Small Advantages

By Robert Briscoe and Michael Ward

Editor’s note: Briscoe is program director and Ward is deputy
director at the Centre for Cooperative Studies at the National
University of Ireland in Cork. This is the second of a two-part look
at dairy co-ops in Ireland. The first article appeared in the Sept-
Oct. issue.

“Why is a company the size of Glanbia paying farmers a lower
price than smaller co-ops that never amalgamated with anyone?”
— Farmer quoted in the Irish Farmers’ Journal, May 21, 2005

eware the “Grey Ones!” The English novelist J.B. Priestley wrote a thought-provoking tale called The Grey Ones that told of a sinister secret society that specialized in discouraging optimistic people. The Grey Ones did this by explaining — in merciless detail — why progressive ideas and hopeful dreams could never possibly work, “human nature being what it is!” Sometimes, we might be forgiven for suspecting that co-ops have attracted more than their fair share of Grey Ones — those experts who seem to delight in pointing out to us, in scornful detail, why cooperative practices and principles are hopelessly at odds with conventional management wisdom.

We are told, for example, that conventional management wisdom requires considerable economies of scale if producer co-ops in agribusiness are to meet the needs of their members and survive in a global economy. But consider the quotation at the start of this article, in which a farmer compares the performance of the biggest of Ireland’s dairy co-ops with the performance of some of the smallest. In spite of the conventional “wisdom,” many of the smaller dairy coops in Ireland appear to be able to pay higher milk prices to members than some of the giants, as well as contributing more fully to the sustainability of local communities. How is this possible?

Another tenet of the conventional “wisdom” is that coops, particularly smaller ones, are inevitably less flexible than conventional firms. Co-ops, we are told, are less agile because they are obliged to buy all of their members’ outputs, regardless of whether or not there are markets for all of it. However, in spite of conventional “wisdom,” Irish dairy coops of all sizes have found ways of increasing their flexibility regardless of their size. How was this possible?

We are also told that co-ops, particularly the smaller ones, are conservative and slow to respond to new opportunities. In Ireland, for example, smaller agri-co-ops were criticized for retaining retail outlets, going against conventional management advice. However, their retail outlets continued to generate profits and provided invaluable services as well as jobs for rural communities. Now, many of the major co-ops and co-op Public Limited Companies (PLC) are investing heavily in new retail ventures.

This article addresses the question of how is it possible for small- to medium-size co-ops to fly in the face of conventional management “wisdom.” It suggests that conventional “wisdom” may not be as wise as its advocates would have us believe.

Multi-purpose dairy co-ops
Irish dairy cooperatives are multi-purpose businesses. Dairy processing is their prime activity, but they also engage in activities such as grain handling and storage, meat processing and the sale of farm supplies. According to the 2005 annual report of the Irish Cooperative Organization Society (ICOS), there were 31 dairy cooperatives in Ireland, including co-ops with holdings in PLCs. These co-ops had 88,564 members and total sales of 10.5 billion euros. They range in size from the very small to global organizations operating on almost every continent.

The three largest dairy co-ops (Kerry, Glanbia and Dairygold) account for 82 percent of the total sales of dairy co-ops and 44 percent of the members. Medium-size co-ops account for 14 percent of the total sales and 47 percent of the members.

Small co-ops that process milk account for 3 percent of the total sales and 5 percent of members. Very small co-ops that collect milk and then sell it to larger co-ops to process account for 1 percent of the total sales and 3 percent of members.

Conventional wisdom vs. common sense
In spite of such wide variations in size, the quality of services to farmers and the milk prices they enjoy seem to be independent of size, because many smaller co-ops are outperforming their bigger neighbors. Smaller- and mediumsize co-ops have found a variety of innovative ways of responding to the conventional wisdom, which advocates the following kinds of strategies for achieving economies of scale:

the merger of co-ops;
rationalization of manufacturing facilities and services, and
growth through acquisitions.

