Get real about where the money comes from

There’s a lot of noise around about the lack of equity available to invest in New Zealand agribusiness companies.

At the recent Agricultural and Horticultural Outlook Summit, (reported in Farmers Weekly 14 June) Murray Sherwin, director general of MAF, talked about the challenge of persuading farmers to pump more money into their co-operatives which lack sufficient equity to realise their full potential. Sherwin said it wasn’t surprising New Zealand’s biggest companies were SOEs and co-operatives, because publicly listed companies tended to get caught out in a downturn and had to turn to a, usually overseas owned, white knight to bail them out.

He told me last week New Zealand’s weak savings record and the small size of our domestic market have the effect of creating greater risk which puts an increasingly high premium on balance sheet strength. However he acknowledged the enormous challenge in getting farmers to invest meaningful amounts of capital off farm.

At the same Summit Bill Falconer, Primary Growth Partnership and Meat Industry Association chairman, was reported as proposing greater government investment in agricultural companies as the means of helping them to grow while retaining New Zealand ownership.

Without wishing to debunk these contributions from two such eminent figures, I struggle to see how they have advanced the debate much, if at all. When asked for his solution to the problem of increasing farmer investment, Sherwin said this was the challenge, but it wasn’t his position to propose what ought to happen. At the same time, Falconer’s suggestion has about as much chance of success as I have of becoming an All Black! Our government has neither the stomach, nor the fiscal flexibility to invest in private companies on behalf of taxpayers except in cases of extreme need, like Air New Zealand when it was in danger of collapse.

This is not to say there isn’t a problem in need of a solution, but when confronted by the government’s unwillingness to consider floating even small shareholdings in our SOEs to free up capital, the small uptake by members of shares in Silver Fern Farms and the convoluted process of removing Fonterra’s redemption risk, it’s a struggle to see either of these ideas gaining any traction.

A discussion with Andrew Talley, director of one of New Zealand’s largest agribusiness companies, identified an entirely different perspective. Talley’s Group has grown organically because it’s a private company and has taken the long term view, electing not to pay any dividends, but to put the capital back into the business. He said it’s important not to confuse size with success, believing firmly we should expect companies to earn their success through good management and direction, not through statutory decree like Fonterra and the SOEs.

He makes the point the entire farming sector is funded by private capital, whether local or overseas, but the issue for gaining greater investment is one of capital allocation. In his opinion there is no lack of private capital, but it is hesitant to invest because agribusiness has such variable returns and policy settings tend to discourage investment, particularly exchange rate volatility, introduction of the ETS and other business unfriendly government charges.

Agriculture essentially has three forms of ownership structure – co-operative, publicly listed and privately owned – if we ignore government ownership of Landcorp and Crown Research Institutes. Of these three the public company structure is the least appropriate for the reasons listed, as demonstrated by the roller coaster performance of PGG Wrightson and NZ Farming Systems Uruguay and a decreasing number of minority shareholders in AFFCO. In contrast Sanfords has been a successful fishing company over many years.

Co-operatives are an effective form of ownership, provided the ownership signals are clear with no ideological conflicts between the interests of shareholders and those of the business. However the most successful cooperatives tend to be purchasing rather than supply based, like Foodstuffs in the grocery trade, although this may be as much to do with the strength of the cashflows and their capacity to invest in land banking for future expansion. In contrast Fonterra always has a potential conflict between the milk payout and sufficient return on capital to fund growth into value added production. The meat co-operatives are caught between the constant livestock procurement battle, investing in modern processing plants, product enhancement and market development. Furthermore their cashflows are seldom strong enough to fund all these initiatives simultaneously.

This leaves the privately owned company, of which there are plenty of examples: ANZCO Foods, Talley’s Group and Sealord are among the biggest, but the meat industry has several successful medium sized companies such as Taylor Preston, Wilson Hellaby, Progressive Meats, Greenlea Meats and Universal Beef Packers to name but a few. ANZCO, Sealord and Universal have substantial overseas shareholders who appear to have had an entirely benign influence on those companies which suggests there is no reason for paranoia when foreign capital is invested directly in our companies.

I suggest we need to be more realistic about sources of capital to fund the growth of our agricultural sector when neither government nor farmers are willing or able to increase their level of investment.

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Tags: capital, cooperatives, equity investment, overseas investment, private equity, public agribusiness companies, Talley's Group