Financial snags in FrieslandCampina plan

From January 1, 2022, FrieslandCampina wants to link the financing of the company to the amount of milk supplied by its members. From now on, every milk supplying member must have delivery certificates. Such a certificate represents a value of €8 per hundred kilos of milk.

The delivery certificate is available by making a cash payment or by converting member bonds and member certificates into delivery certificates. According to FrieslandCampina, 70% of the members have sufficient bonds and member certificates to be able to convert to closed-market delivery certificates.

Warranty disappears
This does not mean that the adjustment will remain without consequences. At Alfa Accountants and Adviseurs, Jeroen Boele, tax advisor, and Hans de Bie, Food & Agri market manager, made an analysis of the economic and fiscal points of interest. "If bonds are exchanged for delivery certificates, the member is no longer entitled to the interest on the exchanged bonds. That guarantee disappears. And that was a nice return. In the proposal, that compensation is reflected in the subsequent payment and depends on the profit ", says Boele.

Apart from this loss of certainty, there is an effective loss of additional payment in the proposals. Now 55% of the profit is added to the general reserves, in the proposals this will be 60%. The payment in bonds (10%) disappears and is returned in the cash supplementary payment, but net members receive 5% back in supplementary payment.

Increased burdens
Dairy farmers who do not have sufficient bonds and member certificates to link the size of their milk pool to sufficient delivery certificates must purchase delivery certificates. FrieslandCampina offers members the opportunity to borrow money for this from the cooperative under certain conditions. In many cases this concerns young dairy farmers who usually already have significant financing.

For dairy farmers facing a business takeover, there is an additional financing issue. "It simply means an increase in your burden," says Hans de Bie. "And if you finance the delivery certificates yourself, you also get extra risk-bearing capital in your company."

Creditworthiness
Banks and credit rating agencies do not include 100% of the member bonds on FrieslandCampina's balance sheet in the valuation. In fact, it is partly assessed against a kind of debt capital. And that is not the case with delivery certificates. The intention of the proposals from the FrieslandCampina board is therefore to partially convert member bonds into equity in the form of delivery certificates. This increases creditworthiness, making it possible to obtain financing on more favorable terms.

But the opposite actually happens on the dairy farmer's balance sheet; if the member buys the certificates with a loan, outside capital is needed to strengthen the dairy cooperative's equity. FrieslandCampina's creditworthiness gets a plus, at the expense of that of the individual member. De Bie: "In fact, it comes down to whether you want to make that investment in your beautiful cooperative. You have to look at the total picture, including the effect on the guaranteed price of the milk in the long term. That remains the case. the most important pillar for the profitability of dairy farms."

To convert bonds or not
There are also points of attention from a tax perspective. The first question is whether a book profit will arise if the bonds and/or member certificates are converted into delivery certificates. The member certificates are now often shown at zero on the balance sheet, but will soon represent the nominal value of €0 per 8 kilos of milk. The Tax Authorities will undoubtedly think something about this, but it is still unclear how this will work out.

In addition, the member bonds often provide a pension for transferring parents after the company takeover. When those bonds are converted into delivery certificates, this will lapse. According to Jeroen Boele, it may be interesting for companies that have the cash available for the certificates not to convert the bonds and/or member certificates. Because the compensation on those bonds does not disappear in the proposals.

The interest payment is more lucrative than the savings interest at an average bank. Suppose a company needs €100.000 for the delivery certificates and that amount is available both in cash and in bonds. Then it is more profitable to buy the delivery certificates with that money and keep the bonds. At current interest rates, it may even be possible in individual cases to borrow money from the bank for certificates and not convert the bonds.

Cycle faster
Dairy farmer Nils den Besten understands that the board's proposals are inevitable. The chairman of the South Holland district calls it uncooperative that the current system leads to skewed growth. "The financing of the company now rests on some of the milk supplying members. The backlog that the other members currently have can only be caught up by cycling a little faster. In other words, by investing extra money in the coming years."

Den Besten recognizes that members ultimately have less cash left over. If bonds are converted into delivery certificates, the guaranteed fee of currently 2,75% will disappear. That compensation is reflected as profit in the subsequent payment, but because 60% of this goes to the general reserves (dead capital), the dairy farmer does not see half of that back.

Den Besten: "The dilemma would not exist if more profit were made, that's where it's going to be. The adjustments are necessary to keep FrieslandCampina healthy and to achieve good results. This also benefits the young farmer. This adjustment keeps The cooperative is also owned by the members in the long term."

Tradability certificates
Finally, Den Besten raises the issue of the tradability of delivery certificates. In principle, they always keep the nominal value of €8 per 100 kilos of milk. FrieslandCampina proposes an internal market to enable the trade in delivery certificates. The idea is that there will be 1 trading day per year.

Nils den Besten mainly expects discussion about the situation in which supply exceeds demand, for example due to a decrease in milk volume. The golden rule is that exiters can withdraw their money from the company at any time. "We have been discussing this with each other for more than a year. A survey among members shows that there is a preference to solve this internally. The consequence is that in the event of a shortage, an additional contribution must be made from the milk money."

Den Besten calculates the situation in the event that the milk pool decreases from roughly 10 billion to 9 billion kilos. The exits then require 1 billion times €0,08 in capital: €80 million. If the remaining dairy farmers have to pay this additionally, this amounts to 0,8 cents per liter of milk (80 million parts on the remaining 9 billion kilos of milk). The uncertainty lies in how large any reduction will ultimately turn out to be.

The member council of the FrieslandCampina cooperative will vote on the proposal on June 16.