Economies of scale
Over the years, experts have urged Irish co-ops to amalgamate into a single mega-co-op, but many small dairy cooperatives have deliberately remained small and independent. They see this as the best way of serving their member/users into the future. They point to what they regard as relatively poor performance by the larger cooperatives and the negative consequences of mergers, such as the decline of formerly vibrant rural communities.

Proponents of small co-ops also argue that a mix of dairy ownership structures and scale of operation are good for the industry because they ensure a competitive environment. They often refer to the woeful state of dairy farming in the United Kingdom, where more than half of dairy farmers have left the industry since 1995, (see Felicity Lawrence’s “Why British dairy farming is in crisis,” The Guardian, London. April 24, 2007). They also cite the nightmare condition of the Chilean dairy industry, where conventional “wisdom” led to a single multinational manufacturer setting the price of milk.

More recently, the Prospectus Report (2003), commissioned in Ireland by the government and industry, argued that the Irish dairy industry is falling behind its international competitors and that much larger processing units are required to shift the emphasis on to more value-added products and investment in research and development. The report also recommends forming larger farms.

“A consolidated player needs to emerge in the medium term with a scale at which it is processing around 70 percent of the processed milk,” said Joe Rea, commenting in the Irish Farmers’ Journal in April 2003 on the Milk Price League (a table that compiles the prices Ireland’s dairy co-ops pay to their members).

It was also pointed out that even if all of Ireland’s dairy coops were to merge, the resulting “giant” would be smaller than the biggest dairy co-ops in Europe, and far smaller than Dairy Farmers of America and New Zealand’s Fonterra.

In spite of such recommendations, Irish co-op farmer shareholders have been somewhat reluctant to amalgamate. The merger in 1997 of Waterford and Avonmore Co-ops and PLCs (to form Glanbia) was accepted only after members were promised substantial financial benefits to sweeten the deal.

The case against merger
Merger is resisted for a number of reasons. Many farmers have a sense of loyalty to their co-op that goes far beyond mere commercial considerations. They take pride in their coop’s achievements and in the foresight of their ancestors. They also worry about the detrimental impact of merger on local employment and the sustainability of neighboring communities.

Above all, they believe that healthy competition between several independent cooperatives leads to efficiencies, ensures farmer influence and enhances member services and the milk price paid to farmers.

The presence of cooperatives side by side with PLCs is an added complication in attempts at amalgamation. The PLCs tend to regard acquisitions, particularly overseas acquisitions, and in-house diversification as more important strategies for growth than amalgamating with other local co-ops. The PLCs are less concerned with primary milk processing and do not see their major profits coming from this source.

Is ‘small’ manageable and cost effective?
Many Irish farmers are sceptical about the efficiency and economy argument for large-scale milk processing. They point to medium-size societies — such as Town of Monaghan Co-op in Ulster or Newmarket in Munster — which regularly outperform the largest co-ops and PLCs on milk price and service to farmers.

“The performance of Newmarket [a medium-sized co-op] is remarkable,” said Joe Rea, commenting in the April 2003 Irish Farmers’ Journal. “With only 8 million gallons of owned quota, it is a pace-setter.” Newmarket is virtually an allcheese manufacturer, which was a very difficult product to sell last year. “Monaghan tops the Price League,” Rea continued. “It has performed very well over the last three months, paying impressive spring bonuses.”

The efficiency of small, well-managed cooperatives operating in niche markets has international parallels. In New Zealand, Tatua Co-op and Westland Milk Products, with less than 5 percent of the milk supply, outperform the giant Fonterra on milk price.

Co-op leaders in this sector maintain that small- to medium-size operations can enjoy unique competitive advantages of their own. These include better communications with farmer-suppliers, staff flexibility, efficient hands-on management, greater motivation and identification. In the words of one manager: “With hands-on management, we can gradually keep equipment and technology up to date without having to embark on major investment programmes. Also, we can often spot bargains or acquire pieces of equipment at rock-bottom prices from dairies or bigger co-op branches that are closing down and, if necessary, put it into storage.”

Yet another manager said: “As outfits get big, real control is lost …around here, the labor force has been reduced gradually — with the advent of new technology — by simply not replacing staff. So there is no need for big, expensive rationalization programs, which destroy morale and alienate the local community.”

