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.
The purpose of this report is to comment on the debate and issues surrounding the Genetic Engineering (GE) debate in relationship to whether New Zealand should allow the use of GE technology or not.
In determining whether New Zealand should allow the use of GE, this report looked at some of the issues impacting on New Zealand agriculture. The report identifies the fact that the New Zealand economy has a dependence on the agricultural sector and that that sector is very vulnerable. This report recommends that New Zealand agriculture needs to form stronger lobby groups, enhance agriculture’s image through positive promotion, and encourage New Zealand agriculture and its associated industries to invest more resources into research and development. These recommendations are suggested to counteract and restrict the increased compliance cost imposed on New Zealand, created through urbanisation and the shift of political power to the urban voter, to improve the understanding and profile of agriculture and to ensure that New Zealand Agriculture maintains its comparative advantage.
Before the completion of this report, the Royal Commission on Genetic Modification released its findings. This report supports the Royal Commissions findings, to the precautionary use of GE technology. It also recommends that New Zealand Agriculture and its associated industries continue to lobby for the right to use GE as a means of maintaining its comparative advantage in the international marketplace and as a tool to enhance the environmental sustainability of agriculture.
Having completed a degree in agriculture I am aware of the importance of soil health and had started modifying the way we approached crop establishment, mainly with direct drilling autumn forage crops, and then moving into the cash crops. We had also invested in irrigation.
I had become involved in setting up a sustainable cropping group, with which the regional council were also involved. The group was concerned over wind erosion, water use and trying to sow into peat and timber to establish crops without ploughing.
LandWISE was formed and successful in gaining a Sustainable Farming Fund grant.
The three study topics were all major concerns of the group with a focus on vegetable crops and maintaining profitability if the production system was changed. We had already experienced difficulty with establishing super sweet sweet-corn under reduced tillage systems yet knew the benefits gained by the soil from reduced tillage farming practices was well documented and proved by many. With world leading technology available in NZ for use in this area my main aim was to look at management issues and systems.
The water issues were also of concern, with the public perception about irrigators wasting water on windy days. What constitutes an efficient system? How do we allocate water to irrigation in limited reserve areas? All of these are critical issues when water is seen as a limited resource.
Agriculture is no stranger to technology but new technologies rarely receive an enthusiastic welcome, particularly when they relate to emotive issues such as animals and food. Throughout history, people have used and adapted to both the positive and negative aspects of new technologies.
Initially there were over one hundred reasons given by opponents as to why a simple heat treatment process being developed to make food products safer was an unacceptable technology. Without the ability to pasteurise milk, consider where the New Zealand dairy industry would be today!!
Looking back in history, we see the great impact of a number of pivotal events. The internal combustion engine brought on the industrial revolution. New chemical entities broadened our manufacturing capabilities. Information technology has accelerated the creation of our knowledge base. But not all of the impacts of these have been positive.
Albert Einstein said “The significant problems we face today can not be solved at the same level of thinking that we were at when we created them”.
Biotechnology itself is not new but for many farmers it is a new way of thinking. Biotechnology is providing us with the ability to solve some of our more challenging problems. Problems in health and medicine, issues of food security and most importantly to farmers, new options for sustainable agricultural development.
The industrial, chemical and information revolutions are our history. The biotechnology revolution offers us options for a healthy farming future.
The dairy market environment is changing rapidly as the millennium trend of “globalisation” intensifies competition and rationalisation of both buyers and sellers. Acquiring critical mass in terms of milk and capital is necessary for dairy companies to successfully compete in the globalising market.
Dairy co-operatives worldwide are grappling with finding solutions to achieve critical mass. Given that dairy co-operatives have evolved to meet the needs of their supplying members, it is essential that the co-operatives ‘reason for being’ is not compromised or destroyed by solutions to acquire critical mass. It is also essential that the co-operative is able to remain viable and competitive as a processing and marketing company operating in a globalising dairy market. To fail will lead to falling returns and ultimately the demise of the co-operative.
Critics claim that limiting the supply of capital to that from members’ compulsory contributions and retentions constrains the co-operative. Members themselves also question whether it is the co-operative’s role to be involved in activities that do not directly relate to the collection, processing and marketing of their milk.
New Zealand’s dairy industry has been dominated by dairy co-operatives since 1936 when the single seller legislation was introduced. Deregulation means that farmers will have alternative supply options in the future. New Zealand dairy farmers have been geographically and historically isolated from the realities of supplying a co-operative versus a conventional company and often take the benefits of co-operative membership for granted.
