Keith Woodford says that with Silver Fern Farms drowning in financial underperformance, it is time to "get on with it". If OIO approval comes, there will be a wide variety of ownership models as options for farmers

Keith Woodford says that with Silver Fern Farms drowning in financial underperformance, it is time to "get on with it". If OIO approval comes, there will be a wide variety of ownership models as options for farmers

By Keith Woodford*

Silver Fern Farms announced last week to its farmer suppliers that it now expects no more than a breakeven return for the year ending 30 September.  This should focus the minds of its farmer shareholders, who vote on 12 August as to whether or not Silver Fern Farms should proceed with the partial takeover by Shanghai Maling.

The disappointing projected financial outcome – which could yet get worse - reinforces the notion that Silver Fern Farms lacks the necessary financial resilience to go it alone. There is increasing risk that without completion of the Shanghai Maling buy-in, that Silver Fern Farms will lose the support of its bankers and be placed in receivership. That is not an attractive option, for what has in recent years been New Zealand’s largest meat processor.

Last September I wrote that the Shanghai Maling deal was a very good one from the perspective of its New Zealand farmer-shareholders. It valued the shares, at that time trading at 35c, as being worth about $3. And it provided the capital to do the necessary restructuring of the company, including upgrading some plants and closing down others, plus market development.

Farmers supported the deal at the time, with 82% voting in favour based on a 67% turnout. This support was despite a widespread understanding that, although structured as a 50/50 deal, in reality Shanghai Maling would be in effective control. But since that time, the seeds of doubt have been sown.

In the last 10 months, I have watched events from the sidelines, as disaffected shareholders, led by John Shrimpton but with others standing both alongside and behind him, have lobbied for a reconsideration of the deal.

The essence of their argument has been that last year’s better than expected profit of $24.9 million post tax (announced after the deal was voted on) proved that Silver Fern Farms could either go it alone or else prosper with a much smaller shareholding sold to Shanghai Maling or others.  The argument was bolstered by the headline that that Silver Fern Farms reduced its debt last year by some $168 million. But what got lost in the rhetoric was that Silver Fern Farms ended the last financial year with very little inventory, and that was the key reason for the debt reduction.

Come the new (current) season, Silver Fern Farms still needed to borrow several hundred million dollars of working capital to go with the $121 million of hard core debt at season opening.  This funding has been provided by the banks, but it is a one-off facility on the assumption that the Shanghai Maling deal goes ahead.

Although Silver Fern Farms may well be a leaner and more efficient operator than was the case prior to 2015, the company, while standing alone, remains just one bad year away from a financial disaster.  And taking the last five years in aggregate, the losses have exceeded the profits.  With this year added in, it is looking like six years where overall losses exceed overall profits. This is not a healthy company.

These latest financial projections should surely convince wavering farmers to renew support for the deal. However, with the ongoing delays in approval by the Overseas  Investment Office (OIO), new risks are emerging.

These ongoing delays show the Overseas Investment Office in a very poor light. How is it that the decision has dragged on for what is now upwards of a year? The inability of the Overseas Investment Office to act expeditiously on this and other applications is now acting as a major dis-incentive to other overseas investors considering investing their capital in New Zealand agribusiness.  It is hard to characterise the delays other than as a mix of bureaucratic and institutional paralysis.

The Overseas Investment Office has stated that currently their hands are tied until Shanghai Maling provides additional information. But there is surely a story behind that.

The drum beats that I am hearing out of Wellington are that it is the good character test that is holding things up. The Overseas Investment Office has been embarrassed by disclosures that it had approved investments by an Argentinian of doubtful character, and without doing rigorous due diligence. The blow-back from that has been the Overseas Investment Office developing new procedures on the run. 

The Government now needs to look closely at the messages that these delays send to the wider investing community. What is needed are transparent and explicit rules, followed by quick decisions.

Last September I was in Beijing at the time the Lochinver Station application from Shanghai Pengxin was turned down by the New Zealand Government. I was there as member of the New Zealand China Council delegation led by Minister Steven Joyce.

Minister Joyce reported that at his private meeting with the Chinese Premier Li Keqiang he had been questioned as to the broader implication of the Lochinver Station rejection. He had to try and explain that the Lochinver rejection was a ‘special case’ and that Chinese investments were indeed welcome. The argument at the time was that New Zealand operated a rules-based system, but subsequently it became apparent that it was Ministers Paula Bennett and Louise Upston who rejected an approval recommendation from the Overseas Investment Office. That did not look good over in Beijing.

