Waidale Rams

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Wednesday, October 7, 2015

Silver Fern Farms (“SFF”) proposed joint venture with Shanghai Maling (“SM”)

I like many interested farmers and shareholders recently attended a Silver Fern Farms Road show sell as to why shareholder should vote for this joint venture (“JV”)

To be frank I did consider the presentation to be more of a hard sell of the proposal to shareholders as opposed to the provision of all the facts to shareholders for consideration.
A lot of the presentation was on how good their “Plate to Pasture Strategy” is and will be and how much SM wanted to be part of it as opposed to the nuts and bolts of the JV.

As most pundits are predicting I think it will go through, however, in an ideal world I would like to see it remain as a cooperative for the following reasons:
1.      One of the reasons share price of a cooperative is generally of little consequence to a farmer is what we are worried is how much we are going to be paid for the animals we supply, that is what we want to see maximised.  However the tension that comes with this 50/50 joint venture is that the cooperative half of the JV (in theory) requires the company to maximise what it pays to farmers for the animals they supply, while SM have an obligation to its shareholders to maximise their returns.  These obligations are very different are in direct conflict with one another: the more you pay farmers the less of course you can return to SM’s shareholders.
Now while there is still strong competition in the meat industry and primarily Alliance succeeds (being the only remaining cooperative), then I don’t think there will be any major issue as the JV will have no alternative but to pay farmers, at the very least the same as its competitors.  But the risk is years down the track if the likes of Alliance and perhaps other companies tank and fail, SM (which SFF pointed out repeatedly at the Road show is essentially an SOE (State owned enterprise owned by the Chinese Government)) and as such has very deep pockets it clearly has the ability to take advantage of any financial weakness it may perceive. 
The cynic in me would suggest that is why SM have put up a lot of money for 50% i.e. equal control.  If SM put up a bit less money for 40% ownership, then surely this would still provide all the same so called access and capital advantages SFF has been promoting on their road show, but the control of the JV would clearly remain with the cooperative farmer shareholders.   I would imagine that SM would never been interested in such an arrangement.
2.      SFF when questioned about such a JV leading to a procurement war were quick to say that it has no intention of doing this.  However there denials of this happening is basically only rhetoric, I am sure that the SFF Board before the 2012 season (I think 2012) would have made similar statements before dramatically overpaying for stock that year. Again as SM is essentially owned by the Chinese government and accordingly has very deep pockets it has the ability, particularly if in the future its’ competitors are in a precarious financial position, to pay well over and wear the loss if it means destroying its competition.  I reiterate you need strong competition to ensure the farmer is getting paid the best price for the animals they supply. This is a worst case scenario however it is a risk associated with such a 50/50 joint venture.  This would also depend on farmers, if many decide to change suppliers from SFF, I am sure this JV will be looking to pay what is required to get a minimum throughput at least.   I think we all agree that any procurement war that is not based what the consumer pays at the end is not good for the industry.
3.      SFF put a lot emphasis on how brilliant their plate to pasture strategy is and it’s the only one of its kind.   I hope it is, but given they emphasised how:
·         much they have reduced debt levels;
·         there was no plan B if shareholders did not vote for this JV;
·         they will have real issues obtaining the appropriate funding from their banks if this JV does not go ahead.
All this begs the question what are the banks concerns about this strategy and SFF’s management given a bank before lending money has to evaluate risk etc associated with it.
Surely if SFF is well managed, has a good marketing strategy and have shown in the past years how it has lowered its financial vulnerability (dramatically reduced debt levels) it would be nice to know why the banks have major concerns, as clearly that’s how a bank makes money, by lending it!
4.      Any extra value the JV does succeed in obtaining in the market for their meat, only 50%  is likely to come back to the farmer supplier, as clearly the other 50% will be going back to SM’s shareholders.  The only way all such incremental value gains will be returned to the farmer supplier is if its competitors are also succeeding in gaining the same increase in value; for example presumably and hopefully Alliance being a cooperative would return all such gains to its farmer suppliers and as such this JV would have to pay its farmer suppliers a similar price to its competitors.
I think this will go through as many farmers will see it as a way of getting some cash out, but also because no real alternative has been put forward.  The risks outlined above are very real, how risky is another matter, which is very dependent on the competition. If we have good competition that is also financially strong then the risk is minimal, but if not, who knows what our meat industry will look like in 10 to 15 years.   

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