24 March 2010

5 minute read

Europe

Launching a report on the collapse, Mr Michael Jack MP, chairman of EFRA said: “The harsh reality of a cruelly competitive liquid milk market exposed the inadequacies of DFB’s senior management as they sought to put the business into the ‘premier league’ of Britain’s dairy industry."

Purchase of ACC

"By paying too much for tired processing assets and the customer base of Associated Co-operative Creameries (ACC), they sowed the seeds of their eventual downfall," said Mr Jack.

The way in which DFB went about pursuing its vertical integration strategy was over-ambitious, given the relative youth of the business and its financial constraints.

Farmers’ optimism about taking control over their long-term future was a noble objective, but in this case it was severely hampered by decisions that turned out poorly in practice.

Loss making contract

In entering milk processing on a large scale with the purchase of ACC, DFB was involving itself in a highly competitive sector alongside major businesses such as Robert Wiseman Dairies who DFB must have realised were likely to bid keenly to increase their market share. DFB was held back from the start by being tied into a lossmaking contract that cost it millions and whose effect would make it less certain that DFB would be able to retain the Co-operative Group contract when it came up for renewal.

Although it is reasonable to expect co-operatives to support each other to some extent, we recognise that co-operatives’ prime responsibility should be to their own members. DFB lost the Co-operative Group contract because it could not make competitive bids in the relevant lots.

Loss of confidence

Gerry Smith, former Head of the Liquid Milk Division at DFB said: "The real reason for Dairy Farmers of Britain going into receivership was that as farmer members lost confidence in us, our other suppliers lost confidence in us and, most importantly, our customers lost confidence."

By late 2008, DFB was caught in a vicious circle in which lost confidence led to resignations, which in turn led to a further loss of confidence and more resignations. Its fate was not inevitable, but its continued survival grew increasingly unlikely during the early months of 2009.

The co-operative model

We agree that DFB did not fail because it was a cooperative. However, its failure draws attention to a number of ways in which UK dairy co-operatives could be strengthened, if they are to be able to compete successfully in the dairy sector.

Capital raising

EFRA has welcomed the proposal in the draft Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2010 to remove the £20,000 limit on a member’s maximum transferable shareholding in a co-operative. A step which it believes is in the right direction.

Management of DFB

In pursuing a challenging vertical integration strategy, with limited capital-raising ability, DFB’s difficulties were compounded by a governance structure that did not function as well as its members were entitled to expect.

The lack of executive directors on DFB’s Board was a weakness and should have been addressed, even if this meant a rule change. It is important for members of the Executive Team to be represented on the Board in farmer-owned co-operatives, as in other businesses.

Communication

We recognise that it is difficult to strike a balance between providing an accurate picture of the state of a co-operative to its members and not revealing commercially sensitive information. However, we consider that the Board of DFB failed to strike this balance and that DFB members did not receive the quality of information that they were entitled to expect. This breakdown in communication encouraged speculation about the future of DFB and can only have contributed to the business’s difficulties.

Finding new buyers

There is a balance to be struck between achieving long-term relationships in the dairy supply chain and allowing farmers sufficient flexibility to change buyers if something goes wrong. A clause which allows farmers to terminate their contract with a month’s notice in the event of their buyer going into receivership is sensible. Contracts which allow farmers greater flexibility to switch to another buyer in the event that an agreement cannot be reached on the milk price seem like a good way of strengthening the position of farmers in theory.

Government response

Defra orchestrated a positive response to the collapse of DFB. EFRA commend the swift and effective action it took to facilitate cooperation and disseminate information.

The report also commended the Welsh Assembly Government for making early single payments to former DFB members in Wales. The Rural Payments Agency failed former DFB members in England by being unable to make the same commitment.

Recommendations

EFRA suggests that DEFRA produce a report in the next 12 months examining governance and capital-raising arrangements of older more experienced co-operatives in Europe and elsewhere, as well as looking at the legislative framework that applies, and exploring the lessons these countries offer for dairy co-operatives in the UK.

EFRA recommends that Defra discuss the issue of how contracts which give producers greater flexibility to switch buyers would work in practice at the Dairy Supply Chain Forum.

With regard to the draft Legislative Reform (Industrial and Provident Societies and Credit Unions) Order 2010, EFRA urges Defra to set up a task force comprising the Financial Services Authority, HM Treasury, members of the banking community and industry representatives further to investigate ways to overcome constraints on capitalising UK agricultural co-operatives.

Commenting on the report, NFU Cymru Deputy President, Stephen James said, “Despite this inquiry being a drawn out affair, Efra has made a number of positive recommendations, which – if adopted – have the ability to strengthen the British dairy industry and this can only be welcomed.

“We must now ensure that the committee’s recommendations do not simply sit and gather dust, but are taken up in full and receive an enthusiastic reaction from government and the dairy sector.”

TheCattleSite News Desk