Recently, I travelled to Holland with a group of young Irish dairy farmers to meet with representatives from the Dutch co-op, FrieslandCampina. The purpose of the trip was to learn about how the co-op is structured and how their farmers are represented at board level.

Since the merger of the two Dutch co-ops Friesland and Campina in 2008, the new business FrieslandCampina (FC) has gone from strength to strength. It is now listed by Rabobank as the fifth largest dairy company in the world, based on a turnover of €9.7bn in 2011.

Earlier this year, FC spent €230m in purchasing a controlling stake in Alaska Milk Corporation, which is the largest dairy company in the Philippines, with a population of nearly one billion people.

The purchase will give FC much better access to the expanding Asian market, a sign that this co-op has big plans for the future.

Frans Keurentjes, a dairy farmer and member of the main supervisory co-op board in FrieslandCampina, spoke to the group during a visit to the milk processing facility in Bedum, north Holland.

Frans is one of nine farmer representatives on the board who represent FrieslandCampina’s 14,000 suppliers. His reasoning for why the merger took place was simple: “We decided to stop focusing on politics and start focusing solely on milk markets,” he said.

The agreement to merge the two co-ops was first announced in December 2007 when milk price was at an all-time high. However, farmers had one eye on the challenges that producers were going to face in the future.

Frans added: “With no more market protection due to quota abolition in 2015, exposure to increased volatility, increased global competition and the great opportunity to meet a constantly increasing demand for food, the decision was made that to merge co-ops and achieve the many associated benefits was the best option to deliver a better milk price to suppliers.”

With milk price so good at the time it would have been very easy for farmers to be complacent about their future, but Frans emphasised the importance of acting before problems occurred.

“It is always best to change the roof when the sun is shining. By taking on the project when we did, we could do everything the way we wanted and weren’t under pressure to change instantly.

“If we waited until milk price dropped, there would be pressure to increase price as quickly as possible, which could mean cutting corners in restructuring the business,” he said.

The merger had just been agreed by the end of 2008 when the outlook for milk price dropped dramatically, but, by that stage, FC farmers were supplying a more efficient co-op whose long term future looked much more secure.

Improved Milk Price

According to Frans, the merger has worked out extremely well with FrieslandCampina regularly paying one of the best milk prices in Europe.

Suppliers are notified what price they can expect at the beginning of every month (See Figure 1 page 32).

Milk is paid on an A+B-C system with the base level set at 3.47% protein and 4.41% fat.

FC sets its monthly milk price based on the average of a number of other European processors in the Netherlands, Denmark, Belgium and Germany.

The quoted base price for September is set at 32c/l excluding VAT (at Dutch solids of 7.88%). Milk price has yet to drop below this level in 2012 and bonuses for better fat and protein mean that the average FC supplier will receive 33.44c/l in September.

However, the base milk price does not represent a farmer’s final income for the year as FrieslandCampina also pay out 30% of the net profit of the business at the end of the year as a ‘performance payment’ top-up.

Another 20% of the net profits are issued as member bonds, based on the volume of milk supplied in the previous year, and the other 50% of net profit is withheld by the business as capital reserve.

In 2011, a farmer received a base price of 36.94c/l (based on above constituents), a performance top-up of 1.1c/l and a payment from membership bonds worth 0.73c/l, giving a total milk price of 38.77c/l, which was up 13% on 2010.

Frans described seasonality as not a big issue in Holland with a maximum variation in milk supply of 10% due to the indoor all year round calving production systems operated by most Dutch suppliers.

FrieslandCampina have a seasonality scheme in place with a levy of 2.3c/l applied to milk supplied from March to June and a bonus of 2.45c/l applied to milk supplied from August to November.

Because of the calving pattern of herds, this works out financially neutral for most suppliers.

Of 10.14 billion kilos of milk processed by FrieslandCampina in 2011, 8.83 billion kilos were supplied by FrieslandCampina members and the rest by farmers with supply contracts.

Only members receive a share of the profits at the end of the year so those with supply contracts receive the guaranteed milk price and associated milk solids bonus only.

Board Structure

The actual structure of FrieslandCampina is that the milk processing and retail business, FrieslandCampina NV, is a company owned 100% by the co-operative FrieslandCampina UA.

The main managing board of the business is known as the supervisory board and consists of 13 people, of whom nine are farmers.

Frans described how the governance of the co-op is structured: “FC has milk suppliers from the Netherlands, Germany and Belgium. The whole catchment region is split into 21 areas and each has a district council of 10 people.

“The district councils from each area together form the members’ council. From here, one person from each district area is elected onto the co-operative council and from these 21 people, nine are elected onto the managing board of the co-op,” he said.

The whole process starts at the district council which still covers a large area so that local politics can only play a limited role in influencing someone’s election.

“People should be elected onto boards on merit only. These are the people involved in debating key issues and making decisions which will influence the success of the business so they must be chosen based on their knowledge and capabilities,” Frans said.

While a farmer must be elected onto the main supervisory board, the board itself puts out a specification for the skills of the board member they are looking for.

