18 January 2002

Mergers milk price boost

By Robert Harris

THOUSANDS of dairy farmers can expect better milk prices if they approve a proposed merger announced this week between two of the UKs largest milk groups, say the moves backers.

Northern co-op Zenith and The Milk Group, based in Cheshire, have unveiled plans to create a new farmers co-op after unanimous agreement from both boards.

If a majority of the groups 4200 members also support the idea, the new business should be operational from Apr 1. It would supply about 2.4bn litres of milk a year, almost 20% of the UK milk pool.

Chris Bird, chief executive of Staffs-based Zenith, would retain that role in the new business. He said the key objective was to improve the long-term milk price through cost efficiency and processing investment.

"We have substantial overlap in our milk fields. There are tremendous savings to be made," he told farmers weekly. "The recent Milk Task Report suggests these could amount to 0.2-0.3p/litre in milk collection costs – we anticipate that, if not more.

"We also want to be part of the processing industry. While there will be acquisitions, we see joint ventures as the way forward. Greenfield sites are not high on our agenda."

The groups have very different backgrounds. Zenith started trading in Apr 2000, one of three co-ops created from the governments forced break-up of Milk Marque. The Milk Group began in 1994 after deregulation.

Each company controls about 1.2bn litres of milk a year. Zenith has about 3000 members – an individual annual average of 400,000 litres of milk. Each of the Milk Groups 1200 members average about 1m litres a year, and the company processes about 10% of output through its subsidiaries, Nene Valley Foods and Lubborn Cheese.

Nevertheless, both groups predict a high level of support at membership meetings over the coming weeks.

"We have come from different places, but we share a common objective," said Mr Bird. "That is, to provide a service and develop relations with our customers and consumers, while returning an optimum milk price to our members."

David Stern, chairman of The Milk Group and the proposed new co-op, described both organisations as a natural fit. "We will combine strength in marketing and logistics with a growing and profitable processing business.

"We believe this will be a major step in improving the efficiency of our supply chain which will bring benefits to our consumers, our customers and our farmer members."

Terrig Morgan, NFU milk committee chairman, said the move mirrored the unions view that there should be fewer, larger, milk-producer groups to achieve strength in the market.

"This announcement is not only good for farmers supplying Zenith and the Milk Group. It will also have a positive impact on the whole of the dairy farming industry," he said. &#42

Proposed new generation co-operative details

The proposed new business, dubbed a "new generation co-operative", would be operated along European lines. Plans were facilitated by Dutch co-op bank Rabobank, which advised Milk Link on a similar move.

The boards describe the new co-op as a democratic structure, giving members "real control". Local district chairmen, elected by members using a proportional voting system based on milk volume, would make up the Member Council. This would approve key decisions. It would also elect the board, which would appoint executives and direct core business objectives. There are several planned routes to raise capital and loans for processing.

The new firm would retain a small proportion of monthly milk cheques. Some of this would fund a member capital account as security against borrowings (repayable two years after retirement). Part would be added to general reserves as core business capital. Surplus could be returned to members as a "13th" payment.

A liability agreement would also increase borrowing power. This would be set at 5p/litre on the previous years milk production, giving creditors about £120m of protection in case of bankruptcy.

Finally, shareholders would be offered new "B" shares for existing shares, or loan stock. Both would provide capital for a new plc established to operate the processing arm of the business.