Answers for NZ dairying there for taking says visiting expert

By PHILIPPA STEVENSON agricultural editor

Ready-made solutions on issues ranging from raising capital to unbundling returns are there for the dairy industry's taking, says United States co-op expert Professor Bruce Anderson.

Professor Anderson, director of Cornell University's cooperative enterprise programme, has worked primarily with agricultural cooperatives for more than 20 years, in the past year advising companies with sales of more than $US42 billion ($100 billion).

While in New Zealand briefly last week, he was questioned on claims by dairy industry leaders here that in establishing a mega co-op they were presented with unique issues which had no "off-the-shelf" solutions.

Both big companies, New Zealand Dairy Group and Kiwi Dairies, have said the complex nature of the issues they are trying to resolve are among reasons for the failure of their merger talks in March, and a subsequent lack of progress.

Professor Anderson was sceptical of the New Zealand industry's claim of uniqueness.

"There's not too much in the world that hasn't been done before," he said.

"It's completely possible [there are ready-made solutions]. It's only limited by one's imagination. It's probably just a small tick-off of something that already exists out there, someplace."

One of the most vexed issues for the industry has been the Commerce Commission's requirement for shareholders to have fair value entry and exit of the co-op.

Traditionally, shareholding in the dairy cooperatives has been on a nominal basis calculated on the amount of milk farmers supply. Returns, no matter how they have been earned, are all bundled into a payment for their milk.

As a result, the value of other investments made by the manufacturing companies or their Dairy Board marketer is reflected in the value of shareholders' farms.

But as earnings increasingly come from activities unrelated to the supply of New Zealand milk, the bundling of earning streams into the milk payment, and the capitalisation of off-farm investment into farm value becomes more and more problematic. Dairy farm value would get further out of kilter with other land values, as well as making it almost impossible for new farmers to buy into the industry.

And it makes little sense for farmers to produce more milk to get greater returns when in the future much of their earnings could come from milk produced in other countries, or from other investments.

Shareholdings that better reflect farmers' investment in the industry, and on which they receive a dividend, would go some way to solving the problem but also raise another.

Farmers want to retain total ownership of their industry, and shares traded only among themselves would not realise their true value.

Leaders are also concerned that farmers wanting to cash up their more valuable shares and leave the industry immediately might cripple the company.

Professor Anderson said that in the US, the 600-member Agrilink Foods fruit and vegetable co-op, which had a turnover of $US1.2 billion last year, had developed a shareholding system that solved two of the biggest problems in cooperative finance: liquidity and fair value.

It had three types of equity: common stock, retains and preferred stock.

Common stock was the equivalent of dairy company shares. They were bought up front in order for a grower to be a member of the co-op, purchased in proportion to supply and traded only among members.

Fair value was maintained because the shares were bought and sold at the present cost of production rights. For instance, 30 years ago a farmer might have bought his shares for $10 for every tonne of sweetcorn he produced. But today, if sweetcorn was selling for $300 a tonne, he could retire and sell the shares to a new producer for the going amount, making a $290-a-tonne profit.

If the co-op wanted more supply it issued more shares at the going rate, Professor Anderson said.

Retains and preferred stock were the profits shareholders got back at the end of the year over and above the price paid for their supply.

The retains - the patronage refunds the co-op declared - were retained for only five years. During that time they had no dividends, but were transferable to anyone and, in fact, were traded on a market managed by several regional brokers.

Because there was no dividend they had discounted value, but were often traded among growers to reduce their tax because they could claim a tax loss if they had paid, say, $30 for $100 worth of stock.

After five years, they were converted into preferred stock which had a par value of $25. They had no voting rights and were traded freely on the Nasdaq exchange.

Professor Anderson warned against co-ops becoming public companies, saying there had been no successful examples in the United States.