Inquiry into dairy collapse sets out vision for stronger co-ops

By Guy Montague-Jones

- Last updated on GMT

A UK parliamentary inquiry has outlined ways to strengthen agricultural co-ops after concluding that the Dairy Farmers of Britain (DFB) sowed the seeds of its eventual collapse by spending too much for tired processing assets.

The co-op had employed 2,200 people and was responsible for 10 per cent of UK milk production when it went out of business in June 2009.

Reporting on the collapse, the Environment, Food and Rural Affairs (EDRA) Committee said the co-operative model itself was not to blame. Instead, MPs concluded that poor decision making, loss of confidence, over ambition, and a highly competitive marketplace all contributed to the failure of the business.

Committee chairman Michael Jack MP 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.”

Poor decision making

The purchase of Associated Co-operative Creameries from the Co-operative Group in August 2004, for a total of £81m, was identified as one of the key factors in the demise of DFB.

The co-op had sought to buy up the processing facilities to add value to members’ milk but MPs said the purchase was poorly handled and proved to be over-ambitious given the relative youth of the business and its financial constraints.

MPs concluded that management paid too much for the creamery and entered into a loss-making contract to supply a competitor that cost DFB millions of pounds.

“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,”​ said Jack.

Problems were then compounded by poor communication between the Board and members and a governance structure that did not function properly. As financial and operational difficulties worsened, a crisis of confidence set in.

The EFRA committee said: “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.”

Recommendations to strengthen co-ops

In its assessment of the collapse of DFB, the committee leveled no blame at the co-op model itself although MPs did highlight a number of ways in which UK agricultural co-operatives could be strengthened. These are recommendations put forward by the committee:

• 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.

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