Saturday, December 9, 2023

Silver Fern Farms exceeds expectations

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The benefit of the Chinese investment, strongly resisted at the time, has become crystal clear, says Allan Barber.
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Silver Fern Farms’ latest annual result has set a new benchmark for published meat industry profit performance, with pre-tax and post-tax earnings more than 80% ahead of the previous year. 

The $76.9 million dividend paid to shareholders, including the interim payment, was nearly two thirds higher, with half being paid to each 50% shareholder, Silver Fern Farms (SFF) Co-operative and Shanghai Maling. 

The predicted benefit of the major Chinese investment, strongly resisted at the time by a minority of supplier shareholders, has now become crystal clear. There appear to be no obvious downsides from selling half the company to an overseas investor, despite the fear of loss of control and potential interference in its strategic direction. 

The injection of much-needed capital has enabled SFF to carry out overdue upgrades to its ageing processing assets, as well as investing in the market-led programme that it initiated as long ago as 2008.

The company invested $96m in plant and systems improvements last year and aims to spend 50% more during the current trading year with an increasing focus on new product development technology, cold chain improvements and information systems as well as further plant upgrades. 

CEO Simon Limmer makes the point that two of its South Island plants, Belfast and Finegand, are well over 100 years old and require serious capital investment to ensure they are maintained to a high standard.

As New Zealand’s largest meat processor and exporter since the contentious acquisition of Hawke’s Bay-based Richmond Meats in 2006, SFF initially struggled to rise above a mountain of debt and inefficient excess capacity. The attempted buyout by PGG Wrightson in 2008 fell victim to the global financial crisis and, apart from receiving a $42m compensation payment, the company was back to square one.

To do him credit, then-CEO Keith Cooper persisted with the new vision, supported by the company’s rebranding, to turn SFF into a consumer-led business, focusing on a new plate-to-pasture strategy in contrast to the traditional “procure, process and sell it” industry practice.

The meat industry of the last part of the 20th century was beset by its legacy of large, old, heavily unionised, mainly co-operatively-owned freezing works, designed to process large volumes of livestock to export to the United Kingdom and more recently to Europe and the United States. Britain joining the European Common Market in 1973, the oil shock and finally the removal of subsidies by the 1985 Lange Government all progressively contributed to making this operating and ownership model unsustainable. 

Farmer ownership of meat processing facilities came under threat for several reasons: a militantly unionised workforce, ageing plants, depressed markets, removal of subsidies and declining livestock numbers causing excess capacity, procurement wars, and ultimately the destruction of shareholder value. In the late 1980s and early ’90s Alliance and AFFCO both came close to going broke, and Weddel and Fortex closed for good. 

PPCS (the trading name of the Primary Producers co-operative Society), the previous identity of SFF, benefited from the struggles of its South Island competitors, until its expansion into the North Island, but was still saddled with ageing facilities it couldn’t afford to close or upgrade properly.

The structure of North Island farming – less seasonality, more dairy farming, newer, privately owned meat companies – meant co-operative ownership of processors was no longer tenable. By 1992 AFFCO was a co-operative in name only, being funded entirely by its banking syndicate, until its recapitalisation and public listing in 1995. 

Since then it has delisted and operated as a subsidiary of the Talley’s Group. The change of ownership has brought about a substantial improvement in plant maintenance and operating efficiency; although it no longer reports its profitability, this is rumoured to be very good.

South Island co-operative ownership remains viable and even the preferred model,  though both Alliance and SFF have faced balance sheet challenges, culminating in the latter’s sale of 50% to its Chinese partner in 2016. 

Since the sale SFF’s performance has really taken off with profit increasing exponentially every year, especially since 2020, which enables the company to invest progressively more capital in its assets. This has resulted in substantial dividend payments as well as market-based rewards for its supplier shareholders through SFF Co-operative.

Over a similar period Alliance has made steady, if less spectacular, progress towards sustainable profitability. Last year’s after-tax profit exceeded $100m for the first time, three times higher than the year before, on record turnover of $2.2 billion for the 12 months ended September 30. 

Like its neighbour, as well as rewarding its supplier shareholders, Alliance is intent on investing heavily in upgrading its facilities and systems, though last year’s capital expenditure at $47m was just under half the amount invested by SFF. 

It remains to be seen if the 15 months covered by the two meat companies’ annual results prove to be a performance peak that both of them struggle to repeat, either because of reduced market returns, lower margins or higher cost pressures. 

Limmer agrees 2022 was an exceptional year for all parties, processors, suppliers and exporters, whereas 2023 is more challenging and unlikely to provide a repeat following a downturn in market sentiment six months ago. 

That said, he is confident the medium-term market outlook remains good and SFF is committed to continuing to share available profits fairly across the value chain.

Amid the welter of challenges farmers face from government regulation, rising costs and adverse climate events, they can at least be confident the processing and marketing parts of the sector are well capitalised and well placed to ensure the best possible returns for their suppliers.

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