Silver Fern Farms: Well-Baited Hook

Published: Wed 14 Oct 2015 11:08 AM
I believe that Silver Fern Farms intention to allow a foreign entity to buy an equal 50% shareholding with the equivalent retained by its cooperative shareholders in New Zealand's largest meat processing and marketing company is a wrongheaded decision by its board.
I contend that if this announced proposition succeeds in securing the 50% shareholder vote to enable this outcome, then both the supplier farmers and in a wider sense, New Zealand will be disadvantaged economically by having foolishly and meekly given away the most crucial part of our animal production enterprise.
New Zealand meat producers should retain the independent ability to maximise their net return; from the huge quantity of sheep, beef and venison products they provide SFF.
I was until recently a sheep farmer and I supplied stock to SFF ( & formally PPCS ) so I well appreciate the ongoing, unresolved issues relating to the long standing lack of on-farm profitability and current substantial freezing works overcapacity causing seasonal stock procurement wars, between our processing meat companies.
NZ meat processors / marketers also face ongoing offshore challenges, with access / distribution of product through to targeted overseas consumer outlets.
Unfortunately, to-date, our two largest NZ meat processors, SFF and Alliance Group, has not found enough justification / motivation to merge and then rationalise plant over-capacity. With their financial balance sheets being presently weak, ( especially SFF ) agri commentators have long warned that if a merger was not obtained soon, it left SFF vulnerable to bank driven dictates and foreign interests looking to secure meat at the earliest and cheapest point along the product chain.
China in particular, is presently aggressively buying into food infrastructure worldwide, where they have the financial means and given the opportunity. The SFF bankers are now insisting their financial exposure be reduced, and the present government who has long touted themselves as the farmers ally and advocate, has progressively repositioned themselves as now more the advocate of other sectors of our economy such as start-ups, IT and the tourism industry.
A prudent government should be prepared to intervene proactively, working alongside our meat processors in enabling the orderly transition across to much needed amalgamation and then processing rationalisation, to minimize the debilitating value loss, within one of our main revenue earning industries.
Unfortunately these unresolved critical structural issues, have presently left SSF isolated, under financial pressure and very exposed to opportunistic savvy foreign business interests who are able to make a play for a half slice of our largest animal processing / marketing company. Our core means of adding substantial value onshore for our farmers / meat industry.
Our hard working farmers, who stoically struggle on despite adverse climate events, fluctuating (and often unsustainable) poor yearly net returns and mounting regulatory imposts, are right to be despondent about their present circumstances.
SFF suppliers will presently be very concerned about their cooperatives viability and this now tabled Chinese offer, which has been cleverly (and cynically ) well baited with upfront money inducements are going to be seriously tempting to these shareholding farmers, who, without another NZ based offer available, and with no doubt considerable reluctance, will most likely endorse this offer.
However, many shareholders / suppliers will be less impressed, instinctively knowing in their gut (and heart) that the financial incentives being presently dangled to help secure the 50% shareholder endorsement required, are very unlikely be in their longer term best financial interests, knowing half of the profit from each of the animals they produce with much effort, will be exported to China- huge income lost to New Zealanders & our domestic economy.
Many SFF shareholders will be of the view that they have no other choice but to accept that offer, to satisfy the cooperatives pressing bankers, and endorse it, with the vague hope that their new foreign joint partner will somehow have their farming families best interests at heart, and only by selling down their shareholding to them, will they also gain improved product access into the Chinese consumer marketplace.
I suggest however, that this foreign offer may be considerably flawed and comes at a much greater potential cost / risk to New Zealand’s best interests than the SFF board advocates would have shareholding farmers believe.
My understanding of the Chinese offer is that within the proposed governance structure of the new company, the top tier JV board will consist of 10 board members - i.e. 3 farmers elected, 2 independents appointed by the 3 farmer directors, and the other 5 directors being Chinese appointees.
However as fair and balanced as this governing board may appear on the surface, there appears to be a seriously inequitable balance of power lurking in the detail, where only the Chinese directors appoints the CEO of the company and any casting vote is only held by the Chinese Co Chair of their five board appointees.
