The View From Level 3

Bank report on rural co-ops proves sadly lacking

Posted by Ramsey Margolis on 29 September 2009 | 0 Comments

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In his eight-page report A Financial Commentary on New Zealand Rural Cooperatives, National Bank rural economist Kevin Wilson demonstrates an understanding of cooperatives which might not be shared by co-op members.

The title entices. Finally, it seems, mainstream economists are taking cooperatives seriously. It will, however, sadly disappoint those who are co-op shareholding members.

The author examines publicly available information on nine significant cooperative businesses: Fonterra, Westland, Tatua, Silver Fern Farms, Alliance Group, Ballance Agri-Nutrients, Ravensdown, CRT and Farmlands, dividing them into what are described as four “natural groups”:

● dairy – Fonterra, Westland, Tatua
● meat processors – Silver Fern Farms and Alliance Group
● fertiliser manufacturers – Ballance Agri-Nutrients and Ravensdown
● merchandise cooperatives supplying farm inputs and services – CRT and Farmlands

On the surface this appears logical, but actually is not useful in understanding what motivates people to join and, more importantly, continue being involved with them, and why they are so successful.

To better understand what drives these nine businesses they should be seen as either producer co-ops or purchasing/shared services co-ops.

● Producer cooperatives are owned by those who produce similar types of products: farmers who milk cows, raise sheep, deer and cattle, or grow crops, or by artisans and craftspeople. By banding together they are able to leverage greater bargaining power with buyers. They also combine resources to market and brand their products more effectively, improving the incomes of their members.

Dairy co-ops Fonterra, Westland and Tatua along with meat processors Silver Fern Farms and Alliance Group are the producer cooperatives examined in this report.

● Purchasing and shared services cooperatives are owned and governed by independent business owners who join together to enhance their purchasing power, lowering their costs and improving their competitiveness and ability to provide quality services. They operate in all sectors of the economy.

This accurately describes the fertiliser and the farm supply co-ops. At the same time it describes a large number of non-agricultural co-ops, such as Orb Communications, Mitre 10, Independent Timber Merchants and Foodstuffs.

Putting these nine cooperatives into two rather than four groups would therefore permit us a far clearer understanding of their performance.

I would also criticise the author’s use of profitability as a measure of performance for cooperatives.

Unlike investor-owned firms (IOFs), cooperatives are not profit-maximising entities. They need to make a fiscally prudent level of profits and allow for sufficient retained earnings, but more than that and they would not be serving their members well.

As evidence of this, I’d hazard that while many New Zealanders know Fonterra’s milk price, very few indeed would be able to say how much profit the cooperative made in any given year. It’s just not a relevant statistic.

For co-op members, aside from the level of payment for what they produce or rebate on purchases, the best measure of performance is to look at what is happening in the market place outside the co-op.

Look, for instance, at the competition between farm supply businesses in South Canterbury – between co-op and co-op, and between co-ops and IOFs. This is not something that is easily measurable.

Also, IOFs maximise profits by externalising costs, worrying less for instance about pollution than would a locally-owned cooperative which is part of a community, and which has a direct interest in not messing up their own back yard.

So why has this report been produced? At a guess, because as The National Bank is New Zealand’s largest rural bank, their owner, Australia’s ANZ Group, are concerned about how much money they can repatriate to fatten a precarious balance sheet.

(ANZ National Group proudly claim on their website that, based on their profits and assets, they are New Zealand’s largest company.)

This document is thus best understood as a moneylender’s risk analysis. In the current financial recession, the risk from lending to a cooperative is clearly more political than financial, seeing as a bank has the first call on the co-op’s revenue while the owners who transact with it are unsecured creditors.

Let’s face it, with Fonterra’s milk payout being in the region of $10bn, there is, in reality, little or no problem for the banks.

A realistic examination of the financial risk from these cooperatives would show that they are likely to survive with their assets more or less intact long after individual farmers who own the co-ops go under, in particular those at the margin who find it more difficult to survive in this recession.

Should you read this report? Most definitely. It could in fact usefully be discussed by co-op members in small groups.

However, as well as analysing annual reports and financial statements, a useful exercise in itself, this report shows that your cooperative businesses remain, sadly, misunderstood.

Download the report from HERE.●

– from the April/May 2009 Cooperatives News