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Capital structures of large co-operatives.

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Executive Summary

Many large co-operatives are grappling with the issue of how to fund their growth strategies without compromising the returns that they pay their farmer shareholders or put the co-operative at risk.

Fonterra also has to deal with the issue of how it funds its growth aspirations.  The capital structure that was negotiated at its formation was at best a compromise through the negotiations and was only ever intended to be a short term option.

Other large co-operatives around the world who have similar growth strategies as Fonterra face similar issues of how to fund that growth within the co-operative.  Fonterra has a clear objective to be a major player in the consolidation of the food industry that is in progress globally at the moment.

This strategy will require large investments in companies and businesses around the world and is in effect an investment strategy.  An investment firstly in the long-term viability of New Zealand Dairy farming which is totally reliant on the international market place.  And secondly an investment in businesses around the world so that we participate in the consolidation of the international market place and the value that will be created in the process will provide further security to allow us get our product to market and receive a fair market price.

It is also a hedge to ensure that we can better ride out the highs and lows of the commodity market as the returns from commodities and down stream businesses tend to be counter cyclical.  The New Zealand dairy industry has over the years developed some core competencies in manufacture and this strategy is seen as a way of leveraging off those core competencies to add value to the business both in capital growth and as a way to enhance shareholder/owner/supplier returns.  These groups are all the same in the co-operative.

Capital Structures of Large Co-operatives – Jim van der poel