NZX chief executive Mark Weldon likens the debate about the capitalist market versus the cooperative system to that between opposing sides in the abortion forum. “They talk at each other, rather than to each other. Where capital markets have miserably failed is in not trying to understand cooperatives but telling them what do. These are businesspeople in their own right. Running a farm is the same as running a business; it just happens to be incorporated differently.”

The major weakness of the cooperative model, says Weldon, is in its singular dependency on banks. “The global banking system has changed. Regulations mean it will continue to change. The cost of funds from banks is going up; the level of covenants banks are putting onto corporate is increasing.”

Weldon also advocates a ‘clean sheet of paper’ approach to business models after 18 months of massive change. “The days of a strong balance sheet being called a lazy balance sheet are well and truly gone.”

The issue with cooperatives is not whether their business model is right or wrong, but where they go next, says Rob Cameron, investment banker and chairman of the Capital Markets Taskforce.

“There are good and quite powerful reasons for them. The fact they have persisted tells you that alternative forms of service and supply haven’t worked for them, so the issue becomes how to help them evolve ... maybe to get bigger. That evolution may be about the business model or their ownership architecture, or both.”

Cameron’s government-appointed taskforce is to produce a plan to develop New Zealand’s capital markets. His company, Cameron Partners, has provided advice on strategy and capital structure to cooperatives including Fonterra, Silver Fern Farms, Livestock Improvement and kiwifruit marketer Zespri.

While New Zealand’s listed debt market is active, its equity market is small by any standards, he says. “We don’t know the complete reason for that, but some reasons are that a lot of the assets you’d expect to be listed are owned by central and local government, and the other reason is that co-ops are a big part of it. We seem to be less successful than other countries in bringing our smaller private firms through to being bigger firms on the market.”

Other challenges for the rural cooperatives are to get fitter and faster. The cooperative way, says van der Heyden, isn’t to be nimble – witness Fonterra’s meandering capital restructure journey. It’s a cliché, but the world is changing. Van der Heyden says rural cooperatives dealing in export must have a global strategy that can evolve with such change.

“I think the world will change for a long period of time now and companies won’t be so heavily leveraged again. So how does a cooperative structure itself for that new environment? It’s back to the capital structure again.”

Cameron predicts evolution within cooperatives will be driven by pressure from stakeholders, markets and their own success. They will have to get bigger to deal with scale and new markets.

“People need to be comfortable with the change ... When outsiders are providing capital other than debt, they need to be comfortable, they need to ensure stability and, if it doesn’t work out, they need to know how they can put Humpty back together again.
“Yes, it is a time of great opportunity – not just for cooperatives, but for their businesses ... If they don’t address the problem of change quickly enough, they will miss out on those opportunities.”

For Blue Read, the single biggest challenge for New Zealand’s rural cooperatives will be sourcing capital while keeping their stakeholders “happy and involved in the business”.

“It’s more about satisfaction. Satisfaction drives success more than money does. With the right set of values and the right understanding within an organisation, it will prosper.”