Confidence in European cooperative giant erodes

INSIGHT UPFRONT RESTRUCTURING

Retiring Royal FrieslandCampina (RFC) cooperative chairman Frans Keurentjes – ‘Royal FrieslandCampina is in better shape than five years ago’.

Confidence in European co-operative giant erodes

Netherlands-based Royal FrieslandCampina (RFC) paid one of the highest milk prices in Europe for many years. However, the results have been under strong pressure for about three years. Many profitable businesses have been sold and confidence among members only seems to be eroding further. What is going on at RFC? Jelle Feenstra from Langs de Melkweg spoke to retiring chairman Frans Keurentjes, who stepped down on June 16.

Disappointing results in China that seem to never end. Numerous profitable business units sold. A cheese division that is failing to make serious profits. Difficult discussions with members about ever-increasing sustainability requirements. A relatively disappointing milk price for the past three years; these are just a few of the many points on which RFC is not winning.

The dairy co-operative is in severe trouble. Frans Keurentjes, who recently stepped down as chairman of the dairy co-operative after five years, sees it differently. “FrieslandCampina is in a stronger position than five years ago,” he says.

Q. RFC has recently been only taking backwards steps. The milk price went down, member obligations and associated interest are gone and one business unit after another was sold off. It looks like a complete dismantling.

A. “I understand that the outside world and many members view it that way. But

we know very well what we are doing. If you see the bigger picture, it fits, it is all good and logical to explain. I am convinced that we have set the right course.”

Do you ever have any doubts then?

"Of course I have it (doubts). Every day, including on my dairy farm. Last week, to mow grass or not to mow? To use that bull or not? To buy land or not, to build a stable or not. But you also have experience, intuition, advisors, you look at others. Based on that, you build a course and you always let it be tested. Well, that is no different at FrieslandCampina. It has to be right today, it has to be right this year and it has to be right for the next generation.”

Then take us into that bigger picture.

“That starts with the merger between FrieslandFoods and Campina in 2007. That was a direct hit. A company was created with maximum synergy benefits, which, thanks to a combination of expertise and chance factors, also scored like crazy in China. Everyone wanted to be part of FrieslandCampina around 2015.”

Where did it go wrong?

“Too much complacency. We paid too little attention to the changes around us, and relied on the success of the merger for too long. Meanwhile, the competition also became stronger in China. Add to this the fact that after the abolition of the European milk quota, an enormous mountain of milk came over us in a very short time. Then a relapse is inevitable.”

You became president during that period.

“That was in 2016. And now I come back to the bigger picture. Professor Jan Rotmans held up a mirror to us and said: we are not in a time of change, but in a change of era. FrieslandCampina is a fossil, an old-fashioned mammoth tanker. But you must become a modern and progressive fleet of small, co-operative companies that help and strengthen each other. A plea for exploiting the diversity of members within the co-operative. After that we also concluded: things need a major refit, both the co-operative and the company have to change radically. From then on we started building a new cooperative, which has resulted in various reorganisations, structural changes and personnel changes to this day.'

What changed for the farmers?

‘We launched the Milk with Added Value strategy for the co-operative. The message was and is that member dairy farmers must be prepared to adapt their farms to the wishes of society. Some have trouble with that, just as they also have trouble that we have become increasingly active in this direction.'

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A Dutch dairy farmer contracted to FrieslandCampina with his children.

“We paid too little attention to the changes around us, and relied on the success of the merger for too long.”

You also gave space to various small milk flows and you shook up the company with the strategy 'Our purpose, our plan'. But it seems a bit like you guys keep on reorganising, while the financial results are getting worse and worse.

"Looks like”, you're saying it right. The reality is that it is a logical sequence of steps that we are taking. The picture may be reinforced by the fact that the corona pandemic has brought the last major reorganisation forward by a few years. But we have been doing what we agreed upon for five years now. Believe me, this will soon mean a future-proof FrieslandCampina, which ensures that from 2022 we have structurally lower costs of more than €100 million per year. A FrieslandCampina that can operate successfully even under very challenging market conditions, as we know them today.'

For real?

“Both the co-operative and the company are in much better shape than they were five years ago. The co-operative has been greatly modernised. I speak to many colleagues from foreign dairy cooperatives: they say: how is it possible that you can talk about major sustainability programmes, about the introduction of special milk flows, about all things that cause a lot of hassle among our farmers. You even dare to enter into a collaboration with environmental organisations, which they find extremely modern and contemporary. So these are chairmen who have the same perceptions as us, but who say: how am I going to share that with the co-operative?”

And the company?

“It has also been significantly modernised and made stronger. The culture has changed: it's about winning in the

Cows graze in a meadow.

market, it's about market share, it's about innovations, it's about cost awareness. We are currently scoring in all those areas, while we have been in a period with plenty of headwind for two years now. Close the borders of Hong Kong, Covid-19, you name it. Everyone at FrieslandCampina is aware that we have to take extra steps and that success no longer comes to us, as in the golden age. And we didn't make a loss last year, did we? While Covid-19 and other setbacks did give rise to that. So I'm very optimistic about the future. The company is in pole position. If the market conditions are better later, we will reap the benefits.”

ROYAL FRIESLANDCAMPINA CHANGES FINANCING OF COMPANY

Netherlands-based Royal FrieslandCampina (RFC) will drastically change member financing from 2022 on. Current obligations are converted into member certificates. Lenders enforced this change and the fact that a lot of capital is in the factory with retired farmers is also addressed. After much murmuring, the members council recently voted in favour of the proposal.

RFC has been working with member bonds for years. These bonds were traded a few times a year through an internal market and retired member dairy farmers could hold these bonds, and gave a return of 3% interest.

However, two problems have arisen in recent years. The first is that the bonds have always been seen as part of RFC’s equity, but this is under strong pressure due to the tightened supervision of European banks. RFC was therefore forced by its lenders to set up an alternative financing structure.

The other reason is that many retired members have kept money in the business while the young and growing farmers have less and less money in the business. On average, the former members die earlier and more often, with their bonds barely being taken over by young farmers. They do not have the money available or are not willing to invest in their co-operative.

They are now forced to do so with an adapted system. RFC will work with delivery certificates. Each member contributes €8.00 per 100 kilos of milk. For most RFC members, that’s not a big change. The amount for their annual milk supply corresponds to the capital they have already built up in the co-operative. The biggest difference is that they no longer receive interest on part of their assets in the co-operative, as they have done up to now.

For about 15 to 20% of the members, however, this already means that they have to invest serious extra money in the co-operative in order to continue to supply the same amount of milk. To pay for this, RFC offers its members an interest-free loan that they can repay in twelve years.

Many members are not happy with these conversions, but they do understand the underlying problems and in the end the grumbling about this arrangement was not too bad among the largest group of members.