Bernard Hickey managing editor of www.interest.co.nz explores the Crafar dairy business and possible sale to Chinese interests. The joint-owner of New Zealand’s largest privately owned dairy farming operation has confirmed it is in talks to sell out to a Chinese company for over NZ$200 million. The sale would make the Chinese interests one of the biggest individual shareholders in Fonterra, but would save two New Zealand banks and PGG Wrightson Finance from taking big losses on loans to the farming group.

Allan Crafar told interest.co.nz the family-owned Crafar Farms group had been in discussions with a Chinese firm, which he declined to identify. Due diligence and valuations had been carried out, but no sale agreement had been reached, he said. The sale of the 15 farm group with 30,000 stock, mostly in the Reporoa and central plateau area, had now been opened up for wider interest, Crafar said.

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Craig Norgate is clearly not one prone to sulking. When he was humiliatingly replaced as Fonterra chief executive in June 2003, Norgate could have been forgiven for licking his wounds and quietly retreating from public life reports The Dom Post. But less than six months later there he was with a sharemarket raid on rural services company Wrightson, which turned into a full-blown endeavour to lead rationalisation in the rural sector.

The unspoken fact to emerge from the disaster that was yesterday’s PGG Wrightson annual result was that Norgate’s dream is in tatters. He has already stood down as the company’s chairman. Next will come the surely unpalatable fact that he is about to lose his always tenuous position as the company’s main shareholder. Norgate has maintained a nearly 30 % in PGG Wrightson with the assistance of the wealthy South Island McConnon family and through a company that borrows money directly from the public to fund the stake.

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Ezicalve scheme seeks to achieve dairy farmers’ buy-in as beef numbers fall. A new calf contract gives financial surety to breeders, calf rearers and finishers, says PGG Wrightson’s supply chain manager Pierre Syben. It is the Ezicalve contract, aimed at getting more beef cattle from the dairy industry reports The Manawatu Standard. The beef industry is dependent on dairy farmers, said Mr Syben, as beef numbers fall, and dairy cow numbers increase, and the new contract is aimed at getting dairy farmers’ buy-in. “A bobby calf is only going to be worth about $16 this year, maybe less. That’s 20 per cent back on last year. So dairy farmers are better to use beef bulls or their semen. Under this Ezicalve contract, they’ll get $40 for a heifer and $70 for a bull calf of 33 kilograms at four days,” he said.

Mr Syben said this gives more certainty to all players. “In the past, calf rearers were burned [losing money]. There just hasn’t been the demand for the weaned calves.”Mr Syben said the contract will give surety from conception to customer. It is called the Ezicalve contract after the Ezicalve bulls sold by the Ardo Stud at Marton, the Riverton Stud at Fordell and Shrimpton Hill in the South Island. They are selling low birthweight hereford bulls and semen. Some of the bulls also have a low gestation period. “The bulls produce calves, which cows are able to have naturally. They’re not cow-killing calves,” said Mr Syben, and the low gestation period gives dairy farmers more early milk once calves are born.

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PGG Wrightson has announced that Craig Norgate has stepped down as Chairman today and has been succeeded by independent director Keith Smith report The Stock Exchange. Mr Norgate advised of his intention last month and the Board accepted that decision yesterday and confirmed Mr Smith’s appointment. Mr Norgate will remain a director of PGG Wrightson and Managing Director of Rural Portfolio Investments, which owns a 27.5%shareholding in the group.  Mr Smith has been a director of PGG Wrightson since its formation in 2005 through the merger of Pyne Gould Guinness and Wrightson. He was previously chairman of Wrightson from 2004.

Mr Norgate said his decision to step down reflected the preference for an independent chair given the listed status of the company and the fact that Managing Director Tim Miles is now well established after 15 months in his role. “Tim now has a team that is more than capable of leading the company forward,” Mr Norgate said.  Mr Norgate said the change was a natural progression that would allow the company to identify the governance platform best suited to its next stage of development. This would be carried out through a formal process to review board composition, currently under way.”PGG Wrightson is the product of a five-year campaign to revitalise the rural services industry for the benefit of farmers throughout NZ. That process has involved continuous change – in corporate structures, but more importantly in the way the industry works with farmers to help them improve their performance and profitability.

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PGG Wrightson, NZ’s biggest rural services company, was raised to a “buy” at the research firm AspectHuntley, which said the stock became better value after tumbling on a profit warning reports Scoop. Shares of PGGW dipped to NZ$1.12 on June 24, when the company said normalized earnings for the year ending June 30 would be NZ$30 million to NZ$32 million, down from previous guidance of NZ$36 million to NZ$42 million, because of a downturn in dairy farming and a lack of spending by sheep and beef farmers. The shares traded recently unchanged at NZ$1.18 on the NZX.  “Valuations appear attractive considering the sharp pull back in the stock”, said analysts at AspectHuntley, a research unit of Morningstar, which kept its fair value for the stock at NZ$1.80.

Wrightson managed to settle a dispute with meat cooperative Silver Fern Farms amounting to NZ$42 million in April after gaining what was effectively a NZ$25 million loan from South Canterbury Finance, with the finance company holding the right to convert the debt to shares. Costs of the failed transaction to acquire a half stake in Silver Fern and a writedown of Wrightson’s stake in NZ Farming Systems Uruguay contributed to a net loss of NZ$32.8 million in the first half.

