[This post first appeared in the Fairfax NZ Sunday Star Times on 13 July 2014]
Last week I wrote about PGG Wrightson and the challenges it faces. For their seeds division there are clear strategic options, but for the farm services division, the long term strategy remains challenging. Part of the reason is the competition they are facing from the farm services co-operatives, with Farmlands now dominant in the sector.
Farmlands has 56,000 members and an annual turnover exceeding $2 billion. This is more than double the New Zealand farm services revenue of its major investor-owned competitor, PGG Wrightson. The aim of Farmlands is to keep prices low for its members. This ensures that its investor-oriented competitor also has to keep its margins low.
The farm services sector is diverse. Services offered by both the co-operatives and investor-oriented companies include rural retail, most farm inputs, real estate, livestock trading, horticulture, and credit.
The origins of Farmlands go back some 50 years, to the formation of the Economic Trading Society in Hawkes Bay and of the Otago Rural Trading Society in Outram. Both were formed in response to farmer dissatisfaction with the investor-owned stock and station agents of those days. Over time, similar co-operatives formed elsewhere in New Zealand.
More recently, these co-operatives gradually came together to form the Combined Rural Traders (CRT) as the dominant South Island farm services co-operative and Farmlands as the dominant North Island co-operative. Then in 2013, these two co-operatives came together to form the national Farmlands Co-operative Society (‘Farmlands’), although there is still some CRT legacy co-branding.
There are at least two other farm services co-operatives of some importance in New Zealand. There is the Fonterra-owned RD1 which most dairy farmers use for many of their supplies. The RD1 turnover is not readily apparent from Fonterra’s accounts, but I expect that it is well over $1 billion per annum. And in the South Island there is the Ashburton Trading Society, known as ATS, which has a turnover of about $220 million.
The remarkable success of Farmlands and other farm services co-operatives is a function of the trust in which they are held by their members, who are also their shareholders. These members are the farmers and rural businesses of New Zealand. The trust is built on alignment of interests.
Profits are still essential to maintain the co-operative business, but dividends flow back as rebates on purchased goods rather than payments to outside investors. Farmers therefore have a sense that the co-operatives are looking after their interests. Membership of Farmlands costs only $500 as a one-off payment.
Given their importance to the rural economy, which in turn underpins so much of the broader New Zealand economy, it might seem surprising that the farm services co-operatives manage to fly beneath the radar in that broader economy. The name ‘Farmlands’ would have low recognition in the general community.
At least part of the reason for the low profile is that there are no public or institutional investors. The financial analysts therefore have no reason to analyse these companies given that no-one is going to pay them for their analyses. For the same reasons, there is little incentive for the print media to write about them. And the co-operatives themselves, with precise knowledge as to their membership and hence their clientele, see no need for either general media advertising or big public relations machines.
The relative merits of investor-owned companies versus co-operatives can generate lots of debate. At times the debate gets clouded by political perspectives relating to socialism versus capitalism. However, in the New Zealand context, all rural co-operatives are fully commercial entities, and politics should be considered irrelevant. New Zealand business co-operatives are indeed companies and are typically registered under the New Zealand Co-operative Companies Act of 1996. Many also have dual registration under the New Zealand Companies Act of 1993.
The defining characteristic of co-operatives is that they are owned by members who transact with the co-operative. What the co-operative structure does do is to fundamentally change the balance of power between relatively small scale purchasers and large scale suppliers. The key issues for co-operative success are business efficiency and retention of member loyalty. If the first of these is achieved, then the second follows naturally.
Across the farm services sector, there is now limited scope for further consolidation. The future will therefore be Farmlands and RD1 as the two major co-operatives, and PGG Wrightson as the dominant investor-owned company. Market share will probably ebb and flow, but at the moment it seems that the co-operatives have the advantage of dominant farmer support.