Silver Fern Farms’ co-products JV helps meat focus

The joint venture between Silver Fern Farms (SFF) and Modena Investments marks a change in the meat co-operative’s focus which will ultimately enable it to concentrate on its core meat business. For the time being this is a South Island strategy, where co-products are processed on the individual plants, because in the North Island there is the Richmond legacy of contracts with outside meal and tallow processors which have continued under SFF ownership.

 

Keith Cooper, SFF’s CEO, has stated publicly the JV was formed to boost production and sales of meal and tallow, which are valuable sources of export revenue and profit, with total exports of over 200,000 tonnes per year across the industry, although prices are subject to the normal highs and lows of commodity trading. SFF has been unable to capture as much of this value as it would like, because the capital needed to maximise co-product revenues always take second place to the demands of meat processing.

 

There are three ways for meat processors to capture the value of co-products: do it all themselves, sell them to a specialist outside processor, or form a JV which combines the expertise and assets of each. All meat companies use at least one, sometimes two of these options.

 

The choices are more restricted in the South Island where there are only a couple of independents which means co-products must mostly be processed on plant. In the North Island there are several independent specialist processors, Taranaki By-Products, Wallace Corporation and Lowe Corporation. North Island meat processors generally send their raw material to one of these independent companies, although AFFCO processes its own raw material centrally at Horotiu, while PVL Proteins operates under the same ownership as, but separately from, Auckland Meat Processors.

 

SFF’s JV, named Farm Brands, will initially focus on co-product marketing, but will eventually build new processing facilities; this will mean rendering materials can be processed centrally on one purpose built site. The owners of Modena are Landmark NZ which has a tallow business and Societa Azionaria Prodotti Industriali, a leading Italian processing company.

 

The JV partner will contribute capital, with the Italian company bringing a substantial amount of expertise and product knowledge, while SFF will provide a small amount of capital and mostly contribution in kind, including plant and equipment, sites with resource consents, and raw material supply contracts. Its objective is to take advantage of each partner’s strengths to build an efficient and profitable rendering operation.

 

Although Keith Cooper has indicated Farm Brands’ sales will be over $70 million in the first year with no effect on staffing levels, it is only the first step in the process. These sales will not be additional to SFF’s current production, unless the JV can immediately achieve higher prices than before, but in future rendering sales and costs will be separately reported, SFF carrying 50% of each. So any improvement to SFF’s overall performance must come from dramatically improved recoveries and yields through better production management of the present processing facilities, higher prices and greater volume of production.

 

In the long term this may come from building the new central processing site and ideally persuading other processors to send their raw material there. Then there’s the opportunity to extend the JV to the North Island which could take over marketing or processing currently performed by Lowe Corporation, although this hasn’t been suggested at this stage.

 

It looks as if SFF is willing to forego half its present revenue from meal and tallow production to get rid of direct responsibility for a part of its business which has potential, but demands more capital and attention than can be justified. The JV is a creative way of transferring direct control of the rendering business and reducing capital expenditure, but to start with it may see a reduction in total profit.

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One Response to “Silver Fern Farms’ co-products JV helps meat focus”

  1. John.Jnr Says:

    Here’s wishing you and yours a very happy and prosperous new year !

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