According to Co-operatives UK’s figures for 2016, the UK has 416 co-ops in agriculture, with 134,566 members and a collective turnover of £5.8bn. Farmer co-ops employ 7,765 people.
As a whole, agriculture is facing difficult times, with farmers struggling to cope with the uncertainty of Brexit, volatile commodity prices, regulation and increasing costs of employment.
“In certain sectors, the most prominent of which is the dairy industry, this is having a devastating effect on farmers,” warns Co-operatives UK, the umbrella body for the country’s co-op sector.
This uncertainty has sparked a crisis in the global dairy industry, which is also facing a changeable market marked by globalisation and innovation.
In the UK, this led to a restructure at First Milk Co-operative, which was forced to make redundancies and reduce payments to farmer members after hitting trouble in 2015.
There have also been governance reviews at Australia’s CBH and Murray Goulburn – the latter of which has faces challenging times.
New Zealand dairy co-op Fonterra has also shaken up its governance after a nine-month review, and wants expand its co-operative structure abroad under its Dairy Partners America venture in a bid to secure milk supplies from South America.
Chair John Wilson has told the press he would like to see “some sort of sub-co-operative structure”, tailored to the needs of each country, while maintaining the rights of New Zealand farmers who have an average of NZ$900,000 invested in Fonterra.
Fonterra has reported a 2% lift in its net profit after tax to NZ$418m for the half year to January 31, with director John Monaghan sounding a confident note despite the turbulent market. “We talk now about volatility in global milk prices being the new normal,” he told reporters, “But this means opportunity for Fonterra.
“China is our largest market. The countries that don’t have enough milk will always look to the countries that have more milk than they need to close the gap.”
The co-op – owned by 13,000 farmers and the world’s largest exporter of dairy products – has invested in efficient new plants; moved to flexible production to match changes in demand and fluctuating costs; switched production from low-margin to high-value products; and is aiming for $35bn revenue in 2025.
Meanwhile, in Argentina, SanCor dairy co-op has been working with the government to develop a new device, the credit invoice, and set up a countercyclical fund of 800m pesos to help farmers weather price volatility.
But there is still expansion in the dairy sector. Ireland’s Glanbia Co-op voted last month to establish a joint venture with a plc to expand its global reach. The co-op has agreed to pay €112m to acquire a 60% shareholding in Glanbia plc’s Dairy Ireland division, which consists of Glanbia Consumer Products and Glanbia Agribusiness. The joint venture, Glanbia Ireland, will offer a diverse portfolio of ingredients, leading agri and consumer brands, in a global market.
It will operate a 2.4 billion litre milk pool, with revenue of €1.5bn, 11 processing plants, 54 agri branches and over 1,800 employees.
And it will own a range of leading consumer and agri brands such as Avonmore, GAIN Animal Nutrition, Kilmeaden Cheese, Premier Milk, mymilkman.ie and Wexford.
There is also positive news outside the dairy sector, with co-ops in arable farming enjoying an upturn. GrainCo, East of Scotland Growers and United Oil Seeds have all enjoyed standout years, says Co-operatives UK, with the latter growing by a third and now turning over £165m a year.
Britain’s biggest agri co-op, Openfield Group, offers services in seed, fertiliser, grain and storage and, with 2,693 members, has a turnover of more than £743m.
The other main sectors are agricultural suppliers, such as Mole Valley Farmers and Fram Farmers, and horticulture. Produce-marketing co-ops and producer organisations play an important role in the fresh produce sector, with co-op businesses such as Berry Garden Growers turning over £212m.
Another important player, the Green Pea Company, was created in 2006 from a merger of five smaller growers to supply Birds Eye. Its 240 members annually harvest 5,000 tonnes peas over approximately 10,000 hectares (25,000 acres) in East Yorkshire and North Lincolnshire.
Co-operatives UK sums up the benefits of the co-op model to agriculture as:
- Control over crucial parts of the supply chain
- Cost savings through economies of scale
- Tax efficiency through ‘mutual trading status’
- Sharing knowledge and best practice
“Joint ventures, share/contract farming and producer organisations (POs) are all different forms of co-operation and will offer opportunities and benefits to different owners,” it says.
