Barber’s Wire: Fairton closure unfortunate but inevitable

Silver Fern Farms decision to close its Fairton plant did not have much to do with Shanghai Maling’s investment, but was only a matter of time. Even the workforce had apparently come to accept the inevitable after seeing lamb numbers through the plant decline sharply from more than one million in 2010 to less than 500,000 last season and 325,000 in the latest six months, writes Allan Barber.

This demonstrated graphically the unsustainability of keeping the facility open when the company’s modernised multi-species operation at Pareora is only an hour down the road. In its notice of proposal to close, subject to a two-week consultation period, SFF cited declining sheep numbers in the surrounding catchment area as a result of land-use change to more profitable forms of agriculture. However, not surprisingly, the company didn’t mention its substantial loss of market share at the same time, 14 percent share loss over a six-year spell since 2010.

SFF has struggled with retaining its lamb market share across the country since its acquisition of Richmond in 2003, losing large slices of share in both Richmond’s traditional North Island power base and in SFF’s own back-yard in the South Island. Investment in its cattle processing business has seen gains in its beef processing business which have compensated for the losses in lamb.

During the period between the seminal decision to conduct a hostile takeover of Richmond and the completion of the deal with Shanghai Maling last year, PPCS, subsequently renamed Silver Fern Farms in 2009, battled against a whole range of factors: supplier resentment, excess capacity, lack of capital to write off ageing facilities, years of little or no profitability, increasing debt and interest costs and, finally, notice from the banks that they were running out of patience.

Hence, SFF was between a rock and a hard place. The banks wanted out and alternative sources of capital weren’t immediately obvious, regardless of what dissident shareholders said. When the board was presented with the offer from Shanghai Maling to invest $261 million in acquiring 50 percent of the company’s operations, it must have seemed like manna from heaven. We all know the end result of the exercise, which was finally consummated in January this year.

SFF is now in a position where it can make the right business decisions at the appropriate time without having to wait to find out if it has enough capital to carry them out. In spite of the screams from opposition political parties about the damaging influence of the Chinese shareholding, this would have had nothing to do with the closure decision apart from strengthening the balance sheet to ensure it can happen.

Although restructuring and rationalisation in such a dynamic industry environment will never cease, SFF has finally reached the stage in its evolution to be able to operate with a plant and capacity configuration appropriate to today’s world. With the other good work it is doing with FarmIQ on farm systems, Eating Quality Reserve Beef, genetic improvements, its value-added branded products and participation in the Red Meat Profit Partnership, the company can now get on with building its positive vision of the future for its suppliers and shareholders.

Allan Barber is a meat industry commentator. He has his own blog Barber’s Meaty Issues and can be contacted by emailing him at allan@barberstrategic.co.nz.

 

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