KEY POINTS:
Craig Norgate's plan to buy half of meat processor co-operative Silver Fern Farms and shake up the meat industry finally fell over last week.
Dunedin-based Silver Fern Farms terminated a $220 million agreement to sell half of itself to rural services business PGG Wrightson, of which Norgate is
chairman.
PGG Wrightson missed the first instalment of $145 million in September because it was unable to finalise bank credits in the current financial market environment.
Silver Fern Farms could not wait any longer.
Both sides talked about ongoing dialogue and exploring other options but comments from Silver Fern Farms chairman Eoin Garden perhaps put the state of play in a clearer light.
There could be opportunities for agreement in future but there were no specific deals under discussion, Garden said. "We don't have a timetable, we don't have specific concepts that we are dealing with."
So after all the cost of selling the vision of partnership, investigations, reports, cancelled capital raising, meetings and road trips what's left is perhaps a better mutual understanding and working relationship - not valueless but no cork popper.
Next up is the thorny issue of what compensation PGG Wrightson should pay to Silver Fern Farms for failing to complete the deal, a topic which cannot be a great relationship builder.
- Sorry it didn't work out old chum. Messy business, messy. Not your fault, I know. Ermm ... by the way you don't happen to have that money you owe me do you? Next week maybe? Or whenever, forget it, forget I mentioned it. Going anywhere nice this summer?
Silver Fern Farms is not drawing up the bill just yet while other avenues of co-operation are explored.
But business is business so eventually the tab will have to be paid and failed mergers and acquisitions don't come cheap.
However, if a better working relationship is the final outcome of all the hard work then neither side will want to unduly risk even that minor success.
Financial markets will settle, both parties want a deal, Silver Fern's farmer shareholders approved the plan and battles can be lost with wars later won.
In the meantime the partnership deal can be added to a list of failed visions for the industry, including a merger between Silver Fern Farms and Alliance Group, a mega-merger proposed by Alliance and a taskforce launched by Meat & Wool NZ.
The Silver Fern Farms-PGG Wrightson partnership was promoted as creating a pasture-to-plate supply chain and a platform for industry rationalisation.
Meanwhile, Southland-based co-operative processor Alliance Group last month bought the assets of North Island meat company Levin Meats, doubling the company's lamb and sheep capacity in the North.
The company says it has been evaluating a number of opportunities and was pleased to be able to grow without increasing capacity in the industry.
Much of the decline in sheep numbers this year is related to last summer's drought, Alliance says, and the company has confidence in the industry's future with the purchase of Levin a long term strategic move.
Sheep farmers have had three years of low returns and animal numbers were down 11 per cent in the year ended June 30 at 34.2 million, with the export sheep slaughter this season expected to be down 9.3 million animals.
There has been talk of a procurement war - something Silver Fern Farms has said it would not get drawn into - and many people see rationalisation as the way forward to a more profitable industry, but restructuring in the near future looks less likely to be driven by grand vision than hard reality.
Fonterra cautious
Fonterra is changing contract milk supply for the 2009/10 season to ensure its balance sheet stays strong amid the instability in financial markets.
Farmers will not be able to cash up shares and swap to supplying on contract, which will only be an option for growth milk from existing farmers or new milk from conversions.
Chief executive Andrew Ferrier says the company is comfortable with its debt gearing of 57 per cent - outside a target range of 45-55 per cent - which is high because of commodity prices pushing up the cost of inventory. The gearing will go higher before it falls, Ferrier says. "So as we go through the cycle we need a lot more cash to cover our inventory at the peak time of our production.
"It will be well down inside our range by the time we get to the end of the [financial] year. There are no issues sitting on our radar screen that say there's a risk here."
Fonterra was taking on longer-term debt and had no concerns with any banks, which in Australasia were some of the strongest in the world at the moment, Ferrier said.
Fonterra has relationships with 10 or 15 different banks in terms of debt facilities and stand-by lines of credit and had met all of them.
"Nevertheless in this environment any prudent business is taking multiple precautions because nobody knows where this crisis could ultimately play out."
Action at Fonterra also included deferring capital expenditure if it was not necessary, not hurrying to make acquisitions in the very short term and watching costs and working capital.
Farmer shareholders buy shares based on the amount of milk they supply and account for 96 per cent of total milk supply.
The price of contract milk in 2009/10 will be 10c below the milk price, compared to 2c less this season, and will require milk to be fully share-backed within three seasons.
Chairman Henry van der Heyden said the change was to protect shareholders from the risk of a significant expansion of contract supply and surrender of shares in a tightening credit market.
The board has also held back 24c from last season's record payout of $7.90 a kg of milksolids, which was worth about $277 million.
"Our farmers need to know that we're doing all we can to make sure their co-op, the source of their livelihoods, is strong and not overly exposed to the global forces that are buffeting companies here in New Zealand and around the world."
Kiwifruit steady
An updated forecast from kiwifruit exporter Zespri is holding steady per tray, although a smaller than expected crop estimate has dropped the total fruit and service payment by $3.7 million to $778.2 million.
The forecast payment per tray for green and gold was up by 1 and 2 cents respectively at $6.92 and $9.56, while the organic forecast dropped 1c to $9.14 a tray.
Acting CEO Lain Jager says a drop in the estimated crop of green fruit from 76.4 million trays to 75.7 million has affected the total payment.
A slowing global economy, the credit crunch and high oil prices were all contributing to higher costs and reduced global consumption of food products, although the company had some relief from the reduced oil price and improved foreign exchange in recent months.
Zespri is watching closely as the economic situation unfolds to factor it into planning, although the current forecast assumes the crop will be sold as planned, Jager says. As at October 19, global sales volumes were up more than 10 per cent on last year.
Chief financial officer Mervyn Dallas says there has been a major pull back of money into Japan with the credit crunch, but sales are still tracking well and Zespri has lifted prices. Sales in Japan of green fruit were down 6 per cent at 6.9 million trays while gold was up 6 per cent at 6.7 million trays.
In Europe the overall market situation is deteriorating as general consumer confidence declines. However, the company had had a good start to the season and was in good shape to close out the season reasonably well, Dallas said. Zespri's European sales of green fruit were up 10 per cent at 36.4 million trays, gold up 10 per cent at 5.9 million and organic up 4 per cent at 1.1 million trays.
"We might come under some price pressure [in coming seasons] as we see consumers seeing the alternative Chilean kiwifruit at maybe 50 per cent of Zespri's pricing maybe wish to purchase a lower price product but generally we believe our product is a far superior product," he says.
Demand was good in China and Taiwan, growing in Southeast Asia, static during the previous month in Korea, with a positive North America market.