James Graham, chief executive of the Scottish Agricultural Organisation Society (SAOS), the umbrella body for Scottish agri-food co-ops, agrees.
“Farmers co-operate to gain scale advantages not available to an individual farmer – be that buying, selling, or taking a stake or ownership in other parts of the supply chain to cut out intermediaries – and co-operate to pool resources and risks,” he said.
“The more concentrated supply chains become, the more necessary it is for farmers to react to strengthen their position to satisfy markets and retain some negotiating leverage. The more volatile the world market becomes, the more farmers need to act to increase their resilience.”
And the sector will have to remain dynamic. Co-operatives UK predicts more consolidation for the industry, as changes to markets, climate, regulation and institutions call for better understanding of supply chains, export opportunities, marketing and how to add value to products and services.
“Globally, agricultural co-ops account for 32% of the top 300 co-ops and are the second largest sub-sector behind insurance … this part of the industry has plenty of scope for the future,” it adds.
Crucial to agri-co-ops’ ability to meet any challenges is governance. The SAOS produced a governance code for agri co-ops with Co-operatives UK and James Graham says: “Effective governance is the number one critical success factor for an agricultural co-op. The components are easy to identify, but know-how is required to put all these in place and maintain their performance.
“Directors must learn their role and understand and occasionally learn the behaviours that contribute to a functional board, and be prepared to permit external independent governance evaluation from time to time. The most effective co-op leaders understand this, and lead accordingly.”
Crucial to good governance, he says, are:
- Common goals and united commitment among members, requiring sound strategy and two-way communication between board and members
- Ambition and leadership among members and directors, and a concern for the future
- Active participation in democracy and accountability
- High standards of governance, and professional management that understands the primary purpose of members in co-operating
- Commercial success, satisfying members’ needs of their co-op, and rewarding them in proportion to their participation.
Looking at recent restructures in the global dairy sector, Mr Graham says: “With the governance reviews at Fonterra, Murray Goulburn and CBH, capital is a central issue – how to raise sufficient to maintain their position as milk-based product manufacturers in a rapidly concentrating and innovating industry that is becoming more global every year.
“Each has been innovative and taken risk in addressing capitalisation needs, out of necessity. They are to be congratulated on their leadership in attempting to come up with durable solutions. Members were consulted and supported their boards.
“First Milk is a different scenario, where an independent governance review found insufficient expertise on the board, and made recommendations to remedy the situation very quickly as the business was in some difficulty. That difficult moment has now passed, and the members adopted a two-tier model.”
Pekka Pesonen, secretary general Copa-Cogeca, the umbrella body for farmers and agri-co-operatives in the EU, agrees governance is crucial.
“When coping with their capital and innovation in co-op ownership, agri co-ops shall not expose the key elements of their model, which is characterised as a ‘member-owned’, ‘member-controlled’ and ‘member-benefit’ business,” he says.
“Moreover, new business models, the innovative ways to use information and computer technologies, as well as new analytical capabilities enabling agri co-ops to maximise performance, could be the new drivers towards an improved proximity to members’ needs and more efficient governance.”
Relations with stakeholders and national administrations are also crucial, adds Mr Pesonen.
“Several cases, around the globe and in different co-operative sectors, have indicated that we must be more resilient when defending the co-operative model of enterprise,” he warns. “Regulatory or political interventions can indeed easily jeopardise democratic structures built and developed over a long period of time, which have benefited their members as well as local and rural economies.”
Weighing up the Brexit factor
Added to the uncertainties facing farmers is the UK’s decision to withdraw from the EU. Mr Pesonen warns there are “serious concerns about the potential trade and budget impact” of Brexit.
He adds: “The UK is well integrated into the EU single market, is a net importer of agri-food products to the extent of €57bn. Furthermore, 60% of UK agri-food exports (beef, lamb, poultry, dairy, cereals) worth £11bn are traded with the other EU-27.
“We believe farmers and agribusinesses on both sides will be hit hard. Consumers who have up until now enjoyed a good choice of quality produce from across the EU will also feel the impact.”
He says there are also complications for several transnational European agri-co-ops which have farmer members in the UK, who will face economic, commercial and legal implications.
