Alliance to start docking farmer payments for shares to bolster balance sheet

UPDATED: Alliance Group is to start withholding some stock payments to its farmers from next week to bolster its balance sheet and force suppliers to meet their share requirements.

New Zealand's second-biggest meat cooperative will withhold 50c per head for lamb, sheep and calves, $2 per head for deer and $6 per head for cattle.

The payments will go towards additional shares in the cooperative and will only apply to farmers who have fewer shares than required, the company says.

Alliance is moving to entrench its cooperative status as its larger rival Silver Fern Farms waters down its cooperative by tapping a Chinese investor for capital to repay debt, upgrade plants and invest for growth.

If successful, Alliance's move will ensure shareholder investment in the cooperative matches livestock supply, and will bolster its own balance sheet.

"The Alliance Group has made it plain that they would like to be in a position where they have complete alignment between their shareholders and suppliers – a very efficient model, as  acquisition costs/costs of contracting/transaction costs are expected to be minimised at this point," said James Lockhart, senior lecturer at Massey University's School of Management. 

"They are simply continuing to move in that direction, through retained earnings – and endeavouring to be transparent about it. On the other hand, SFF appear to be motivated by substantially different values in the interim, with Shanghai Maling providing them the proverbial 'get out of jail free card'," Lockhart said.

"Cynics would argue that Alliance are padding farmer returns, deferring cash for shares," he said. "It is, however, a demonstration that Alliance are committed to their cooperative model which gives suppliers are more marked contrast between the two South Island companies."

Alliance's model, providing it's well governed and managed and creates value, is inherently more stable than SFF's model where huge asymmetry exists between the two shareholders and their respective aspirations, Lockhart said.

Farmer lobby group Federated Farmers said Alliance's move was understandable.

"I can understand why they are doing it," Federated Farmers meat and fibre industry group chairman Rick Powdrell says.  

"Traditionally farmers have probably been under-capitalised in the processing side of the industry, particularly if you compare us with the dairy industry, or the likes of the kiwifruit industry or other industries."

Mr Powdrell says to get farmer support, Alliance will need to clearly outline how the extra investment in shares will aid farmers.

"If they want farmers to really get on board with it, they are going to have to have a clearly defined strategy of where the company is going and how farmers are going to benefit from it."

The Federated Farmers meat and fibre industry group is likely to discuss the move at its council meeting in Wellington next week, Mr Powdrell says, who isn’t an Alliance shareholder.

In a letter to its farmer suppliers outlining the proposed change, Alliance says some shareholders don't hold enough shares to reflect the amount of stock they supply.

"This helps to ensure the cooperative has the right level of investment from our farmer shareholders, enabling them to receive the full benefit of the cooperative's profitability and ensure some suppliers are not being subsidised by others," Alliance chairman Murray Taggart and chief executive David Surveyor say.

"We believe these changes are in the best long-term interests of your cooperative."

Alliance also wants to retain more profits to allocate towards share payments. In future, it wants to be able to withhold half of a profit distribution as payment towards shares, up from a third.

It is also ending the scaling shareholding system which rewards larger farmers.

Shareholder suppliers are expected to hold 11 shares per stock unit up to 5000 stock units and then reducing to 4.5 shares per stock unit, but limited to 25,000 stock units in aggregate.

One lamb, sheep, or calf is equal to one stock unit; one deer is equivalent to four stock units; and a cattle beast is equivalent to 12 stock units.

Under the revised calculation, there will be no reduction from 11 shares per stock unit after a particular level of supplied stock units, reflecting that all stock processed requires the same use of processing facilities and therefore should require the same number of shares, Alliance says.

"The strength of the cooperative depends on farmer ownership and all farmers contributing and benefiting equitably," the company says.

"We are all in this together and these changes will ensure all members of your cooperative invest equitably and that the business is appropriately capitalised to operate sustainably."

The cooperative is also lifting its shareholding cap to 1.35 million shares, equivalent to about 2% of its shares, from a current level of 145,000 shares.

Alliance says it is aware farmers had faced a "challenging" season and its board debated the changes "at length," mindful they would have financial implications for those shareholders who don't have enough shares.

"In the end we were of the view that delaying these changes will prolong the inequity of the current system where those shareholders who meet the standard shareholding effectively subsidise those who do not," Alliance says.

(BusinessDesk)