The broader response from our Chinese colleagues at the Forum was more than raised eyebrows. I therefore returned to New Zealand with a clear personal judgment about the Silver Fern Farms application, which back then was about to start the first stages of its approval journey. It seemed evident to me that any rejection of the Silver Fern Farms proposal by the Overseas Investment Office would signify an effective fracturing of the special relationship that has existed between New Zealand China in recent decades.  It would be the final straw.

Now, some ten months later, the application is still caught somewhere in the system. Shanghai Maling have agreed to a further three-month extension, but it would be understandable if they were to walk away should they decide that the business environment has now changed, and that doing business in New Zealand has become too difficult.

The history of New Zealand’s special relationship with China is not widely understood.  It can be traced back to that iconic New Zealander Rewi Alley who first went to China in 1927 and lived there until his death in the 1987.  Although often pilloried in New Zealand throughout the 1950s, 60s and early 70s for his political leanings, it was Alley who built enduring links.

I first met Rewi Alley in 1971 when I interviewed him on the day of his 74th birthday during a trip he made back to New Zealand. And then I met him again in Beijing in 1973. He was truly a remarkable man. At times life must have been very difficult, not least in the early days of the Cultural Revolution when many things went crazy.   However, in amongst the turmoil, Premier Zhou Enlai protected him from some of the worst excesses, including very publicly at one stage coming down from the Praesidium to sit with Rewi Alley at a major sporting event. It was an indication that Alley was his personal friend and was not to be touched.

From those foundations, New Zealand has been recognised in China for a series of supportive actions. In particular, New Zealand was the first country to support China’s entry to the WTO, and subsequently was also the first country to recognise China as having a market economy.  The Chinese remembered the positions New Zealand took, and this surely influenced the decision by China that New Zealand would be the first developed country with which it would negotiate and sign a free trade agreement.

Since 2008, New Zealand has benefitted greatly from that FTA. It was not so much the reduction of tariffs although they were important, but the message it sent to Chinese companies that the Chinese Government supported business relationships with New Zealand. More recently, New Zealand gained further respect for firm but deft handling of the melamine crisis at the time of the Beijing Olympics.

However, right now in 2016, the New Zealand China relationship seems somewhat more fragile, with significant irritations on both sides. In the greater scheme of things, the ongoing delays with the Shanghai Maling application cannot be helpful.  If this deal falls over as a consequence of decisions made within New Zealand, then there will be implications for all New Zealand agribusiness industries.   As I have said many times before, the New Zealand economy looks very shaky without a strong working relationship with China.

Assuming the Shanghai Maling application is approved, and the deal finally consummated between the business partners, then there are prospects are for a more robust meat industry in New Zealand.

There will still be the fully New Zealand owned Alliance Co-operative; there will be the New Zealand owned AFFCO controlled by the Talley family; there will be the largely Japanese owned ANZCO, and there will be the Chinese controlled Silver Fern Farms. And then there will still be a myriad of smaller companies, both local and overseas owned.

I look forward to seeing which business models prosper in that environment.   There is no attractive alternative. So let’s get on with it.


Keith Woodford is Professor of Agri-Food Systems (Honorary) at Lincoln University and a Senior Fellow (Honorary) of the NZ Contemporary China Research Centre. His archived writings are at http://keithwoodford.wordpress.com

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There is increasing risk that without completion of the Shanghai Maling buy-in, that Silver Fern Farms will lose the support of its bankers and be placed in receivership. That is not an attractive option, for what has in recent years been New Zealand’s largest meat processor.

But it is the realistic outcome given the way we collectively conduct our economic and personal property affairs.

You might have wanted to balance your glowing endorsement of the Chinese communist government with some detail about things like organ harvesting, or just forcibly moving people off land to where the govt wants them, or maybe a bit closer to home, the strong arm tactics being used by them in our quest to hold an inquiry over shoddy steel.
COME ON! Totalitarian government is STILL totalitarian government and one that will have CONTROL of one of our largest export industries.
Lipstick on a pig springs to mind

Woah buddy, in our new master's home land talk like that will get you arrested or killed.

