KEY POINTS:
As it announced a big fall in profits for the September year, meat processor Affco indirectly floated the idea of Kiwi rivals taking more of a "NZ Inc" approach in offshore meat markets. A combination of factors - including the dollar's strength and higher costs - saw Affco's net profit slump from $21.1 million to $13.1 million.
Tucked away in the announcement was the somewhat anodyne statement that "Affco is committed to finding better solutions for the industry to create a more sustainable platform for all involved". This echoed earlier calls from chief executive Tony Egan for meat exporters to be careful over the way they set prices in offshore markets so as not to hurt fellow Kiwi operators.
That suggestion has been criticised by some in the industry and, while there's been informal discussion about the idea in the meat sector, Affco's chairman Sam Lewis said no formal talks are planned with rivals.
The fresh Affco comment comes not long after "key messages" from a primary sector CEOs' forum - initiated by Agriculture Minister Jim Anderton - suggested exporters should stop "cannibalising" each other's market share and collaborate more offshore.
Another pre-Budget meeting between the Government and the primary sector over the way ahead is planned for the new year.
Whether Affco's ideas get any further traction in that environment remains to be seen. But Lewis acknowledged taking meat industry discussions further on the subject might be tricky. "Perhaps they first have to be able to talk onshore before they can talk [about] offshore."
Fonterra shares
There are some mixed messages floating about over exactly when Fonterra will start releasing some firmer proposals for changes to its capital structure.
Chairman Henry van der Heyden has said Fonterra will start discussions with farmers next month about their thoughts.
One industry suggestion was that Fonterra was listening closely to calls for change and suppliers could expect some moves to present options to farmers early in the new year. But another source believed that was too soon for concrete options to be released. They also said consideration of change was likely to take some time.
Van der Heyden's comment followed a suggestion from Chris Kelly, the chief executive of state-owned Landcorp, that Fonterra could split its shares into two with a tradeable share to reflect returns from the value-add business and another related to returns from commodity milk products.
Kelly's suggestion came after widespread farmer concern about the level of value-add returns, from such activities such as branded consumer products.
Broadly speaking, farmers must hold a share in Fonterra for every kilogram of milk solids they supply. The value-add earnings are viewed as the "dividend" farmers get for investing that capital - they represent the returns in excess of those that would be earned by selling the milk as commodities.
A share split would allow farmers dissatisfied with value-add returns to sell the tradeable shares and use the cash to seek higher returns elsewhere.
Fonterra looks set to go through another lively discussion about its future capital structure in 2007.
Measuring value
The chairman of the dairy section of Auckland Federated Farmers, John Sexton, says how to measure the level of Fonterra's value-add returns has to be carefully considered during debate over the co-op's capital structure.
One way of looking at them is that this season's forecast value-add return of 45c/kg of milk solids would represent a 6.85 per cent return on the current share price of $6.56. However, Sexton estimated between $2 and $2.50 of that $6.56 could be capital applied directly to the commodity side of the business, with the rest being used to support value-add activities.
If he is correct, that would suggest 45c/kg is a return of between 9.8 per cent and 10.8 per cent on capital directly supporting value-add activities.
Another dairy sector source agreed this was a valid point but said it can be hard to know where value-add begins and ends.
Some farmers are said to be concerned that Fonterra management has the ability to "screw the scrum" when it comes to deciding what is counted as a value-add return. That creates potential to make the performance of this crucial part of the business look better than it otherwise might. Fonterra said its share price reflects returns from both commodity and value-add operations.
But a spokesman said no breakdown was available on what proportions of share capital were applied to different parts of the business.
Sexton, meanwhile, said he was a little wary about talk of a share split, as such a move could ultimately lead to the value-add side of the business being hived off to non-farmers. "It opens it up for it to be all given away and puts farmers back into just being peasants."
But sector commentator Tony Baldwin said a leading academic expert on international dairy co-ops has recommended businesses be listed public companies, majority-owned by a supplier-owned co-op. Such a set-up could retain ultimate farmer control but also give suppliers the ability to sell shares on market, helping ease the "redemption risk" associated with farmers potentially going to the co-op en masse to cash in shares. Also, a dairy business would have a mechanism for raising capital directly from the public through a share float, without having to tap farmers on the shoulder for funds.
The subject of potential capital constraint in New Zealand co-ops gained prominence earlier this year when the Food & Beverage Taskforce suggested they may focus too hard on maximising short-term supplier payout at the expense of investing in longer-term growth options.
The report drew on a paper by Fonterra's strategy and growth director Graham Stuart, who argued maximising producer payout means co-ops can be more likely to miss opportunities to lift performance. He also said that similar-sized multinational dairy companies have "greater access to capital than we do".
While van der Heyden has said it is too soon to voice an opinion on the merits of a split share system, it seems highly unlikely that it is not being considered as part of Fonterra's longer-range strategising. Fonterra Shareholders Council chairman John Monaghan has said a share split is just one of many options but has stressed that whatever happens it is "imperative" that farmers retain control of the co-op.
Seeking solutions
The country's biggest combined kiwifruit grower and post-harvest company deserves credit for a series of measures aimed at helping avoid this year's revenue-slashing pre-export fruit losses.
The industry has been dogged by extensive spoiling of green variety kiwifruit and the listed Te Puke-based Seeka Kiwifruit Industries announced it expected the problems to cut net profits this year.
An industry investigation into the spoiling has yet to formally identify the reasons for it being more prevalent.
Seeka believes a range of factors, such as labour shortages, meant fruit wasn't picked at optimal maturity. So it has, for example, applied to bring in 200 Asian workers and is spending $4 million on equipment which will help speed up processing of kiwifruit.
However, wet harvest-time weather affecting picking is also a suspect in the spoiling - and that's not such an easy thing to try to control.
