Unless it was forced on the co-operative, it is hard to understand why Alliance felt it necessary to choose this moment in time to announce to shareholders they would immediately be docked $3 per livestock unit on stock supplied, as well as being required to lift their shareholding by 25%.
The co-operative’s balance sheet obviously took a horrible battering last financial year and in February banking covenants were breached. Although rectified, this may indicate the banks’ patience is close to breaking point.
There aren’t many options and the solution has to be a combination of positive cashflow from operations, cost cutting, asset sales and new equity. Consequently, in the worst season for sheep farmers in decades, the directors have decided shareholders must pay up, when it is absolutely the last thing cash-strapped farmers would want.
Last month’s press release announcing the capital raise makes much of the benefits to be gained from this unwelcome prescription, including preserving 100% farmer ownership and driving towards “our goal of being New Zealand’s most efficient processor”, as well as expanding product offerings and delivering more value to farmers, but at what a cost?
Alliance’s past and present chairs, Murray Taggart and Mark Wynne, have both told me last year’s performance and the continuing depressed state of the market have affected the whole processing industry equally. The inventory value downgrade at the beginning of last financial year and Silver Fern Farms’ loss for 2023 provided some justification for this view, but ANZCO’s pre-tax profit of $60.9 million has shown this to be a delusion.
The rumoured profitability of other meat companies in the difficult trading conditions has been confirmed by ANZCO’s encouraging performance.
While farmers may be suspicious of meat company profits at any time, it should be possible for efficient companies to procure, process and sell product for a positive margin even when market conditions are poor.
Farmers ought to be happy to see their processor making money at all times, provided they are paying a fair price for livestock; this does not mean the price paid will always be as much as desired, but it should reflect the state of the market.
The reasons for Alliance’s capital raise underline the importance to farmers of their company being profitable.
Alliance has signalled its requirement for additional capital of $100-150 million over the next three years to meet the co-operative’s objective of restoring its balance sheet, but a rough estimate suggests the capital raise from farmer shareholders will achieve less than a third of this.
However, the terms of the equity-raising exercise are somewhat unclear, to me at least. At what point will an individual shareholder be deemed to have contributed enough capital under the specified terms? How much are shareholders expected to contribute, and will there be a specified end point to the process?
In the absence of a formal prospectus, shareholders will hopefully get a clear explanation of what they must contribute in “the individual letters with information on what these changes will mean for them”.
The implications of the present situation for Alliance’s future ownership structure and survival as a 100% farmer-owned co-operative are huge. Major questions the board should be asking are whether its stated goals are remotely realistic under the present constrained ability to raise new capital.
While remaining wholly a co-operative may be a virtuous aim, it would be interesting to know how Silver Fern Farms’ shareholders feel eight years on from going through the divisive process of agreeing to sell half the company to an outside investor. That exercise resulted in a $267m investment including the repayment of all core debt, $57m paid to the co-operative and a special dividend to all shareholders.
I suspect a substantial proportion of Alliance’s shareholders may now feel sacrificing half their company in return for a dividend and financial security would be preferable to the imposition of $3 a lamb at a time when they are probably losing money.
But it may be too late to negotiate a deal remotely as favourable as the Shanghai Maling investment in SFF in light of the changed economic environment globally and in China, even if Alliance shareholders were to give their board approval to seek an external investor.
Another big problem is the procurement of livestock from non-shareholder suppliers, which is always brushed under the carpet, but everybody knows forms an important component of supply outside the peak season.
Wynne told me third parties and non-shareholders make up only a relatively small part of supply, but they would be penalised through lower schedule payments, which sounds idealistic if not downright impossible to achieve. It is difficult to see a mechanism for differentiating between schedule payments when one category of supplier will supposedly receive $3 less per livestock unit, let alone agree to supply on those terms.
Wynne emphasises Alliance’s progress towards best in the industry, pointing to more than $400m of capital expenditure in the past 10 years on plant upgrades, automation, and the lengthy ERP installation to replace an outdated computer system, supported by independent processing efficiency benchmarking.
He also maintains confidence in the co-operative structure, which he says is just as capable as a corporate structure of building a high performing business, although profits over the same period total $166m, nearly quarter of a million dollars less than the capital expenditure. This indicates the banks have been funding the difference.
Although there are successful co-operatives in New Zealand, especially Foodstuffs, Mitre 10 and to a lesser extent Fonterra, the key ingredients of success are shareholder capital, profit retention, continuous investment in the right assets, and the ability to exert market control.
The main concerns for Alliance are its inconsistent profitability, insufficient equity, and competition from companies with deeper pockets.
Unless farmers are prepared to stump up three to four times as much as they are being asked for, the best hope must be a white knight that sees Alliance as a worthwhile investment in partnership with its suppliers. If not, it will be a tough challenge to generate the cash it needs to flourish.
In Focus Podcast: Full Show | 10 May
We chat with Katrina Roberts, who is the new Dairy Woman of the Year. She’s a Waikato vet, working with dairy farmers to not only maintain cow health but also improve the efficiency of their farm systems.
Federated Farmers arable chair David Birkett also joins us to talk about the arable industry awards, which are open to nominations now.
And, senior reporter Hugh Stringleman wraps up the dairy commodity season for us, following the latest GDT auction.
