The major advantages and disadvantages of agricultural cooperatives in Australia

     

David Williams
Managing Director
Kidder Williams Limited

    
Tom Howard
General Manager Grower Services
and Agronomic Development
SunRice

Q1.  Compared to the agricultural market landscape in most overseas locations, Australia has relatively few agricultural cooperatives, and especially relatively few global-scale cooperatives. Do you have a view why that would be the case?

David Williams, Kidder Williams
I am not aware of any data that shows we have any more or less cooperatives than in other countries. In any case it is difficult to control any observed differences for differences in infrastructure development, industry regulation and technology which all impact on the need for and size of cooperatives.

For example, if 300 farmers supplied (say) Victoria with a particular product a cooperative may make sense to build the necessary processing and to deal with major buyers. With modern technology six farmers might supply the same amount and the need for a cooperative is diminished. Look at what technology has done to tomatoes, eggs and many other products in terms of size and number of farms.

Tom Howard, SunRice
In the early period of Australian agricultural industry development, farmers and growers considered that the formation of cooperatives was a useful and effective way of gaining critical mass for their products or their industry sector. Cooperatives allowed industry-aligned farmers and growers with common interests and views, especially those located within particular regions or states, to establish and advance meaningful domestic markets for products and produce.

During the early stages of establishing an industry and developing domestic markets, the cooperative structure provided a solid framework and foundation on which future growth could be built. Cooperatives are useful vehicles for nascent industries and sectors to share information between participants with similar beliefs and objectives – hopefully this sharing of information then progresses to engendering real collaboration to generate tangible outcomes, especially related to markets, brand development and taking advantage of economies of scale. It is fair to say that Australian agriculture and industry participants have been served well by cooperatives.

I do not consider that cooperatives are necessarily under-represented in Australia when compared to other countries around the world, especially when you consider our population, the sparsity of the population, and differences in climatic and agronomic conditions.

Q2.  What do you think are the major advantages and disadvantages of agricultural cooperatives in Australia?

David Williams, Kidder Williams
The major disadvantage is that when they have outlived their usefulness they can be value destroying for farmer members and it becomes ‘last farmer standing’ in terms of who is entitled to the wealth accumulated in a cooperative over a long period of time.

The major advantage is as a countervailing power to powerful private interests who might be unwilling to service small farmers or who might charge too much if they do, compared with farmers doing it for themselves.

Tom Howard, SunRice
The strengths and advantages of the cooperative structure are primarily drawn from the power of having one vehicle for similar minded farmers and growers to join together. This provides the cooperative with an enhanced ability to advance, promote and sustain an industry during the establishment and initial growth phases. This is especially relevant to cooperatives focused on regional areas rather than those with a whole-of-industry, national or even international view.

When I was the CEO of the Walgett Special One Cooperative between 1997 and 2001, we managed to more than double sales and quadruple membership numbers. I attribute this, more than anything else, to the like-minded dedication of the members, who worked together to build something beneficial for themselves, their families, the region and the community.

While SunRice is no longer a cooperative and corporatised in 2005 (listing on the NSX in 2007), having the initial cooperative in place when the rice industry was being secured and then expanded is one of the key reasons it is experiencing success with a corporate structure today.

However, the challenge that most cooperatives encounter eventually is the ability to attract increasing amounts of capital, for ongoing and meaningful expansion and growth, particularly if this is to be internationally focused.

A corporate structure has a much better ability to trade and attract external capital. If members of cooperatives are aligned regarding the future path of an industry, then the limitations to raising and accessing capital need to be addressed if return growth, international market expansion, and benefits of scale are to continue so that the industry can maximise its full potential.

Q3.  Is it inevitable that any successful agricultural cooperative in Australia will eventually end up either fully or partially listed in order to get access to capital in excess of what is available from its membership or retained earnings?

David Williams, Kidder Williams
It is not inevitable that a cooperative needs to be fully or partially listed. A well run cooperative does not need outside capital. My experience is that attempts to partially list and balance the needs of farmers with outside investors almost always ends in tears. Partly, this is because cooperatives sometimes take advice from people in capital markets who know nothing about cooperatives. Other times the need for outside capital is misguided and ignores ways of funding within the cooperative structure. The fundamental problem is outside investors want low farm product prices and high profits for dividends and farmers want the opposite. There is a way to solve this apparent conflict but not the way many advisors and management have gone about it.

There are many cases where technology and industry regulation mean it might be time to turn cooperatives into a private or public company. This is a process which might unlock significant value and facilitate industry rationalisation by allowing farmers to retire gracefully and for others to expand. In such cases it will be obvious to, and suggested by, the farmer shareholders once they are fully acquainted with the facts.

Tom Howard, SunRice
While not all successful Australian agricultural cooperatives will eventually pursue the corporatisation path or a listing in order to enhance their access to capital, this is certainly a journey many have successfully undertaken. There are examples where cooperatives have retained this structure and expanded, with one such notable example being West Australian-based CBH Group. However, it is fair to state that not all agricultural industries necessarily have the patience or the consistency of resources to achieve their full potential within the same timeframe under a cooperative structure.

For companies to grow to their full potential and attract the necessary capital to fund expansion, they need to carefully weigh up the advantages and challenges of moving to a corporate structure. Cooperatives need to clearly and consistently explain to their members how any corporatisation will benefit them personally, as well as the industry more generally. Cooperatives also need to take on board the concerns of their members over the implications of any corporatisation, and to give every member the opportunity to raise all of their concerns. These concerns then need to be addressed to provide comfort and this requires time. It is optimal if restrictive timeframes, which only serve to apply undue and unnecessary pressures to the cooperative members or the corporatisation process itself, are removed.

SunRice has undertaken measured progression from a cooperative to corporate structure and has clearly identified that the next step required for continued expansion of the Australian rice industry is a listing on the ASX through a structure that retains control of the company in the hands of active growers, while providing improved access to a broader capital market base. Our ability to meet the growing international demand for Australian rice, which can only benefit our growers, needs improved access to capital – something that would be constrained if we were still a cooperative.