Barber’s Wire: Silver Fern Farms’ marginal profit shows benefit of new ownership

Allan Barber

The 50 percent Chinese owned meat processor and exporter, Silver Fern Farms (SFF), has posted its first normal full year result since the change in shareholding structure after the long and sometimes acrimonious debate in 2017, writes Allan Barber.

What this result proves is that without the Chinese capital injection which wiped out the cooperative’s large debt burden SFF would still have posted a substantial loss.

Westland Dairy’s shareholders would do well to reflect on this before they reject the offer from Yili to buy all their shares. Cooperatives, by their very nature, have a tendency to pay more than they should to their shareholders for supply and SFF, Westland and Fonterra are no exception. Eligible shareholder suppliers of the country’s largest meat company will benefit from a distribution, termed an ‘unimputed patronage reward’ totalling $874,000 which will presumably compensate those shareholders for any underpayment for their livestock during the season.

On the face of it, Silver Fern Farms Limited (the parent company) performed reasonably well during the 2018 calendar year, reporting an after tax profit of $5.8 million and EBITDA of $32.9 million on sales of $2.4 billion. This compares with losses of $7.4 million and $30.6 million for the previous two reporting periods, although 2017 was for fifteen months and 2016 was under its original cooperative structure with $14.8 million finance costs. This of course was the main reason the company needed a well-heeled new shareholder, a fact that seemed to escape the minority group fighting to preserve independence.

The situation seems to have settled down completely since Shanghai Maling invested in SFF. The sky hasn’t fallen in, the cooperative still owns half the company and the improved cashflow permits capital investment – increased from $8 million to $29 million – in health and safety, compliance, asset replacement and operational improvement, as well as a profit distribution to both partners.

As the CEO, Simon Limmer, notes in the press release, this result was “not at the level we are aiming to achieve for the company.” It is still necessary to lift profitability “to sustain our aggressive capital re-investment programme, and to more actively progress our in-market investment in sales and marketing to grow value in the market.” SFF appears to have stemmed the loss of market share that be-devilled it during the period of successive loss making years, as it claims to have increased its procurement share in beef and maintained a stable share of sheepmeat and venison.

This confirms what has always been true about meat (and dairy) processing and exporting. Companies must be in a position to pay a competitive price for throughput and process and sell it efficiently. Otherwise processing facilities become inefficient and expensive to operate and a competitive procurement price sucks the remaining margin to the point where the company cannot make a profit.

Good capitalisation is essential. AFFCO is a great example of the positive impact a well-capitalised owner has on a full service processing and marketing business; ANZCO and Silver Fern Farms promise to show similar benefits, while Alliance is hopefully another, but has to tread the path between rewarding its shareholders and re-investment. The jury is still very much out on the dairy industry, for so long the darling of the agricultural sector. New Zealand’s meat and dairy industries have shown over the years that the cooperative structure has several positives, but a robust capital structure and investment in the right areas are sometimes a casualty of supplier ownership.

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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