First Milk is to hold a Special General Meeting on 1 July asking members to approve a set of rules creating a new class of share, as part of a drive to improve the organisation’s financial stability.
The farmer-owned dairy co-operative is the 10th-largest co-op in the UK, with a turnover of £460,087,000 in the year ended 31 March 2015. If approved, the proposed new class of share (C Preference shares) would lead to changes in how members’ and former members’ capital is held.
AHDB Dairy, a division of the Agriculture and Horticulture Development Board (AHDB), which works to improve the sustainability of British dairy farming, has published a report looking into how the changes would impact members and ex-members.
“At the moment, members have money deducted from their milk cheque, at a rate of 0.5ppl, until they reach their individual capital target,” says the report. “The capital target is set at 7ppl of a member’s average annual milk production. Once capital has been deducted, a member can only access money in their capital account if they leave the co-operative. Even then, the repayments occur a number of years after the member has left, and are still subject to First Milk’s agreement.”
During its recent financial difficulties, First Milk has deferred the repayment of capital to its former members.
The proposed changes, which have been unanimously agreed by the board, would see the capital accounts converted into C Preference shares. As a result, any farmer leaving First Milk would be able to get capital back by selling their C Preference shares to a continuing First Milk member.
First Milk co-operative reshapes its capital structure
However, AHDB Dairy says the downside is that the value of capital will be determined by negotiation between the farmer looking to sell and the farmer looking to buy.
“There is no guarantee a farmer would receive all of their capital back,” says the report.
“The new policy will also allow an existing member to cash in part of their capital account, provided they retain at least 50% of their capital target, and they can find another member willing to buy the shares off them. Alternatively, a member could reach their capital target quicker by purchasing C Preference shares from a farmer looking to sell, potentially at a discounted price.
“The key benefit to First Milk is the co-op will no longer need to find the money to repay capital to ex-members – as a result, significantly strengthening and stabilising its balance sheet.”
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