Cooperative Development:Cooperative Development:Business Design and Business Design and

StrategyStrategyTimothy WoodsTimothy Woods

Department of Agricultural Department of Agricultural EconomicsEconomics

University of KentuckyUniversity of Kentucky

What is a Cooperative What is a Cooperative Business?Business?

A cooperative is a business voluntarily A cooperative is a business voluntarily owned and controlled by the people using owned and controlled by the people using its services its services may be operated on a non-profit basismay be operated on a non-profit basis

What’s on the Agenda?What’s on the Agenda?

General overview of CooperativesGeneral overview of CooperativesNew Generation CooperativesNew Generation CooperativesHow to develop a cooperativeHow to develop a cooperativeGeneral insights into the success of General insights into the success of

cooperativescooperatives

Growing Marketing BillGrowing Marketing Bill

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 19990

100

200

300

400

500Marketing Bill

Commodity Farm Value

•Source: USDA-ERS 2000

Common barriers facing Common barriers facing agricultural entrepreneursagricultural entrepreneurs

Where do Where do IDEASIDEAS come from? come from?How are How are MARKETSMARKETS developed? developed?Where is the Where is the CAPITALCAPITAL for a pioneering for a pioneering

idea?idea?How can How can REGULATIONREGULATION be a friend? be a friend?How have pioneers managed How have pioneers managed GROWTHGROWTH??

What is a Cooperative PrincipleWhat is a Cooperative Principle

A principle is an underlying doctrine or A principle is an underlying doctrine or tenet that defines or identifies a tenet that defines or identifies a distinctive distinctive characteristiccharacteristic

Cooperative PrinciplesCooperative Principles

Voluntary and Open MembershipVoluntary and Open Membership

Democratic Member ControlDemocratic Member Control

Members Have Economic ParticipationMembers Have Economic Participation

Autonomy and IndependenceAutonomy and Independence

Education, Training, and InformationEducation, Training, and Information

Cooperation Among CooperativesCooperation Among Cooperatives

Concern for CommunityConcern for Community

adopted by the ICA Centennial Congress 99/95adopted by the ICA Centennial Congress 99/95

What Does a Cooperative Do?What Does a Cooperative Do?

Provide its user-- Provide its user-- owners goods and owners goods and services at costservices at cost

Purchase inputs: Purchase inputs: seed-feed-fertilizers-seed-feed-fertilizers-chemicals-equipment-chemicals-equipment-suppliessupplies

Market members and Market members and non-members’ non-members’ productsproducts

Provide member with Provide member with services: insurance-services: insurance-credit-irrigation-credit-irrigation-custom fertilizer custom fertilizer spreading-telephone-spreading-telephone-electricity-marketingelectricity-marketing

Reasons for Joining a Reasons for Joining a CooperativeCooperative

EconomicEconomic Vertical integrationVertical integration

forwardforward backwardbackward

To obtain a fair or To obtain a fair or efficient priceefficient price

To reduce costs To reduce costs through economies of through economies of sizesize

To pool risksTo pool risks

To provide markets, To provide markets, supplies, and services supplies, and services that are missing or in that are missing or in danger of being lostdanger of being lost

To capture profits from To capture profits from another levelanother level

To benefit from To benefit from increased market increased market powerpower

Cooperative BenefitsCooperative Benefits

Allows farmers to pool their financial Allows farmers to pool their financial resources and conduct business activities resources and conduct business activities they could not independently perform as they could not independently perform as efficientlyefficiently

Allows farmers to respond to firms that Allows farmers to respond to firms that follow monopolistic practicesfollow monopolistic practices

Provides farmers with access to goods Provides farmers with access to goods and services neededand services needed

Disadvantages of CooperativesDisadvantages of Cooperatives

Access to capitalAccess to capitalCost of member and public educationCost of member and public education Investment in democratic processInvestment in democratic processLimit in scope of operationsLimit in scope of operationsCo-ops are only as good Co-ops are only as good

as their members ask them to be. as their members ask them to be.

Types of Agricultural Co-opsTypes of Agricultural Co-ops

Marketing Co-ops --Marketing Co-ops -- improve bargaining improve bargaining power, reduce costs, access new markets, power, reduce costs, access new markets, improve quality, and increase profits improve quality, and increase profits

Purchasing Co-ops --Purchasing Co-ops -- obtain needed obtain needed products and services, reduce or share costs, products and services, reduce or share costs, and increase profits and increase profits

Value-added ProcessingValue-added Processing Co-ops -- Co-ops -- access a access a more significant share of mark-ups available in more significant share of mark-ups available in the retail market & obtain better value from the retail market & obtain better value from lower grade produce/productlower grade produce/product

Fairview Produce AuctionFairview Produce AuctionFairview, KYFairview, KY

Auction patterned after Auction patterned after produce auctions in PA, produce auctions in PA, OH, and MOOH, and MO

Established by local Established by local Mennonite community in Mennonite community in 19971997

Metal frame building and Metal frame building and land purchased through a land purchased through a $72,000 stock drive$72,000 stock drive

100 shares of outstanding 100 shares of outstanding stock offered at $1,000 now stock offered at $1,000 now valued at $2,000-$2,500 per valued at $2,000-$2,500 per shareshare

$0$100,000$200,000$300,000$400,000$500,000$600,000$700,000

1997 1999

Annual Gross Sales

EquipmentProduce

FireFire

Iowa Soy Specialties, LLCIowa Soy Specialties, LLCVinton, IAVinton, IA

1995:1995: Benton County, IA, producers begin investigating Benton County, IA, producers begin investigating possibilities to add value to area agricultural productionpossibilities to add value to area agricultural production