Farm efficiency or economies of scale?
In an interview in the Irish Farmers’ Journal (June 24, 2004), the chairman of Newmarket Co-op argued that all coops need to be proactive to encourage their suppliers to stay in milk production. A big part of this effort involves promoting increased financial management skills among dairy farmers. In other words, greater efficiency at the farm level is a key issue.

“Some people talk about increasing scale as the panacea to all ills; here it can be clearly seen that those farms that reduced costs considerably did not do it by increasing scale, but by cutting out the cost of infertility, machinery and buildings — and by increasing labor productivity,” said Arndt Reil, who compiled a cost-comparison study for the 2004 European Dairy Conference in Wales (as reported in the Irish Farmers’ Journal, July 17, 2004). “Reducing costs on the farm is one of the main ways farmers can influence how much money ends up in their pockets,” the same article concluded.

Competitive advantages of being Irish!
Many co-op leaders, especially those from small and medium-sized societies, argue that it is not legitimate to compare the Irish dairy experience with that of New Zealand or mainland Europe. Irish dairy farmers have distinctive competitive advantages when compared with their counterparts in Denmark and Holland. Milk can be produced at lower cost than in mainland Europe, given the fact that Irish cattle are free to roam fields and dine on fresh grass for most of the year.

One respondent argued that an Irish supplier with a 55,000-gallon milk quota could generate as much income as a Danish farmer with twice that amount of quota. They assert that Irish co-ops should look more closely at their own achievements and successes of the last quarter century and build on these achievements rather than always looking abroad at situations which are not comparable.

Enjoying the best of both worlds The above arguments may sound reasonable, but do they really compensate for the loss of economies of scale? In fact, small cooperatives have also found tangible ways of enjoying the advantages of scale while remaining small. Almost all of these strategies involve cooperating with other co-ops in ways such as these:

Processing together — Carbery Creameries Ltd. in West Cork is a widely admired federated co-op. This secondlevel milk-processing cooperative is owned by four smallto medium-size cooperatives: Drinagh, Bandon, Lisavaird and Barryroe co-ops. Respectively, they hold 39, 22.6, 20 and 18.4 percent of Carbery shares. It processes all of the milk (74 million gallons) collected by the four co-ops in their own trucks, which retain the individual name and logos of each co-op. Carbery is a leading cheese manufacturer (Dubliner Cheese is its best known brand) and it has some involvement in food ingredients and alcohol production. It operates its own dedicated research and development facility. The individual co-ops that own Carbery continue to operate independently. They operate their own farm stores, provide services for their own members, and each decides on the milk price it pays its own members.

Despite this, or perhaps because of it, they typically pay the top milk prices in the country. Eric Donald, commenting in the Irish Farmers’ Journal in 2006, said: “For the second year in a row, Bandon has emerged to pay the highest price in the country… the second and third highest milk prices in the country last year were also paid in West Cork by Barryroe and Lisavaird, respectively. Wexford creameries disrupted the West Cork four-in-a-row record by placing just ahead of Drinagh Co-op.”

To the surprise of the pundits, Glanbia topped the milk price league in October 2006, with one of the Carbery coops a close second, underlining the importance for farmers of the strong competition from the smaller co-ops.
Marketing together — The Irish Dairy Board (IDB) is a second-level federated cooperative owned by Irish dairy coops. With subsidiaries in the United Kingdom, Germany, Belgium, France and the United States, IDB’s key task is marketing Ireland’s dairy products internationally. It has proved particularly useful for small- to medium-size co-ops, enabling them to access export markets. Inevitably, to some extent it duplicates the marketing activities of the larger coop/ PLCs, but it still enjoys strong support from the big coops. With a sales turnover in 2004 of 2 billion euros, IDB has enabled small-scale Irish co-ops to enjoy the benefits of large-scale operation.

