To: Scottish Parliament Economy, Energy and Tourism Committee

Transcription

1 To: Scottish Parliament Economy, Energy and Tourism Committee Innovation in Social Enterprises and Employee Owned Businesses (including Co-operatives) - a contribution to the discussion from SAOS Introduction and Summary of SAOS Contribution SAOS (the Scottish Agricultural Organisation Society Ltd is Scotland s expert organisation in agricultural co-operation and supply chain collaboration established in 1905, and structured as a co-operative society owned by Scotland s farmers co-ops (our members, whose collective throughput in 2014 was 2.3 billion). SAOS delivers specialist services to a wide range of stakeholders, including the Scottish Government and Scotland Food & Drink. Although we acknowledge that some may not regard agricultural co-operatives as social enterprises, we consider that experience from these co-ops may be relevant to the Committee s theme of innovation. Agricultural co-operatives generate higher collective levels of ambition, motivation and innovation amongst farmers, and worldwide, they provide one of the most commercially important interfaces between farmers, their suppliers and their markets in both developed and developing economies. Co-operatives amongst farmers have unique potential to help realise the Scottish Government s policy objectives of a properly market driven farming industry that is responsive to supply chain needs, whilst delivering scale efficiencies, and environmental responsibility. As the opportunities and complexities of agriculture increase, sharing investment and risk through co-operation will deliver a triple bottom line of farm business success and resilience with environmental responsibility, while helping to safeguard family farms and rural employment. Our vision is that farmer co-operation and co-ops will be pre-eminent in optimising farmers market opportunities and their environmental credentials by acting as initiators of innovation. Their effectiveness will create better connections with, and be essential to, a sustainable food and drink industry, and they will be a positive factor in attracting new investment in food and drink processing. Our challenge is to fully embed cooperation to a high level in all sectors of agriculture. Our request is that the role and development requirements of co-operatives receive appropriate priority by public bodies in future policies and strategies, taking into account their distinct characteristics, community embedded ownership and control, and their enabling capabilities for individuals and small businesses. Although agricultural co-operatives are supported by EU policy, our experience is that there remains limited understanding in the public sector of the features and factors that determine agricultural co-op success. The Scottish Government should acknowledge that co-operatives require specialist support and it should clarify and confirm its commitment to co-operative enterprise. SAOS Contribution to the Discussion Our contribution to the discussion is structured as requested by the Committee: Part 1: The scale and growth of agricultural co-operatives in Scotland, and the key benefits of membership. Part 2: Examples of innovation in agricultural co-operatives and an increasing role in future. Part 3: Sources of funding and support. Part 4: Suggestions for public bodies 1 P a g e

2 Part 1: Current Scale and Contribution of Agricultural Co-operatives Quantitative Measures of Agricultural Co-operatives SAOS compiles key statistics of its member co-ops. They trade in Scotland, and are predominantly headquartered in Scotland. As agri-business has over the years up-scaled for competitiveness, some SAOS members have extended their operations to farmers in England and Wales, and some England-based co-ops that trade in Scotland have joined SAOS. None disaggregate Scotland only throughput. We have tracked our members growth in throughput over the years. The top 20 by throughput value can be found in the appendix on pages 9 and 10. An inter-year comparison of a selection of SAOS members from 2001 to 2014 reveals the following growth: Machinery Rings throughput 1,009,000 75,900,000 ANM Group 68,711, ,600,000 First Milk 176,000, ,000,000 Scottish Pigs 27,028,000 58,400,000 Scottish Shellfish MG 1,775,000 13,800,000 Tarff Valley 11,500,000 64,000,000 United Farmers 22,900, ,000,000 United Oilseeds 54,500, ,400,000 Over this period, SAOS co-op members increased the value of their throughput at a faster rate than the growth in the value of Scottish agricultural output, due to their embracing innovation. The selection of co-ops above recorded an aggregate growth factor of 3.2 between 2001 and The co-op members of SAOS in total recorded a growth factor of 2.8. During the same period, the gross agricultural output value of Scottish agriculture recorded a growth factor of 1.6 (2001: 1,887.1 million. 2014: 3,049 million). Co-operatives are limited liability corporate entities owned by their farmer members, registered under the UK Co-operative and Community Benefit Societies Act 2014 (formerly the Industrial and Provident Societies Act 1965) and as such they are required to submit annual returns to their Registry, the Financial Conduct Authority. Key financial information from audited accounts is therefore on the public record. Despite this, there is currently no comprehensive analysis derived from these annual returns reporting the scale and performance of UK agricultural co-ops. In addition, several agricultural co-ops based in other EU member states have significant operations with farmers in Scotland and the UK, trading through plc subsidiaries registered under the Companies Act. Examples include Danish Crown, Demark (UK subsidiary Tulip plc), ForFarmers, Netherlands (UK subsidiary ForFarmers UK Ltd), BayWa, Germany (UK subsidiary Cefetra), Arla amba, Denmark (UK subsidiary Arla Foods UK plc). As a result it is difficult to track the performance and market shares of agricultural co-ops in the UK. As accurate analysis is not available, there is a degree of co-op invisibility. Although the scale of activity is selfevidently substantial, the absence of accurate statistics means that the significance of agricultural co-ops in the agri-business economy of the UK is understated and undervalued. Although the available statistics are far from being full and accurate (for example, they do not include trade of EU based co-ops in Scotland, such as Arla with important milk processing facilities at Lockerbie), they never the less indicate significant scale and growth in agricultural co-operation, and suggest that the value share (market share) of agricultural co-operatives in Scottish agriculture is growing. A further measure we obtain from co-ops in membership of SAOS, is the number of farmer members each has registered in their co-op. In 2014, this figure totalled more than 26,000, exceeding the number of active farmers in Scotland. Membership is always voluntary. Farmers may join or leave membership as they choose in light of the services and financial advantage they derive from their co-op. Many active farmers are members 2 P a g e

