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UPDATE: Alliance plans to start docking farmer payments

UPDATE: Alliance plans to start docking farmer payments for shares to bolster balance sheet

(Adds comment from Massey University lecturer starting in fourth paragraph.)

By Tina Morrison

Feb. 10 (BusinessDesk) - Alliance Group, New Zealand's second-largest meat cooperative, plans 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.

From Feb. 15, Alliance will withhold 50 cents per head for lamb, sheep and calves; $2 per head for deer; and $6 per head for cattle, it said in a letter to shareholders. The payments will go towards additional shares in the cooperative and will only apply to farmers who have fewer shares than required, it said.

Alliance is moving to entrench its cooperative status as its larger rival Silver Fern Farms waters down its cooperative by tapping Chinese investor Shanghai Maling Aquarius 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.

"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," said Rick Powdrell, chair of Federated Farmers meat and fibre industry group.

Powdrell said that 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 really 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, said Powdrell. A farmer in Te Puke, he isn't an Alliance shareholder and says he doesn't have the option of a sheep cooperative because of the distances to plant.

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

“This helps to ensure that 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 chair Murray Taggart and chief executive David Surveyor said in the letter, on behalf of the board.

“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 currently.

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

Currently shareholder suppliers are expected to hold 11 shares per stock unit up to 5,000 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 stock units, reflecting that all stock processed requires the same use of processing facilities and therefore should require the same number of shares, Alliance said.

“The strength of the cooperative depends on farmer ownership and all farmers contributing and benefiting equitably,” Alliance said. “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 percent of its shares, from a current level of 145,000 shares.

Alliance said it was 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 would prolong the inequity of the current system where those shareholders who meet the standard shareholding effectively subsides those who do not,” it said.


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