Co-op the way to go

By PHILIPPA STEVENSON agriculture editor

It's easy to lose sight of just who and what is the Primary Producers Co-operative Society.

The long form name of the Dunedin-based meat company better known as PPCS is seldom used.

What's more, in its messy takeover bid for listed Hawkes Bay meat company Richmond, the transgressions of the co-op's executives so harshly penalised by High Court Judge William Young seem hardly consistent with the staid decorum normally associated with a farmer co-operative.

When it comes to the ongoing Richmond saga, PPCS' behaviour more closely resembles the knockdown, take-no-prisoners actions of 1980s corporate raiders. That may be because some of its confederates, such as Paul Collins, were in the thick of 80s excess as Brierley henchmen. But according to at least one PPCS sympathiser, the co-operative nature of the company is the nub of the bid for Richmond.

PPCS commissioned Guenther Mueller-Heumann, emeritus professor of marketing at Otago University and now an Auckland business consultant, to explain his viewpoint on the takeover.

This was not a normal takeover battle but a bid to ultimately transform Richmond into a co-operative, owned by Hawkes Bay farmer-suppliers, Mueller-Heumann said.

"From a Hawkes Bay farmers' perspective that means an opportunity to gain control over Richmond, not on the basis of their current cash and wealth, but on the basis of future productivity," he said.

"With the full takeover of Richmond by PPCS, Hawkes Bay red meat farmers could well gain control - like their dairy counterparts already have through Fonterra - over the added value past the farm gate."

Right or not about the motives of PPCS, and the benefits to Hawkes Bay farmers of supplying a co-operative instead of a listed company, Mueller-Heumann did identify the great attraction of co-operatives - member control. A co-operative belongs to and operates for the benefit of its members - people who have organised to provide themselves with the goods and/or services they need.

Members invest in shares to provide capital. Net profits left after bills are paid and money has been set aside for future needs are returned to members on the basis of their transacting with the co-operative, not the amount of investment.

In the dairy industry, farmers get a payout based on their supply of kilogram of milksolids. In the meat industry rebates and bonuses are paid on top of the payment for stock, and fertiliser co-ops distribute annual rebates on the basis of fertiliser purchases.

The earliest record of co-ops in New Zealand are farmer trading co-ops in Timaru and Christchurch in 1881. While most often identified with agriculture, co-ops are found across many business sectors.

The 21-year-old NZ Co-operatives Association has around 40 members, two-thirds agriculturally based businesses but a growing number in other sectors.

Non-agricultural members include Foodstuffs, the country's largest supermarket chain in which the grocery operators own the grocery wholesale business; PSIS, a national network of financial services; Plumbing World, a chain of plumbing stores owned by the NZ Plumbers Merchants, a co-op of plumbers and related trades; Interflora, a flower seller and part of a world network; Capricorn, a panelbeater co-op with headquarters in Australia; MTF, a vehicle finance business; Vehicle Inspection NZ, an imported motor vehicle and related services business.

Dairy Farmers of America, with which our big dairy co-op Fonterra has a number of partnerships, is the largest co-op in the world, with 26 per cent of American milk supply.

America's National Co-operative Business Association reports that in the US 47,000 co-ops serve 100 million people - nearly 40 per cent of the population.

The roughly 12,600 US credit unions have more than US$280 billion ($510 billion) in assets, accounting for about a third of all deposits, and almost 65 million members.

There are housing, medical, childcare, and grocery co-ops. Restaurant supply purchasing co-ops save money and provide products for franchisees of such fast-food chains as KFC, Dunkin Donuts, Taco Bell, and Burger King.

Co-operatively owned hardware wholesalers supply virtually all of the independent US hardware stores, nearly a thousand rural electric co-ops operate more than half of the electrical lines and telephone co-ops serve 1.2 million people.

Fonterra, formed in October 2001 from the merger of two dairy processing co-ops and the statutory single-selling Dairy Board, is not only New Zealand's biggest co-op but also its biggest company, twice the size of second-ranked Telecom.

Fonterra chief executive Craig Norgate fields many questions about co-ops.