3 of several co-ops; for example, a machinery ring to assist in field operations, a grain group to store and market cereals, and a livestock group to market livestock. The primary purpose of a co-operative is to capture and deliver value for members through their use of its services. Farmers measure the effectiveness of their co-op by the profitability of their farm business, achieved through participation in the co-op. Each co-op has a member value proposition which indicates how value will be attained by a farmer from their membership. Three types of agricultural co-operation are found in Scotland. These can be summarised as: More competitive farming: neighbouring, sharing, group farming, machinery rings, advisory groups, animal health groups. Improved participation in the supply chain: buying groups, supply co-ops, marketing groups, central grading, packing, QC, processing, etc Strategic strength in UK production, food manufacturing and processing or marketing. Co-op activity and market shares vary considerably amongst farm types. In general, in sectors which are less subsidised (by the CAP), co-operative activity and market shares are highest (eg pigs, soft fruit, and vegetables). And vice versa, where subsidies are more prominent, co-op activity and market shares are lower (eg beef and sheep). Other sectors lie closer to a mid-point of co-op participation and share. Machinery and labour ring co-ops are an example of innovation in farm co-operation and have grown rapidly over the last 15 years, built on a wide range of cross-contracting and group services provided via a low cost transactional platform. The Scottish Machinery Rings Association compiles annual statistics, which can be found in the appendix. Key to co-op participation is the member value proposition. In 2015, we identify the main purpose and advantages derived by farmers from agricultural co-operative membership as improving farm performance, profitability and security by: Optimising market position and value Creating supply chain collaboration to increase market connection, opportunity and security Gaining access to scale efficiencies and economies Enable sharing of risk and accessing risk management Market led innovation Enabling pooling of resources for investment Enabling pooling of labour and machinery in machinery rings Safeguarding Scotland s structure of family farms Investing and providing employment in rural areas Maintaining services and facilities in rural areas Agricultural Co-operation Out-with Co-op Entities In much of agriculture, informal co-operation is part of the culture of the farming community. Sharing with neighbours or assisting neighbours either individually or in groups, is common practice and takes place outwith any separate corporate entity. This activity therefore, although undoubtedly important, is unmeasured and its value is unquantified. SAOS commissioned research in 2009 that gave at least some insight into levels of co-operation activity as a whole, including formal (in a co-op) and informal co-operation, and an insight to farmer perceptions of cooperation more generally. The research was carried out by George Street Research amongst a sample of farmers representing different farm types and geographical areas throughout Scotland, excluding crofting. Some of the findings from the research follow. 3 P a g e