I rest my case

Yes it seems we are injuring the relationship with China with the impacts of a disfunctional meat processing structure/management/psychology.

Mind you we have seen on the one hand artful China based strategy and on the other woeful meat company tactics - for 30 years or more.

Vivd memories those experiences. We gotta have our thinking right at each step before dealing with others.

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The implications of New Zealand's abject and foolhardy relationship with China have a long way to run. The fact is, New Zealand produces no agricultural commodity that is not widely available from elsewhere. The purchase of agricultural land and businesses is another matter. And, in these areas, our much trumpeted agricultural efficiency rests on immense indebtedness, with its own insecurities - SFF is merely the canary in the mine.

We will, as geopolitical tensions increase, find that we can no longer separate trading and political relationships. At some point, possibly very soon, we will need to take a position - beyond words - with regard to events in the South China Sea. (Our Comprehensive Strategic Partnership with China - signed largely to benefit or rescue our agribusiness volume fantasies - commits New Zealand to 'develop and implement a long-term engagement plan for defence engagement, focusing on ongoing high-level and other bilateral visits, strengthened strategic communication, and expanded cooperation in training and exercises').

When New Zealand needs to choose between China and every other nation involved in the South China Sea, we will find how unsupportable our 'Comprehensive Strategic Partnership' with China is, and then how little China really needs our agribusiness production. Our so-called agribusiness strategies will be revealed for what they are - merely naive, almost cargo-cult, thinking.

Workingman,

You echo many of my own concerns. We are now glimpsing the iron fist behind the velvet glove with China's not so veiled threats over steel.
If you haven't already read it, I can recommend 'Asia's Cauldron', the South China Sea and the end of a Stable Pacific by Robert Kaplan. However, I do have some sympathy for the dairy industry and our politicians. The low-hanging fruit on offer was just too tempting, but now we have to find a way to balance our continuing economic need to trade with China, while exerting our independence. It will not be easy.

It seems to me, linklater01, that the opportunities for industry reform made available by the 'low hanging fruit' have been wasted. Instead we have created an industry - ever larger, ever more undifferentiated, ever more indebted - fit for nothing but more and more low hanging fruit. And thus most closely fitted for the simplest of mainstream Chinese consumer markets. Crucially, the needs of this sector are fast bringing the country into a geopolitical and economic cul-de-sac from which it will be difficult to extricate ourselves successfully.

Professor Woodford's arguments for our relationship with China, couched in half-truths, appeasement and double-speak (I have no pleasure in so characterising his historical and contemporary viewpoints), well indicate the desperation and contortions of an industry that now has few options. And businesses or business sectors with few and reducing options are heading for trouble. The pity is that this industry has been allowed or encouraged to lead the country into considerably larger, fast emerging problems - environmental, as well as political and economic. Thanks for your mention of Kaplan's book. I didn't know it, and I'll find it.

Workingman,

I can't fault your reasoning and as the Irishman said when asked for directions; well sir, I wouldn't start from here. But we are here and somehow we have to find our way to a more defensible position.
Another book you might look at is The China Challenge by Thomas Christenson, He was an Assistant Secretary of State for East Asian and Pacific Affairs.

Eg. Imagine here if the the army reported to the natioal party not parliament.

Former top Chinese military leader Guo Boxiong was sentenced on Monday to life in prison for accepting bribes, the official Xinhua news agency said – the latest high-profile conviction in president Xi Jinping’s crackdown on corruption.

For a decade, Guo was one of the two vice-chairmen of the Central Military Commission, second only to China’s president in the top body of the People’s Liberation Army (PLA). He retired in 2012 and was expelled from the ruling Communist party last year.

His fall comes as Xi seeks to consolidate his power and enhance his control over the PLA, the world’s largest military and technically the armed force of the ruling party rather than the Chinese state.

https://www.theguardian.com/world/2016/jul/26/top-chinese-general-guo-bo...

If its orders, marching and a party you're looking for...

COFCO's acquisition of Chinatex is the latest--and not the last--step in Beijing's plan to engineer a company that is dominant in food markets and follows the communist party's marching orders.

On July 18, the State Asset Commission announced the State Council's approval of the plan for Chinatex to become a fully-owned subsidiary of COFCO. Both are state-owned enterprises owned by the central government with business in agricultural trading, processing, marketing and sundry other businesses.

http://dimsums.blogspot.com.au/2016/07/cofco-engineering-abcd-competitor...

