Praise and advice for new dairy co-op

By PHILIPPA STEVENSON agricultural editor

A report commissioned by the proposed dairy mega co-op has praised the company's international strength, but says it should be fairer to sharemilkers.

Co-operative industry specialist Dr Adrie Zwanenberg, of agribusiness bank Rabobank, was commissioned by GlobalCo to examine whether the dairy company would be a "true co-operative."

The report, made public on Friday and due to go to the GlobalCo board this week, has few reservations about the company after reviewing its draft constitution and other documents.

Dr Zwanenberg agrees it will be a "true co-operative."

However, the report says GlobalCo needs to further develop and explain a system for determining fair value entry and exit to the co-op, be more explicit about a commitment to a good milk price for farmers and acknowledge its long-term obligation to collect and process members' milk.

It also says allowing the 5400 herd-owning sharemilkers, who produce about 40 per cent of the country's milk, to hold shares in the company alongside landowning farmers would make it a fairer co-operative.

Dr Zwanenberg has not made any recommendation on the issue, but said on Friday that the company was talking about the concept.

The cabinet is expected to determine today whether the Government will decide the industry's future structure, or refer a proposed merger between Kiwi Dairies and New Zealand Dairy Group to the Commerce Commission.

The merger and amalgamation of the Dairy Board industry exporting arm would create GlobalCo.

The cabinet is also expected to consider whether the new company will be fair to the 14,000 milk producers, and what provisions the companies will make to ensure competition on the domestic market.

Dr Zwanenberg said co-operatives were ideal for the dairy industry because of the daily frequency of milk production, milk's high perishability and the speed at which it was processed into thousands of products.

"These factors mean that dairy farmers are forced to develop and secure relationships with players downstream. This desire to secure the processing and marketing of the milk is not due to emotions but to plain technical-economic motives.

"For the sake of their own businesses, the farmers must concern themselves with the next link downstream in the production chain."

He questioned the benefit to farmers of competition for their milk supply.

His study suggested dairy farmers were more likely to look for a strong company which could guarantee future milk collection and return good value, "and the bigger and stronger the company the better it could compete with other companies."

"That is the first and foremost priority of dairy farmers. To have two companies just to be able to [have the option to] deliver to another company is of minor priority for a dairy farmer."

Dr Zwanenberg tested GlobalCo against other dairy co-operatives, including the world's largest, Dairy Farmers of America, and against co-operative theory.

He concluded that GlobalCo was the only co-op to focus on share value while neglecting to mention the aim of striving for good milk price.

"However, it is the only co-operative which is obliged to provide transparency on milk prices and account for the value gained from its value-added activities."

GlobalCo needed to be clearer about the method of calculation for its fair value entry concept, the way the commodity business and the added-value business would be dealt with in the valuation process, the method of calculation of the actual milk price, and the difference between the actual and theoretical milk price used in the valuation process.

Capacity notes, a mechanism for providing additional capital to match the growth in milk supply, were unique "but fit perfectly with the theoretical concept of co-operatives."

Exit conditions varied between co-operatives but GlobalCo seemed to handle exit payments in the right way by issuing tradeable capital notes for the fair value of shares and buying back capacity notes at issue price.

"In the future, if GlobalCo wishes to extend its capital base to finance its international activities, it should probably adopt a middle course position," Dr Zwanenberg said.

"This would ensure that not all activities are financed for the full 100 per cent by member capital, but only those that are directly associated with the production of milk by member firms.

"While GlobalCo's foreign processing facilities are not directly associated with the processing and marketing of members' milk, these could be largely financed by a separate company [in which] a part of the risk-bearing capital might be contributed by non-members.

"By using this construction, further expansion and development does not have to be frustrated by lack of capital, and the co-operative character of the firm remains intact."