Understanding the co-op model and its importance to NZ

7th September 2016

Statement from Cooperative Business New Zealand CEO Craig Presland

Understanding the co-op model and its importance to NZ

The co-operative business model has stood the test of time and thrives throughout the world, while New Zealand is an outstanding example of its enduring success, writes Craig Presland, Chief Executive of Cooperative Business New Zealand which represents the interests of this country’s co-operatives and mutuals.

With Member ownership and sustainability at its heart, the co-operative business model goes back almost three centuries to its origins in the UK. In New Zealand our first known co-operative was formed on John Mathieson’s dairy farm on the Otago Peninsula in 1871 and is part of what we now know as Fonterra.

NZ currently has over 100 registered co-operative businesses and organisations. Together, they have combined annual revenues exceeding $NZ 43 billion – that’s almost 15% of our GDP. Globally there are an estimated 2.6 million co-operatives that turn over more than $US 3 trillion a year and employ over 250 million people.

“The United Nations declared New Zealand’s to be the world’s most co-operative economy following a survey of 145 countries.”

Co-operative Members are usually either suppliers or customers of their organisation although some overseas-based co-operatives are owned by their staff. The business model is reasonably simple: benefits are provided to Members either on the basis of volumes supplied and/or the amount of business transacted with the organisation. In the case of volumes supplied, an initial (opening) price is paid for products such as milk, meat and horticultural products by the organisation at the beginning of the financial year with a final payout provided at the end of the year once annual returns are finalised. With consumer-owned co-operatives, prices for products (such as building products or fertilizer) or services (such as banking or insurance) are charged to customers with a year-end rebate/dividend paid back to customers once annual returns become finalised.

The Co-operative Companies Act 1996 requires that only 60% of voting rights are to be held by transacting shareholders which, therefore, provides a generous level of capital raising options. Co-operatives are able to raise funds from their Members, from publicly issued debt securities such as debentures, from private debt, banks and retained earnings.

In recent years Fonterra has listed on the NZX and has differentiated between supplying shareholders (Members) and external investors who are able to buy units on the NZX, the latter not being suppliers of milk and with no voting rights.

“The co-operative business model is based on economic, social and environmental sustainability.”

The co-operative business model is based on economic, social and environmental sustainability. Co-operatives which, through their long-term endurance and successes over decades and centuries, offer stable employment for people, including over 43,000 jobs in NZ at present. These jobs are critical to social and economic wellbeing.

Of Cooperative Business NZ’s Full Members, 70% have been in business more than 25 years while three are over 100 years old, including Fonterra (by way of its preceding co-ops) at 145 years. The dairy giant is NZ’s largest organisation by far with a strong co-operative philosophy that has been able to operate successfully over the years and decades despite fluctuating market conditions including its recent challenges with high global milk supply volumes, low commodity prices and over the past 12 months a strengthening NZD against the USD.

Fonterra’s endurance, and the ability of the dairy industry to ride through market downturns, is a reflection of the strength of the co-operative business model. It would appear that light is now beginning to shine on the horizon with the rise in whole milk powder prices (a key indicator) to almost $US3,000 per tonne and Fonterra’s latest farm gate milk price forecast for 2016/17 to $4.75/kg of milk solids, up from $3.90 paid in 2015/16, and $4.40 paid in 2014-15. As a reflection of the strong variability that can eventuate year on year, a record $8.10 was paid in 2013/14.

Co-operative organisations, large or small, are fully committed to serving their Members optimally by achieving outstanding commercial success while taking care and responsibility along the way in keeping with that key co-operative principle: concern for community (social responsibility).

One only has to look at the quality of the top 3 nominations for our recent CBNZ Co-operative Business of the Year Award to gain an understanding of how Kiwi co-operatives give back to local communities each year. Organisations like Farmers Mutual Group with its Farmstrong programme supporting farmers working through tough times, Foodstuffs South Island with its support for those struggling since the Canterbury earthquakes as well as educational support for youth in the South Island, and Fonterra with its Milk in Schools programme providing a 200ml carton of Anchor Lite milk to 170,000 Kiwi kids each school day. These organisations care about their Members, communities and NZ’ers.

Looking more widely, co-operatives have their own Members (customers, clients, suppliers, staff etc.) now totalling over one billion globally. Here in NZ we have three co-operative financial institutions which have over 350,000 Members (customers) between them i.e. Co-op Money NZ, The Co-operative Bank and Rabobank. That’s almost 8% of all Kiwis. Such Members within the co-operative sector, whether they be suppliers, customers or staff, who all benefit from the strength of the co-operative business model and the relative certainty that it provides.

“Co-operatives rarely close down.”

Co-operative businesses rarely close down, products and services are provided over the long term by trusted organisations and brands, there is job security and decent working conditions, fair and reasonable employment terms and conditions, gender equality and equal employment opportunities.

When considering things globally, there is widespread conflict and uncertainty at present. This includes increasing acts of terrorism in Europe, the decimation of Syria and resulting mass exodus of refugees into neighbouring countries and Europe. There is turmoil in the Middle East, attempted political coups and uncertainty with the upcoming US elections as well as Britain’s exit from the EU, the latter possibly the most likely to have a more direct impact on NZ exports.

In the background we have the United Nations and International Co-operative Alliance (ICA), the world’s governing body for all co-operative organisations, working away towards the achievement of 17 Sustainable Development Goals which were agreed to in October 2015 and with the objective of having these achieved by 2030. Co-operatives, and other organisations which operate within strong co-operative principles, are best placed to support the UN and ICA in the achievement of these ambitious and yet critical 17 goals towards achieving global peace, survival and prosperity. Why is that? Because co-operatives are all about sustainability, endurance and social responsibility.

What does all this mean? While our geographical remoteness is welcomed given world conflict, it presents us with challenges in terms of overseas trade competitiveness. This, along with our small size (i.e. limited local market), has resulted in the need for Kiwis to be more innovative which is often talked about when considering NZ’s past.

“We need to be more co-operative and collaborative.”

In addition, however, we need to be more co-operative and collaborative. Kiwis working together more effectively, sharing resources and information, combining procurement requirements so that better prices and supplier terms and conditions are negotiated. Industries and associated groups of businesses and organisations avoiding the duplication of common support services provided (public and private sector). People, and organisations, who work together effectively to achieve win/win outcomes so that services (and products) improve and long-term business growth and successful evolution are assured.

In my view NZ has the potential to lead the way globally across all of the 17 Sustainable Development Goals, however a key factor will be our willingness and ability to work co-operatively and in collaboration with each other. We need to work smarter.

A key strength of co-operatives is that the business model is about sustainability – economically, environmentally and socially. These organisations are dedicated towards serving their Members optimally each year, and over the longer term, providing enduring service while also giving back to along the way. They are not organisations that are owned and controlled by outside investors who may have short term investment plans and expectations of wanting to make a quick return and then to divest.

While driving commercial success is just as important to co-operatives, and let’s not forget that, they are here for the long term and hence the importance that is placed on sustainability. We have a proven and successful business model here, why would we want to move away from it?

ENDS

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