Or just to put by trickery into an undesirable position.
You hum it we'll play it.

P.S.
The presumption seems to be that "big is competitive." The communist party loves big things and views small things as chaotic and hard to manage. Or maybe the companies need to be under a prominent flagship company to open the pipeline to political influence which leads to subsidies, bank loans, and IPOs. COFCO will be free to make money as long as executives answer the phone when the Party calls. Another advantage of the sprawling structure is the possibility of cross-subsidizing businesses through various pop-up subsidies and monopolies, such as earmarked loans and import quotas set aside for COFCO's exclusive use, and subsidies for holding grain reserves.

But beware foreign companies. Just because Chinese companies can sign collusive agreements, monpolize markets, and set prices through "macro controls" with the government's blessing and encouragement doesn't mean you can do it too. China's antimonopoly law is made specially for you

Eg. Singing from the same song sheet.

China’s Communist party regularly seeks to legitimise its rule by highlighting the uncertainty caused by elections elsewhere. State media has recently generated a flurry of news reports and commentary on the rise of Donald Trump in the United States. Brexit is receiving similar treatment.

Other state media have taken shots at the Leave campaign’s claims that Britain could more quickly strike trade agreements with rising Asian powers once it is untethered from the EU.

https://www.theguardian.com/world/2016/jun/25/britons-showed-losing-mind...

Mind how you go.

Workingman and linklater.... many thks for the dialogue ...

Expresses my own thoughts and feelings.... .. better than I could..

As per Workingman's comments above I suspect the week after the first shot is fired over China's crazy claims on the 9 dashed line total control of the China Sea, (and probably has similar ambitions/just claims on every other sea including the Sea of Tranquility,) farms, housing and the NZ$ will basically fall into a bottomless pit even though our PM will state "at the end of the day nothing has changed" Would he side with China in a trade / gun fight with Asia / US, this guy is bat shit crazy about his precious GDP growth but I would hope he would think it through.

The latest news from China sees Xi basically writing all the news fit to be read by the peasants. How hardline will China go?
(China enforces ban on original news reporting)
https://next.ft.com/content/7cac715c-522e-11e6-befd-2fc0c26b3c60

I think, Smalltown, that issues in the South China Sea are more perilous than politicians - here and elsewhere - are willing to admit. The New Zealand government is used to employing fudge and distraction, but neither of these are going to cut it. The knots it has succeeded in tying itself in over threatened retaliation for any inquiry into steel dumping are going to look like bows in shoe-laces compared to the tangles coming.

My fear is that it will go to war, and we'll have to pick sides. The situation between USA and China isn't far off cold war conditions as it is.

Agree workingman. I work with a vietnamese. Very concerned about what is going on in their country re territory creep by the neighbour...and not just the China seas either, they move within. Thinks we are barking mad for not seeing it. NZ is the steppng stone to arctic fisheries.. what we have down here has them drooling.

With our liberal, western, christian upbringing we believe or are taught/encouraged to regard all people as equals. That's OK but many then make the unjustified connection that we are all alike. Big mistake! The dominant culture (western) is under increasing threat and it is vital to understand what is going on, unless you believe that the world will be a better place with the Chinese or Muslim or Indian or African culture and their traditions in charge of the globes institutions and direction.

" The political and economic issues broadly discussed in the media usually revolve around political cycles, terrorism, foreign policy, rising debt levels, sluggish economic performance, academic underachievement, environmental problems, ageing demographics and so forth.

In our view, this all ties into a major cycle of history that has been with us for some time, and which has been gaining traction since the 1990s: the end of Western Civilization and the transition towards a globalized society. There is some confusion between the two terms, where the latter is often perceived as the continuation of the former, but in reality the two have been in conflict for almost 100 years.

We are delighted to get Prof. Harry Redner’s views on this topic, which he has studied and written about extensively. The political, social and economic ramifications are likely to be life changing in the years to come. Politicians, investors and citizens all over the world should take note."
http://www.zerohedge.com/news/2016-07-23/post-western-world-disturbing-i...

Fantastic read. Thanks for the link. Have just ordered one of the books from an online library. :-). His latest one, which was really the one I wanted, wasn't yet in their catalogue. Amazing theorist/historian.

