Memo 5 ~ Are the MVF subsidiaries being subsidised… and if so, at what cost                    to farming members in the south west ?

Updated 20th July

The main reason for posing these questions is to encourage awareness of the negative impact of the SCATS and Pye Bibby acquisitions on Mole Valley’s ability to fulfil its cooperative cost-saving purpose.  All the data used is drawn from MVF Annual Reports and Accounts, together with the separate Reports and Accounts of SCATS plc and Southern Valley Feeds Ltd.

Why bother, when it’s all in the Mole Valley family, isn’t it?

Yes it is, but when the family’s cost basis shows such rapid and damaging escalation of administrative costs as 250% (£7.5m to £26.2m) over the past 10 years against a sales increase of 95%, it is essential to identify the causes, and take radical steps to reverse this process.

MVF Total (ie. Group) Sales for accounting years 2001-2006 are shown below together with total administrative expenses.  Figures in brackets show % increase from previous year.

Table 1

Year ended 30th September 2001 2002 2003 2004 2005 2006
Total MVF Sales
                                                   £000’s 		89,511
  		90,0200
(6%) 		115,311
(28.1%) 		126,248 (9.5%) 145,290
(15.1%) 		166,855
(14.8%)
Total Admin Expenses                                                                            £000’s 10,023
  		10,854
(8.3%) 		17,926
(65.2%) 		19,596
(9.3%) 		22,552
(15.1%) 		26,185
(16.1%)
Admin Exps per £100 sales £11.20 £12.06 £15.55 £15.52 £15.52 £15.69

2001 is the latest complete year prior to acquisition of subsidiaries, because 2002 Admin Expenses would have included preparatory expenses in the run up to the commencement of Mole Valley controlled SCATS trading on the 27th September 2002.  The major deterioration in Mole Valley’s competitive potential over the period 2003-2006 can be seen to commence with the SCATS acquisition, but this, of itself, does not identify a direct causal relationship possibly just a coincidence.

To clarify this, an analysis of the annual increases in admin expenses, drawn from the published subsidiary accounts, is provided below.   The final column in Table 2 is headed MVF Residuals and is derived by deducting the subsidiary increases from the Group increases within the same year.

Table 2 - Annual Increases in Admin Expenses 2001-2006

MVF Group
£000’s 		SCATS
£000’s 		SVF
£000’s 		MVF Forage Services
£000’s 		MVF Residual
£000’s
2001 404 - - - 404
2002 831 - - - 831
2003 7,072 6,441 - - 631
2004 1,670 445 - - 1,225
2005 2,956 378 2,212 - 366
2006 3,633 664 1,491 128 1,350
Total Increase 16,556 7,928 3,703 128 4,807

Members will have noticed that Mole Valley’s annual accounts now include two different balance sheets – one described as “Consolidated balance sheet”, which refers to the whole MVF Group, the second described as “Company balance sheet”, from which the subsidiaries have been excluded.  The “Company” to which this second balance sheet relates is the same entity that the “MVF Residual” column in Table 2 refers to.  The expectation for this core residual business entity is that its admin expenses would increase annually, roughly in line with general inflation i.e. around 20% over the 2001/2006 period, and thus in a regular arithmetic progression.  Instead of this the “MVF Residual” column displays a highly erratic pattern, raising serious questions about the reliability of the apportionment of Group Admin Expenses as between the subsidiaries on the one hand and MVF Residual on the other.

Table 3 

2001 2002 2003 2004 2005 2006
“MVF Residual” Sales                                    £000’s 89,511 90,020 94,723 103,804 105,024 110,088
“MVF Residual” Admin Expenses                £000’s 10,023 10,854 11,485 12,710 13,076 14,426

Table 3 above does not explain the erratic variations in the resultant balance of Admin Expenses charged to the Residual MVF account, but it does illustrate clearly that in total they represent an increase of £4.4 million (43.9%).  If Admin Expenses over the period had increased above inflation up to, say, 25%, the resultant £2.5 million expectation is shown to have been exceeded by £1.9 million.

I believe that a sum of around this magnitude represents the extent of the understatement of Admin Expenses within the SCATS and SVF accounts, and is duly reflected in the massive escalation of MVF Group Admin Expenses from 2003 onwards – someone in the family has to pay this bill!

In addition to the Admin Expense bill, there are two other cost items that should be referred to:-

The £2.3m identified above represents the amount by which the published subsidiary accounts are estimated to understate the real cost to date of their acquisition and operation.  This must then be subject to deduction of cumulative profits recorded in those accounts, or addition of any losses.  For SCATS deduct £1,152,000 reported 4-year profits but add back £326,000 SVF losses, to provide a net deduction of £816,000.  This leaves a balance of £1.5m as the best estimate from published accounts of financial subsidy by parent company Mole Valley to its two major subsidiaries.

I am not suggesting that accounting judgements made on inter-company costs allocations for accommodation and other service provisions, for goods transfer prices, for transport, for management time and general overhead costs are otherwise than strictly objective.  Nor do I wish to imply that such judgements have been influenced by some of the initial projections of the high profitability of the SCATS venture or of an early start for the profitability of SVF.

I fully accept that the judgements on what proportion of this or that shared expense should be covered by each party is difficult to make with accuracy: the process would be extremely time consuming.  When the concerned parties are a sponsoring parent company and a new addition to the family Group there is a strong likelihood or bias creeping into the judgement process.  All this bias will tend to be in a one-way direction.  For example there will probably be a failure to identify many cost items incurred by the parent, as well as a natural caution not to over-burden the young enterprise.  Over the 4-year period this bias factor could well amount to £1-£2m: it is most improbable that it could be less than £0.5m.  Addition of this to the £1.5m previously identified, arrives at a figure of £2m for the equivalent of subsidisation of the SCATS and Southern Valley Feeds.

This conclusion has been challenged by the claim that these acquisitions have brought compensatory advantages to MVF members.

CONCLUSIONS

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