A company with shareholders is not the only business model for the food industry, as some of the world’s biggest players show. Chris Lyddon looks at whether the vertically integrated cooperatives, long established in some countries, have the edge over companies that have to report to shareholders in the conventional way.
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The answer is not simple, as Henrik Nygaard, business controller of the UK division of Arla Foods, one of the biggest and longest established cooperatives in the European food industry and the biggest dairy company in Europe, told just-food.com. “You can’t generalise that all co-ops are superior to private companies,” he said. “It’s a question of getting it started up right and getting in the right intentions.”
Cooperatives were starting to come back into fashion. “For five or ten years the word co-op had a negative ring,” he said.
Originally Swedish, with the takeover of Denmark’s MD Foods in 2000 Arla Foods is now owned by some 7,200 Swedish and 8,300 Danish dairy farmers. They supply almost 80% of all milk production in Sweden and Denmark, 6.2 billion kg, to the group. With an extra 0.9 billion kg of milk purchased each year bringing the total to 7.1 billion kg, Arla Foods is the largest dairy company in Europe. Its annual turnover is €5.1bn.
Another giant among the world’s co-ops is Fonterra, formed in October 2001 out of the reform of New Zealand’s dairy sector and owned by 13,000 New Zealand dairy farmers. The value of the co-op is a guarantee to both parties, Fonterra’s Gareth Johnstone told just-food.com. “Fonterra has a guaranteed and largely predictable source of milk supply,” he said. “Farmers have a guaranteed buyer of their milk, with the cooperative principle being that Fonterra accepts all milk produced.” That predictability meant that Fonterra could have a high degree of certainty about its capacity to meet customer demand.
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By GlobalDataThe farmers were directly involved with the running of the company and did have the freedom to take their milk away if they didn’t like its performance. “It gives them the means, through our value added businesses in ingredients and our consumer business New Zealand Milk to move their milk into the high end of the value chain,” he said.
Co-ops inherently different to companies
A cooperative works inherently differently to a conventional company, Arla’s Henrik Nygaard explained. “From a co-op’s point of view the supply of milk is fixed,” he said. A normal company buys milk to cover what it wants to make. “The cooperative needs to optimise its performance on a given supply of milk.”
“Profit itself is not that important for Arla,” he said. “Profitability is a given. It depends on what we need to put back into the business as investment. Instead we choose to optimise on the milk price – which may then fluctuate depending on performance.”
The price was an average across a wide range of products, from highly profitable milk proteins to skimmed milk powder. “A normal food company would want to get out of the less profitable areas,” he said. “Sometimes we even end up selling products which don’t make a profit in order to optimise the total business.”
A cooperative like Arla would take a more long-term view than most companies. “The farmers we’re working with are on long-term timescales,” he said “Their outlook is over generations. If we believe in it in the longer term we’re going to stick to it.”
Benefit for farmer members
Henrik Nygaard is convinced that the long-term investment is worth it for the producer owners. “Is there an advantage for farmers in taking control of their own destiny? Definitely there is,” he said.
But from the farmer point of view, cooperating did not have to mean processing. “If you can get along without it maybe you don’t need stainless steel,” he said. “You can make an alliance with someone who has got the stainless steel.”
One example is Express Dairies plc, a company that works in partnership with farmers in the Express Milk Partnership. Arla has agreed a deal to take over Express Dairies.
Working with a dedicated group meant that Express could help its suppliers understand their market, Peter Walker, director of milk buying for Express Dairies, told just-food.com. “You need to know your milk’s going to be marketed 365 days a year,” he said. “Farmers increasingly want certainty.”
UK co-ops different to continent
The UK dairy sector was still going through the process of change that started with the deregulation of the market and the ending of the Milk Marketing Board system in the 1990s. Cooperatives in Britain were completely different to the highly vertically integrated operations on the continent. “Co-ops in the UK came out of the Milk Marketing Board and primarily are milk brokers who are trying to be processors,” he said. “They’re not at the moment the same animal by any means.”
But Walker disagreed with those who feel British farmers would not stay committed to a co-op over the long term. “Out of the producers who supply us we’ve probably got 600 who’ve supplied us every day since deregulation,” he said. “It’s a bit of a myth to say UK farmers move around a lot.”
Even so, after a hard couple of years, farmers might be prepared to look elsewhere for a bit more money, John Duncan, chief executive of First Milk, one of the UK’s biggest cooperatives, told just-food.com. “Given the two really difficult years that the dairy farmer has had, if he could find another outlet that would pay an extra one and a half pence a litre for milk he would take it,” he said.
“If there were no co-ops every dairy farmer would be in a direct relationship with their processor. Is it conceivable that they would have a strong negotiating position?” And the market needed the co-ops to deal with all the milk. “Cooperatives sell a range of products to balance the liquid market,” he said. “In the UK 15% of milk goes to intervention products. If all farmers supplied plcs, who would have managed the element that goes into intervention?”
Need for investment
But Ireland’s Kerry Group, which has become one of the world’s leading food ingredients companies, demonstrates how being a company can give the flexibility needed for large scale expansion, Frank Hayes, Kerry’s director of corporate affairs, told just-food.com.
“The Kerry Group has become a global company with a €2.8bn market capitalisation. That growth could not have been achieved as a co-op,” he said. Kerry was a co-op which in 1986 transferred its assets to Kerry Group to become a company. “The group has acquired over 50 companies around the world. Being a public company is central to that,” he said. “In the cooperative industry here in northern Europe at the time the amount of capital available for expansion at the time was quite thin. That’s what encouraged Kerry to go public in 1986.” The 1988 takeover of Beatreme Food Ingredients in the US at a cost of US$135m had been equivalent to the whole market capitalisation of Kerry Group. “We were able to buy a business as big as our own,” Hayes said. “A co-op would not have got the capital.”
That had been the first of a series of large scale takeovers, including the 1994 purchase of DCA (DCA Food Industries and Margetts Foods) in the US and Europe for $402m and the purchase of Dalgety’s food ingredients business in the UK for some £335m. “Now we’re in a leadership position in a range of global markets. That’s testament to the success of the Kerry strategy,” Hayes said. “Over the years Kerry has grown its business across all these markets and it has done it on a profitable basis.”
“If you’re just going to be a commodity player I doubt if too many investors would be interested in that,” he said. “Strategy comes first. One must have capability and leadership and vision.” That meant being in high value areas. “We’re in the most dynamic areas. You must be in a sector that you’re confident can grow.”
