Importance of agribusiness co-ops
LAST WEEK I wrote about the Farmlands co-operative which, together with other co-operatives, dominates the farm supplies sector.
I suggested that farmers have a natural affinity for co-operatives. This is because these co-ops, which are owned by the farmer members, exist for the purpose of working in farmers’ interests.
Whereas Farmlands and similar co-operatives such as RD1 and Ashburton Trading Society (ATS) are merchant traders who have their own retail stores, there is also a range of other farmer cooperatives that supply specific and specialist inputs, either directly to farmers or through the merchants.
Most notable of the specialist supply cooperatives are the Ravensdown Fertiliser and the Ballance AgriNutrients cooperatives. They are of similar size, each with about $1 billion of annual revenue. Between them, they have over 90 per cent of the fertiliser market.
Both fertiliser co-operatives have diversified in recent years, but in different directions. Ravensdown has diversified into farm chemicals, whereas Ballance has diversified into compound animal feeds. Both of the fertiliser co-operatives have complex origins.
The Christchurch-based Ravensdown was formed in 1978 when farmers became concerned that there was insufficient competition within the New Zealand fertiliser industry. The farmer politicians of the day successfully lobbied the Muldoon government to facilitate purchase of the dominant Kempthorne Prosser (KP) Fertiliser Company, using producer board funds. The company then became farmerowned.
In the last decade Ravensdown has tried to expand into Australia, where they operated as an investor-oriented company. However, in 2013 and 2014, after suffering debilitating losses across the Tasman, they have been consolidating back to their fundamental New Zealand interests. The Tauranga-based Ballance Agri-Nutrients can trace its origins back to the 1950s and the formation of fertiliser cooperatives in Southland and Bay of Plenty. However, it was a complex journey of purchases and amalgamations that finally led to the formation of Ballance AgriNutrients as a co-operative in 2001. Even then it was a hybrid co-operative with 20 per cent ownership by Norsk Hydro. These hybrid arrangements are often uncomfortable, and in 2005 Ballance moved to a fully owned farmer co-operative.
Both Ravensdown and Ballance manufacture superphosphate from imported raw materials. They also import urea and some
Co-operatives give more economic power to farmers.
other fertilisers. Ballance also manufactures urea here in New Zealand at its Kapuni plant.
The other major supply cooperative in New Zealand farming is LIC (Livestock Improvement Corporation). LIC is the dominant supplier of semen and herd testing services to the dairy industry. Originally an offshoot of the New Zealand Dairy Board, LIC was spun off as a separate cooperative at the time that the Dairy Board was folded into Fonterra in 2001. This was necessary, given that LIC aims to service the whole industry, and not just the dairy farmer members of Fonterra. The main competitor to LIC in New Zealand is Dutch farmer-owned CRV Ambreed.
As well as farmer supply cooperatives, there are many agribusiness product marketing co-operatives. Of course the best known is Fonterra, which has essentially moved to a hybrid model with non-farm investors via the Fonterra Shareholders Fund. In contrast, Westland Dairy Co-operative and Waikato-based Tatua have retained traditional co-operative structures with 100 per cent farmer supplier ownership.
In the meat industry, there are two co-operatives, which have a combined market share of just over 50 per cent. At one stage Alliance had a hybrid structure which included non-farmer ownership, but now it has 100 per cent farmer ownership. In contrast, Silver Fern Farms, which for most of its life was known as PPCS, has in recent years moved the other way from a traditional to a hybrid structure that includes non-farmer-owned shares.
There are also myriad other agribusiness marketing cooperatives. The NZ Goat Cooperative has been a standout success in recent years. They have managed a highly successful growth strategy, with a strong focus on market development for goat-based infant formula, alongside the growth in production. Other marketing cooperatives include Eastpack in the kiwifruit industry, the New Zealand Honey Producers Cooperative and the New Zealand Blackcurrant Co-operative.
Co-operatives have one outstanding advantage relative to their investor-owned competitors, but also an Achilles heel. Their advantage is that farmers like dealing with co-operatives because they feel that the cooperatives are on their side. Cooperatives can change the balance of power within the value chain and give more economic power to farmers.
The Achilles heel is that cooperatives have nowhere to go for new equity when things turn rough. Co-operatives therefore always need to retain sufficient funds to grow the business from within. Also, a strong governance team is needed to keep an oversight of entrepreneurial management, who sometimes beat a different drum.
When internal funds are insufficient for growth, there is always the temptation to go the hybrid route and bring in outside investors. However, that can be a rocky path, with inevitable tension as to how the pie should be shared between the different groups. Keith Woodford is professor of farm management and agribusiness at Lincoln University. His archived writings can be found at http:/ /keithwoodford.wordpress.com