New Zealand dairy farmers and our co-operatives also face unique challenges around restricted market access, a near-total reliance on exports and geographical isolation from the market place.
My report covers five European dairy companies that are fortunate to have unrestricted access to the European Union’s 360 million consumers. On the downside, European dairy farmers had milk growth restrictions imposed with the introduction of milk quotas in 1984. While European dairy farmers and companies face different challenges and opportunities, the co-operative purpose and characteristics are universal.
Many co-operatives are developing innovative solutions to achieve critical mass and retain members. Looking at the impacts and implications for the co-operative resulting from some of these initiatives provides some insight as to how similar proposals could affect Fonterra Co-operative Group.
Using case studies from Campina Melkunie Co-operative and Friesland Coberco Co-operative in the Netherlands, and Kerry Group, Glanbia plc and Golden Vale plc in Ireland, the objectives of this report are to:
Identify the differences between co-operative and conventional dairy companies.
Define the unique purpose and distinguishing characteristics of a cooperative.
Examine the experiences of the five dairy companies in terms of:
operating environment,
strategy and structure (organisational and capital), the company’s ability to meet its members’ needs.
1.1 The Milk Marketing Board in the UK was deregulated in 1994 and the previously integrated dairy industry was fragmented into separate organisations responsible for milk collection and dairy processing.
1.2 This opened the door for true competition for dairy farmers who could now choose to supply milk directly to any one of a number of independent processors, many of whom are public listed companies.
1.3 Competition for milk supply initially saw milk prices rise 15%. But after four years, the milk price has dropped some 30%. The farmer owned supply co-op (Milk Marque) has lost 24% of it’s market share as more and more farmers are attracted to the independents who pay a slightly higher milk price.
1.4 Milk Marque finds itself in the extraordinary position of not only selling the bulk of it’s milk to it’s competitors, but also sets the base price above which it’s competitors pay a premium to attract direct milk supply from farmers.
1.5 Because Milk Marque has no processing capacity of it’s own, it must onsell all it’s milk to the independent processors. Until it can rebuild a processing capacity of it’s own, it will always pay the lowest milk price. This rebuilding phase takes a lot of time and capital and will require the development of new brands and markets. This demand for funds puts even greater pressure on milk price.
1.6 All farmers appear to be worse off under this new deregulated environment. The independent processors seem able to manipulate the purchasing system so that the milk price paid to farmers is an absolute minimum. Dividends is the key measure of their performance and can only be maximised if costs (including the cost of milk) are minimised.
1.7 Competition seems to have been more destructive than constructive and the farmer owned co-op is now desperately trying to rebuild an integrated “cow to customer” structure in order to regain some ability to influence returns to farmers.
2. Corporates vs Co-operatives
2.1 Corporates
There are a number of corporate dairy companies operating in Ireland, with varying degrees of success. The most successful of these would be the Kerry Group plc and the Avonmore Waterford Group plc.
2.2 There is no doubt that Kerry has been very successful since it adopted the aggressive growth strategy in 1986 and became a plc (public listed company). Turnover has increased from NZ$570 million in 1984 to NZ$4 billion in 1997. The shares, initially issued to farmers at 35 pence, were trading on the Stock Exchange for 11 pound each in April 1998.
2.3 The farmers involved in the company at these early stages are very proud of this achievement. Their investment in the industry has been “unlocked” and can be cashed in at any time at true market value. Their income is now derived from three sources – milk price, dividend flow and capital growth in share values.
2.4 But not all the corporates have been as successful. Waterford narrowly avoided financial ruin by merging with Avonmore in January 1998. Golden Vale is under constant pressure, from both shareholders and farmers, to improve it’s very mediocre performance.
2.5Furthemore, many of the younger farmers are feeling uncertain about their future. They cannot afford to pay the high price for Kerry shares. Their income stream is limited to milk price. Farmer ownership of the company is now significantly less than 50%. As the Kerry business, has grown the dairying sector has become the smallest and least profitable division. There was talk that if the company was forced to rationalise, the dairy division may be sold off. These farmers were worried that as shareholders demanded higher dividends, their milk price would be lowered……and lowered….and lowered. They could become peasant farmers once again.
2.6 Co-operatives
On the other hand, there are several 100% farmer owned co-operatives throughout Europe and the USA who are achieving the same levels of success, in terms of business growth, without having to raise capital on the Stock Exchange.