This obvious inequitable balance of power, in a voting sense, may well result in important board decision-making (in a tight voting situation) being controlled, outcomes skewed in favour of the Chinese shareholders interests, at the expense of the farmer / shareholders best interests.
If I was presently a SSF shareholder, and aware of this potentially dangerous fish hook, I would be very concerned about that situation at board level and be very annoyed that my own board directors are somehow approving of that potentially dangerous situation. A situation where especially the high level strategic / pricing / product placement company decisions could ultimately be decided by the foreign shareholders.
The Chinese investment motivation is well known, driven by their desire to secure long term access to meat protein and other food categories for their countrymen from a reputable, high quality source at the best price possible.
They can achieve this objective by either purchasing NZ farmland outright where they are able or alternatively, target primary food processing industries / businesses, where they simply invest to secure the food product at the least cost. Another advantage for them in buying into the meat processing works is that they gain direct access to valuable IP held within the company and sophisticated technology within the processing plant which New Zealanders have developed and provided production efficiencies which have given us some competitive advantages over many years.
If the Chinese simply inherit that IP knowledge in this deal, you can see an obvious scenario occurring.
Chinese engineers will copy that plant and China will then use the SFF model to duplicate identical processing plants back in China in very short time. Give them the technical ability to independently construct state of the art freezing works to process their own stock and they will then be very formidable competitors in the world marketplace. China. Is presently building massive industrial farms and farm to meat outlet supply chains. Why would we want to hand over the SFF template to enable them to better compete against the New Zealand meat industry?
I suggest a relevant NZ example of how China tends to operate is evident in the wool fibre sector. China was keen to source quality merino wool for their textile industry, so New Zealand and other wool growing countries were encouraged to follow those market signals and many farmers concentrated on growing finer wools to get better returns.
When the amount of fine merino wool grew to much larger quantities, the price premiums held for a time and then China would stockpile enough in reserve so they could step out of the auction market for a while and the wool prices would drop. The Chinese would only start buying again at the very bottom of the market.
They are such a large player in many commodities types traded that they can influence / manipulate prices such as food commodities to their advantage.
China will have little overriding interest in making NZ farming / families prosperous. They have different economic objectives so we should not delude ourselves, that somehow they are favouring us with this offered financial assistance / investment too befriend us.
If China did wish to see our meat growers prosper they would be content just to purchase back in China, more (NZ added value) consumer ready retail product.
If SFF shareholders vote to accept this offer, the consequences for its main processing rival the Alliance Group are very serious. A cash strengthened SFF will be in a position to offer a higher price to secure additional stock, mostly at the expense of Alliance so their balance sheet worsens over time and their bankers would likely tell them to bring in a strong Chinese partner, like SFF, to improve their financial position or we won't continue to fund you. If Alliance rejects that ultimatum they will continue to lose increasingly more stock to SFF and New Zealand's last true farmer cooperative will likely be severely downsized or be sold, mostly likely to other Chinese merged companies.
The consequences of a Chinese owned / controlled NZ meat processing situation with no real processing alternatives or effective stock competition would result in much lowered prices being offered for stock and NZ farmers would become price takers, effectively low paid contracted farm suppliers for China. New Zealand's main agriculture export and income being dictated by Beijing.
I have no personal objection to the Chinese or any other nationality investing in New Zealand, as we have limited capital ourselves but please have those investments made outside our key revenue generating food processing industries. On shore processing plants are our own practical means to add much needed additional value, to our meat and gain the premiums we need to capture to help offset our costs, to our distant marketplaces.
New Zealand farming families right down through the generations have toiled long and hard to obtain a basic living from animal pastoral farming and to have the meagre profits obtained from all that enterprise and physical endeavour over the decades traded away so easily in 2015, for a presently needed new cash injection, is too high a price to pay, in my opinion.
Now that an alternative SFF funding proposition is now a reality and available for shareholders to evaluate... please closely study this new proposal. You will then appreciate the comparative medium and longer term advantages / value in retaining ownership / control of your NZ cooperative processing company, both for all suppliers long term security / financial benefit , but also succeeding generations to come.
Ex South Otago SFF Supplier
(Name withheld – Editor verified authorship)

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