“Finally, the UK is also a net contributor to the EU budget,” he adds. “Ways to maintain the current budget for the Common Agricultural Policy must be found. Any disruption to agricultural trade should also be avoided. Otherwise, farmers and their co-operatives, both in the UK and in the EU-27, will end up paying twice for Brexit.”
But one alternative path agriculture could take after Brexit is liberalisation – a path taken by New Zealand in the 1980s.
The country suffered after the UK – its main market for dairy exports – joined the Common Market in 1972.
At first, New Zealand opted for protectionism, with subsidies and a controlled economy, but in 1984 the government moved to deregulation, the removal subsidies and free trade.
Critics of this policy have pointed to immediate effects of job losses and hardship but supporters say it eventually revived the country’s economy.
Now, Dr Francis Reid, trade strategy and stakeholder affairs manager at Fonterra, says his country’s example could point the way for Britain once it leaves the EU.
Speaking to the Semex Dairy Conference in Glasgow, he said Fonterra and New Zealand had shown how successful open markets could be, offering a lesson for post-Brexit Britain.
If New Zealand and the UK could establish an open trading and economic relationship post-Brexit, he argued, they could build on their strengths, including their proximity to markets in the Asia-Pacific region and the EU.
For the SAOS, James Graham has been in “ongoing discussion” with the Scottish and Westminster governments. He predicts a move away from continuous subsidy but hopes for measures to help farmers, and says he has received “recognition of the more challenging circumstances of hill farmers and remote area farmers”.
“My reading of [the two governments’] position is that in their future policies, they want to support farmers to help themselves rather than provide support through continuous direct subsidy type payments,” he adds.
“They want to support developments that will strengthen farmers’ position in supply chains and increase transparency of markets, and they want to support the adoption of agritech that enables farming to be competitively productive, and efficient in use of resources. These will increase farmers’ resilience to shocks.”
He says the governments are also researching schemes, such as insurance, to help farmers manage extreme downturns in market prices.
“SAOS proposals are getting a positive hearing because we appealed to all these drivers in the measures we suggested.”
But he warns: “It’s early days in the policy formulation process, and both EU market access and WTO regulations may limit what is feasible.”
As for what agri-co-ops themselves can do to cope with the transition, he says: “Co-ops are already responding to intense change drivers through their governance processes, regardless of Brexit. Change is a normal state.
“But with respect to Brexit in particular, I suggest boards should be looking at new scenarios and opportunities, and all the time be identifying how to strengthen the resilience of their farmer members’ businesses and their co-op.
“I predict that farmers will need to co-operate more through their co-ops in future, and they will need their co-ops to provide the leadership.”
One area where co-ops can show such leadership after Brexit, argues Mr Graham, is in technology.
“At SAOS,” he says, “we are pursuing opportunities for co-op ownership and management of data related to members’ farm production via agritech, and using this in connecting with market requirements and opportunities. There is new potential for competitive advantage in which co-ops are essential, and through which farmers retain ownership and control of their data.”
One UK organisation looking at agritech innovation is farmer-owned grain processing network Camgrain, which recently held a masterclass on how to trade in a changing global market.
The session revealed how global events can shake the market: a drought in the US in 2012 saw a sharp rise in wheat prices as supply dropped – but the westernisation of the Chinese diet has seen record levels of production and wheat prices fell.
Technology also moves to the fore as a growing population and environmental changes force farmers to increase production while reducing their footprint.
Speakers told co-ops to provide good apprenticeships to create a workforce which could use this new technology.
Echoing James Graham’s view on the importance of data, in the US a new co-op is being created to give farmers a neutral space to safely store and share their information.
AgXchange is the brainchild of Grower Information Services Co-operative (GISC) and the Agricultural Data Coalition, a non-profit formed by a group of universities and farm businesses.
GISC founder Billy Tiller says the new system fills “a need many growers may not have recognised yet – neutral and secure data storage”.
He said many growers were failing to make best use of their data or were unknowingly signing away the rights to third-party providers.
Chief executive Jason Ward said: “When a grower gains complete control of their data, the grower will then be able to maintain complete control of their operation from the present to the future.”
GISC – which is rebranding as Growers Agricultural Data Co-operative under the new project – is governed by a board of directors composed of the growers’ peers, to ensure data rights are protected and the information is safely stored.
It’s a sign that even as technology changes, basics such as good co-op governance remain as important as ever.