4 Responses when asked to state whether involved in co-operation either formal or informal: 65% of farms of 100Hectares (Ha) and larger co-operate 70% of dairy farms co-operate 68% of general cropping farms co-operate 72% of Borders farms co-operate 69% of Tayside farms co-operate 59% mention machinery rings 71% identify cost saving as main benefit 85% said they would co-operate at the same level or more co-operation in the next 5 years (More cooperation for labour sharing and cost saving. Less co-operation due to impending retirement) Responses when asked to state advantages of co-operating (formal or informal): Total 100Ha- 100Ha+ Lower fixed or variable costs 60% 83% Better input prices 56% 74% Better output prices 45% 69% Increased profits 51% 67% Fairer share of end price 40% 61% Opportunity to supply new mkts 44% 58% Opportunity to add value 37% 55% Better risk management 36% 47% Our conclusion is that co-operation amongst farmers is more embedded than generally is assumed. It is also notable that larger and more business-oriented farmers are more likely to co-operate in formal co-ops, than smaller farmers. As the research was carried out by telephone interview, the researchers had the opportunity to seek deeper explanation behind some of the initial responses. Two factors that emerged were: Some farmers had forgotten that the business with which they were trading was in fact a co-op, and only remembered when prompted. This may be adding to a mistaken perception that co-operation is not common in Scotland. Many small farms of less than 100Ha were part time farms, and only accounted for part of the income of the proprietor, or were farmed by a neighbour. SAOS has committed to repeat and update the research in Part 2: Examples of innovation in agricultural co-operatives and an increasing role in future Many agricultural co-operatives lead innovation amongst and on behalf of their members. The following are exemplars, and a summary table with more examples can be found in the appendix on pages 9 and 10. East of Scotland Growers. Co-op of farmers in Lothians, Borders and Fife partnering via their co-op in research and commercial development of high oxidant healthy broccoli. Ringlink Scotland. Farmers in north east Scotland cross contracting labour and machinery via low cost ring co-op platform. Enables some farmers to better utilise machinery whilst others save by choosing to use only ring-contracted machinery rather than purchase their own. The ring enables rural labour to be mobile amongst farms rather than fixed (important as most farms require part time or peak time help). Ringlink has introduced its own intern scheme to provide school leavers with experience and training in farm work. This has proved successful in recruiting new start farm employees who may 4 P a g e

5 not otherwise be aware of farm work as a career choice. Ring co-ops have extended their services to group negotiation of purchases on behalf of their members. Grampian Growers. 25 Tayside farmers co-operating to diversify into an unsubsidised crop and market: daffodil bulbs. 95% are exported to the USA and Europe. GrainCo Oat Group. Fife and Lothian farmers negotiating majority of oat supplies to Quaker Oats plant in Fife via their co-op. Complying with agreed agronomy scheme, quality management and delivery programme. Highland Grain. Farmers on the Black Isle co-operating to up-scale drying, storing and marketing of malting barley for improved market returns and security and increased efficiencies relative to individual farm drying and storage of grain. Also recovering waste materials and utilising to provide heat for crop drying. Preferred suppliers to maltsters and distillers of in-specification, large volumes of grain. Established farmer co-operatives demonstrate leadership and have excellent potential to lead future innovation. Co-operation generates and enables higher levels of ambition and motivation amongst farmers. Farmers co-ops world-wide deliver and demonstrate these advantages on behalf of their members. Critical Factors for Co-op Innovation Based on our experience of agricultural co-ops, we identify the following critical success factors: 1. Positive ambition and culture of co-op Board and Management 2. Effective governance practices and participation at Board and Member levels 3. Communication to members of a compelling vision, value proposition and performance 4. Strategic analysis and planning by high calibre directors and managers 5. Involved and committed co-op staff 6. Access to specialist co-op knowledge services and support. SAOS delivers training to non-executive farmer directors of co-ops, and provides specialist assistance in strategic planning. Future Potential Towards 2025, the opportunities for increasing the output and value of Scotland s farming (and food and drink industry), while simultaneously making more efficient use of resources, are substantial. Leading-edge knowledge and technologies are becoming more impactful, more affordable and more available than ever and, accessing markets and consumers who value the special provenance and qualities of Scotland s products is increasingly feasible, wherever they may be. While the opportunities for Scottish agriculture are greater than ever, so are the challenges and demands that must be overcome or managed within extremely competitive global food markets. Volatility, uncertainty, complexity and ambiguity emanating from a myriad of sources feature and impact on all parts of farming (and food and drink supply chains) and at an accelerating pace. This means that better management of farm business resources and risks, and the need for greater farm resilience, must be accommodated with the requirement for ambition, entrepreneurship, innovation and investment. The essential tasks of research, innovation and planning: knowledge and translation of markets, fulfilment mechanisms, new production technologies, precision farming and data opportunities, environmental consequences, finance needs and business models, potential returns and critical risks are, in combination, moving beyond the resources of many individual farmers. There is a requirement for mechanisms through which farmers can access, interpret and act upon knowledge that provides leading edge potential, in combination with skills and connections that deliver commercial market participation and fulfilment in a more global world market. 5 P a g e

