The well-publicised downfall of Murray Goulburn (MG) – the Australian dairy industry’s largest cooperative has been well documented. The recent announcement of an impending sale to Canada’s Saputo has been met with bitter disappointment from many milk suppliers – some multigenerational – who have been loyal to MG precisely because it was a cooperative.
MG has been a giant of the local dairy industry – accounting for a third of national milk production – and with a milk collection and manufacturing footprint in Victoria, Tasmania and NSW. A strategy to move the cooperative up the value chain, with investments in fresh milk processing and ingredient manufacture was supported by shareholder-suppliers – but to be implemented outside capital was required.
MG faced the challenges many in the agricultural cooperative sector face – a shrinking supplier-shareholder base to invest in new technologies. The ability to retain profits in a highly competitive farmgate price environment is limited – philosophically the role of the coop has often been to maximise returns to shareholders by paying strong farmgate prices. When this is working, and the cooperative is dominant – it then sets a floor on prices for suppliers to competitors who have to match or better that offer to retain milk intake.
There’s been plenty of analysis about what went wrong at MG, several inquiries and legal proceedings will delve further into the detail. However, many point to the 2014 $500 million capital raising through a listed unit trust as the beginning of the end. The pressure to appease two masters – both farmer-owners and financial investors – led to overreach in milk price promises.
Unlike many other cooperatives who access outside capital – where the interest of investors is to keep input prices low to maximise profits and therefore dividends – the MG structure actually aligned the investors of farmers and suppliers. In other words, a higher milk price would also increase investor returns. While the idea is attractive, it requires the business to execute a strategy that can deliver to both groups, rather than offsetting one against the other – and that’s where MG appears to have fallen down.
So is it the cooperative structure that is to blame? While cooperatives appear to be going out of style in Australia, they remain ubiquitous in the global dairy industry, where the need for supply chain integration – for such a perishable and capital-intensive product – is arguably much greater than for other commodities. In Europe and the US, cooperatives have consolidated over the years, they have large supplier bases and leading brands in home markets – their capital needs have largely been met from supplier-shareholders and debt.
In Ireland, Glanbia a joint venture between the cooperative and a publicly listed company has been the vehicle to access capital. The joint venture is majority-owned by the cooperative, retaining farmer control – and this “bet each way approach” appears to be working. Glanbia has been profitable while paying a highly competitive milk price, and there appears to be a process of remutualisation underway. The co-op voted earlier this year to pay €112m to acquire a 60% shareholding in Glanbia plc’s Dairy Ireland division, which consists of Glanbia Consumer Products and Glanbia Agribusiness. The joint venture, Glanbia Ireland, will offer a diverse portfolio of ingredients, leading agri and consumer brands, with global reach.
In New Zealand, Fonterra’s restructure was aimed less at raising capital but to mitigate share redemption risk – the requirement to pay out on “fair value shares” to farmers who left the coop as competition increased at the farmgate. The Trading Among Farmers (TAF) scheme decoupled share capital ownership from the co-op’s liability to redeem shares. The changes created a second class of share capital that could be traded on the stock market. A derivative equity instrument issued by a Fonterra Shareholders Fund allowed shareholders to sell the economic rights of their share to public investors. There was accompanying legislation and oversight put in place to monitor Fonterra’s farm gate price setting mechanism. Proceeds from the issue of units to the public would be paid to shareholders, and not Fonterra. Equity would continue to be raised by retentions from earnings, or conventional equity raising approaches.
The demise of MG doesn’t signal the end of the dairy cooperative globally. Cooperatives are likely to remain at the heart of dairy industries that can invest in long-term strategies for growth and member prosperity. They will need to evolve and adjust to have the flexibility they require for future challenges and opportunities.