NZ Farming Systems Uruguay’s two independent directors – Graeme Wong and John Raodley – have thrown in the towel and recommended that shareholders accept the 70 cents a share offer from Olam International.

This is little comfort to investors who first bought shares in the 2006 IPO at $1.00 each and then participated in the 1 for 2 non-renounceable rights issue a year later at $1.50 a share.

The independent directors have capitulated because the company’s original business model, which was based on bringing New Zealand farming methods to the South American country, has not delivered its forecast results. According to the latest Grant Samuel independent adviser’s report; “NZ Farming Systems Uruguay has determined that a New Zealand based system involving predominantly grass feeding is not viable for the Uruguayan environment and although pasture will continue to comprise a significant proportion of milking cows’ diet, a substantial level of concentrate feeds will also be applied”.

In other words the company’s plans for Uruguay were flawed because New Zealand’s farming methods are not easily transferred to South America.

Olam, which owned 78 per cent of the company prior to the latest offer, has completely changed the dairy farmer’s business plan as follows;

  • -The number of cows will increase from 21,300 at present to 48,226 in 2014 instead of the previously planned 55,075 cows
  • -The company will use far more feed, instead of grass, and the cost per litre is now expected to be 24US cents in 2014 instead of the previous estimate of US17 cents
  • -There will be a dramatic increase in productivity with output per cow now expected to be 6,143 litres per annum instead of 4,175 litres at present. The output per hectare is forecast to leap from 8,321 litres at present to 18,473 litres.
  • -It is always a big shock when shareholders are told that the business model doesn’t work. This is further exacerbated when the offer price is well below net asset value per share, in this case 70 cents versus a NAV of 81 cents.

The appreciation of the New Zealand dollar has also had an impact as demonstrated by Grant Samuel’s August 2010 and May 2011 valuations.

Grant Samuel’s valuations

US$ value Exchange rate NZ$ value
August 2010 45.8-55.8 .7050 64.9-79.2
May 2011 48.0-55.0 .7900 60.0-69.0

A sharp increase in the NZ dollar, from 70.5 US cents to 79.0 US cents, has resulted in a drop in value for New Zealand shareholders even though the medium value, in US dollars, has risen.

PGG Wrightson, the promoter of NZ Farming Systems Uruguay, and former directors of the two companies have a great deal to answer for in light of the poor performance of the South American company. The independent directors’ sell recommendation is particularly frustrating because it occurred in the same week that Fonterra announced a record payout for New Zealand dairy farmers.