The issues around governance at Ornua over the past year are nothing new but things have come to a head in the past week with Dairygold suggesting a plc structure is needed to address the issues.

But why would a 100% farmer-owned and farmer-controlled dairy co-op with a strong co-op heritage and belief in the co-op system propose to turn Ornua, a co-op which is owned by co-op members, into an unlisted plc?

There is a large business at stake here. Ornua is a €2bn turnover business and owns the hugely valuable and only €1bn Irish food brand.

Put simply, a plc model allows the value that sits in the Ornua business be unlocked and flow back to the member co-ops – a value that is not insignificant at €520m based on last year’s accounts.

Balance sheet boost

This of course would boost the balance sheets of expanding co-ops and some to the tune of up to €100m. This would be welcomed for sure by many co-ops given the level of expansion and debt taken on since quotas were lifted. Some €1.5bn has been invested at processing level since then and a further €0.5bn is planned.

The proposals being discussed right now suggest that the governance concerns cannot be addressed without changing Ornua’s structure from that of a co-op to an unlisted plc

But the question has to be asked – if these proposals are accepted, will this finally bring an end to governance concerns and conflict at Ornua, allowing management to drive on with the business?

The proposals being discussed right now suggest that the governance concerns cannot be addressed without changing Ornua’s structure from that of a co-op to an unlisted plc. This would suggest that while the co-ops believe in the co-op model at a processing level, they also believe it may not be the best model for a marketing, consumer foods, ingredients, exporting and distribution business.

There are risks to the structuring as a plc, even if it is unlisted – namely investor interests and share price can become more important than the price paid for milk

This is ironic, given that the majority of those co-ops sitting around the table now directly market and export their dairy products independently of Ornua. The point is made even starker given that Ornua now handles only about half of all Irish dairy exports.

But there are risks to the structuring as a plc, even if it is unlisted – namely investor interests and share price can become more important than the price paid for milk (or delivered back through milk in Ornua’s case).

Commercial

Plcs by their very nature are very commercially focused. Management teams concentrate on quarterly reporting and driving growth through headline-making mergers and acquisitions. In a dull and worthy way, co-ops focus on the long-term interests of their stakeholders, grow organically and reinvest all profits rather than siphon them off to shareholders.

The questions farmers and co-ops need to ask when discussing these proposals is will going down the route of a plc structure deliver an improved milk price in the long term?

Will management work harder for the milk supplier under a plc structure to deliver better returns?

Dairy farmer suppliers too have been offered a carrot under these proposals of around €100m to flow directly back as shares

No doubt under a plc structure, pay levels for senior executives are inevitably higher too. That may not be a problem if it is delivering.

Dairy farmer suppliers too have been offered a carrot under these proposals of around €100m to flow directly back as shares. It works out at €7,500 for the average dairy supplier. Given it looks like it will be treated as income tax, up to half of this could be taken by the tax man.

Structure change alone won’t overcome key dilemmas at Ornua

It is unclear how many options have been explored by the board of Ornua. Given the letter seen by the Irish Farmers Journal this week, it would seem the option provided by Cregan and the governance committee to remove CEOs and chairs from the Ornua board was completely dismissed and rejected.

This is a once-in-a-lifetime opportunity to deliver a world-class business that already has a world-class product and brand

It would be interesting to see what options have been discounted by the board. Dairygold has invested time and no doubt cash in coming up with the current proposal. But have other co-ops with significant interests in Ornua engaged similar experts to explore options that would be in the best interests of their farmers?

This is a once-in-a-lifetime opportunity to deliver a world-class business that already has a world-class product and brand. Plcs can unlock tremendous potential and value – Kerry and Glanbia are cases in point.

But for these two successes, farmers will also be reminded of the fates of Waterford plc, Golden Vale plc, Aryzta plc, One51 plc and Reox Holdings plc, to name just a few. In fact, Glanbia’s milk processing arms are moving back towards the co-op model in both Ireland and the US.

If farmers fundamentally believe the co-op structure works at processing level, then why would it not work one step away in the marketing and distribution arm of the industry?

So does the restructuring suggest the co-op model has been an impediment to the success of Ornua and Irish dairy farmers? A cursory glance at the leading dairy companies around the world reveals that a large majority of them are co-ops that process, market and export dairy products internationally on behalf of their farmer owners – Fonterra in New Zealand; Land O Lakes and Dairy Farmers of America in the US; and Arla, FrieslandCampina and Valio in Europe.

If farmers fundamentally believe the co-op structure works at processing level, then why would it not work one step away in the marketing and distribution arm of the industry?

Perhaps the real problem with Ornua is that it now has members around the table who want to compete with it.

A plc structure change won’t overcome that dilemma. No doubt there is gold in Ornua that plenty will want to get their hands on, but like the rainbow, it may be unreachable.