Its key competitive advantage is the Kerrygold brand, a trusted brand for quality butter in about 60 countries. The Kerrygold brand accounts for 47 per-cent of the IDB’s total sales, with a third of Kerrygold butter being sold in Germany. There is also considerable potential for using the Kerrygold brand to promote other consumer products in Europe. In recent years, IDB has been highly profitable, with pre-tax profits in 2003 reaching a record level of 36.5 million euros.
Purchasing together — Irish dairy co-ops have traditionally been involved in operating stores, with the aim of reducing the costs of farm inputs and supplies. The larger co-ops and PLCs have enjoyed favourable terms with conventional wholesalers. These deals were not always available to smaller co-ops. To address this problem, CEOs of smaller co-ops met in 1996 and set up Associated Trading Co-op (ATC), an association of co-ops that would coordinate the purchasing of a wide range of store goods, with the aim of improving the profit margins and competitiveness of their members.

Today, 20 of the smaller cooperatives are members of ATC, which has an annual turnover of 30 million euros. It is a low-overhead agency, without warehouses, inventory or delivery trucks and is managed by a part-time coordinator, assisted by representatives of the membership. It pools the orders of member co-ops and identifies and negotiates with potential suppliers, which are visited to ensure quality standards.

Members are required to purchase the amounts they ordered from the selected sources, and goods are delivered direct to the co-ops by the suppliers. ATC has also developed its own brand name, Co-op Source, and suppliers pack a growing range of products in Co-op Source packaging. The aim is to build an attractive brand, which guarantees quality products at reasonable prices.

Different approaches to rationalization, restructuring
While cooperatives are often slow to merge, many of them, particularly the bigger ones, have embarked on rationalization. For example, Dairygold has divested itself of a number of unprofitable operations and reduced its labor force by one quarter. Glanbia PLC has a turnover of about 2 billion euros and is 55 percent owned by Glanbia Co-op. It has almost completed a major restructuring of its food operations and is now growing businesses in cheese-based nutritional ingredients and consumer foods in the United States. Its emphasis on health-based functionality is being supported by a new 15-million-pound research and development innovation center in Kilkenny.

On a more modest scale, many smaller cooperatives are rationalizing their milk transport collection divisions by outsourcing, or by making arrangements with neighboring co-ops. Connacht Gold is providing a 2-cent-per-gallon bonus for farmers who invest in new higher capacity milk bulk tanks on their farms. This will allow the co-op to move to an every-third-day milk collection schedule. Two or three co-op drivers will work a 24-hour shift with the same truck.

This is a very different way of rationalizing. Unlike the usual approach, this is a rationalization strategy that: a) benefits farmer members by decreasing their co-op’s costs, and b) protects jobs in local communities.

Who benefits from acquisitions?
Acquisition (particularly overseas acquisition) is a favored route to growth for the giant co-op PLCs, and has led to considerable diversification. Kerry Foods, for example, is a very successful business, but fewer and fewer of its activities relate to the needs of local dairy farmers. In 2004, Kerry Foods spent 665 million euros on eight acquisitions, and it recently set up a Bioscience Division, thus extending the group’s food ingredients platform to bio-ingredient and pharma-ingredient applications.

This opens up a new range of customers for Kerry in the pharmaceutical industry. During the past 10 years, Kerry has invested an average of 4.5 million euros per year on the continuing development of this site. In spite of its scale of operation, Kerry is being pressured by major U.K. retailers to relocate some of this Kerry-based production to England for the convenience of Tesco and Wal-Mart.

Impact of different types of acquisition
The above approaches to growth through acquisition ultimately export Irish funds and jobs overseas and divert substantial profits to non-farmer investors, all of which is likely, in the long run, to have a detrimental effect on the survival of small-scale farmers and rural communities in Ireland.

The kind of acquisitions favored by small- and mediumsize co-ops are often in marked contrast to those of the giant co-ops. Instead of hemorrhaging local resources, they build local communities and expand cooperative membership.

For example, Town of Monaghan Co-op, a medium-size co-op, has grown by acquiring the privately-owned Leckpatrick milk powder plant in Artigarvan, County Tyrone, and now processes milk in Northern Ireland for the first time. At its Artigarvan plant, it also produces a range of hydrolysed wheat and rice flours with various applications for end users in the bakery, baby foods, breakfast cereals and high-energy foods sectors.