6 Farmers acting together in co-operatives are more advantageously positioned to achieve this combination of outcomes than farmers acting individually. The fore-runners are already established. The advantages and future potential of Scotland s leading agricultural co-ops are: Access to markets, market intelligence and marketing expertise, UK and global. Very few individual farmers can attain the market intelligence and marketing professionalism to achieve an optimum market position that serves their interests, and fulfils all their customers requirements. In addition co-operation enables access to market risk management tools, which may include forward contracts, futures markets, insurances, and collective self-insurance as well as avoiding over-dependency on a single customer. Scaling-up through co-operation opens market and related farming opportunities that are not otherwise accessible. Co-operation enables more direct access to market developments and opportunities, and facilitates collaborative chain relationships. Climate change is a priority change driver for farming. Co-operation and collaboration opens to individual farmers the efficiency advantages of up-scaling and opportunities to adopt smart technologies to maximise productivity and minimise waste. Investment in modern large scale drying equipment and storage facilities for grain, as exemplified by Highland Grain, has demonstrated reduced energy consumption in storage and logistics relative to farmers constructing numerous, smaller, individual stores. Co-operation has leading potential for ambitious farm programmes that research and implement tailored innovations in precision farming in crops and livestock supported by expert advice. These developments can be pursued in collaboration with supply chain partners, and may address opportunities for landscape scale initiatives where such opportunities exist. Supply chain participation. Agricultural co-ops are responsive partners in supply chains delivering on-time, in-specification, large volumes of primary prepared product to an agreed supply programme. Co-ops provide traceability and quality management back to farm sources. Procurement planning, and specification or crop variety development are addressed jointly with supply chain partners for rapid market response and competitiveness. Further expanding the connection of farmers with the food chain in Scotland is a priority of Scotland Food & Drink s industry strategy. Shared investment risk. Collective investment and sharing of risk enables the acquisition of higher specification buildings, plant and equipment to grow, harvest, quality condition, process and deliver farm output to customers, meeting the most demanding specifications. Some agricultural co-ops are involved in secondary processing (food manufacturing) or high investment primary processing such as freezing vegetables. Most such facilities are beyond the investment capability of individual farmers. Access to innovation: technology, information, interpretation and advice. Co-ops pool members resources to commission or purchase technology and information, tailor-made or adapted to the farming circumstances of their members, with the purpose of providing opportunity and advantage to them. This is of a scale, complexity and relevance beyond the resources of most individual farmers. The EU provides a grant to recognised Producer Organisations specifically to develop and implement their own innovation programmes. Risk management for added resilience. Marketing and innovation entail considerable risk for farmers, in addition to on-farm production risks resulting from weather, disease control, etc. Collective action provides additional risk management and assurance. Risk management is an important component of the co-op membership value proposition and contributes to farm resilience. Co-op strategies are more than ever concerned with risk management across the spectrum of farm production, marketing, and innovation. 6 P a g e

7 Part 3: Sources of funding and support Agricultural co-ops are funded by a combination of: Member equity and loans. Agricultural co-ops do not access external equity Bank loans and overdrafts Capital and development grants. Agricultural co-ops have the same access to grants and account management by enterprise agencies as all other businesses, with the exception of EU Producer Organisation grants applicable only in the fruit and vegetable sector (which grant assist innovation programmes). The key grant for many is: Scottish Rural Development Programme Food Processing, Marketing and Co-operation Grant Scheme This scheme provides both capital and non-capital grants to eligible projects. Several agricultural co-ops have successfully applied to the scheme to assist funding of major investment such as a grain store or for processing equipment. SAOS is the principle source of expert support to agricultural co-ops in Scotland. Some of our work is grant assisted by the Scottish Government, subject to state aid regulations. Other services we provide are paid for by co-ops on a consultancy basis. Our services to agricultural co-ops include: Hands-on advice and assistance to groups considering how to launch a new business that involves cooperation or joint venture including sources of grant funds Market research, feasibility studies, business plans and financial plans required prior to new business formation Model constitutions and members agreements Advice on job specifications and manager recruitment Assistance with registration and company secretarial tasks Induction and foundation skills training for directors Strategy review and board strategy workshops Strategy development and business planning Advice and assistance on member communications Multi-partner public/private sector projects in agriculture, food and drink Sector and supply chain analysis and strategy development Research and innovation of co-operative systems and impacts Part 4: Suggestions for public sector bodies Our request is that the role and development requirements of co-operatives receive appropriate priority by public bodies in future policies and strategies, taking into account their distinct characteristics, community embedded ownership and control, and their enabling capabilities for individuals and small businesses. Although agricultural co-operatives are supported by EU policy, our experience is that there remains limited understanding in the public sector of the features and factors that determine agricultural co-op success. The Scottish Government should acknowledge that co-operatives require specialist support and it should clarify and confirm its commitment to co-operative enterprise. In respect of agriculture, SAOS will assist in this, and provide the development interface with farmers and the agricultural co-op business sector. Co-operative business is unlike more conventional partnership and company forms of business organisation in the following fundamental ways. 7 P a g e

