Financial involvement of member dairy farmers in FrieslandCampina
The member dairy farmers in the Netherlands, Germany and Belgium are the joint owners of Koninklijke FrieslandCampina N.V. through Zuivelcoöperatie FrieslandCampina U.A. How does the company form its equity and how are the member dairy farmers financially involved in FrieslandCampina?
Most dairy farmers’ income is determined largely by the volume of milk they supply and the price they get for it.
FrieslandCampina’s job is to add value to all the milk that the members of the co-operative supply. The absolute level of the price for the members’ milk is set by general trends in the dairy market and the company’s performance. This is expressed in the components of the milk price. These are the monthly guaranteed price, the annual cash performance premium and the annual issue of fixed member bonds. The level of the performance premium and the issue of fixed member bonds depend on the company’s results and the reservation policy. The performance premium and the issue of fixed member bonds are, therefore, made after the financial statements have been approved.
Allocation of the result of Koninklijke FrieslandCampina N.V.
50% of the company’s profit, based on the guaranteed price and after deduction of the interest on the member bonds and perpetual notes and the profit attributable to minority interests, is added to the general reserve. A further 20% of the company’s profit, based on the guaranteed price and after deduction of the interest on the member bonds and perpetual notes and the profit attributable to minority interests, is added to the registered reserve. This is distributed to the member dairy farmers in the form of non-negotiable member bonds issued by Koninklijke FrieslandCampina N.V., called fixed member bonds. 30% of the company’s profit, based on the guaranteed price and after deduction of the interest on the member bonds and perpetual notes and the profit attributable to minority interests, is paid to the member farmers as a performance premium for the milk supplied.
The reservation policy, which sets out the appropriation of the result, is adopted for periods of three years. In December 2010, it was adopted for the years 2011, 2012 and 2013.
Equity of FrieslandCampina
FrieslandCampina’s equity can, therefore, grow when additions are made to the general reserve from the company’s profit and by the issue of fixed member bonds to the members. This is the profit based on the guaranteed price and after deduction of the interest on the member bonds and perpetual notes and the profit attributable to minority interests.
Financial relationship of the members with FrieslandCampina
Part of the capital of Koninklijke FrieslandCampina N.V. and Zuivelcoöperatie FrieslandCampina U.A. is registered in the names of the member dairy farmers. Members can, within certain limits, decide on the extent to which they participate in Koninklijke FrieslandCampina N.V. The members receive a commercial interest rate on the registered capital, irrespective of the company’s results. Depending on the reservation policy, the company’s results are expressed in the performance premium for the milk supplied, the issue of fixed member bonds and addition to the general reserve.
The main types of member financing through which members participate in FrieslandCampina’s risk-bearing capital are set out below.
Zuivelcoöperatie FrieslandCampina U.A. member certificates
Dairy farmers who were members of Friesland Foods or Campina at the time of the merger (end of 2008) received a one-off issue of member certificates from Zuivelcoöperatie FrieslandCampina U.A. at the time of the merger. These member certificates are non-negotiable but, while they are members, the holders can convert all or part of their member certificates into fixed member bonds. These are non-negotiable but, like member certificates, bear interest. Member certificates are automatically converted into free member bonds (negotiable) if a member discontinues his business or membership. There may be tax consequences for individual members on conversion of the free and fixed member bonds.
FrieslandCampina fixed member bonds
Fixed member bonds are issued to the members from the company’s result (registered reserve) each year. The amount distributed as fixed member bonds depends on FrieslandCampina’s financial results and the reservation policy and is based on the value of the milk that a member dairy farmer has supplied during the previous calendar year.
A member may also own fixed member bonds converted from member certificates. Fixed member bonds are non-negotiable. Fixed member bonds are automatically converted into free member bonds if a member discontinues his business or membership.
FrieslandCampina free member bonds
Members and former-members in the ‘closed group’ can hold, buy or sell interest-bearing free member bonds. Sales and purchases are made on an internal market. Member certificates and fixed member bonds are automatically converted into free member bonds if a member discontinues his business or membership. In some cases, such as ending membership on leaving the industry, delivering to another customer, emigration outside the Netherlands, Germany and Belgium or death, free member bonds must be sold on the next trading day.
There are up to six trading days a year. FrieslandCampina publishes the trading dates in media available to members and former-members in the closed group. Orders are executed in the order they are received, unless there are preferred categories. It is possible that an order may not be executed in full, depending on supply and demand. Free member bonds are traded at a face value of €50, plus interest accrued from 1 June to the payment date. FrieslandCampina has entered into an agreement with a liquidity provider to ensure a smooth internal market. If supply exceeds demand, this party takes up bonds and when demand exceeds supply it sells the bonds in its portfolio.
Interest on member certificates and member bonds
The same interest rate is paid on member certificates and fixed and free member bonds: 6-month euribor plus 2.50%. The mark-up has been 3.00% since 1 June 2011. The member bonds are perpetual and have no maturity date. The bonds are subordinated to the claims of all present and future creditors, to the extent that these are not subordinated. Interest payments may be deferred, provided that Koninklijke FrieslandCampina N.V. has not distributed any performance premiums in the 12 months prior to the annual coupon date. Deferred interest becomes payable on the date on which a performance premium is next distributed.