[This post first published in the Fairfax New Zealand Sunday Star Times on 20 July 2014]
Last week I wrote about the Farmlands co-operative which, together with other co-operatives dominate the farm supplies sector. I suggested that farmers have a natural affinity for co-operatives. This is because these co-operatives, which are owned by the farmer members, exist for the purpose of working in farmers’ interests.
Whereas Farmlands and similar co-operatives such as RD1 and Ashburton trading Society (ATS) are merchant traders who have their own retail stores, there is also a range of other farmer co-operatives that supply specific and specialist inputs, either directly to farmers or through the merchants.
Most notable of the specialist supply co-operatives are the Ravensdown Fertiliser and the Ballance Agri-Nutrients co-operatives. They are of similar size, each with about $1 billion of annual revenue. Between them, they have over 90% of the fertiliser market.
Both fertiliser co-operatives have diversified in recent years, but in different directions. Ravensdown has diversified into farm chemicals, whereas Ballance has diversified into compound animal feeds. Both of the fertiliser co-operatives have complex origins.
The Christchurch-based Ravensdown was formed in 1978 when farmers became concerned that there was insufficient competition within the New Zealand fertiliser industry. The farmer politicians of the day successfully lobbied the Muldoon Government to facilitate purchase of the dominant Kempthorne Prosser (KP) Fertiliser Company, using producer board funds. The company then became farmer-owned.
In the last decade Ravensdown has tried to expand into Australia, where they operated as an investor-oriented company. However, in 2013 and 2014, after suffering debilitating losses across the Tasman, they have been consolidating back to their fundamental New Zealand interests.
The Tauranga-based Balance Agri-Nutrients can trace its origins back to the 1950s and the formation of fertiliser co-operatives in Southland and Bay of Plenty. However, it was a complex journey of purchases and amalgamations that finally led to the formation of Balance Agri-Nutrients as a co-operative in 2001. Even then it was a hybrid co-operative with 20% ownership by Norsk Hydro. These hybrid arrangements are often uncomfortable, and in 2005 Ballance moved to a fully owned farmer co-operative.
Both Ravensdown and Ballance manufacture superphosphate from imported raw materials. They also import urea and some other fertilisers. Ballance also manufactures urea here in New Zealand at its Kapuni plant.
The other major supply co-operative in New Zealand farming is LIC (Livestock Improvement Corporation). LIC is the dominant supplier of semen and herd testing services to the dairy industry. Originally an offshoot of the New Zealand Dairy Board, LIC was spun off as a separate co-operative at the time that the Dairy Board was folded into Fonterra in 2001. This was necessary given that LIC aims to service the whole industry, and not just the dairy farmer members of Fonterra. The main competitor to LIC in New Zealand is Dutch farmer-owned CRV Ambreed.
As well as farmer supply co-operatives, there are many agribusiness product marketing co-operatives. Of course the best known is Fonterra, which has essentially moved to a hybrid model with non- farm investors via the Fonterra Shareholders Fund. In contrast, Westland Dairy Co-operative and Waikato-based Tatua are two dairy co-operatives that have retained traditional co-operative structures with 100% farmer supplier ownership.
In the meat industry, there are two co-operatives which have a combined market share of just over 50%. At one stage Alliance had a hybrid structure which included non-farmer ownership, but now it has 100% farmer ownership. In contrast, Silver Fern Farms, which for most of its life was known as PPCS, has in recent years moved the other way from a traditional to a hybrid structure that includes non-farmer owned shares.
There is also a myriad of other agribusiness marketing co-operatives. The NZ Goat Co-operative has been a stand out success in recent years. They have managed a highly successful growth strategy, with a strong focus on market development for goat-based infant formula, alongside the growth in production. Other marketing co-operatives include Eastpack in the kiwifruit industry, the New Zealand Honey Producers Co-operative and the New Zealand Black Currant Co-operative.
Co-operatives have one outstanding advantage relative to their investor-owned competitors, but also an Achilles heel. Their advantage is that farmers like dealing with co-operatives because they feel that the co-operatives are on their side. Co-operatives can change the balance of power within the value chain and give more economic power to farmers.
The Achilles heel is that co-operatives have nowhere to go for new equity when things turn rough. Co-operatives therefore always need to retain sufficient funds to grow the business from within. Also, a strong governance team is needed to keep an oversight of entrepreneurial management who sometimes beat to a different drum.
When internal funds are insufficient for growth, there is always the temptation to go the hybrid route and bring in outside investors. However, that can be a rocky path, with inevitable tension as to how the pie should be shared between the different groups.