Season has contrasting impact on Silver Fern Farms and Alliance

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.

 

The bare facts of the differing results are NPAT of $24.9 million and dramatically reduced debt for SFF and $4.6 million NPAT for Alliance accompanied by a marginal reduction in equity ratio. Alliance’s performance was slightly worse than 2014, disappointing as chairman Murray Taggart agreed, whereas SFF’s result was a massive improvement on the previous year. Neither result represented a satisfactory return on assets, but signs for the future are positive.

 

SFF’s recovery from several torrid years, combined with the JV agreement with Shanghai Maling, lifted morale considerably, as well as removing an enormous degree of stress from the shoulders of board, management and banks. It also clarified the position of cooperative shareholders in their capacity as both suppliers and shareholders. Although there remains a minority not in favour of the rescue package, the vote at the Special General Meeting was very conclusive.

 

Alliance, with a stronger balance sheet and therefore without such an acute need for remedial action, has taken a completely different course of action. There is no confusion at all about its continuation as a 100% farmer owned cooperative which it is now able to promote as a key point of difference. The new company strategy is clearly focused on delivering value to shareholders.

 

At the release of Alliance’s latest annual result Taggart made a point of emphasising the company’s commitment to accepting lamb and sheep from farmer suppliers, even in weakening market conditions, in order to reduce exposure to volatile markets and to limit the impact of dry conditions. He said “The alternative of reducing our processing would not have been in line with our co-operative principles and would have adversely impacted our farmer-shareholders. This is the unique difference in being a 100% New Zealand farmer owned cooperative; we look at things through the lens of what’s important to our farmer-shareholders.”

 

There are other reasons for the differing performances of the two companies, although it must be remembered both actually made a profit. This has not always been the case. The main reason is the advantage SFF gained from its spread of plants across different species in both North and South Islands. Cattle made a much greater contribution to profit than sheepmeat as a result of the heavy cow kill and the demand from the USA which pushed beef prices to levels not seen before.

 

The lamb kill kept going far longer than usual and Alliance ended up processing a disproportionate number of these towards the end of the season when other companies, notably SFF, had basically stopped killing. Consequently Alliance ended up with a large inventory carryover at year end which didn’t help the annual result, as SFF had discovered in the 2012 and 2013 years. However in spite of a weaker trading environment, Alliance has successfully sold the excess inventory and stock is now down to normal levels.

 

Other negative impacts on profit were difficult weather conditions in key catchment areas for Alliance, like North Canterbury, and the need to cut lambs in less than ideal configurations because of high numbers later in the season. However the company believes it is very well placed strategically and has put a programme in place which will deliver benefits to its supplier shareholders, although the full results of the programme will take two years to take full effect.

 

Interestingly both companies ended the 2015 financial year with very similar equity ratios: SFF at 59.4% and Alliance at 58% which suggest a solid foundation for future performance. Assuming Shanghai Maling receives OIO approval to acquire 50% of SFF, this ratio will improve dramatically with term debt predicted to disappear. However the new board will have decisions to make about expenditure on plant rationalisation and upgrades which will require a certain amount of debt as part of an efficient balance sheet.

 

In discussion with Dean Hamilton about the condition of SFF’s plants, he accepts the company has some surplus capacity, although not as much as some competitors like to think, while he asserts plant maintenance has been kept up to date. It will be interesting to observe how the joint board decides to address these issues when the JV partner’s investment becomes available and the ownership restructure occurs.

 

Meanwhile Alliance is satisfied with the condition of its plants having booked $4.3 million of restructuring costs in the last two financial years. Taggart is confident Alliance is at the most efficient end of the cost curve and will continue to improve as it implements its strategy.

 

In spite of MIE’s failure to bring about a merger of the two cooperatives, it seems certain both companies will achieve the desired efficiencies under separate ownership. Because of the differentiated nature of meat processing and marketing, I am convinced the outcome will be good for the meat industry, because it will require companies to become efficient at what they do best, or they will fail. In this way farmers will benefit from improved performance and pricing, while being able to continue choosing where to send their livestock.

 

The meat industry has long been viewed as agriculture’s ugly duckling, even when it has had good years, but I am optimistic it now has a good chance of achieving its rightful position as a viable alternative to other, more fashionable, forms of land use. Two profitable South Island cooperatives will be a good place to start.

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Tags: Alliance, annual result, cooperative company, Dean Hamilton, financial performance, Murray Taggart, Overeseas Investment Office, plant efficiency, Processing capacity, Shanghai Maling, Silver Fern Farms