The case for co-ops

The Mur­ray Goul­burn dilemma – co-op­er­a­tives are dy­ing out but they’re still needed, writes Michael Duffy

Farms & Farm Machinery - - Contents - Michael Duffy is a lec­turer and re­searcher at Monash Univer­sity’s Monash Busi­ness School. This ar­ti­cle orig­i­nally ap­peared on The­Con­ver­sa­tion.com/au

Why they’re still needed

ana­dian dairy com­pany Sa­puto’s bid for Mur­ray Goul­burn is just the lat­est ex­am­ple of how co-op­er­a­tives are dis­ap­pear­ing in the Aus­tralian busi­ness land­scape. But de­spite this pres­sure for co-op­er­a­tives to fold into the dom­i­nant cor­po­ra­tion model, these busi­ness mod­els are still wor­thy.

Co-op­er­a­tives have a long his­tory be­cause they have the ad­van­tage of min­imis­ing con­flicts of in­ter­est be­tween pro­duc­ers and own­ers.

Pro­ducer co-op­er­a­tives are set up to be cen­tred on the in­ter­ests of their pro­ducer mem­bers whereas cor­po­ra­tions are mo­ti­vated by share­hold­ers. Un­less all share­hold­ers are also pro­duc­ers, a con­flict can arise.

Nat­u­ral se­lec­tion plays a part in mar­kets so this com­par­a­tive ad­van­tage could see new types of co-op­er­a­tives emerge in the mar­ket. But the or­gan­i­sa­tion of new, large-scale, co-op­er­a­tive ven­tures is likely to be dif­fi­cult for busy farm­ers with­out ex­ten­sive cash.

Aus­tralia’s farm­ers don’t re­ceive sub­si­dies to the ex­tent that Euro­pean and Amer­i­can farm­ers do and are of­ten cash strapped, lack­ing sur­plus cap­i­tal to in­vest. Be­cause of this, co­op­er­a­tive man­agers ar­gue for the need to look else­where for more cap­i­tal to in­vest in man­u­fac­tur­ing and sup­ply chains.

Co-op­er­a­tives such as Mur­ray Goul­burn have gone to pri­vate eq­uity mar­kets but this has di­luted their co-op­er­a­tive struc­ture while cre­at­ing other prob­lems such as con­flict be­tween pro­duc­ers and in­vestors. This is ex­em­pli­fied by the cur­rent in­vestor class ac­tion.

Co-op­er­a­tives also strug­gle with banks that are re­luc­tant to lend as they do not un­der­stand or even dis­trust the co-op­er­a­tive struc­ture. Some also ar­gue that in­creas­ingly glob­alised free trade and ex­cess pro­duc­tion has de­pressed agri­cul­tural prices which im­pacts the mar­ket power of farmer co-op­er­a­tives to hold out for a good price.

Reg­u­la­tors also have an in­ter­est in trans­form­ing co-op­er­a­tive struc­tures into the cor­po­rate form for ease of reg­u­la­tion.

CHANG­ING LAND­SCAPE

The once proud farm­ers’ co-op­er­a­tives have trans­formed in Aus­tralia. While agri­cul­tural co-op­er­a­tives main­tain their pop­u­lar­ity over­seas, in Aus­tralia there are a num­ber of ex­am­ples of co-op­er­a­tives re­struc­tur­ing into, or be­ing taken over by, listed com­pa­nies.

Some ex­am­ples in­clude for­mer cus­tomer co-op­er­a­tive Pivot and for­mer pro­ducer co-op­er­a­tives such as Wes­farm­ers, War­rnam­bool Cheese and But­ter (now owned by the Cana­dian Sa­puto) and Bega Cheese (ASX listed in 2011).

Yet some ma­jor co-op­er­a­tives con­tinue in busi­ness, such as CBH Group (a bulk han­dling co-op­er­a­tive) and Norco, and there are a num­ber of other agri­cul­tural co-op­er­a­tives.

