paying customer, unless there are reasons to direct the product elsewhere. Predictions of meat industry Armageddon based on this one partnership appear somewhat exaggerated. Nevertheless there is a risk SFF’s joint venture partner will use its value chain muscle to fund livestock procurement at above market rates as a means of destroying competition.

    What will drive industry change is a shift in relative strength between industry participants and the change in SFF’s fortunes has the potential to be a game changer. Of some concern is the fact Shanghai Maling has negotiated a casting vote over budget setting and appointment of the CEO which suggests a larger degree of influence than cooperative shareholders might like. It implies an intention to retain the right to determine how much profit is applied to rebates or retained by the partners, although there is a commitment to pay 50% of the cooperative’s profit share to shareholders.

    But then the previous management and board of SFF haven’t exactly covered themselves in glory since the hostile Richmond takeover 10 years ago. The last year has seen an improvement in both industry and company performance, but there is never a guarantee this would continue for long; boom to bust has been the traditional pattern of the meat industry.

    It is important for SFF to address its inefficiencies to make it operationally competitive with its big and smaller competitors and this will involve some downsizing and upgrading of facilities. There may be redundancies which won’t please the Meat Workers Union, but far better a planned process than what could have been a messy financial failure at any time in recent years. SFF now has the balance sheet strength and stability to be able to tackle operational issues as well as continue with the development of its plate to pasture business strategy in which its suppliers have the opportunity to share.

    SFF has a major task on it hands to re-engage with past and present shareholders, some of whom have taken supply elsewhere, while others have remained loyal but are disillusioned with developments in recent years. One shareholder’s estimate is 1.5 – 2 million lambs have been lost from ‘dry’ shareholders who have taken their supply away from SFF, alienated by the failure to ensure Richmond suppliers shared up at the time of the takeover and other departures from cooperative principles.

    In an ideal world this sea change will stimulate the whole meat industry to focus on moving towards value added production destined for higher paying markets which will necessitate paying suppliers for performance.

    The only way this can occur is for processors to be prepared to differentiate between suppliers on the basis of quality rather than quantity. But the dairy industry already provides a high percentage of the beef kill which is undifferentiated, so efficiency not marketing will maintain its importance.

    What is certain is the New Zealand red meat sector is about to enter an exciting new phase.

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    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

    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 or read his blog here ». This article first appeared in the Farmers Weekly and is here with permission.

  • Allan Barber says Shanghai Maling is no Trojan horse and is probably much a better owner than the Vesteys and Borthwicks of the past. And farmers will still hold "a powerful weapon"

    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.

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    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

    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 or read his blog here ». This article first appeared on the Sharing Shed blog, and is here with permission.

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