Barry Irvin, Chairman of the Bega Co-operative Society Ltd, (known as Bega Cheese), a co-operative with a 100 year history, points out the seven co-operative principles: voluntary and open membership, democratic member control, equitable contribution of capital, autonomy and independence, education, training and information, co-operation amongst co-operatives and concern for the community.

“Both the history and popular perception of co-operatives are surrounded by undefined notions of co-operation and equity. However, the legislation does not prescribe what they mean or how they should be achieved. Ultimately that responsibility sits with the Directors of individual co-operatives,” Barry says, and adds: “We can preserve those things in the co-operative movement that make us unique, but success and failure are driven by many things, structure is just one.”

The Bega Cheese example is an important one, a Co-operative with a 100-year history, a business that has tripled in size in the last three years, a strong culture focused upon change and opportunity, and a Board and management that’s first objective is the creation of wealth.

Barry Irvin defines Bega Cheese’s first objective: “For Bega Cheese, indeed for any organisation, it is important never to forget, who owns you, and to understand what their aspirations are. Because we are a co-operative, our owners’ definition of wealth relates to more than the business value of Bega Cheese or the dividend we pay on the capital they invest. It relates strongly to the price they receive for their raw material, and the underlying value Bega Cheese creates in their businesses.”

The definition of wealth accepted by Bega Cheese’s shareholders comes in a particular order:

1. Strong (above average) sustainable returns for their milk.
2. Commercial returns for their investment.
3. A growing valuable equity base.
4. A continuous ability to receive and add value to their produce.
5. A contribution to the community in a real sense; business growth, jobs, etc.

Barry explains, how the co-operative structure gives shareholders a different perspective and expectation in terms of wealth creation: “The co-operative shareholder is perhaps the most committed of all types of shareholders, the success of his or her business is directly related to the success of the co-operative. I believe the reason why so many co-operatives exist in the dairy industry is because this relationship is a daily one and the options to sell your product elsewhere are limited at best. In Bega Cheese’s case, geographic isolation means shareholders are truly committed to their co-operative. Their investment and participation in the co-operative is large. Their scrutiny of short and long term performance is intense and their understanding of the strategy going forward is vital.”

It is in this environment, that Bega Cheese has flourished. There is little doubt the dairy industry in Bega and the prosperity of the community would be very different if Bega Cheese did not exist.

Twelve years ago Bega was producing a mere 3,000 tonnes of cheese with no capacity to produce more. The growth of the business to the size it is today was first triggered by the installation of an alfomatic cheddar cheese plant. At the cost of $4m, an enormous amount for a small co-operative to raise at the time. The co-op was successful in raising $1m from around 80 of its 140 members. A combination of member equity and bank finance saw the alfomatic installed, and the real growth in the Bega Cheese business commence.

Barry Irvin remembers: “This one-off capital raising led us to realise the difficulty and potential inequity of co-operatives raising money from members at particular times. It was not much later, that we introduced a compulsory capital contribution scheme for all members, raising capital over time, with an endeavour for share capital to reflect business done with the co-operative.”

It was a benefit of the co-operative structure itself that allowed Bega Cheese its next expansion: the installation of a whey plant, with a further increase in cheese production, and a focus on using all the component parts of milk supply. No special contribution from members was required this time. Bega Cheese was the first New South Wales co-operative to utilise section 120(i)(c) of the Tax Act that allows co-operatives to borrow from State Governments for the purpose of capital expenditure, and claim the repayments of such loans as tax deductions.

This was not a new section of the Tax Act, and was in fact put in place in recognition of the advantage, public companies had in their access to the market for capital. Barry recalls: “We borrowed the money from the Queensland Treasury Corporation. The New South Wales Government was, at that time, not keen to support us in our endeavours. I might say, that it didn’t take us too many years before we convinced the NSW State Government of the merits of this approach, and we were in fact the first co-operative to establish a NSW Government Treasury loan, for the next stage of our development.”

Bega Cheese has, through a strong period of growth and capital expenditure, now established a number of facilities that allow it access to the benefits of section 120(i)(c). These capital tax deductions, combined with the ability to claim dividend payments as tax deductions for the co-operative, places the business in a very tax effective position, which facilitates and encourages growth, and is an advantage that only exists under the co-operative structure.

Bega Cheese’s capital expenditure represents a huge commitment by the shareholders. It was vitally important that shareholders both understood and supported the coop’s value-adding strategy during this period, and indeed they did, giving strong support to the organisation and stability to its Board. “Co-operative shareholders, I believe, are very willing to support both growth and value strategies,” says the Chairman. “Short lines of communication are a significant advantage for Co-operative Directors. I should, however, be clear, and state that one of my disappointments with the co-operative movement is, that significant erosion of value can occur within a co-operative with very little or no remedial action taken to protect the value that has often taken years to create. There are advantages to the regular market assessment of business that occurs for publicly listed companies.”

Barry explains, that the expenditure of $100m over a few years was a carefully considered strategy. “It was a strategy, however, that was built on market demand and a philosophy of value adding. It was about our soft assets: people, service, quality, and brands. Our influence on the supply chain is vital to this strategy, strong influence and control over the quality and type of raw material we receive is essential.”

There is no question that co-operatives have an advantage in this area. Bega Cheese was the first dairy company to introduce an externally audited HACCP program for its members, and continues to look to introduce innovative and environmentally friendly initiatives on farms. These approaches are aimed at Bega’s end customers being satisfied with the integrity and the quality of the product they receive.

By its very nature the co-operative movement is well placed to speak for the particular industry it is involved with. The ability to gain the ear of government and speak with a united voice for the industry as a whole has proved invaluable. The dairy co-operative movement, it could be argued, is responsible for the largest restructure package ever paid in Australia. $1.6 billion have gone directly to the dairy farmers of Australia with strong support from all co-operatives and political stakeholders.

Barry underlines the benefits, the co-operative structure of Bega Cheese had on its business performance: “ Last year Bega Cheese was the best payer for raw milk. We have paid a dividend equivalent to the Bank lending rate for past five years. Our assets have grown by $100m in five years. Bega Cheese will process some 60,000 tonnes of product in 2002 / 03, up from 3,000 tonnes 10 years ago.

“Our co-op employs over 500 people in its local community, the largest employer by far, and up from 130 just four years ago. Last year as a result of a major manufacturing and marketing alliance with Fonterra and Bonlac Foods, Bega Cheese released on average $120,000 in cash and shares to its members, over and above milk pay rates. Bega Cheese now has a dominant position in the domestic market and its product can be found in over 30 countries around the world.”

Barry Irvin makes a final point: “Understanding the aspirations and expectations of your owners, having a clear view of your business strategy, and implementing that strategy effectively, are the keys to success. When people, who consider forming a co-operative, approach me I always tell them to do their business plan first. If the co-operative structure fits, fine – if not, do not be wedded to it for the wrong reasons. I am intolerant of people that attribute either their success or failure to structure. We live in a commercial and changing world, and the ability to recognise opportunity and embrace change are the keys to success.

Contacts for this item

Bega Cheese website.