You'd think the South China Seas stuff would be enough to fail the "good character" test.

Good point.

In my opinion, China has been very cunning in using 'soft' (economic) power to extend its reach and dominance. It's seems pretty obvious in third world countries where China is buying favours, it's more subtle but still powerful in western countries.
The west has been suckered in because without China's huge growth over recent years, well, we would have had stagnant economic. And money talks, obviously.

I'm surprised more questions have not been asked of this strategy.

Totally agree with sentiments in thread. It's short term gain vs long term strategic thinking. Will SFF farmers look at 6 month financial statement and take the short term cash or will they recognise the wider strategic forces that are at play and elect to keep control for future generations. I particularly take issue with the view that there will remain plenty of alternative options post the SM deal. The SM play book will be obvious, ramp up prices ,weaken opposition, especially Alliance ,and then start mopping them up. In 5 years the only processor with any genuine capacity left will be controlled by a Communist state owned enterprise. Ask the previous generation how having their supply chain dominated by the British worked for them?

Yes, Sheep Shagger, long term strategic thinking is essential in areas crucial to national well-being. But short term thinking takes over - or can take over - in an environment being driven by fear. And fear is what characterises the SFF (and larger agribusiness) decision-making.

On the one hand, fear is being fed into the debate by those panicked by any - any - upsetting of China. This argument is, at bottom, that we need to sell, and sell quickly, to keep the Chinese state friendly for other, larger trading reasons. On the other hand, there's fear of the influence of the banks - a result of real (or maybe exaggerated) financial vulnerability. The argument from this direction is that SFF must sell because the banks want out, and there's Chinese money on the table.

These two dynamics are getting in the way of reasoned strategic thinking. And, in this area - to do with SFF - as in many others, we are choosing to lock ourselves into a general culture of short-term appraisals and short-term solutions. Neither produce great or extended value.

How come this is so bleeding obvious to us know nothings - I am speaking for myself, btw

Got it in one workingman. The debate has been dominated by fear of receivership not whether it is a good deal. The amount of money on the table has surprised and blinded many because they don't appreciate the potential SFF and other NZ food companies have if they can climb the value chain. Also In the context of the value of their farms proportionately minimal.

It seems that New Zealand has emerged from an era where the majority of agricultural exports went to the UK and is marching determinedly to a bright new age where the majority of agricultural exports go to China.

What gives with the fixation on a single market? Is it a flaw in the national character, a stubborn refusal to learn from history, or what?

As for climbing the value chain, based on what I see in my local supermarket, it's going to be a long, long climb, over a long, long time.

Commenters above may care to reflect as to where alternative sources of finance for SFF are gong to come from, and be constructive in suggesting solutions.
In doing so, it is worth remembering that SFF has been trying to go down the value-add path since 2007. It is never an easy path, and even harder when there is no investment capital available.
SFF has been trying to find additional capital for most of that time, but farmers have been unwilling to go to their pockets, and no white knight has emerged.
Given that over the last six years (including this year) overall losses have exceeded overall profits, then the bankers have lost patience.
If the Shanghai Maling deal falls over, then in all likelihood SFF will fall into receivership.
As to what will happen then, there are alternative scenarios, but there will undoubtedly be many job losses and others will then pick over the corporate carcass.
One possible outcome is that the more desirable parts of the carcass will still fall into Chinese ownership, but purchased at a much lower price than the current proposal.
One thing that is clear is that Alliance, who are also under pressure from their bankers, will not be able to come to the rescue.
So what we need are some constructive suggestions that are feasible in the imperfect world in which we live.
Keith Woodford

Do you honestly think the Chinese government is doing this to save Silver Fern Farms and its shareholders? Come on, honestly, now.

Nobody could possibly be that naive and be allowed outside on their own

How about a public share issue? I'd buy some, but would probably consider it a donation to charity..

Yep, I'd buy some too.

Pocket Aces
Of course not. Shanghai Maling is doing this for its own benefit. That is the way the world works. But there is no other deal on the table. SFF is caught between a rock and a hard place, with the reasons for that going right back more than 15 years to the start of the Richmond saga. If SFF had the capacity to stand alone it would be a totally different matter, but it no longer has that capacity.
Keith Woodford

I would suggest Keith that if concerns about China play out you will be very embarrassed about this article at some pt in the future, "Chinese colleagues indeed"

Why won't the government come to the party with a $100 million dollar loan? It would be a better investment than the dream scheme of getting rid of all the rats, stoats and possums. What have they really done for NZ?!!!

