Quota allocations suggest change in balance of industry power

February 3, 2016

The release of the 2016 quota allocation which Alan Williams analysed in detail (Farmers Weekly 11th January) show some considerable shifts in tonnage entitlements between the major meat exporters. The quota is allocated as a percentage of the total allowable quota for shipment to the EU for sheepmeat and USA for beef during a calendar year; in the last two years New Zealand has only filled around 75% of the EU quota and 90% and 98% of the USA beef quota. Read the rest of this entry »

Hard to see where sheepmeat solution will come from

January 28, 2016

Not surprisingly farmers are dissatisfied with the state of the sheepmeat market. The impact of drought has brought about a near 20% increase in the kill for the first quarter in a season where the full year lamb kill is forecast to be 1.7 million lambs below last year. Read the rest of this entry »

Partnerships the key to China business models

January 13, 2016

It’s true of any marketing and distribution strategy, but China’s size and comparatively underdeveloped cold chain make this factor even more important for the successful development of agricultural business there. Read the rest of this entry »

MPI’s SOPI report suggests it is on different planet

December 23, 2015

When I read the headline forecast in the December update of the Situation and Outlook for Primary Industries report, my initial reaction was “they must be joking, what planet are they on?” After a slightly more in depth study of their analysis, I am still baffled. Read the rest of this entry »

MPI’s SOPI report suggests it is on different planet

December 21, 2015

When I read the headline forecast in the December update of the Situation and Outlook for Primary Industries report, my initial reaction was “they must be joking, what planet are they on?” After a slightly more in depth study of their analysis, I am still baffled. Read the rest of this entry »

MPI’s food safety responsibility still causing major problems

December 11, 2015

In January this year I wrote a column which argued the Primary Industries Ministry risked losing focus on two of its core responsibilities, namely food safety and biosecurity, as a direct consequence of merging MAF, NZ Food Safety Authority and Bio-Security New Zealand into a single mega government agency.

I cited the Fonterra whey protein botulism scare as an example of the new agency dropping the ball.

The WPC80 report into that incident stated “overall there was a lack of commitment to ensuring readiness to deal with a food safety event” quoting a senior official as acknowledging nobody had taken ownership of food safety.

The report went on to say the gap had since been closed.

Recent events like the Hepatitis A cases from frozen berries from China, antibiotic-resistant campylobacter in chickens distributed by three of the four largest North Island producers and last year’s outbreak of gastrointestinal bug yersinia suggest the gap remains open.

In the meantime, MPI maintains weeks or even months of secrecy before it discloses information about the identity of suppliers or the source of the problem.

Even worse, sometimes, as in the case of the yersinia outbreak, the named culprit is found not to be the source after all.

I argued at the time MPI’s four key areas of focus, as listed in its 2014 annual report, were as follows: maximise export opportunities, increase sustainable resource use, improve sector productivity and protect from biological risk.

It seemed then and still seems staggering that the most important role of all, protection from biological risk, should come last instead of first in this list of priorities.

In case people think this is just semantics, consider the benefits of the previous structure when NZFSA was split out from MAF in 2002 and run as a sole-purpose government department between 2006 and 2011.

NZ’s food safety reputation was at an all time high among our trading partners and I struggle to remember any serious food disease outbreaks, although I might not be entirely correct.

The food safety performance of the red meat sector still demonstrates the excellence of the standards put in place under MAF and NZFSA.

 

Unfortunately, the performance of Bio-Security NZ under MAF control was not as impressive during the first decade of the 21 st century, as kiwifruit growers hit by the Psa virus would testify.

The value proposition for the creation of MPI argued there was a risk of divergence in areas of regulatory policy and standard-setting, cost recovery and international standards.

Given NZ’s unique biosecurity and trade needs, the regulatory programme was not considered optimal for creating economic advantage for NZ.

However, the most important point of protecting NZ’s borders from biosecurity risks and consumers from food safety events appears to have been taken as a given, rather than disciplines requiring single-minded focus.

The National Government’s main objective has been to achieve greater efficiency and cost-effectiveness of outcomes by means of structural changes but there is a danger this focus might result in the baby being thrown out with the bath water.

I have read one comment which calls for the responsibility for food safety to be handed back to the Ministry of Health because its sole focus is public health.

The same writer also argues MPI has a conflict of interest between its priority to protect consumers and protection of food producers.

I would argue MPI’s main focus is not on producers but on economic gain for NZ, as shown by its first three areas of focus – export growth, sector productivity and sustainable resource use.

It is very easy to claim this is absolutely consistent with maintaining first-class food safety and bio-security but the point is MPI does have a conflict of interest.

Which of the four areas of focus should they concentrate on?

If the Government insists on doubling exports by 2025 while improving sector productivity and resource allocation, it isn’t difficult to see where food safety and bio-security sit in the queue.

I spoke to Labour’s primary sector spokesman Damian O’Connor about this issue in January.

He was adamant MPI is too big and has a conflict of interests between its regulatory and compliance responsibilities as well as its goal of maximising exports while the increasing quest for trade freedom is at variance with the protection of NZ’s biologically-based economy and reputation.

He wanted to see separate food safety and biosecurity agencies established outside MPI.

 

Unfortunately, I can’t see this happening before the next election at the earliest but it looks to me more and more as though we should evaluate this as an option.

At the very least we should assess the risks to NZ health and reputation of continuing as we are.

