The Cost of Cooperative Ownership: Estimates of The Costs To Fonterra’s Farmer Owners

Abstract

Fonterra Group Cooperative Limited, New Zealand’s largest company, is owned by the dairy farmers who supply milk. Each dairy farmer owns the same number of shares as the kilograms of milksolids supplied. Farmers therefore have an investment in Fonterra, and when a farm is purchased, there is a concomitant investment in off‐farm assets. As a consequence farmers are likely to be poorly diversified. This paper provides estimates of the cost of being undiversified or only partly diversified, using the same method that Meulbroek has used in assessing the cost to pension beneficiaries when the pension scheme reinvests in the employer’s stock, and when executives hold executive stock options. The costs depend upon the degree of “under‐diversification”, the duration of Fonterra’s cash flows and the period over which the co‐operative structure will persist. Using data from Nestlé, we estimate the loss to an undiversified farmer at up to 63% of the value of his/her investment, with the estimate depending on the assumed market risk premium. If farmers are at least partly diversified or the cooperative structure will not persist indefinitely, then these losses will be less.

Citation

Maher, M. and Emanuel, D. (2005), "The Cost of Cooperative Ownership: Estimates of The Costs To Fonterra’s Farmer Owners", Pacific Accounting Review, Vol. 17 No. 1, pp. 37-48. https://doi.org/10.1108/01140580510818512