Stick to the knitting

Stock and station agencies have a long history in this country, performing essentially the same role throughout their existence, but at the same time the industry has undergone enormous change. At the turn of the 20th century there were 80 firms, by 1986 when Wrightson and Dalgety merged this had fallen to seven, while today there is only one full service firm, PGG Wrightson (PGW) supplemented by Elders and Allied Farmers offering a narrower range of services, three specialist farm merchandise retailers, wool buyers, and a number of regional agencies offering livestock, grain and seed, and advisory services.

The original business model provided a fully bundled product offering – livestock trading, wool selling, grain and seed, fertiliser, agricultural chemicals, animal health, clothing, groceries, liquor, real estate, insurance – for which seasonal finance was the glue. As economist Brian Easton observed in his 1987 analysis, the benefit to the farmer of this arrangement arose from economies of scope; in other words it was cheaper and easier for the farmer to buy all these products and services from a ‘one stop shop’, particularly where getting seasonal finance was conditional on the rest.

But all this has changed in the last 25 years. There is competition in every area of activity, most notably from farm merchandise cooperatives, private wool brokers and the trading banks. So if the answer is to focus on the core business or stick to the knitting, the question must be what is a stock and station firm’s knitting?

Events of the last few years suggest it has been impossible to define what produces competitive advantage. PGW, the result of many mergers, attempted to re-invent the meat industry under Craig Norgate’s direction, trying to make meat behave like the dairy industry. In the 1980s Elders Pastoral thought it could be successful by acquiring regional operators or opening offices and stores throughout the country. Allied Farmers tried to grow by acquiring finance businesses in the 1990s, writing off 75% of Prime Finance’s loan book in bad debts, buying Hanover’s assets which since have lost about two thirds of their value and Allied Nationwide Finance being placed in receivership last year, suggesting they didn’t learn anything from past experience.

George Gould, Managing Director of PGW, wryly observes economists’ and investment bankers’ predictions of stock and station being a sunset industry since 1986, but says, despite competition in all facets of the business, it is still there, because of the way the agents look after their farmer clients. He considers it very important to present a stable company identity, admitting this hasn’t always been the case in recent years, but sees his job as being to bring the business back to basics by ensuring PGW has the best agents in all business areas.

He believes the probable majority shareholder, Agria, shares the Board’s commitment to maintain the twin focus on AgriServices (traditional rural service activities) and AgriTech (grain, seeds and nutrition) because they complement each other. However this won’t become clear until after Agria gains 50.01% of PGW, while the future of the finance division will also come under scrutiny at that time.

Stuart Chapman, CEO of Elders, also says it is critical to focus on the core business which most importantly includes livestock and wool, but not finance, currently being wound down. Livestock and wool make a good contribution to the profitable operation of the business, unlike merchandise which has always been a bit of a struggle. However having sold its merchandise business to Farmlands in the early 2000s, Elders has opened 16 merchandise stores since 2006 because Elders Australia sees farm supplies as an important part of the core business.

Chapman is very pleased with the way the wool business has developed in partnership with Primary Wool Cooperative (PWC) which owns 50% of Elders Primary Wool, with 1000 wool suppliers who are also shareholders of PWC, and the Just Shorn marketing initiative. He is convinced the hybrid of corporate and cooperative is more successful than the pure cooperative model.

Both PGW and Elders emphasise the critical importance of employing specialists and providing solutions to farmers that enable them to get more out of the property and livestock they have, instead of investing capital to buy more land and expand stock numbers, assuming they can access it from the bank.

Both companies see a role for stock agents in procuring prime stock for meat companies, although here their philosophies differ slightly. Gould is happy for PGW to cooperate with meat companies for livestock supply on a headage basis, in contrast to Norgate’s previous vision which was to take over the total procurement activity for one specific meat processor. Elders would prefer a contractual arrangement with different companies where the stock agent would use his expertise to manage supply through the breeding, rearing and finishing stages of the animal’s life. However they both agree the agent’s expertise combined with the company’s reputation is crucial to building and retaining the trust of their clients.

There’s also clearly a role for small, low overhead, specialist companies which makes it even more important for the more traditional full service agency like PGW and to a lesser extent Elders to use their size to add expertise and value across all aspects of their business. It may not be the bundled service offering of the past, but it still operates on the same principles.

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