Expert warns farmers to heed a cooperative call to arms
Farmers have always looked to the cooperative model to provide them with protection and balance in free market economies.
The Australian dairy industry was, at one time, virtually dominated by cooperatives and cooperative companies. Yet the industry finds itself in a situation whereby Murray Goulburn Co-operative Company is the last major Australian farmer-owned milk processor in eastern Australia, while Challenge Dairy Co-operative is the sole dairy cooperative in Western Australia.
Graeme Charles (former Executive Officer and Director of the Co-operative Federation of Victoria and regular commentator on cooperative matters) warns that farmers who fail to recognise the power of farmer ownership will contribute to their further demise in the market place.
How has it come to this?
The reasons for the demise of agricultural cooperatives in Australia are many and varied, not the least of them being the inability of cooperatives in this country to cooperate with one another.
Dr Gary Lewis’s comprehensive history of Australian agricultural cooperatives, “The Democracy Principle; Farmer Co-operatives in Twentieth Century Australia”, published in 2006, should be compulsory reading for anyone with an interest in this subject.
Lewis clearly demonstrates that Australian cooperatives have often failed to rise above their parochialism and basic business instincts to work together in their own joint interests. Sadly, dairy cooperatives have been at the forefront of this particular failure.
This has allowed non-farmer owned and overseas organisations to seize opportunities that the cooperatives might have seized had they been able to work together.
Let’s be clear about the major difference between the cooperative ownership model and its rivals. Cooperatives are member-owned, member-controlled businesses, operating to guarantee dairy farmers an outlet for their milk production whilst at the same time maximising the return they receive from supplying that milk.
Challenge Dairy Co-operative and its joint venture operate a slightly different model, with milk intake being driven by suitable markets rather than being purely supply driven. It sends signals to its members via a milk supply agreement that guarantees to take all the milk from its members under that agreement. At the same time, it vigorously pursues opportunities to grow the available market share for its members’ benefit.
Investor-owned businesses exist for the sole reason of maximising the value their shareholders receive by way of dividends and share price. By way of contrast to a cooperative like Challenge, this need to maximise shareholder returns has sometimes seen dairy companies taking action such as cutting supplier contracts or notifying farmers they are no longer “required suppliers”. There is nothing inherently wrong with either model, but farmers need to consider, and then decide, which ownership model best serves their interest.
(bold) Co-operatives underpin prices
Even dairy farmers outside the cooperative model recognise it is cooperatives such as Challenge Dairy that underpin the milk price they receive. Dairy Australia’s “Dairy 2006: Situation & Outlook Report To The Australian Dairy Industry”, June 2006, confirmed this fact when it said “the traditional cooperative model plays a critical role in generally setting the farmgate value of milk in the Australian industry”. In reference to the powerful eastern states industry, the report’s author went on to say “other companies which are either publicly owned, or in the case of Fonterra, owned by farmers in another country, will pay a milk price which is benchmarked off the level set by Murray Goulburn Co-op”.
Having made the distinction between cooperatives (including other forms of farmer-owned businesses) and other business models, it is important to make it clear that cooperative involvement in any industry is not advocated unless that cooperative is able to provide its members with a clear benefit derived from their membership. The problem with the Australian dairy industry for cooperatives is the “free rider” issue. Dairy farmers choosing not to supply a cooperative are effectively having their milk price underwritten by the cooperatives.
The cooperative’s challenge (amongst a myriad of others) is to provide additional member benefits, other than just milk price. Challenge Dairy Co-operative is responding to this challenge by continually seeking to expand its services to its members and is focused on helping members to develop their own farm businesses.
Let’s ponder what the situation might be for farmers in a West Australian dairy industry devoid of a cooperative presence. To do this we must take ourselves back to the very infancy of the industry in this country. Why did cooperatives emerge then?
To quote Lewis again, “cooperatives represent farmers’ determination to achieve just reward for their labour and other investments and were created to drive out ‘middle men’ and to supply farmers with goods and services of the required quality at competitive prices”.
These days cooperative membership also allows the individual dairy farmer to benefit from the value-adding process that follows his milk supply. Has anything changed?
Has the free market economy suddenly undergone a conversion “on the road to Damascus”? Do dairy farmers no longer need cooperatives to ensure that other processors are not free to set prices independently and impose supplier quotas?