Young Farmers Council

One of the most impressive aspects of FrieslandCampina is their young farmers council.

Hans Nieuwenhuis, a 28-year-old dairy farmer and board member of the council, talked the Irish group through how the council works and what it hopes to achieve. “This is an organisation for suppliers or potential suppliers between 18 and 35 years of age to learn all about FrieslandCampina, from its milk processing facilities to the board structure to long term strategic plans.

“The object is to increase the knowledge suppliers have of their co-op so that they understand decisions being made and are as informed as possible about how their co-op is performing and how they plan to improve in the future.

“It’s also a great way to train up potential board members in the future as, through the different open days, guest speakers, meetings etc, you are constantly improving your knowledge of how the co-op and dairy industry works,” he said.

The young farmers council has 4,000 members and has regular activities from farm walks on member farms, information events discussing particular issues and national meetings where the young farmers hear from the FrieslandCampina CEO and other key leaders in the co-op.

The council has no official role in influencing policy in the co-op but is free to give recommendations and opinion which, for Hans, is a crucial aspect.

“As we have no direct political influence, we are free to discuss co-op issues without any bias. You don’t join the council to achieve a position of power but rather to involve yourself in co-op issues and try and learn as much as possible.

“In years to come it is the young farmers who will make decisions on the progression of the co-op so the more educated we are now, hopefully the better decisions we will make,” he said.

When asked why Hans himself joined the council, he was very passionate about the benefits both for him and his co-op.

“FrieslandCampina’s performance is critical to how I, as a farmer, get paid in the future and similarly FrieslandCampina would get nowhere without its group of farmers who give it a guaranteed milk supply with which to make products.

“We are critically linked so it’s important the relationship should be as positive as possible so that both groups work together and help the business reach its potential,” he said.

Efficient Milk

Processing

The group were given an excellent tour of the impressive processing facilities at Bedum by cheese plant manager Pieter van de Velde.

After €57m of an investment in 2008, the plant has gone from producing 18,000 tonnes of cheese per year in 2002 to 87,000 tonnes per year today. Pieter gave an interesting insight into being a plant

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manager that is part of an amalgamated co-op structure.

“We have several cheese processing plants in the country and are constantly benchmarking off each other in terms of how efficient our operations are.

“This means everyone can learn off each other with the result of better processing efficiency and there is also healthy competition in seeing who can run the best operation.

“This is a big motivator for every manager to ensure his plant is operating to the best of its ability,” he said.

Erik Petter is plant manager of the infant formula processing which also takes place in Bedum, producing FrieslandCampina’s ‘Domo’ brand. He outlined FrieslandCampina’s targets in terms of product mix and returns to farmers.

“Valorisation is a key word for us and means achieving the ultimate product mix to add as much value as possible to producers’ milk. Our ambition is to produce as much of our own brand added value products direct to consumers as possible – this returns the best profit,” he said.

Key Points

FrieslandCampina are now ranked fifth largest milk processor in the world giving them the scale to compete with the best in the world

A base milk price is set at the start of each month and net profits are divided as a top-up payment at the end of each year

A supervisory board of 13 members (nine farmers) manage the milk processing and retail business within the FrieslandCampina group. A young farmers council educates young suppliers about their co-op.

The co-op pay farmers a grazing bonus if they can get some grazed grass into cows and, in turn, the co-op get a better price for milk

From grass to glass

FrieslandCampina are extremely focused on their image and on ensuring they give the best possible impression of how their milk is produced, which ultimately adds value to their products.

According to FC, the ‘grass to glass’ initiative is all about showing their consumers how natural FC milk products are. FC have put €45m into a summer grazing scheme to address the issues some of the Dutch public had with the move to intensive indoor farming.

Frans Keurentjes explained how this scheme works: “Farmers who sign up must have their cows out at grass for a minimum of six hours a day, 120 days a year. For this, they get a 0.5c/l bonus on the milk they produce.

“FC sells this milk for an extra fee of 0.3c/l to consumers and funds the other 0.2c/l out of their own funds. It doesn’t make us any extra money but in terms of advertising and marketing is worth a lot,” he said. Seventy four per cent of FC suppliers are currently subscribed to this scheme.

Other schemes and initiatives include spring public open days on farms where locals visit farms to see cows being turned back out to grass for the first time since the winter. ‘Red carpets’ are laid on farm roadways and various fun and games are organised on farms to encourage people to attend.

Comment

It is refreshing to visit a co-op that has clear goals for the future and are building markets now for five and 10 years time in developing regions of the world where dairy demand is growing. FrieslandCampina have also clearly established themselves as global competitors with good scale able to compete with the best. To have milk processing sites within the one co-op competing with each other to the benefit of all suppliers is really interesting and worthwhile.

There are lessons for Ireland in the establishment of the young farmers council but also the ‘grass to glass’ initiative.

Obviously, we in Ireland don’t need such grazing initiatives, but the marketing and promotion of dairy products in areas removed from direct farming is key to consumers’ understanding of where produce comes from, and if those who purchase the product are willing to pay a premium, all the better.