ProVelco Co-operative Ltd is a producer owned co-operative company, registered with the Companies Office and complying with the Securities Act 1978 and the Securities Act (Co-operative Companies) Exemption Act 2002. It is based on the velvet marketing co-op formally known as Velexco Co-operative Group Ltd. ProVelco is 100% owned by supplying velvet producers and is completely independent of any other commercial entity in the velvet industry (except for contracts for services entered on usual commercial terms).

Because ProVelco was unable to commence operations until it sold its shareholding in New Zealand Velvet Marketing Ltd, (which was finally settled in November 2010) it can offer only a basic brokerage service to deer farmers for the 2010/2011 year. It will receive suppliers’ velvet, collected and handled under contract, and sell it to maximise returns on the suppliers’ behalf. Unlike other velvet traders, ProVelco makes no profit on the sale transaction and the supplier receives all returns after costs are deducted. ProVelco has a small, efficient, highly experienced sales force with minimal overheads and aims to be the lowest cost velvet selling company in NZ.

An important difference between ProVelco and other velvet trading businesses, is that the co-operative is not content to remain as a broker, but intends to become a producer owned marketing company with the capacity to own the velvet supplied by its shareholders, develop new markets, brands and products, and commercialise opportunities to add value to the raw product currently exported. ProVelco is committed to becoming the world’s premier deer velvet marketing company.

Since the 1970’s, the velvet supply chain has been dominated by brokers, traders, intermediaries and those who profit from the trading process, rather than the market itself. The result has been diminishing returns to the producers at the end of the chain, to the extent that farmers now receive about 20-25% of the net returns of 35 years ago. Over 95% of the velvet industry’s assets are invested on farms and growers carry all the risk of the sales process if selling through a broker. Producers deserve a selling system that recognises and rewards them for that risk. Up until now the selling process has been designed to control the producers. ProVelco finally provides the mechanism for producers to control the process.

The velvet supply chain has been starved for capital as all the component businesses confine their investment to that link in the chain which they can control. There is no marketing in the sense of creating demand, and while Deer Industry New Zealand has done its best to maintain a generic profile for NZ velvet, there has been no well resourced vehicle to commercialise opportunities in the main markets. NZ deer velvet has huge possibilities internationally as a natural health and wellness tonic and healer. Without investment, velvet will remain confined to traditional markets in traditional form, through traditional chanels. Most export industries invest a minimum of 10% of their capital in the marketplace. If just 1% of the NZ velvet industry’s on-farm capital was available for investment in the market through a co-operative, it would introduce about $7million of producer controlled funds enabling serious market development.
Traditionally, farmers do not invest in co-operatives for the return on capital, but rather to use the benefits of consolidation of product and disciplined selling to gain market strength and enhanced returns. None the less, ProVelco’s board will investigate mechanisms to recognise the capital invested as well as the volumes of product supplied.

ProVelco is in the process of completing a Prospectus and Investment Statement which will be available as soon as possible – hopefully before the end of the year. As a co-operative, suppliers will be required to become shareholders once the prospectus and investment statement are available, but until that time the company is not seeking any money or applications for securities. Suppliers will be expected to hold shares in proportion to their volume supplied which will be determined on a rolling average basis. The initial capital contribution will be $1.00/kg supplied in the first year with a maximum of $5.00/kg in the first five years in payment of 5 x $1.00 shares per kg of supply.

Currently ProVelco has five directors. James Guild and Kelly Hudson have been directors of Velexco since its inception. John Spiers was voted in as a director at the company’s last AGM. Grant Cochrane and Ponty von Dadelszen were appointed to the ProVelco board in October 2010. All the directors have had a history of commitment to reform of the velvet sector and have governance experience.
The directors have assumed a semi-executive role during this formative stage of ProVelco. The board intends to hold a full strategy and governance review of the company in the early part of 2011, and all directors will consider their future with the company at that point. Elections for directors will follow as soon as possible after the board’s review findings have been identified to shareholders.

