Current debates about the potential takeover of Warrnambool Cheese and Butter (WCB) and Graincorp highlight one of the interesting features of Australian agriculture, which is the limited presence of farmer-owned cooperatives in the agribusiness environment in Australia compared to almost any overseas location.
While WCB and Graincorp are now both listed companies, they both have their origins as either cooperatives or grower-controlled entities, and in both cases farmers have opted to relinquish control and have cashed their shares, and are now becoming concerned about the consequences.
Interestingly, in the WCB case the potential buyers (in addition to the Canadian Saputo) are reported to be Bega Cheese (a former dairy cooperative that is now a listed company), Murray Goulburn (one of the biggest cooperatives in the Australian agribusiness landscape), and Fonterra (which has its origins as a statutory marketing board in New Zealand that now has a company structure, but which New Zealand Dairy farmers still control through their shares.
Looking around Australian agriculture, the remaining major cooperatives are CBH, the Western Australian grain handler and marketer, Murray Goulburn Cooperative, the Victorian dairy cooperative, Norco, the northern NSW dairy and meat processor and the Ricegrowers Cooperative, the owner of Sunrice. In all cases except perhaps Norco, the organisations are struggling with questions of ownership and structure, and appear likely to move to different ownership structures that bring in non-grower shareholders. There are also smaller cooperatives in the sugar (for example the NSW Sugar Milling Cooperative) and horticulture industries (Batlow apples), but compared to the number of cooperatives in Australia twenty year ago the number has shrunk dramatically.
Internationally, this is not the case. The agribusiness sectors of South America, North America, Europe and Asia often feature large, farmer controlled cooperatives. For example, Denmark has four major cooperatives, Danish Crown (one of the world’s largest pig exporters), Arla Foods (a major international dairy exporter), and DLG and DLA, both major european farm input suppliers. All these are owned and governed by Danish farmers, and all are thriving and expanding businesses. In Brazil, the main agribusiness organisations are all cooperatives, either supplying farm inputs or marketing farm produce.
Why cooperatives have not generally survived in Australian agriculture, and in particular in the broadacre industries, is an interesting question.
One theory is that, in the absence of government subsidies, Australian farm businesses face a lot more financial risk than farm businesses internationally. This means Australian farmers need to retain as much of the profits from their businesses as possible, and makes them reluctant to contribute some of that profit to enable cooperatives to develop and grow.
A second explanation is linked to the culture of Australian farming, which involves farmers living on their farms which are often long distances from towns or cities. This is not the case internationally – for example in the USA or Europe farmers often live in villages and towns, and travel out to work on their farms each day. A theory is that Australian farming therefore attracts participants who are self-sufficient and used to working on their own, and who are not comfortable in a cooperative structure, as distinct from farmers overseas who have a long history of cooperative involvement.
A third theory is that the export dependent nature of Australian agriculture means that agribusinesses in Australia are exposed to greater risks and therefore have greater need for capital than is the case internationally. This mitigates against a cooperative structure, in which the capital is contributed by the farmer members, and any extra capital they contribute to the cooperative means there is less available for their farm.
Another theory is that Australian governments had a history of regulation of the agriculture sector through statutory marketing boards and single-desk selling arrangements. The theory is that these outlived their usefulness, and in many instances resulted in significant financial pain for farmers before they were finally dismantled. As a consequence, Australian farmers are somewhat reluctant to participate in collective marketing arrangements.
Whatever the reason or reasons, the result is that Australian agriculture has developed few strong cooperatives, and those that do exist are often a takeover target for large multinational corporations.
When this occurs, farmer shareholders often cannot resist the opportunity to cash their shares at relatively high prices. But in doing so, many seem to not understand what is the most basic difference between a cooperative and a company. A cooperative exists for the benefit of its members, while a company exists for the benefit of its shareholders. So while a dairy cooperative might pay a quite high price for milk and forego some cooperative profits in order to bring benefits to dairyfarmer members, a company is, by law, required to maximise its returns for shareholders. This means it will try to maximise the net margin between the price it pays dairyfarmer suppliers, and the price it receives when it sells products to consumers.
Irrespective of what assurances or promises are given when a cooperative is corporatised, companies have no choice but to seek to maximise shareholder returns, and part of this will mean minimising the price that it pays for products purchased from farmers. To expect anything else is simply naive, and farmers should not be surprised when this happens.
This article original appeared on the Australian Farm Institute website. To view original article click here