23 March 2010
Dairy co-op failed when strategic ambition trumped financial reality
The collapse of Dairy Farmers of Britain (DFB) in June 2009 arose from the triumph of strategic ambition over financial reality, say MPs. Poor decision making about the pace and scale of expansion of the agricultural co-operative and a substantial loss of confidence both contributed to the failure of the business.
Launching a report on the collapse, Mr Michael Jack MP, chairman of the Environment, Food and Rural Affairs Committee said today: “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. By paying too much for tired processing assets and the customer base of Associated Co-operative Creameries, they sowed the seeds of their eventual downfall. Members’ trust in their management was rewarded by personal loses totalling millions of pounds and the fractured dreams of a better milk price. DEFRA must now exercise its duty of care for agricultural co-ops and ensure that future governance and capital funding arrangements are updated to minimise the risk of this type of business failure in the future.”
In a report evaluating why DFB’s 1800 farmer members sustained substantial financial losses the Committee reaches a number of conclusions about the business:
Dairy Farmers of Britain wanted to add value to its members’ milk by purchasing processing facilities, but the way in which the co-operative pursued this strategy proved over-ambitious given the youth of the business and the financial constraints it had to live within.
DFB’s difficulties were compounded by poor communication between the Board and members and a governance structure that did not function as well as members were entitled to expect.
The purchase of Associated Co-operative Creameries from the Co-operative Group in August 2004, for a total of £81 million, proved a key factor in DFB’s ultimate demise, particularly because it tied the business into a loss-making contract to supply a competitor that cost DFB millions of pounds.
By late 2008, DFB was caught in a vicious circle whereby a loss of confidence provoked member resignations which led in turn to a further loss of confidence and yet more resignations. As members lost confidence, so then did suppliers until, ultimately, DFB’s customers also lost confidence.
The committee also concludes that DFB did not fail because it was a co-operative. Rather, as MPs argue in the report, the manner in which the business failed highlights a number of ways in which UK agricultural co-operatives could be strengthened:
Defra should set up a task force with the Treasury and industry representatives to investigate ways to overcome the constraints on the capitalisation of UK agricultural co-operatives.
The current tax system discourages investment in agricultural co-operatives by taxing money that is retained within the business and only notionally paid out to farmers. It should not be taxed at that stage but only when it is actually withdrawn.
Insolvency legislation as it applies to co-operatives is not fit for purpose, and needs to be updated as a matter of urgency; the Government should amend the relevant legislation to ensure that insolvency appointments over co-operatives are made on the same basis and governed by the same rules as insolvency appointments over limited companies.
Lastly, while the committee concludes that Defra responded positively to the collapse of DFB, it criticises the Rural Payments Agency for failing former DFB members in England by proving unable to follow the lead of the Welsh Assembly Government and offer early single farm payments to affected farmers.
NOTES TO EDITORS:
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