All of the four intended shareholders have to accept some blame for the failure of the company because in theory at least, it should have worked. Put simply, the shareholders were not aligned strategically and never shared a common vision or developed an agreed strategy. Management positions and contractual agreements were not contestable and an independent chair was never appointed.
Velexco and the Suppliers Council, representing grower interests joined the JV on the basis that producers would always hold at least 50% of NZVM’s shares, and the company constitution and shareholder’s agreement were drawn up on that basis. During the year, the management practices and operational policies of NZVM made it impossible for the Suppliers Council to present an investment proposition that would satisfy potential shareholders, so it was unable to capitalise and take up its 25% shareholding in NZVM. Inevitably the company’s governance processes became frustrated because it was operating under a constitution and shareholders’ agreement designed for four equal partners, when it actually had only three shareholders. Strategic, policy, managerial and operational differences could not be resolved. Various attempts at arbitration and independent analysis failed, and the only solution agreed upon by the three remaining shareholders was for the remaining producer interests represented in Velexco to sell out of NZVM.

Before the sale of Velexco’s shares in NZVM was completed, Velexco and the Suppliers’ Council were unable to pursue their independent aims and unite as ProVelco. The Suppliers’ Council had withdrawn from the joint venture in September 2010, but until the sale was completed Velexco remained a shareholder in NZVM. That meant Velexco could not compete with NZVM until the settlement deed was signed. An agreement was reached in September but implementation was delayed by a protracted legal process, which was finally completed when Velexco’s 33.3% shareholding was sold on the 19th of November 2010.

The answer to that question depends entirely on how deer farmers react to this new paradigm. Producers now have a choice of two quite different options so for the first time ever they hold all the power. They have to choose which brokerage and marketing system they believe will best serve their interests. Obviously, supporting both NZVM and ProVelco would divide both the volume and the selling strength, creating a similar situation to the old competitive pools system of the past, so if growers really want to keep the advantages of a dominant seller, they need to choose one or the other. The worst result would be two equally balanced brokers offering the same sort of service.

ProVelco accepts that it relatively unknown, is providing a basic service only at this stage and suppliers will have to trust the company to deliver what it says it will. In the last few weeks we have had to work very hard to create an enhanced entity with very limited resources. We are confident, however that, ProVelco, with the proven track record of its management and sales executives, and with sufficient support, will provide an efficient, honest, and responsive agency that can become a full farmer-owned marketing company as soon as possible.

ProVelco believes its handling charges will be lower than other selling options, although that may not be apparent when comparing published charges. ProVelco will not have a fixed charge, but will show the actual real costs of taking a kilo of velvet from the farm to the customer. We will not hide costs or load charges onto the buyer that he then deducts from his price. Growers need to assess the net return to them at the end of the process. The cold hard reality is that it costs about $10/kg to sell velvet regardless of whether it is via a broker, an agent, or a cash buyer. Obviously economies of scale will reduce this cost, and conversely some small scale businesses may have much higher real costs. Any comparisons must be based on net average returns to the grower.

Yes, ProVelco will have both sales options for the 2010/2011 season. There is a limited capacity for spot auction sales before oversupply depresses demand. ProVelco believes that fundamentally the two options are incompatible (buyers will not take out contracts if the spot market is lower: suppliers will not opt for contracts if the spot market is higher), but we recognise that many producers have cash flow constraints this year and that NZVM’s VSM system last year penalised its supporters. We believe that there are better ways of managing this incompatibility in the future and ProVelco has some innovations it intends to introduce before next season. Again, these possibilities will be determined by the volumes the company handles this season.

Suppliers will have choice of spot sales conducted on a fortnightly basis, or managed sales throughout the year. Only shareholders and intending shareholders will be able to use ProVelco’s Velvet Investor Premium (VIP) system designed to reward suppliers who are prepared to accept payments throughout the season. VIP supporters will receive a premium over the spot option and will be eligible for rebates at the end of the year .