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

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.

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5 Comments

I agree that it is good that Alliance have finally articulated a clear plan and that both Alliance and SFF have been underperforming. Where I would take issue is that this lack of strategic planning is as a result of MIE or general shareholder activism. Any blame for lack of strategic planning lies squarely with the previous CEO Grant Cuff and a long serving board who have been found wanting now that the new CEO has come in and shone a light on things. That there was $85m in inefficiencies found is an indictment.

For years Alliance appointed internally, most senior management were 30 year veterans, and had an oldboys club of directors. If anything MIE led some shareholder activism demanding sharerholders should be rewarded for loyalty and got some rejuvenation on the board. I would agree however their race is run and their remits to B&L are ridiculous.

Rumour is that Prime Range meats has issues getting money out of its new Chinese shareholder...how certain is the Shanghai Maling cash for SFF?

The ability of Shanghai maling to front with the money,given the prime range theme,and the possible,crash of Chinese currency if one listens to soros/bass China might be buying stuff all l 'd be grabbing the money as quick as I could,even though maling dictates dividend,ceo etc,under the agreement ,wonder what happens if they go under could the receiver sell to the large jbl meat company,or would the farmers have to come to the party,I'm sure the directors will have it all in hand.Alliance is seeing the laws of unintended consequences of not buying silver fern when they could have i suspect several years ago,and no that's not the Mia scheme ,we're you supply stock,and you have no say in price you get.Mia 's directors on silver fern board seem to have done opposite what said do if elected even voted against Richardson referendum, 5 Mia directors on 50000 directors fees equals 250000 heavens won't need anything of beef and lamb,plus 100 dollars of all there members how many did they say,in the 1000's,have to check there tax returns they will have to be some were. One notices the 75 million cost cutting target of Alliance one wonders what Mr cuff was doing,what was the highest paid employee when he ceo,what's the highest paid employee in last year's accounts

The ability of Shanghai maling to front with the money,given the prime range theme,and the possible,crash of Chinese currency if one listens to soros/bass China might be buying stuff all l 'd be grabbing the money as quick as I could,even though maling dictates dividend,ceo etc,under the agreement ,wonder what happens if they go under could the receiver sell to the large jbl meat company,or would the farmers have to come to the party,I'm sure the directors will have it all in hand.Alliance is seeing the laws of unintended consequences of not buying silver fern when they could have i suspect several years ago,and no that's not the Mia scheme ,we're you supply stock,and you have no say in price you get.Mia 's directors on silver fern board seem to have done opposite what said do if elected even voted against Richardson referendum, 5 Mia directors on 50000 directors fees equals 250000 heavens won't need anything of beef and lamb,plus 100 dollars of all there members how many did they say,in the 1000's,have to check there tax returns they will have to be some were. One notices the 75 million cost cutting target of Alliance one wonders what Mr cuff was doing,what was the highest paid employee when he ceo,what's the highest paid employee in last year's accounts

I absolutely agree the previous board and management at Alliance let things carry on too long and the fact there are $85 million of cost savings is an indcitment. Also the Shanghai Maling share price has dropped a long way, so the warning about that investment going the same way as Prime Range makes a valid point.

Indeed Allan. I see Shanghai Malings share price has dropped from $18 to $9 since June but of course that is in line with overall market sentiment. Given that is partly a subsidiary of the Shanghai govt you would think that raising the cash should be a formality. If they couldn't it would be a huge red warning light as to the underlying strength of the Chinese economy.

It would also be interesting for SFF. Have they continued to lower their debt profile that would enable them to roll over their banking facilities and carry on as a going concern or would everything come to a head again? Given their last attempt to raise capital with PGW fall over due to the global financial crisis, they sure know how to time these things around maximum volatility!

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