Farmers should take the long-term view and retain control of their destiny, writes Mark Patterson of the proposed Silver Fern Farms-Shanghai Maling deal.
Russell Anderson is to be commended for giving his perspective on the proposed Shanghai Maling deal as a long-time Silver Fern Farms shareholder/supplier to the public arena (ODT, 5.8.16). In doing so, he identifies two key areas for which I have a very different perspective.
Firstly, the debt levels of SFF, the sustainability of which has played a central role in shaping shareholders' views on the merits of the deal.
Let's put some context around that. As of the 2015 balance date, SFF had a debt level of $120million and an equity ratio of 59.4%, well down on the $388million debt and 38% equity of 2013. It also exceeds archrival Alliance Group's $139million debt and 57.6% equity which its auditor, KPMG, described as ''robust'' in AGL's 2015 annual report.
There remains a high level of disconnect between SFF's rhetoric around debt and its actual position, which is much improved and forecast to improve further.
While I have no reason to doubt board and management's assertions that bank pressure has led them to this point, it would seem the actual level of capital required to get SFF on to completely solid ground is well short of the $261million Shanghai Maling has offered for a controlling stake.
There appears to be a complete failure of our capital markets when banks will pump average house prices in Auckland up to $1million but our second-biggest exporter with a turnover of $2.5billion cannot roll over debt of a few tens of millions.
Furthermore, Mr Anderson's view that because interest rates were circa 20% in the 1980s are a reason to take the money is at complete odds with today's deflationary global financial environment, where trillions of dollars are being stored in government bonds at negative interest rates and borrowing rates for business are at record lows.
Secondly, Mr Anderson seems to be missing the significance of this being a controlling stake.
While the board has sought to provide some checks and balances, ultimately control means control and can only be ceded once. If this deal was to go through, then SFF is effectively under the control of a Shanghai government state-owned enterprise.
I for one think it is naive to believe that Shanghai Maling's long-term goals have at their core maximum returns to New Zealand sheep and beef farmers.
In fact, their motives will understandably be to procure their raw material as cheaply as possible, bearing in mind they have the ability to secure their margin further down the supply chain in their retail stores.
Remember, the reason our co-ops were formed in the first place was our grandfathers' determination to break the shackles of the British meat barons.
Alliance Group has proved with its partnership with Grand Farms that you don't need to cede control of your co-operative to build long-term respectful partnerships into the Chinese market.
Surely, a New Zealand red meat company that has a well-developed strategy to sell the quality and provenance of our product under a brand intrinsically linked to the New Zealand story is something we would want to nurture. Let's take the long-term view and retain control of our own destiny.
Mark Patterson is a Lawrence sheep and beef farmer and Silver Fern Farms shareholder.
