Lost in the maize? The future for Aussie grain cooperatives is bleak

Moving from cooperative to corporation could lure foreign investment for grain marketing group CBH, funding its aggressive expansion plans. AAP/Dan Peled

Lost in the maize? The future for Aussie grain cooperatives is bleak

Long a favoured model for Australian farmers operating in a risky and precarious industry, cooperatives seem increasingly anachronistic as greater numbers move toward demutualisation. This is a mistake.

Nowhere are the stakes higher than at the billion dollar grains marketing and logistics cooperative CBH, which is being pushed to corporatise and “tap equity and debt markets to fund growth plans”.

Archer Daniels Midland’s failed $3.4 billion bid for CBH’s bigger rival GrainCorp put growers on notice that there were substantial opportunities for foreign investment to fund the cooperative’s aggressive growth plans. However, the managing director Andrew Crane said a commitment to the current structure remained.

Ultimately the number of cooperatives is diminishing. In some ways, this decline may be a reflection of an ageing and reduced membership. It could also be fuelled by strong balance sheets that persuade members to give up ownership and control in return for a one-off cash payments.

Cooperatives may seem a natural development when numerous, small farmers compete to supply large processors or distributors, so why is it that Australian farmers may opt for other structures?

Farmers abandoning cooperatives

In the absence of government assistance, the inherent risks of farming have led many farmers to leave the land, as well as discouraged newcomers. The remaining members may want to give preference to retaining profits (or cashing out) rather than reinvesting towards the growth of the cooperative enterprise.

History has also played a critical role. Inappropriate arrangements of single-desk marketing boards with monopoly selling powers have made Australian farmers reluctant to adopt the idea of collective arrangements.

The oil-for-wheat scandal involving the Australian Wheat Board, for instance, left wheat growers without a single desk to export their crops and many were greatly affected financially.

Debt also prompts farmers wanting to get out of a cooperative structure. The difficulty with some arrangements is that members are not able to borrow against their equity in the venture.

This is one of the arguments given to explain why some farmers should consider the corporatisation of CBH, and in particular the “non-distributive” arm of the business, which doesn’t redistribute surplus to its members. CBH adopted that structure following a review process, primarily for tax purposes.

Unfortunately, Australian laws have hindered the growth of cooperatives rather than assisted it. Companies, once registered in a state, could conduct business all over the country without any further registration, but cooperatives were required to be registered in every state in which they intended to operate.

This only changed in 2012.

On the other hand, the government in New Zealand has been instrumental in assisting the establishment of cooperatives.

Alongside traditional forms of cooperative enterprises, some New Zealand businesses have adopted a hybrid form – half company and half cooperative. In some instances, businesses can be registered under both the corporate and cooperative acts, which encourages greater investment while keeping decision-making in the hands of members.

Responsible for 30% of the world’s dairy exports, New Zealand’s Fonterra cooperative recently partially listed on the New Zealand Stock Exchange. Public investors were able to buy economic rights through a shareholders’ fund, but the company remains fully controlled by the farmers, who have a monopoly on voting rights.

As a result, cooperatives are prevalent in New Zealand’s agricultural, food and beverage markets.

Pursuing growth

Cooperatives don’t need to corporatise to be successful or to grow. New Zealand’s cooperative sector holds 70% of the meat market, 60% of the farm supplies market, and 80% of the fertiliser market, without any support from government.

Like any other business, these international cooperatives continue to look for growth strategies.

Although financing growth is often presented as a challenge faced by cooperatives, international (and national cooperatives) have access to a wide range of options.

On the one hand, cooperatives can draw from non-redistributed benefits or call upon their members to finance investments. Alternatively they may borrow against assets.

Financial instruments are also available to cooperatives raising capital. Hybrid equity titles can be issued to non-members offering a guaranteed rate of return without voting rights. They could issue debt securities on international markets.

Mergers and acquisitions are also proven strategies for growth. Cooperation between cooperatives, in particular for those vertically associated, can free capital for other purposes.

Some business analysts are of the opinion that growth is not only a question of raising capital but it is also about innovation, operational efficiencies, and partnerships. Strategic leadership may be just as important as access to finance.

It is clear that farmers have an incentive to support the cooperative model when it provides them with benefits that they would not obtain by acting independently. In a cooperative arrangement, they are in a position to counter powerful market players and minimise market risks.

And these arrangements generally translate into higher incomes, greater support and better representation for farmers. A brief comparison between the Australian and New Zealand dairy industries shows that a New Zealand dairy farmer (in a cooperative structure) receives 50% more per litre of milk than their Australian counterpart.

The success of large international cooperatives such as Fonterra or the Fortune 100 listed CHS in the US is a reminder that cooperatives can be a successful structure, and that cooperation is not incompatible with competition.