The cooperative business model is alive and well here in NZ

The cooperative business model is alive and well here in NZ

Over the past few days since Westland Milk Products’ shareholders voted to sell to Yili, China’s largest dairy processor, some commentators have been speculating about the cooperative business model and whether it was right for our dairy industry and agri-producer sector. Some have even predicted the sale of Fonterra to overseas buyers. I would like to provide some balance to this discussion.

I am not going to comment on the reasons for Westland Milk Products’ demise over the past 10 years (at least), as much has been written already.

Keith Woodford, who was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015, has been an advisor to Westland MP since the beginning of its new era in 2001 following the formation of Fonterra.

Keith wrote an excellent article three months ago that covers where he felt it all went wrong for Westland MP. In that article, Keith wrote:

“Co-operatives can help farmers maximise the selling price for their products and also minimise the cost of specific inputs. They change the power balance between farmers and those who are further along the value chain towards the market. However, co-operatives (like any company) can only be long-term successful if they show financial discipline. That means making sure there is always enough money left in the kitty for capital expenditure. It also means keeping a reign on managers who are driven by growth at the expense of company stability, and not being fooled by a company’s own PR.”

Capital retentions versus annual payouts

The challenge here is to balance capital retentions with annual payouts appropriately, while prudently investing in capital projects such as new or upgraded plants. This will ensure volumes can be processed efficiently and into value add products, while investments must provide returns above the weighted average cost of capital. Placing too higher portion of earnings into annual milk payouts, and not retaining enough for future capital projects and/or investments, can only lead to increased bank borrowings which can prove to be disastrous.

Any poor performance from cooperatives due to capital investments made, abandonment of retained earnings policies and poor market investment decisions has no relationship with the co-op business model. It has more to do with wise decision making, good governance and effective leadership. Capital raising appears to be more of an issue with agri-producer co-ops as processing capacities have needed to match rising volumes – milk and kiwifruit being two good examples. One could also argue that dairy plants cost a lot more to build and commission than retail stores, banks and offices.

The cooperative business model and sector

To recap, the co-op business model is about member (shareholder) ownership and control of the business, not investor ownership and control. Investors can come and go, Members (in this case shareholders supplying milk) are usually engaged for the long term, many who farm within NZ’s agri-sector are inter-generational, as farms have been handed down from one generation to the next. Members have “skin in the game” by providing capital and owning shares in the co-op.

Ravensdown director, Tony Howey, wrote an interesting article last Friday in support of the cooperative business model which provides more perspective. In his article, Tony wrote:

“The idea is simple and two-fold: co-operation pays and the whole becomes greater than the sum of the parts. For example, take a processing and packing farmer-owned company that my family farming operation is involved with.  By pooling together, the finances and aggregated skills have led to a multi-million dollar investment in optical sorting and robotics allowing significant efficiencies and enhanced reputation in market. We would have never reaped the benefits if each farmer had tried to go it alone.

“New Zealand is incredibly well served by co-operatives. In agriculture, we boast more co-ops than just about any country in the world. When run well, they generate extraordinary returns to New Zealand economically and socially. The long-term vision, the sustainability commitment, the power of collaboration and the value of people are all characteristics of a cooperative and, of course, are concepts our tangata whenua are very familiar”.

Here in NZ, we have one of the most cooperative economies in the world with our largest 40 co-ops, mutuals and societies generating 16% of our GDP in 2017/18, see details here. 

Globally there are now almost three million co-ops employing almost 300 million people (around 10% of the global workforce) and serving over 1.2 billion Members. The co-op movement, which began in Rochdale, England in 1844, continues to grow rapidly and is closely aligned towards the United Nations 17 Sustainable Development Goals to be met by 2030.

Members own and control the company. Profits are retained locally. Co-ops globally and locally have a strong record of giving back to local communities and Fonterra’s Milk For Schools Programme, now in its eighth year, is a good example of that.

Here in NZ, over two-thirds of Cooperatives Business NZ’s current 65 Full Members are over 20 years old, including five that are now over 100 years old (two being dairy companies in Fonterra and Tatua Dairy). This reflects a business model that offers endurance and sustainability.

How many NZ cooperatives (including mutuals and societies which are also Member-owned) have fallen into receivership or administration over the past 20 years? The answer: very few in comparison with publicly listed and privately owned companies, along with franchises.

Of our largest top 40 co-ops, Silver Fern Farms has been questioned, however, its NZ-based operations remain a 100% co-operative, proudly owned by its shareholders today.

Looking at the de-listed NZ website I see that over 1,000 NZ businesses have been de-listed since 2001 as a result of falling into receivership or administration, otherwise voluntary closure. Fewer than five of these were cooperatives, mutuals or societies.

Where to for Westland Milk Products?

Westland MP was established in 1937 and is now in its 82nd year, that alone being testament to its endurance and survival. While Fonterra was formed in 2001, Westland MP’s shareholders chose not to join and instead have remained as a separate entity, today processing around 3% of NZ’s milk (Fonterra 82%).

While Yili will match Fonterra’s payout for the next 10 years, what about beyond 2029?

Has Westland MP thought about its future generations?

In the end, a portion of profits will be transferred overseas and not re-invested back into the co-op and local communities – how large will that portion be?

Westland MP’s shareholders will lose ownership and control of their company.

What will happen to land values after the 10-year period if Westland MP’s payouts then slip again to well below its competitors?

Who will then buy those farms?

Summary

The co-op business model has been well-proven since the 19th century and provides endurance and sustainability. The co-op sector globally is both huge and diverse.

In NZ, we have one of the most cooperative economies in the world while our co-ops have provided New Zealanders, and those overseas, with trusted brands, products and services for decades and even centuries. In more recent times, however, some co-ops within NZ’s agri-producer sector, notably dairy and red meat, have had trouble raising capital either from their members (shareholders), or banks. Three key factors here are: balancing annual pay-outs with capital retentions appropriately, valuing shares appropriately for additional (new) supply, and investing capital funds very wisely.

The NZ economy needs strong co-ops as they provide returns to Members which means profits are retained, and re-invested, locally.

We should not be questioning the cooperative business model as a result of poor commercial decisions that have been made in the past. As with any type of business, be it a cooperative or publicly/privately-owned company, franchise etc, long-term success requires strong governance, leadership and financial discipline.

What a shame that there could not have been a way found for Fonterra to buy Westland MP so that it remained a co-op, 100% owned and controlled by its Members – and a better outcome long term for the Westland region and NZ.

And finally, let’s not even start to think about Fonterra becoming foreign-owned.

Craig Presland 

CEO, Cooperative Business NZ

8th July 2019.