People either do not understand them at all or want to know about Fonterra because it is regarded as successful in size and scope, as well as having addressed some of the thorny issues that come with the co-op territory.

Former Treasury director Phil Barry, a member of the disbanded Producer Board Project Team which evaluated the likes of the Dairy Board, easily pinpointed the reservations about co-ops - lack of liquidity in the shares for the shareholder, co-ops' limited access to capital, the difficulty for shareholders to monitor a large and diverse company and, compared with a listed company, the lack of a transparent indicator of performance - a share price.

Barry, now a principal of corporate finance advisers Taylor Duignan Barry (his associate Geoff Taylor previously headed the Dairy Board's treasury), acknowledged that different organisational forms suited different businesses at different times.

"Ultimately it is an issue for the shareholders to decide," he said.

"In the case of dairy, milk is a perishable product that has to be picked up at the gate and the farmer wants to be paid a reasonable price. Another advantage is that the company can be monitored by people who understand the industry."

But while performance transparency was the business of shareholders only, they needed to be aware of the consequence of their choices, Barry said.

"For example, there have been estimates that the lack of liquidity in closely held co-ops can result in discounts in the value of the shares of from 30 to 50 per cent."

Fonterra may make good sense when it comes to picking up milk. "But when you start thinking about the diverse value-added operations associated with milk - and offshore operations are collecting, say, a South American farmers' milk - you have to wonder whether [a co-op] is necessary and desirable.

"Is that achieving the farmer shareholders' objectives? Ultimately the risks come home to the New Zealand shareholders."

Barry said dairy farmers were aware of the issues but he questioned whether they were fully aware of what they had at stake.

"Farmers need to be asking themselves whether the capital they have tied up in Fonterra is earning them a decent return, if the benefits of the co-operative system outweigh the costs and if there are other ways."

Some co-ops had become hybrids to retain the benefits of a traditional co-op while getting the benefits of the more open corporate model.

"The advantage of that is that it allows access to capital, allows shareholders who are not farmers to bear some of the risk but it can still allow the farmer shareholders control if they still want it."

Big Western Australian listed company Wesfarmers, with interests ranging from insurance to coalmining, sprang from a rural service co-op dating from 1914, and Ireland's Kerry Group, which started life as a small dairy co-op, had transformed into a listed food company.

At Fonterra, Norgate said the flipside of the constraints on access to capital was a tight focus "on what you are there for".

It also acted as a brake on "taking the business into fields that might not be in members' interests".

Fonterra was forced to plan in a long-term way for its capital requirements but, he said, access to capital was not a constraint on the company.

"It also forces you to think long term about how capital structure may evolve. So you've seen a lot of changes in our model to what it was 10 or 12 years ago, and I'm sure you will continue to."

Fonterra had a number of joint ventures, undertaken because they were the best option "but the reality is that it does make your capital go a lot further", he said.

"Normally when you start separating off the value-added activities you're embarking on a path that means you ultimately sell them."

Co-op governance, said Norgate, was a strength. Critics might say it was bedevilled by politics and lacked breadth of expertise but members' interests were totally aligned with the firm's, "which is why you've got co-ops in the first place, because you've generally got market failure".

Fonterra, for example, had 14,000 medium-size business people who relied on the company for up to 90 per cent of their revenue. That made them very active investors "and they don't appoint fools to administer their business for them".

The company had a close affinity with shareholders' interests. "One of the arguments against [co-ops] can be that there is too much of that but not in my own experience." Instead there were "liberal doses" of common sense and a commitment to the business.

A key advantage of a co-op was a longer planning horizon. A New York Stock Exchange-listed company, for instance, had to report quarterly earnings, which could partly be to blame for failures such as Enron, he said. Co-ops are said to move slowly but they stayed the distance "because they are focused on the long term and less inclined to jerk around in response to short-term issues".

Vital statistics

NZ's first co-ops formed in Timaru and Christchurch in 1881

The NZ Co-operatives Association has 40 members

NZ's biggest company, Fonterra, is also the biggest co-op

Dairy Farmers of America is the world's biggest co-op

In the US 47,000 co-ops serve 100 million people