Some agri­cul­tural pro­ducer co-op­er­a­tives have, to a greater or lesser de­gree, ex­per­i­mented with doses of pri­vate non-farmer eq­uity in the hope of sur­vival. Un­for­tu­nately, the at­trac­tions of city cap­i­tal have in­evitably brought con­flicts with the old farmer mem­bers and an end to the purist model.

CON­FLICT OF OB­JEC­TIVES

There are some log­i­cal rea­sons why a co-op­er­a­tive struc­ture would trans­form into a cor­po­ra­tion, apart from the abil­ity to raise cap­i­tal.

A busi­ness hav­ing a cor­po­ra­tion-type struc­ture al­lows greater trans­parency on the health of the busi­ness through a listed share price. It also pro­vides greater liq­uid­ity and gives mem­bers the abil­ity to exit the busi­ness (by sell­ing their shares).

How­ever, there is a con­flict in pro­ducer co-op­er­a­tives be­tween the ob­jec­tives of pay­ing farm­ers the best price and gen­er­at­ing high­est re­turns for non-farmer in­vestors. For ex­am­ple, the greater the dif­fer­ence be­tween sale price and far­m­gate price of pro­duce, the greater the rev­enue for the cor­po­ra­tion.

Though this pro­vides an in­cen­tive to max­imise the sale price of pro­duce to re­tail­ers (which is good for farm­ers) there may also be a the­o­ret­i­cal in­cen­tive to min­imise far­m­gate price, as this also in­creases the re­turns to non-farmer in­vestors.

There are also com­pe­ti­tion is­sues in the cor­po­ra­tion model as farmer-owned pro­ces­sors could gen­er­ally rely on their farmer own­er­ship to avoid price ex­ploita­tion by the dis­trib­u­tor/pro­ces­sor.

How­ever, once the pro­ces­sor be­comes ex­ter­nally owned, there is the temp­ta­tion to use that mar­ket power against farmer sup­pli­ers (in the way some pow­er­ful su­per­mar­ket play­ers do). The ACCC then is left as the only pro­tec­tor in en­sur­ing there is suf­fi­cient com­pe­ti­tion be­tween pro­ces­sors to pre­vent this.

An­other prob­lem in cor­po­ra­tions is the fo­cus on short­term cap­i­tal. This is where peo­ple, such as day traders and spec­u­la­tors, seek quick re­turns and short term share price gains. This could be detri­men­tal to the long-term pro­ducer in­ter­ests of max­imis­ing far­m­gate price and rein­vest­ing in the co-op­er­a­tive.

There’s also a lack of in­ter­gen­er­a­tional eq­uity in the cor­po­rati­sa­tion of co-op­er­a­tives. Cur­rent mem­bers and in­sid­ers may get wind­fall gains at the ex­pense of ser­vices to fu­ture sup­pli­ers or cus­tomers.

This is be­cause busi­nesses built up over a long pe­riod by pre­de­ces­sor farm­ers, which would oth­er­wise pass to the next gen­er­a­tion, have their value crys­tallised and “cashed out” at an ear­lier point in time. This means the next gen­er­a­tion is likely (in a cor­po­ra­tion) to lose the ad­van­ta­geous ser­vice ar­range­ments sup­plied by the co-op­er­a­tive in the past.

Be­cause of all of these is­sues in trans­form­ing co-op­er­a­tives to cor­po­ra­tions, pol­i­cy­mak­ers need to be care­ful that their set­tings are fair to co-op­er­a­tive mod­els, to even the play­ing field.

Farm­ers also need to think care­fully about what struc­tures will pre­serve their long-term in­ter­ests. Given that ru­ral pro­duce (not in­clud­ing min­ing) ac­counted for A$4.1 bil­lion in ex­ports out of a to­tal of A$32.9 bil­lion in goods and ser­vices ex­ports in Septem­ber 2017 (or 12.5 per cent of to­tal ex­ports) Aus­tralia needs to get these struc­tures right.

Photo: Aus­tralian Scen­ics/Pho­toli­brary/Getty Im­ages

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