Allied Farmers - chairman's address to the AGM

For your information; Allied Farmer’s Chairman John Loughlin’s address to the AGM

ALLIED FARMERS LIMITED - CHAIRMAN'S ADDRESS TO AGM 30 OCTOBER 2007

The year ended 30 June 2007featured two momentous events for the Allied Farmers Limited group of companies. The first was the decision to close the Allied Pine Sawmill in Wanganui and the second was the decision to acquire Nationwide Finance Limited.

These events combined in quite different ways to produce costs that offset the solid underlying performances from the continuing Rural and Finance businesses. It is regrettable that there was an overall loss and that no dividend could be prudently paid to shareholders.

The decision to close the sawmill came after protracted efforts to bring the operation into profit. The mill never traded to expectations as a combination of high exchange rates, very high freight rates and high log costs relative to timber prices produced a vicious squeeze that the business could not cope with. Strong efforts were made by the staff on-site and members of the wider board and management team. Unfortunately, these were not sufficient to overcome the external pressures.

The mill produced operating and closure costs of $4.0 million last year. The closure cost stopped an ongoing financial haemorrhage.

Since the closure we have seen the US/ NZ exchange rate continue to appreciate. We have also seen the sub-prime mortgage crisis that will inevitably impact on housing starts in the United Statesmarket. These two factors mean that several months on, the untenable financial operating position of the mill would have deteriorated even further. Thus while the closure decision was a tough one, hindsight is confirming it as the right one.

The second momentous decision was to purchase Nationwide was a much easier one to make. It was a quality asset with a clean loan book, a strong staff capability and it fitted strongly with our recently acquired Prime Finance and long held Allied Farmers Finance operations which had been integrated to form Allied Nationwide Finance. The integration of the finance companies has produced a quality business of scale and lending diversity.

The integration produced one off costs of $1.4 million, but these are in the nature of an investment in the future of a quality business and represent a real investment in a future earnings stream for the group.

Again after the transaction there have been severe environmental pressures in the Finance Companies sector as the sub-prime lending crisis triggered a second round of collapses. Our observation was that the first round of collapses reflected bad lending practices. The second round included some examples of poor lending, but also some examples of poor liquidity management. Where liquidity management was the only issue then the prognosis for investors should be okay. It is sad though that investors have been put though the stress and distress from being exposed to collapses.

It is clear that the number and magnitude of collapses will have permanent effects on the sector. Regulation (which we have anticipated for some time), restructuring and rationalisation are inevitable. This will create some threats and a number of opportunities.

The underlying needs that drive the sector will continue. Businesses and individuals still need specialised asset and working capital finance. Business expansion still needs capital of types not provided by the banks. Farmers still need specialist finance to maximise their farming opportunities. Investors will still want higher yielding securities as part of their portfolios. There will be changes in the packaging and delivery, but change creates opportunity for those with the insight, the strength and the right judgment on execution.

Shareholders may well be wondering if we are regretting our decision to expand our involvement in the Finance Company sector. The answer is a categorical "no". We are pleased with our position in the sector and the latest acquisition, that of Nationwide Finance, substantially strengthened our position in terms of size and liquidity. We have $30 million in liquid reserves and a well matched book. This means that we are well placed to further strengthen our position as the sector evolves.

Behind the momentous decisions there were a lot of other key steps taken:
- We recruited a group Chief Executive, who in turn has put together a quality management team.
- We raised capital by way of Capital Notes and Ordinary Shares to finance the growth steps.
- We developed a new, well researched Strategic Plan.
- We tightened a number of business and financial disciplines.
- We expanded share and profitability in parts of our Rural business.
- We strengthened a number of aspects of our Information Technology capability.

The challenge for us is to make these enabling steps count in what will be quite a different business environment. I have already spoken about the Finance sector. The Rural sector is also going through significant change. The major lift in dairy payout is underpinned by both demand and supply factors that appear sustainable. There are also signs of improvement in the lamb and venison industries. These will offset some of the severe currency effects on exporters. Many commentators are talking about a new age of wealth from "soft commodities" as rising affluence in the developing world and a number of climatic or environmental factors create a new supply and demand balance for food.

A more favourable environment alone is not sufficient, but it sure helps. However, it does provide a better platform for us to sharpen and expand our Rural offering in a targeted way.

Looking to the future we have provided market with guidance on profitability. We will reassess this as the year progresses to reflect the more challenging Finance and the better Rural sector.

Your directors are conscious that we did not reward shareholders with a dividend last year. We are looking at how we can remedy this in the current financial year. We will need a clear sight on how the business will be placed in terms of challenges and performances before we can make a clear, prudent call on this. However, we are keen to see shareholders rewarded for their support and patience.

Last year shareholders approved an increase in directors' fees on the assurance that no increase would be paid to directors until a dividend of 10 cents per share was paid and was twice covered with earnings. No increases have been paid and fees will only be increased in respect of the current financial year if that performance standard is met.

Finally, our Rural and Finance businesses are all about people and relationships. I would like to conclude by thanking all our staff for the work that they have done and fort their ongoing efforts.

I will now ask David Bale our Group Chief Executive to give a presentation on some of our operations.
Thank you.

ends

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