New opportunities for agricultural co-operatives to finance investment

Agricultural co-ops play an important role in the UK co-operative sector, accounting for 14.6 per cent of turnover in the co-operative economy and eight per cent of co-op membership.

Whether they aim to expand or simply raise start-up capital, agricultural co-ops are faced with challenges.

James Graham, Chief Executive at Scottish Agricultural Organisation Society Limited (SAOS), agrees that co-ops face some disadvantages when it comes to raising capital. Publically-listed competitors can raise capital from financial markets, while co-operatives depend upon its membership to raise capital.

Furthermore, if they are active in the food business, co-operatives often require a substantial funding from a small number of members. “The only source of capital is debt capital, which means taking on loans from banks, there isn’t anywhere else they can go to, the amount of money members put in determines how much the banks are prepared to lend to them,” explains Mr Graham.

Although some grant schemes are available through EU’s Common Agricultural Policy, these direct payments only finance a small proportion of the investment, and farmers have to contribute the large majority.

Agricultural co-ops exist to benefit their members in accordance with principles of co-operation, with farmers investing in proportion to use. With the government announcing a consultation to lift the £20,000 cap to invest in a co-op, agricultural co-ops in Scotland will look again at their balance sheets and come up with a different mix of shares, thinks James Graham. He said many agricultural co-ops tend to have a high proportion of member loans and a small proportion of share capital.

Says Mr Graham: “This change will be warmly welcomed, and will help to secure more capital for investment in growth. Agricultural co-operatives deliver substantial commercial benefits to their farmer members

by enabling them to access scale advantages in both farm supplies and produce marketing, and by providing a counter-balance to the power of the multinationals.”

David Button, the former Chair of Co-operatives UK who has been involved in the agricultural sector throughout his career, says he welcomes the government’s proposal to lift the cap.

He describes this as a “very positive step forward”, though he says this is unlikely to have an immediate impact on the majority of agricultural co-ops in England, but does offer new opportunities for highly capitalised and expanding organisations.

Mr Button says co-ops had developed sophisticated ways of raising capital, particularly member interest-free loans, linked to the use of services, which has become the preferred and widely used method of member investment, especially for a capital intensive project.

He explains that agricultural co-operatives in England have historically used loans from their members together with bank borrowing and where applicable grant aid,
to obtain the necessary start-up finance, rather than to depend upon member share capital.

With banks looking for greater security, it is becoming more difficult to obtain the necessary bank support. According to Mr Button, the potential for using the availability of an increased level of share capital together with the existing mechanisms already in place, will offer additional opportunities to finance new investment and become less exposed to debt finance.

“I think we underestimate what we already have achieved in this sector of the co-operative movement in this country,” he says, adding that out of UK’s top 100 co-ops, more than 40 are agricultural co-operatives. However, agricultural co-operatives operate in a highly competitive market place and access to finance is a key component to their development and success.