2.7 Friesland Coberco in Holland has a turnover of NZ$8.5 billion, operates throughout the world and has established a system of farmer tradable shares that not only “unlock” the value of a farmer’s investment in the industry, but also identifies a performance measure other than payout.
2.8 MD Foods in Denmark is a true 100% farmer owned co-op. They have no shares. Farmers join for nothing and leave with nothing. They pay the highest milk price in Europe, operate on a 25% Equity ratio and have a global turnover of $NZ6 billion.
2.9 Land O’ Lakes and Dairy Farmers of America are also huge farmer owned co-operatives that have developed a system of patronage shareholding. This system enables the company to retain profits for growth, but recognises each suppliers contribution to that growth, so he can eventually cash it in when he retires.
2.10 All these companies had identified strategies for global growth and were actively merging with and acquiring other complimentary businesses to help them build critical mass. They all recognise that size is power.
2.11 It seems therefore, that it is not necessarily structure that dictates the success or otherwise of a company, but more the vision, skills and ability of the leaders and the management to define and implement a strategy to achieve the desired goals of the owners of the company.
3. Future Issues
3.1 CAP Reform
The European Union is talking of reforming the Common Agriculture Policy over the next 6 years. However, direct production subsidies will simply be replaced by more environmentally and socially based subsidies aimed at keeping farmers on the land.
3.2 Quotas are expected to be abolished by 2006, but this in itself may see an increase in milk production over the short term that could seriously impact on New Zealand farmers. I see little or no prospect of improved returns for New Zealand farmers as a result of these proposed reforms. The political animal called CAP is an unreliable and unpredictable beast.
3.3 The New Zealand Dairy Board
The NZDB is very highly regarded for it’s performance throughout Europe and the USA. Many of our competitors openly admit they do not like meeting them in the market place. They are all waiting, and hoping, that deregulation in New Zealand will see the demise of their toughest competitor.
3.4 Power of the Supermarkets
Supermarkets wield an incredible amount of power in the food retail sector. This power is such that they can significantly influence returns received by food producers, either through demanding exorbitant payments for “shelf space” and/or through their “own brand” products which are regarded as premium quality products by the consumer.
3.5 They demand very high standards from their suppliers, not only in product quality but also immediate on- demand availability. There is little or no loyalty. If a supplier can’t supply on demand, someone else will.
3.6Consumers are increasingly concerned about food safety, animal welfare and environmental issues. Recognising this, supermarkets are demanding that more and more products they sell are supported by full quality assurance and traceability programs. But price will always be the single most important determinant. If the price isn’t right, it won’t be sold.
3.7 Animal Welfare
While animal welfare is largely about perception, the New Zealand dairy industry receives a lot of criticism in Europe for some of our farming practices. Tail docking, inductions, dehorning calves, winter strip grazing, lack of shelter, walking distances, disposal of dead stock and transportation of incalf cows are all mentioned as areas where our practices would be considered unacceptable by the consumer.
3.8It is important, if we want to continue to protect our business from unwanted media attention and perhaps consequential loss of markets, that we do much more to make some of these practices more acceptable (or less visible) to the public. Education of the consumer and the supermarket buyer is part of the answer but farmers must be willing to change as well.
3.9 Scale
It is very evident after travelling through Europe and the USA that all sections of the dairy industry recognise that scale of operation is an important key to future profits. Size is power, not only at the processing and marketing level, but also at the producer level. Growth by acquisition and merger was evident at all levels and the New Zealand industry is no different in this respect. Our future too will depend upon our ability to continue to grow our business, to remain competitive in the global market place.
The consumer is king and the world revolves around their wishes and demands.
The news media has the ability to influence the consumer by creating hype and fear in food products.
Consumers have strong views on food safety, production systems, and environmental issues.
Consumers want food to be blemish free, cheap and available all year round.
The Supermarket
Supermarkets respond to consumer complaints.
They are petrified of bad press and the resulting consumer backlash which inevitably leads to financial disaster for the supermarket chain.
Commercial advantage exists where supermarkets initiate and lead consumers to believe they sell safe, quality food, for good value.
The Grower
The principles of IFP is the important framework for growers to concentrate on. The detail will vary from region to region and country to country.
Growers who are involved with the IFP programme building, review and implementation are the most successful. Those growers where IFP is imposed upon them generally have problems.
Growers need to work closely with researchers to develop and have confidence in the detail. Bureaucrats need to keep out of the detail as this can be detrimental and can make the programme unworkable.
