Relentlessly positive AFFCO comfortable in private ownership

Talley Group is approaching the 90% threshold at which it can compulsorily acquire the remaining shares in the meat processor, although nothing will really change in the way the company has operated since 2006 when Talley’s first passed the 50% shareholding mark. What is different now is a willingness to communicate with a wider audience in a conscious effort to raise its company profile and accentuate its positive achievements.

Ironically this comes at a time when its return to private ownership means it will no longer have to publish its annual and half yearly results, with almost certainly the last one to appear later this year for the 2009/10 year. But as Sam Lewis, AFFCO chairman, told us at the media briefing last week, the company has spent more of its 106 year existence as a private company than it has as a public company, so this new phase in its life is nothing new.

What is new are the commitment of the majority owner and the optimism of the top management which, according to CEO Hamish Simson, is ‘relentlessly positive’, buoyed by Talley’s determination to invest what it takes to be an efficient processor and international marketer. This refusal to pay shareholder dividends has led directly to the privatisation of the company, because long term shareholders like Hugh Green and Toocoya eventually decided they needed to earn a tangible return on their money.

This strategy of retaining earnings suggests the meat industry is not one which sits comfortably with public ownership, because to all intents and purposes there is no longer any opportunity for the public to invest in it. The only remaining avenues for outside investment are Blue Sky Meats and Silver Fern Farms which are traded on the Unlisted exchange, with SFF’s shares trading at a 35% discount to the issue price and only being available when cooperative shareholders want to sell.

In fact agriculture as a whole provides negligible investment options for the general public and none of these options holds much prospect of profitable return – Olam’s offer for NZ Farming Systems Uruguay (NZS) at 70 cents is at a substantial discount to listing, but 80% of shareholders have jumped at it, PGG Wrightson is still trying to recover from overstretching itself while trying to diversify away from its core business, and Allied Farmers is a penny dreadful stock which forgot what its core business actually was.

Agriculture and horticulture obstinately retain their position as New Zealand’s largest international core businesses in spite of the success of tourism and wine, but even the much maligned ‘broken’ meat industry contributes a greater proportion of export earnings than these newer industries or manufacturing. Other stalwarts of New Zealand’s economy, such as telecoms, IT, retail, and energy predominantly serve the domestic consumer, while a disproportionately high percentage of economic activity is central or local government owned

So we have the unusual situation of our biggest wealth generator having virtually no investment by the vast majority of the population with little likelihood of this changing in the future. The largest blocs of investors in agriculture are the shareholders in dairy, meat and horticulture exporters who are at the same time suppliers to these companies. Other owners of parts of the industry are either private individuals or companies, as well as a very few overseas food companies, such as Olam, Itoham and Bright Dairy.

The question is of course whether any of this matters, but I think it does, if only because there is only a very small number of investors in this country with the capital to invest seriously in the future of our most important industry sector. Talley’s is a rarity – a private company, willing and able to invest in extending its range of food processing businesses without requiring the payment of a dividend. But there aren’t too many others floating around willing to open their wallets. This is why the Overseas Investment Office, clearly with the Government breathing down its neck, must take a lot of factors into account when approving land and business investment applications.

New Zealanders in general appear to be paranoid about any overseas investment in land and assets without being prepared to debate whether this is a genuine concern about loss of sovereignty or merely a knee-jerk response to foreign ownership. The potential benefit of overseas investments may well be greater than the damage they could cause. For example Bright Dairy’s investment in Synlait will enable that company to pursue its original strategy to this country’s advantage, when New Zealanders were unable or unwilling to invest. Equally Olam’s offer for NZS is at a price which reflects the balance between the value of the original strategy and the poor subsequent decision on land acquisition. Surely the correct minority investor decision would be to hold on to the shares and wait for Olam to succeed in overcoming the negative impact of that poor decision.

In essence, if local shareholders cannot or will not support locally based companies, they can have little to complain about, if an overseas company sees value at a price. This is a key issue that I hope the meat sector strategy discussion will debate as part of the attempt to find a solution to the perceived dysfunctional nature of the meat industry. If there are only two logical forms of New Zealand ownership for agriculture – farmer and private investor – the sector strategy must take this into account, when it decides what the workable solutions will be.

During the meeting at AFFCO Andrew Talley made the point too much capacity leads to sub optimal returns to farmers which will only be solved by rationalisation (plant closure) as distinct from aggregation (merger) which won’t succeed in transferring pricing power from customers to producers. This may sound obvious, but it clearly identifies rationalisation must happen where there is too much inefficient or redundant capacity. The longer term farm production, breeding and productivity improvement strategy envisaged by the $160 million value chain integration project will not avoid the need for rationalisation, unless livestock numbers recover much faster than expected.

There are other aspects of meat industry practice which need attention in the pursuit of reduced cost structures to achieve global competitiveness, notably in the area of labour force flexibility and meat inspection. NZFSA announced last week several plants across the country will conduct a trial over six months to demonstrate whether meat company staff can carry out meat inspection to the requisite standard without the need for involvement of meat inspectors. The meat industry spends about $80 million a year on meat inspection compared with about $7 million for dairy and $1 million for seafood, so the savings are considerable.

Another major problem area which affects farmer profitability as well as investment in New Zealand agriculture is the lack ofrelativity between land prices and farm production returns. While dairy is currently a star performer, many dairy farms would be seriously overcapitalised if the dairy price were to fall. Equally the relative strength of the NZ dollar is sucking out most of the market gains from lamb and beef prices. Unless the sector strategy can overcome the exchange rate problem, much of the meat industry’s problems will persist.


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