That 'dream scheme' you refer to is perhaps the most enlightened piece of work this dreary govt has supported. Too enlightened for the govt to come up with - private enterprise leads the way. As it succeeds it will become an international recognised piece of work - and not only make our country and even more desirable destination, but create a wealth of knowledge and expertise that wil be sought after and exported around the world. Thank god for dreamers.

Hey, don't get me wrong I like the idea, but you could nuke the place and not kill all the rats. I'm a farmer and in the last four months we have had pest control contractors turning up setting lines for stoats ( we have never had this before). The lines are being set on a small area of the farm, to me it smells of just another job creation scheme like nait. It will need a scientific break through to achieve it, some sort of biological control, not a poisoning program.

This pest proposal also smells of vote buying by National, an attempt to weaken the Greens. If the Greens had announced this proposal it would have been called a dream scheme, but because National has proposed it, we are supposed to believe it's possible?

..won't be a job creation scheme, more like a retirment hobby activity. Been bush lately? Setting traps has become the new golf/cyle activity for the retirees. They are active weekdays and weekends..armies of them. This is quietly taking on a life of it's own...it's a very big, well resourced and well educated group. They will succeed.

Keith what do you think of this article

https://www.thetrumpet.com/article/14057.2.0.0/economy/trade/chinas-conq...

Not the religious stuff just the bit about cows

Credibility destroyed by gradual drift into crazy bible prophecy nonsense.

Indeed. But independently of the bible prophecies the dairy material presented there is devoid of reality.
Keith Woodford

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SFF wont go into receivership. They have as of FY15 $120m core and 61% equity down from $388mand 38% equity FY13. Yes inventory plays out around the margins but there has been significant progress. Maybe only $50m would be needed to get the banks off their back...50 lousy million to put our 2nd biggest export company on totally solid ground. How weak are our capital markets!

I would remind readers that farmers haven't actually been asked for capital. It has been assumed that we wouldn't contribute because a previous capital raising was poorly subscribed. The board have not tested what should be their first port of call.

It is also well known that there has been a consortium of NZ companies prepared to underwrite a capital raise, ironically organised and promoted by SFF itself until the Goldman Sachs process shut that avenue down.

Lastly as raised by Tim, the govt. They have intervened in all manner of situations, Rio Tinto, Media Works, Sky City etc. They are a totally vested interest as they have poured 10s of millions into SFF as part of a primary growth partnership programme (farm IQ), intellectual property that they will be gifting away to the PRC. They could underwrite a bond issue or the like for potentially no cost to the taxpayer. Isnt there walls of money sitting in bank accounts earning 1-2% surely a bond issue at 6% would be heavily oversubscribed......but no we will just take the easy out of selling out to foreign ownership.

Sheep Shagger
Your confidence about SFF being free of the risk of receivership may well be misplaced.
The banks are this year ensuring that SFF ends the financial year with minimal inventory and that is to facilitate a possible receivership should the Shanghai Maling deal fall over. Ironically, that has also been a sound policy for other reasons; i.e. the Brexit related fall in the pound and the euro.
As for the Govt stepping in, there is zero chance of that happening. All of the other meat companies would then sue the Government for tilting the playing field and they would win.
If a NZ consortium had been genuinely willing to underwrite a capital raising of the required scale then it could have happened. In the current environment, the legal and financial logistics of making that happen are no longer possible. The banks have no interest in going down that path and it is they, not SFF, who are in control.
Keith Woodford

No issues from me if SFF goes into receivership, from my perspective in the Waikato at least, their management has been terrible and they have been throwing money into state of the art meatworks and advertising/branding with no thought to if farmers would actually want to supply them, or if their advertising would actually realise higher prices for their product.

I refer to the Te Aroha plant, supposedly the biggest and best around which was built when the Waikato already had excess capacity from Greenlea, Affco and others in the region.
Then the SFF buyers were coming to us and offering a schedule well below what others were paying and expecting farmers to jump at the chance to have their cattle killed at the flash new works.