Thursday, March 28, 2024

Performing as a co-op should

Neal Wallace
Fonterra gets a pass mark from industry observers for its performance as a co-operatively-owned business.
Reading Time: 3 minutes

But they warn it cannot rest on its laurels given challenges connecting with 10,500 owners and plans for further investment in added-value and consumer products.

Fonterra Shareholder’s Council chairman Duncan Coull said Fonterra has performed as a co-operative should. It is owned and democratically controlled by members, it serves its members, returns surpluses to members and strives to operate profitably.

“Fonterra has performed but it is not perfect. But that is the reality of business.”

Shareholders should celebrate Fonterra and New Zealand’s 148-year co-operative ownership of the dairy sector, which outperforms dairy industries overseas.

Fonterra members have safeguards such as an independently assessed milk price and separate governance and representation, protection not available to dairy farmers elsewhere.

But Fonterra can do better and in two areas in particular, he said.

The tough economic conditions of the last three to four years have eroded shareholder belief and purpose in Fonterra.

“We need to re-establish purpose and vision in the industry and the co-operative so we stay relevant for current and future generations.”

Coull said the connection between shareholders and co-operative needs to be more than a blue sign with a supplier number at the gate but something that unites shareholders behind a clear purpose.

It is what gets people out of bed in the morning, the legacy they want to leave and a sense of belonging.

This connection needs to be attractive to future generations, a return to what the small, local co-operatives had before they started merging.

“It needs to be more than milk price and dividend,” he said.

Addressing the sense of connection could also stem Fonterra’s milk supply leaking to competitors.

Another issue to be addressed is the need for greater flexibility to help those entering and exiting the co-operative.

A sustained period of growth has provided shareholders with the ability to financially leverage their businesses but created entry and exit issues for members.

“You could say this is a challenge but I think it is an opportunity. The reason we have been around for 148 years is that we have always had challenges but we have had discussions and found solutions.”

Finology pincipal Alex Duncan, who previously worked in corporate finance at Fonterra and implemented Trading Among Farmers, said the co-operative has performed well given the demands made of it.

Fonterra is a much superior alternative to the option being considered of two competing co-operatives, he said.

It has had to deal with growing and substantial milk flows while also being what he calls the grid operator for the industry, providing milk to competitors and accepting milk from any shareholder.

That obliged the co-operative to fund and have processing capacity ready ahead of new milk arriving.

Duncan said Fonterra members have benefited from intentional measures to be transparent.

The establishment of TAF was in response to fears of large-scale share redemption but also to help establish a share price.

Similarly, the 2008 launch of Global Dairy Trade was a transparent process to hellp determine a milk price.

Both were successfully tested in the 2013 botulism scare and record prices for whole milk powder in 2014.

“They were tested and I think survived that test.”

Shareholders require a high payout to earnings ratio which that helps maintain Fonterra’s financial and processing discipline, he said.

That requirement includes any exceptional profits to be reflected in the high milk price.

Duncan believes some Fonterra shareholders could start to question the extent and nature of owning shares in companies such as Soprole in Chile and China’s Beingmate.

Auckland University business school senior lecturer Lisa Callagher, who has studied co-operatives, said Fonterra has performed financially, socially and environmentally.

She believes it will have a much greater role environmentally but is already active helping members, such as meeting Water Accord expectations.

“Co-operatives do provide functions well beyond their financial performance of their members.”

Socially, Fonterra’s recent Richie McCaw television advertisements are an acknowledgement the co-operative is not connecting with members as well as it had done previously.

The milk in schools programme is another example of it performing a socially responsible role.

Financially, Fonterra has performed reasonably well given the international pressures on export dairy prices.

Callagher said being a co-operative will not hinder Fonterra’s pursuit of growth, pushing more product in to the value-added space or investing offshore. 

The challenge is getting consensus from 10,500 individual members who have diverse risk appetite for such investments.

Co-operative Business NZ chief executive Craig Presland said Fonterra’s stock exchange listing of supplier investment shares is a successful way of raising capital while also retaining the criteria of being a co-operative.

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