Informal cooperation — and being kind to giants!
Another complaint of the “Grey Ones” is that co-ops lack flexibility because they have to buy all the output of member farmers, regardless of the co-op’s ability to process all of it at a profit. While the smaller co-ops are proud of their independence, they resolve the flexibility problem by working closely with nearby larger co-ops and PLCs.

For example, there is considerable cooperation between Irish co-ops and PLCs for milk collection and the use of processing facilities at both off-peak and high-peak seasons. Consider Newmarket Co-op in North Cork, which purchases milk from neighboring co-ops and PLCs to supply its established cheese markets and keep its plant running smoothly and at a high capacity. In turn, the other dairies are happy to supply milk rather than invest in a higher capacity plant, which they would use only for a short period each year.

Glanbia PLC, in which Glanbia Cooperative Society is majority shareholder, collects about 60 percent of the Mullinahone Cooperative’s milk quota of 1.7 million gallons. All of the milk testing for Mullinahone is done in the Glanbia laboratories. However, Mullinahone processes all of its own milk.

Irish co-ops also cooperate informally on EU milk quota issues. For example, in the winter of 2003, a small number of Kerry, Lakeland and Arrabawn dairy farmers transferred part of their milk supplies to Connacht Gold and gained access to its large ‘restructuring’ milk pool. The move was supported by all the co-ops involved.

Connacht Gold took in the dual supplies because it had satisfied demand for its ‘restructuring’ quota among its existing suppliers. In most cases, the suppliers transferred 5,000 to 10,000 gallons of their milk quota to Connacht Gold, which benefited from an increased milk supply. Kerry, Lakeland and Arrabawn co-ops were happy to support their own members’ gaining access to additional quota because this increased family farm income.

Other advantages of being small
Among the other advantages of running small operations are: responsiveness on health issues, product traceability, maintaining closer relationships with farmer-members and the ability to respond more rapidly to member and customer needs.

Smaller co-ops maintain that they are better situated to build consumer confidence on traceability and health issues. This, they say, is because they are much more in touch with their farmer suppliers. Stronger links with suppliers and awareness of their needs, together with the flexibility of a small-scale operation, mean that small co-ops can react swiftly to help farmers deal with farming difficulties.

What conventional firm would act like this small cooperative?
The following excerpt from the 2002 North Cork Cooperative Society annual report underscores what proponents see as the small co-op advantage.

“The adverse weather conditions last summer created serious income pressure on our members, which was keenly felt at the farm level. As an independent cooperative, we are deeply committed to providing appropriate support for our members, and we swiftly moved to cushion their problems by supporting the milk price throughout the year.

“Your Society also introduced a further series of schemes aimed at easing the serious financial strain on members, which saw feed prices reduced. These extraordinary measures were taken to help members through a particularly difficult season and were funded from co-op reserves.”

Cooperative outsourcing
Many smaller co-ops are beneficiaries of outsourcing from the larger co-ops and PLCs. Although operating on strictly business lines, cooperative outsourcing is also an indication of cooperation between cooperatives.

Dairygold Co-op has chosen Town of Monaghan Cooperative to produce its Sno brand of yogurt products. Town of Monaghan already produces Spelga Yogurt (which is the market leader in Northern Ireland) for Dale Farm Ltd., in addition to its own Mona brand.

It is not only the larger co-ops that are engaged in outsourcing. Some of the smaller ones have been able to use this approach to enhance their efficiency.

Thwarting the pessimists!
Small can be efficient as well as beautiful! We have seen how small co-ops can address scale issues in production, marketing and purchasing by observing the cooperative principle of Cooperation between Cooperatives. A compilation of effective federations, joint ventures, secondlevel co-ops and intelligent mutual aid can enhance the effectiveness of small and large alike, and thwart the cynical pessimism of the Grey Ones!

Editor’s note: for references used for this article, please send an e-mail to: Briscoe@ucc.ie, or Michael.ward@ucc.ie.

November/December Table of Contents