Do they no longer need co-operatives to provide some balance in the market place by keeping market participants honest? I don’t think so, and I’m not the only one who doesn’t.
During the 1970s Murray Goulburn’s call for an Australian-wide dairy products marketing cooperative, was strongly supported by the Federal Government of the day. In a country of about 20 million people that produced around that time just two percent of the world’s milk, one could have been excused for thinking it a good idea.
“Unfortunately” Gary Lewis wrote, “like so many rational cooperative development proposals, (it) fell foul of interstate cooperative politics and the absence of national cooperative legislation”.
In 1987-88 the United Dairyfarmers of Victoria (UDV) conducted an investigation into the possibility of creating a “super cooperative” of all farmer-owned dairy companies with a view to achieving the necessary operational scale and marketing leverage to compete with multinationals, particularly the NZ Dairy Board. Former ADIC Chairman, Pat Rowley, once warned against “the folly of soliciting external investors” saying that “even if they did not capture control through ownership, they would organise to fulfil dividend expectations, thereby driving down prices to farmers”.
Mention of the NZ Dairy Board brings me to some pertinent remarks made recently by Lachlan McKenzie, NZ Federated Farmers Dairy chairman. Speaking at the Federated Farmers of New Zealand Dairy Council meeting, he stressed the importance of cooperatives for the industry’s future.
“Why is 85 percent of the world’s milk production sold through cooperatives? Surely 85 percent of farmers have not got it wrong. The dairy industry has to unite again under the cooperative philosophy to get confidence and strength back into our industry,” he said.
(bold) “High price stink”
I have seen the future that awaits Australian dairy farmers should they find themselves without a co-operative presence. It was demonstrated in a front- page story in The Weekly Times November 19, 2008, headed “Fury over fertiliser costs”; “High price stink”. Essentially the NFF was questioning why local fertiliser prices hadn’t fallen to the same extent as they had globally.
“Our immediate concern is a lack of competition in the domestic market,” said NFF economist Charlie McElhone.
Fertiliser supplier Incitec Pivot controls more than half the market and about 70 per cent in Eastern Australia. Pivot itself was once a cooperative owned by farmers. Its demise as a cooperative is another story, but can I suggest that farmer misgivings about fertiliser prices would be less of an issue if Pivot were still a cooperative operating under cooperative principles and values. Closer to home, one need look no further than the beef industry.
WA beef farmers have no cooperative representing their interests in the market place; the result being that they are completely exposed to the success or otherwise of a small number of corporate entities and what they are prepared to pay.
The absence of cooperatives or other farmer-owned and controlled businesses from the West Australian dairy industry would return dairy farmers to the past whereupon they will again be reduced to the role of price-takers, with no capacity to directly benefit from the value-adding that occurs to their milk supply.
(bold) Challenge strengthening industry
As recently as seven or eight years ago, about the time that Challenge Dairy Co-operative entered the fray, West Australian dairy farmers were receiving the lowest milk prices in Australia.
To their credit, the Board and management of Challenge quickly recognised the need for a major change in the way their members’ milk products were marketed. After some early setbacks, Challenge is now paying its member-suppliers at a rate exceeding the oceanic price and well above that paid by any other major milk processors on the east coast of Australia.
At the same time, Challenge Dairy Co-operative, through its joint venture company Challenge Dairy Australia, is playing an important part in strengthening Western Australia’s manufacturing industry. They are absolutely committed to manufacturing and value adding to Western Australian milk, in Western Australia, with an export focus.
Australians have discovered they are not quarantined from the problems resulting from the global economic meltdown. I am certain that WA dairy farmers also need to be aware that they too are not quarantined from the vicissitudes of the market place, a fact that many of their colleagues in the Eastern states have recently discovered, not for the first time I might add.
Current dairy farmer indifference and apathy toward the importance of a cooperative presence in their industry must be addressed before there are no dairy cooperatives left in Australia. Should that sad situation eventuate, dairy farmers will find themselves back where they were during the industry’s infancy, being “screwed” by the market in terms of both delivery of milk and price and having no guaranteed access to the profits derived from value-adding of the milk they supply.
It is to be hoped that WA dairy farmers continue to recognise the importance of maintaining a cooperative presence in their industry and it is high time that organisations representing dairy farmers recognise and take action in response to this challenge.
HOOFNOTE: Article supplied by Graeme Charles, Principal Consultant – Co-operatives – www.communityaction.coop
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