8 The purpose of a co-operative is different the purpose being collective action to generate and transfer benefit to members rather than to maximise profits in the co-operative entity itself. The legislative framework is different co-operatives generally constitute under the Co-operative and Community Benefit Societies Act 2014 (replacing the Industrial and Provident Societies Acts) as opposed to the Companies Act or partnership law, and their registry is the Financial Conduct Authority rather than Companies House. Capitalisation and returns are different the co-op Act specifies that investment and benefits should be proportional to use made of the co-op, not in proportion to monies invested. This leads to very different equity and loan structures with distinct challenges. The form of participation is different collective agreement to a common form of participation is required, necessitating a common form of agreement between all members of the co-op in which respective responsibilities and undertakings are specified. These agreements enjoy exemptions from competition law in bona fide agricultural co-ops. Governance is different a co-op is a democratic organisation in which each member essentially has one vote. This ensures that a co-op always works in the best interests of the majority of members and that a small internal group cannot hijack the business to serve their own ends or discriminate against other members. This form of governance requires advanced forms of internal communications and decision making structures. Co-op Board responsibilities are different the demands on co-op directors in respect of member communication are much greater than those in most companies, where shareholders are generally at arms length. Farm profitability and therefore the livelihood of farmer co-op members depends on the performance of their co-op. Directors of co-ops are very directly accountable and are usually highly visible, being elected from amongst the farming community that comprises the membership. The distinct features of co-operation and co-operative business described above necessitate advisors with specialist training, specialist knowledge, specialist experience and specialist skills. They are not available amongst conventional company business advisers, and are scarce in the legal and accountancy professions. It is important that the public sector acknowledges this market failure in co-op specialists and ensures that provision is made to overcome it. In some circumstances, the limited options available to farmers to capitalise their co-ops has proved to be a significant constraint to investment and growth. Not having access to financial markets creates a disadvantage relative to PLCs and can present a barrier to entry to some activities. Public sector bodies should acknowledge this issue and work with the co-op sector in identifying ways to alleviate this constraint. Appendix The examples in the following pages provide an insight into the range of agricultural co-ops in Scotland and their members collective purpose. January 2016 Contact: james.graham@saos.coop SAOS (Scottish Agricultural Organisation Society Ltd) The Rural Centre, West Mains, Ingliston EH28 8NZ Web: saos@saos.coop Tel P a g e

9 APPENDIX Some Examples of Innovation in Agricultural Co-ops in Scotland Sector Co-op Turnover 2014 Purpose Market position Innovation Vegetables East of Scotland Growers 11.2 m Collective production and marketing of Broccoli in Fife and Lothians 20% of UK supermarket Broccoli EU PO with in-house R&D programme Vegetables Scottish Borders Produce 7 m Collective production and marketing of Peas in Fife, Borders and Lothians Cereals East of Scotland Farmers 20.1 m Marketing members malting barley Pigs Scottish Pig Producers 59.7 m Marketing members pigs Cereals GrainCo 165 m Marketing members wheat, barley, oats Supplier of frozen peas to supermarkets Specialist supplier to drinks industry Main supplier of Scottish pigs to market Largest co-op grain marketer in south Scotland, north England Sequence of planting and harvesting across 60 farms for max quality Investment in specialist agronomy, drying, store, and QC JV with Danish Crown (Tulip) & Scotlean Pigs in Brechin processing plant Collaborative oat group with Quaker Oats, Fife Cattle and Sheep ANM Group 150 m Livestock transfer hill store producers to lowland finishers Dominant and vital role across north, north east Scotland Provision of finance for finishers. Seeking to expand support to encourage growth of production Sheep and Cattle Farm Stock Scotland 12.2 m Market members finished lambs and cattle Largest lamb marketing group in Scotland. Secure contracts to range of meat processors In-train with supply chain improvement programme to improve quality and returns Farm operations Ringlink Scotland 41 m Reduce production costs through efficient deployment of machinery and labour 2,700 members in north and east Scotland. Largest UK ring Intro of intern scheme to encourage school leavers into farming Daffodil Bulbs Grampian Growers 7.4 m Preparing and marketing members Daffodil bulbs 90% of production exported to USA and EU Investment in exclusive rights to new potato variety Gemson Dairy Milk Suppliers Association n/a Negotiating with Lactalis milk buyers All Lactalis suppliers in membership Seeking recognition as Scotland s first Dairy PO 9 P a g e

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