Conditions, attitudes and structures of successful POs and cooperatives Potential role in supporting a competitive farming sector in England and Wales January 2014 Contents 1. Executive summary 1 1.1 Conclusions and recommendations 5 2. Aim of the project 7 3. Background 8 4. Structure of report 11 5. Producer organisations vs agricultural cooperatives 12 5.1 Introduction 14 5.2 The differences between a PO and a cooperative 15 5.3 Organisational objectives 16 5.4 The implications of competition law 17 5.5 The legal structure of PO’s vs. Cooperatives 18 6. Literature review summary 19 7. Measurement & ingredients of success 23 7.1 Difficulties in measuring Success 26 7.2 Key Ingredients of Success 30 7.3 Impact on the Competiveness of the Sector 32 7.4 Examples of Successful Cooperatives 37 7.5 Management and Leadership 38 7.6 Further Considerations on External Efficiencies 42 8. Barriers to the development of POs/Cooperatives in the UK 44 8.1 Structure and Scale 47 8.1 Internal Influences 48 8.2 External Influences 48 8.3 Attitudes of Farmers 50 8.4 Vertical collaboration 52 9. The willingness to join and member commitment 54 9.1 Developing Social Capital 56 9.2 Why farmers don’t join or commit to POs/cooperatives 58 9.3 Member Commitment 58 10. The economic case for cooperation 61 10.1 Competitiveness and Competitive Advantage 66 10.2 Contributions to Efficiency 68 10.3 Innovation, Competitiveness and Growth 71 10.4 Challenges 75 11. Transferability of fruit and vegetable POs to other sectors 79 11.1 Dairy and livestock 81 11.2 Cereals 82 11.3 Other issues 82 12. Potential downsides of POs/Cooperatives 84 12.1 Capital Constraints 85 13. Appendices 87 13.1 Literature review 87 13.2 Survey 124 13.3 Interviews 145 13.4 Workshop 146 Contact: Siôn Roberts Duncan Rawson EFFP LLP EFFP LLP [email protected] [email protected] 1. Executive summary 1 The aim of this report, which combines a review of the academic literature with the results of an industry survey and workshop undertaken for the project, is to provide socio-economic evidence as to the condition, attitudes and structures that characterise successful cooperatives and Producer Organisations (POs) and to make recommendations as to how government could potentially support the introduction and development of cooperatives and POs in the future. Please note that the views expressed in the report do not necessarily reflect those of Defra. Cooperation and collaborative ventures have long been recognised as having many benefits within the agricultural sector, bringing farm businesses together to achieve greater efficiencies in areas such as purchasing, production and marketing. In the UK POs, as defined under the Common Market Organisation (CMO), have existed in the fruit and vegetable sector in their current form since 1996 and can be characterised as essentially marketing cooperatives that are also responsible for the coordination of production, storage and packing of their members’ crops. Although traditionally associated with the fruit and vegetable sector, the EU is now intent on making provisions for Member States to recognise POs across the majority of agricultural sectors; indeed, the legal and practical framework for the introduction of POs in the dairy sector has already been implemented. However, it is not intended that POs introduced into other agricultural sectors will be able to apply for financial assistance as is the case under the Fruit and Vegetable Regime. In terms of the attributes that underpin successful farmer collaboration there would appear to be very little difference between a PO and a marketing cooperative organisation; hence, we consider both as one in the same throughout the report. There would appear to be little that the introduction of POs in the dairy and other sectors can offer that cannot already be delivered by an agricultural cooperative and indeed the industry interviews and in particular the output from the industry forum, confirm this view. This point is explored in some detail in section (5) and where differences may exist between POs and cooperatives these are highlighted. Measuring the success of POs and Cooperatives In recent decades we have seen significant changes in both the organisation of transactions and the growing intensity of competition within the food chain which has led to a fundamental shift from a production orientated focus to a market orientated focus. This has resulted in a corresponding shift in the behaviour and structure of POs and cooperatives who have had to extend their activities beyond better marketing their members output, to investing into the fixed assets and capabilities required to add value to their members production; whether this is by processing or packing, raising efficiency of production, procurement and processing or encouraging and supporting innovation at both the farm and product level. A fundamental point to understand when trying to measure the success of POs and cooperatives is that the objective of most is to enhance the performance of their members’ businesses thus making the performance of the PO/cooperative itself subordinate. It follows that attempting to compare the performance of a cooperative and an investor owned firm (IOF) is particularly challenging. The key business goal for an IOF is shareholder value which is driven by growth and profit maximisation. Not only do cooperatives not have a stock market valuation but also the value they create is captured in the growth and profitability of their members’ businesses. Moreover, a PO/cooperative will often be established to achieve an objective or range of objectives that are wider than an IOF with a focus not just on financial 2 performance but also on the development of social capital and member satisfaction. Traditionally many POs and cooperatives were established to address a market failure; for example, to provide a route to market that didn’t exist or to rebalance power in the supply chain. From this perspective the PO/cooperative offered members the prospect of higher returns by securing market access and/or the ability to negotiate on more equal terms with buyers. More recently many have adopted vertically integrated strategies involving investment in added value activities rather than addressing a market failure per se. This in itself adds another challenge, particularly if attempting to measure performance by price as it does not take into account the impact on price that any investment into value adding activities may have in the short-term – an issue that the large UK dairy cooperatives have had to battle with in recent years. Although a cooperative cannot be judged on its financial performance alone, to be successful it must be in a financial position to meet its members’ aims and objectives and to enable it to develop in response to changes in the external business environment. To that end, it is appropriate to consider the health of a cooperative by using some of the conventional financial ratios – but these should not be used alone to measure success. Sector competitiveness As a nation we seek three unambiguous outcomes from our businesses; efficiency, competitiveness and sustainable growth. This trinity of economic outcomes is generally, but not necessarily, mutually inclusive and competiveness is seen as the key goal. Competitiveness and competitive advantage are discussed in more detail in section (10). Cooperatives offer smaller scale farms three sources of efficiency that they would struggle to achieve by themselves: economies of scale; vertical integration; and coordination. Scale economies lower unit costs by sharing. Vertical integration enables members to add value, including participating in the introduction of new products and/or marketing innovations. Coordination facilitates the dissemination of knowledge across members. It follows that as members of a cooperative, smaller scale businesses can collectively participate in a wider set of attributes that contribute to competitiveness, including innovation, while enabling individual members to focus on the more traditional approach of comparative advantage, i.e. efficiency in production. While scientists and entrepreneurs initiate the process of innovation, when it comes to commercialisation there is a critical role for the transfer of knowledge, the application of expertise and funding. It is at this stage that cooperatives offer a major advantage, allowing smaller scale businesses to be mutually aligned in the process of innovation and thereby potentially reinforcing the industry’s competitive advantage. Cooperatives have a commitment to competitiveness as a sustainable source of growth and thereby a direct link to members’ satisfaction via the profitability and growth of their businesses. A well-managed cooperative can expand market share and/or enter new markets by engaging in value adding production stages and developing innovative products. In an open trading environment it is these sources of competitiveness that drive industry growth. As marketing cooperatives have been a feature of most farm sectors this suggests that these positive social benefits are not sector specific. That said, supply and demand characteristics vary from sector to sector and the behaviour and focus of cooperatives should adjust accordingly. In some sectors short term volatility will demand an emphasis on minimising the impact on members’ returns whereas sectors with a more controllable supply are likely to put more emphasis on 3 convenience, variety and quality. Another, characteristic that varies across sectors is the bargaining power of buyers and in these situations countervailing power is a relevant consideration which calls for larger scale cooperatives. Yet another characteristic that varies across sectors is the scope for downstream processing. Thus, a cooperative’s strategic focus should vary according to the sector’s prevailing conditions of supply and demand. Achieving competitive advantage, particularly when it involves processing or new product development requires investment in fixed assets and capabilities.