First Milk’s drive for financial stability – impact on members and ex-members

Published 20 June 16

First Milk (FM) is holding a Special General Meeting on 1st July asking members to approve a set of rules creating a new class of share (C Preference Shares) that will lead to changes in  how members’ and former members’ capital is held. AHDB looks at the implications for ex-members as well as what existing members should take into consideration before voting.

At the moment, members have money deducted from their milk cheque, at a rate of 0.5ppl, until they reach their individual capital target. The capital target is set at 7ppl of a member’s average annual milk production. Once capital has been deducted, a member can only access money in their capital account if they leave the co-operative. Even then the repayments occur a number of years after the member has left, and are still subject to FM’s agreement. During its recent financial difficulties, First Milk deferred repayment of capital to ex-members.

The changes, already unanimously agreed by the board, would see the capital accounts converted into C Preference shares. As a result, any farmer leaving FM would then be able to get capital back by selling their C Preference shares to a continuing FM member. The downside is that the value of capital will be determined by negotiation between the farmer looking to sell and the farmer looking to buy. There is no guarantee a farmer would receive all of their capital back.

The new policy will also allow an existing member to cash in part of their capital account, provided they retain at least 50% of their capital target, and they can find another member willing to buy the shares off them. Alternatively, a member could reach their capital target quicker by purchasing C Preference shares from a farmer looking to sell, potentially at a discounted price.

The key benefit to FM is the co-op will no longer need to find the money to repay capital to ex-members. As a result, significantly strengthening and stabilising its balance sheet.