Season has contrasting impact on Silver Fern Farms and Alliance

November 29, 2015

The two biggest meat processors had contrasting experiences during the 2015 season to judge by their annual results and accompanying comments. There is no doubt Silver Fern Farms found life easier than Alliance, with respect to the year in question. SFF must also have heaved an enormous sigh of relief after its improvement from the previous three years. Read the rest of this entry »

Exit from EU could cripple UK agriculture

November 7, 2015

A new report by agricultural consultancy Agra Europe entitled Preparing for Brexit suggests leaving the EU, to be determined by a referendum in 2017, could destroy the British farming sector. The authors have based their forecast on the Coalition government’s 2013 Fresh Start Policy document which theorised that British agriculture could imitate New Zealand and Australia’s success in surviving, even flourishing, in a post-subsidy world. Read the rest of this entry »

New era or more of the same?

October 28, 2015

I have already pinned my colours to the mast by saying the JV between Silver Fern Farms and Shanghai Maling will be good for the meat industry and New Zealand as a whole, whereas some commentators don’t appear to share my enthusiasm. Some companies are also less than ecstatic about what it might mean for future competitive behaviour. Read the rest of this entry »

Independent report and road show fail to satisfy all Silver Fern shareholders

October 14, 2015

In spite of apparently solid support for the Shanghai Maling deal at the road show meetings, there are a number of long-term shareholders in the far south who feel let down and ripped off by the company’s determination to sell 50% of their cooperative.

 

Their displeasure has two main causes, one historical and the other current: the historical reason is the company’s departure from cooperative principles after the Richmond takeover; the more current reason is based on a belief there should be no need to commit to a partnership which sacrifices control of the cooperative. However one could argue control has long gone, with present controllers the banks being replaced by a Chinese meat company.

 

There is nothing now to be done about the Richmond takeover which was characterised by acrimony on both sides, as well as the substantial debt burden it imposed on PPCS which had been a successful business for over 50 years. These shareholders feel the company could have raised all the capital it needed, if it had insisted on new suppliers becoming shareholders; but because of the threat of a supplier exodus, PPCS decided to retain supply by accepting livestock from non shareholders.

 

This was an inevitable decision in the very different North Island climate and that horse has long since bolted. AFFCO’s status as a cooperative in anything but name had long disappeared before its capital restructuring in the mid 1990s.

 

The justification for selling half the operating business, including processing assets, brands, intellectual property and production supplied by the cooperative, can be found in the Notice of Meeting sent to shareholders and available on the SFF website. The attached Grant Samuel Independent Report contains essentially the same information as the Notice of Meeting which is logical, as much of Grant Samuel’s information came from discussions with company management and directors.

 

This is probably inevitable, but it raises the question whether an independent report, produced on behalf of and in consultation with a company, can ever be truly independent. The strong probability must be the conclusion will always corroborate the client’s preferred course of action, provided it makes sense.

 

That said, the partnership with Shanghai Maling appears to be an offer which ticks many boxes which are beneficial to SFF and, it could be said, its suppliers. Shareholders will receive a 30 cent a share dividend, having received no dividends and seen the value of their shares fall to 35% of par value; they are also virtually guaranteed to be paid a competitive price for their livestock and dividends in future. The company will be debt free and, in chairman Rob Hewett’s words, the value add ‘plate to pasture’ strategy will gain a turbo charge.

 

The key conclusion in the Grant Samuel report is the following excerpt which states “As a result of an improved financial performance and other strategic initiatives SFF Co-Op has achieved a degree of deleveraging over the last two years and it is arguable that given

time it will be able to achieve a more conservative capital structure without the need for new capital. Nevertheless, the Proposed Transaction achieves the recapitalisation, removes uncertainty, creates new opportunities for growth and is strongly supported by the Board of SFF Co-Op and the Banking Syndicate.”

 

The removal of the uncertainty that has bedeviled the company for several years and the unwillingness of at least some of the banking syndicate to extend facilities beyond the end of this month without a firm, bankable proposal are two very good reasons for accepting the deal.

 

In time the company will be able to transition to its intended supplier remuneration policy of rewarding suppliers for their ability to comply with market specifications. But first there must be a serious review of processing facilities and tough decisions about plant upgrades or closures, because SFF has more capacity than any of its competitors, quite a lot of it less efficient. The recapitalisation will enable this to occur without having to go cap in hand to the banks.

 

For suppliers who support the partnership proposal, the important points are survival of the company, certainty of payment and possibly belief in Shanghai Maling’s ability to enhance the returns from the ‘pasture to plate’ strategy without keeping all the additional profit for itself. Conversely the objectors believe SFF has departed irrevocably from its cooperative principles and should have been able to find alternative capital without selling half the business, while Shanghai Maling will take all the upstream margin.

 

At this stage it is impossible to predict whether, and for how long, Shanghai Maling will be content to remain in a true 50/50 partnership which is a notoriously troublesome business form. History suggests it won’t last this way for ever because, in a joint venture, one partner generally ends up screwing the other. Inevitably it will be the stronger partner that finishes on top and there are no prizes for guessing the outcome here.

 

Unfortunately those suppliers mourning the structural and philosophical change to their cooperative will have to face the reality of the financial position which SFF was faced with and the board has been compelled to resolve the best way it could. That’s what boards are meant to do. Equally, unhappy shareholders also have a choice and can look at the obvious alternative.

 

In proposing the deal with Shanghai Maling, SFF’s board has made a judgement call between the lesser of two evils: it has chosen the financial certainty of new capital in exchange for half the business, believing this to be preferable to the risk of losing supply from disaffected shareholders. The amount of time it took to come up with this solution suggests the board must believe it had no choice in the end.


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