Brave decision by Glanbia

FEW relationships in the world of business are stranger than that between Irish dairy farmers and the public limited company arms of their co-ops.

Unless co-ops are content to stay local, and can sell enough product locally to pay milk suppliers the prices they want, they have to expand.

In Europe, with milk quotas limiting the business, and with some of the highest milk prices in the world, a co-op must look to the world market, if it exhausts the sales possibilities at home.

Finding the money needed for overseas expansion is always difficult for co-ops.

Selling shares in the co-op on the stock exchange is a legitimate option for an expansion-minded co-op.

The main other option is to borrow funds.

In practice, Irish co-ops which went public have also got expansion funds from borrowing.

Having plc after their names made it easier to borrow.

Because of the increased scrutiny of public companies, they can also usually get better rates when they borrow.

And as long as there is market demand for their shares, a public company can always issue more stock. This makes mergers and acquisitions easier, because shares can be issued as part of the deal.

Public companies can use shares to attract and retain good employees.

Going public provides owners and founders with an exit for selling their holdings in the business — this has proved useful for Kerry Co-op shareholders who have valuable plc shares for retirement funds or family settlements.

These are the advantages which co-ops gained by going public. In return, they diluted their ownership; had to reveal all company information; and became subject to stock market fluctuations (a plunge in the share price might discourage employees, customers and suppliers).

Co-ops like Glanbia have got a lot of cash from the stock market, but statements issued on behalf of dairy farmers often indicate misgivings about the decision they made to go public.

The Kilkenny based co-op made another big move last week, announcing it would pay an interim 2006 milk bonus of 1.76 cent per litre (8 cent per gallon), from August to December for manufacturing milk suppliers, and would pay its members two cent over the average of the 2006 KPMG milk price audit (excluding Glanbia) for the year.

At the same time, Glanbia plc announced a reduction in the price to be paid for August manufacturing milk of 1.32 cent per litre (6 cent per gallon) as a consequence of ongoing declining market returns, but would make no further adjustment to manufacturing milk price in 2006.

The combined decision results in a 0.44 cent per litre (two cent per gallon) August manufacturing milk price rise for suppliers who are members of Glanbia co-op.

It sounds like a solution to make everyone happy in these difficult times for the dairy industry. Farmers will end up with above average milk prices, despite spiralling processing costs and falling milk prices.

The plc and the share price won’t be damaged.

But it’s not enough for dairy farmers, as represented by IFA. They said management are bleeding co-op resources, using farmers’ own money to top up the milk cheque, while feather bedding the plc, paying as little as possible to their milk suppliers in order to satisfy stock market investors and deliver €70m in profits.

However, the money must come from somewhere, in these hard times.

Digging into profits would only slow down the company’s progress, at a time when Glanbia must look to expansion of its overseas divisions for growth, because the EU is cutting financial supports for the dairy sector.

The company has predicted good performance from international operations, and hopes for successful commissioning of current joint ventures.

Considerable funding is needed for these ventures, if they are to contribute sufficient profits to tide Glanbia over a very difficult time for dairy processing in Europe.

As for satisfying stock market investors, it must be remembered they are a major potential source of future funding.

They also include co-op members who don’t want to see share values slipping.

Digging into its funds is a brave decision by the co-op, and a positive one, even if it depends on progress for a payoff.

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