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Red meat industry reform continues to be elusive, what with Silver Fern Farms and Alliance still not talking and PGG Wrightson licking its wounds reports Rural News. Mergers are justified based on perceived synergies available to the amalgamated business but the reality is that they are usually driven by the desire to create short-term value for stakeholders and the creation of personal wealth for key players involved. The misnomer of supplier-owned cooperatives is that the underlying share value is immaterial. A farmer wishing to sell his shares in either SFF or Alliance will receive their original subscription value, well below any true net asset value (it remains to be seen what SFF proposes to its shareholders next month in terms of a different share structure).

Therefore value is in the supply contracts and the farmgate prices paid for stock through the rebate systems. The real driver for merging cooperatives is not share value but the synergies, improved market power and cost savings that could in turn improve supplier returns. While management at SFF and Alliance may have disagreed on relative business values in 2007-08, supplier shareholders should have been less concerned with share value. For it is only through efficient processing, procurement and well managed branded sales that farmers will ever see any sustained improvement in prices.

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PGG Wrightson has substantially downgraded its earnings (net operating profit after tax) guidance for the 12 months to June 30, blaming the impact of the global recession on the rural sector and a slowdown in the dairy industry reports The Dom Post. The rural services firm today said it had reviewed its operating earnings guidance for the fiscal year, based on outlook and financial performance and believed that net operating earnings were likely to be within the range of $30 million to $32 million.This was compared to previous guidance of a range from $36 million to $42 million which came after $2.5m of debt-related costs.

PGGW’s board anticipated that initiatives undertaken by management would help improve 2009/10 net operating earnings, now expected to be in a range of $33 million to $39 million. Managing director Tim Miles, in a statement, said the key factor in PGGW’s trimmed outlook for the 2009 year was the impact of the global recession on the rural sector and a significant recent slowdown in dairy activity during the peak trading period.During the first half of the financial year, PGGW recorded a strong operating result reflecting the resilience of the agricultural sector.

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Farmers came from far and wide to bid on bulls at the 46th Annual Blenheim Bull Sale on Monday reports The Marlborough Express. PGG Wrightson Livestock representative Peter Barnes said the packed gallery of buyers at the Riverlands saleyard was the largest he had seen at the sale in more than five years. While 58 buyers come from outside the district, the large contingent of Marlborough farmers meant most of the bulls stayed in the region. Mr Barnes said the turnout could be attributed to a good calf-selling season and stabilising beef cow numbers within the district following stalled changes in land use in recent years. All 48 bulls at the sale sold.

“There weren’t any extreme highs or lows throughout the catalogues, leading to a good result for both breeders and buyers.” He said it was probably the last time two of the studs would be selling at Riverlands. Keith and Gaye Higgins were transferring to the Wairarapa with their Oregon angus stud, while Chris and Amanda Jeffries were taking their operation south to Cheviot.

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Asset sales will help PGG Wrightson meet a $125million bank debt repayment deadline at the end of next year, but none of the company’s businesses – and certainly not the finance arm – will be sold, says chairman Craig Norgate. The debt, part of a $475m refinancing agreement negotiated with the ANZ, BNZ and Westpac in March, would be repaid with around $85m from cash profits and $40m from minor asset sales and working capital reductions, Norgate says in the Farmers Weekly. Asset sales would be the “odd spare block of land, the odd spare building”.  “We have been through our refinancing process and we’ve got a clear focus on what we want to do and achieve and the only asset sales we are looking at are on the periphery. We’re not looking to sell any business and certainly the finance offering is absolutely core to our customer relationship.”

“There will be constant change, but the sort of costs we are taking out are more back office overheads. It’s 2 1/2 years post-merger (PGG and Wrightson) and when you’re growing a little bit of fat creeps into the system and at times like this you take it out,” Norgate says. The poster boy for bold change in the agribusiness sector is catching his breath after a torrid few months for PGW, of which his personal investment vehicle Rural Portfolio Investments (RPI) owns 30%.  “It’s been exhausting. But we have a very good team.”

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PGGW boss Tim Miles has aspirations for the company’s South American seeds and rural businesses to provide much of the group’s growth in the next decade reports Business Day. He has just returned from a farms trip through Uruguay where PGGW has businesses and manages dairy land owned and being developed by New Zealand Farming Systems Uruguay. Uruguayan farms were often mega- scale. Two farms he had seen from one viewing point were of 5600 to 6000 hectares, and dotted with milking sheds. While the heart of PGGW’s business remained in New Zealand, there were good opportunities in Australia for seeds, and in South America for seeds, rural supplies, real estate and livestock.

The company already employed about 400 people for its operations in Uruguay, Chile and Argentina. In South America, the company grew the same amount of seed as it grew in New Zealand and Australia combined. “If you were to ask me where the real growth will be in terms of the next 10 years, I would say it would be in Latin America. You’ve got a huge amount of land that is relatively undeveloped,” Mr Miles said. “The opportunity to help all that development is just colossal . . . you have very good soil but often the grass is just naked, nothing’s ever been done with it.”

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