Conclusion
IFP is the best response for New Zealand export fruit growers to both consumer trends and environmental concerns. We are very good at producing fruit with low residue, but as the industry moves down the IFP track, there needs to be a greater focus on justification for every action taken.
Consumers must have confidence in the brands that are attached to our fruit e.g. ENZA and ZESPRI. These brands must underpin the intrinsic values and enhance the integrity of these value systems. We must work hard to continually improve these growing systems in the future. Sustainable production is not only imperative for profitability but essential to feed the world as the world population expands dramatically into the new millennium.
IFP is only part of a change in world trends. Primary producers are entering a cycle where, if they do not adapt to this changing environment they will be left behind or be completely shut out of entire markets.
In order to form an opinion regarding the relative merits of branded and generic promotion it was necessary to gain an overview of the marketplace. The following section largely focuses on the major markets within the European Union.
European agriculture is dominated by small holdings. Like New Zealand declining product prices in real terms are forcing farms to amalgamate and large units are producing an increasing percentage of the output.
Subsidies still play a major part in European agriculture but reductions will occur as subsidies are not sustainable in the long term at present levels.
Crossbreeding within the United Kingdom sheep flock is widely utilised using a 3 tiered structure which focuses on optimising meat output. A wide diversity of breeds are utilised to achieve this and little emphasis is given to wool production.
To remain international competitive New Zealand sheep farmers must produce a product that is better targeted at the market place. Utilising new technology and better genetics will help achieve this aim.
The United Kingdom sheep processing sector is dominated by small abattoirs in comparison to the pig and poultry sector which is dominated by large processors. Processors such as Lloyd Maunder, Brooks of Norwich and Bernard Matthews run large efficient operations where a huge emphasis is put on product development. Supermarket product requirements are becoming more exacting and the convenience food sector is expanding rapidly.
Large supermarkets chains dominate the food retail business in the United Kingdom with inhouse branding widely used by the big players. The large supermarket groups are spreading their influence into Eastern Europe and Asia while the food service sector (hotels, restaurants, institutions, airlines etc.) continues to grow rapidly.
Food consumption habits are changing for the following reasons
People are more health conscientious
Consumers want variety in their diets
Increasingly customers want fresh food
Demand for convenience food is expanding rapidly
Food safety is of paramount importance
Consumers are very aware of welfare issues
Consumers are becoming increasingly aware of environmental issues.
The image of lamb needs repositioned with new innovative products and all sectors of the industry need to promote the benefits of eating lamb in a balanced diet.
Food traceability systems are now essential in any food chain from the primary producer through to the final customer. Farm Assurance schemes are now an integral part of the chain to ensure that food is safe and produced in an animal welfare and environmentally friendly way.
The New Zealand lamb processing sector must form close partnerships with the supermarket chains of the world. Our clean green image must be protected, enhanced and exploited as much of the world is heavily polluted.
We must protect the integrity of the country of origin brand “NZ Lamb” because like it or not that is the main brand for our lamb. However where possible new brands would help reposition lamb and lift its image.
New Zealand lamb is a minority meat in world terms. The modem sophisticated consumer seeks new eating experiences. Provided the industry can provide innovative exciting products lamb will be an integral part of these new eating experiences.
Lamb farming has a bright future in the long term.
The social effects of the GATT Agreement on the Common Agricultural Policy:
The decoupling of income support payments from market . The present arrangements are an inefficient and market distorting way of supporting rural communities, and of achieving the wider social policy objectives.
A reduction in supply controls and a move to a freer’ market approach.
As has already been foreshadowed in Britain, there will be a shift to effective and holistic policies for the rural economy and for the maintenance of rural communities.
A greater emphasis on cross-compliance, especially on environmental issues within the single market. There will be a need for Europeans to speedily exploit developments in agricultural research and development, to achieve a competitive edge. The impact of this move to a more environmental focus will have an effect on New Zealand Agriculture. We will be forced to meet or exceed their level of environmental standards. In this major area our land based industries must act on now, documenting environmental outcomes, not only to demonstrate that we are clean and green, but that we are on a continuing plane of improvement. The phasing out of export subsidies and thus real pressure to curb both over-production within Europe, and to maintain the present EU share of world markets.
Increased legislation and consumer pressure on animal welfare issues.
Despite the best intentions for a managed change, it may take a crisis, before any major changes to policy will occur. It is unlikely any change will occur until early in the next century and in the intervening period, Europe will continue to be largely cocooned from the free market. The forces of the international marketplace will not be felt at anywhere near the pace as in this country.
Capital Structures of Large Co-operatives – Jim van der poel