1997:1997: Company shell established by Company shell established by farmersfarmers Marlin Marlin Jorgensen, Dave Van Steenhuyse, and Homer Jorgensen, Dave Van Steenhuyse, and Homer ShowmanShowman

Project Creation AssistanceProject Creation Assistance matching grant to begin pilot matching grant to begin pilot production of soy flour using mechanical (rather than chemical) production of soy flour using mechanical (rather than chemical) oil extrusion processoil extrusion process

Business planning assistance from Iowa Business planning assistance from Iowa REVAMPREVAMP and and $200,000 capital startup grant from Iowa $200,000 capital startup grant from Iowa VAAPFAPVAAPFAP

1998: 1998: Initial LLC stock drive attracts over 35 local Initial LLC stock drive attracts over 35 local ownersowners

Iowa Soy Specialties, LLCIowa Soy Specialties, LLCVinton, IAVinton, IA

1999:1999: Spins off Specialty Proteins LLC to manufacture Spins off Specialty Proteins LLC to manufacture textured soy protein soy flourtextured soy protein soy flour

Emphasis on non-GMO productsEmphasis on non-GMO productsStartup Budget: $900,000Startup Budget: $900,000

2000: 2000: Forms alliance with WholeSoy FoodsForms alliance with WholeSoy Foods Enters market with fully cooked, microwaveable Enters market with fully cooked, microwaveable

“Heartland Fields” soy barbecue“Heartland Fields” soy barbecueStartup Budget: $3.9 MillionStartup Budget: $3.9 Million

Cooperative Cooperative competes in the value competes in the value chain like any other chain like any other businessbusiness

Capital, management, Capital, management, marketing, and marketing, and strategy are equally strategy are equally critical factors for critical factors for coops and IOFscoops and IOFs

Fitting into the Supply Chain PictureFitting into the Supply Chain Picture

ABC Aquaculture Farmer’s Coop

Competing Processor

Competing Processor

Key Downstream Customer

Strategies for delivering value

low cost

unique product

added services

superior quality

more products, etc

Business Keys to SuccessBusiness Keys to Success

Thoroughly investigate the market opportunity; be Thoroughly investigate the market opportunity; be knowledgeable of customers and the marketplaceknowledgeable of customers and the marketplace

Make significant investments to capitalize the Make significant investments to capitalize the business business

Hire competent managementHire competent management““Survival as a niche company in such a climate takes a Survival as a niche company in such a climate takes a

specialized expert. So our advice is to raise the capital specialized expert. So our advice is to raise the capital to hire a trained, experienced professional. Don’t do-it-to hire a trained, experienced professional. Don’t do-it-yourself” on this one.” yourself” on this one.” Annie WilsonAnnie Wilson

Keys to SuccessKeys to Success Leadership Leadership

Assess all of your risks!Assess all of your risks!

Planning strategicallyPlanning strategically

Member/Board/Manager Member/Board/Manager communicationcommunication

““More often than not, an investment More often than not, an investment decision is made based on who is decision is made based on who is involved in the project rather than what involved in the project rather than what the project is all about.” the project is all about.” Steve NoakSteve Noak

types of riskstypes of risks productionproduction marketmarket constructionconstruction technologicaltechnological legal and sociallegal and social humanhuman

New Generation New Generation Cooperatives: A Cooperative Cooperatives: A Cooperative

Revival in Rural AmericaRevival in Rural America11

1Phrase taken from Lee Egerstrom’s book, Make No Small Plans: A Cooperative Revival for Rural America. Lone Oak Press, 1994.

What is a New Generation What is a New Generation Cooperative (NGC)Cooperative (NGC)

Focus is on value-added productsFocus is on value-added productsStructure and characteristics of NGC’sStructure and characteristics of NGC’s

delivery rightsdelivery rights limited membership a.k.a closed cooperativelimited membership a.k.a closed cooperativecooperative receives permanent capital/equity cooperative receives permanent capital/equity

investment and debtinvestment and debtpatronage paid only to memberspatronage paid only to membersappreciation of delivery rightsappreciation of delivery rights

Delivery RightsDelivery Rights

Four advantagesFour advantages adequate capital is adequate capital is

raised in the outset of raised in the outset of the businessthe business

capitalization is capitalization is distributed equitablydistributed equitably

investment=interestinvestment=interest may redeem invested may redeem invested

equityequity

ExampleExample plant can process $1 plant can process $1

million goats per yearmillion goats per year $500,000 equity may $500,000 equity may

be requiredbe required offer 500 shares at offer 500 shares at

$1,000 each$1,000 each each share equals each share equals

delivery of $2,000 worth delivery of $2,000 worth of goats each yearof goats each year

Limited MembershipLimited Membership

ReasonsReasons do not want to accept do not want to accept

more raw product than more raw product than co-op can absorbco-op can absorb

ensure purchase o f ensure purchase o f one share may be one share may be enough to justify enough to justify investmentinvestment

Ensure supply to Ensure supply to match demandmatch demand

Six Recommendations for Six Recommendations for Developing Successful NGCsDeveloping Successful NGCs22

Make significant investments to secure Make significant investments to secure appropriately sized facility and proper equipmentappropriately sized facility and proper equipment

Dual contract must commit farmer to specific Dual contract must commit farmer to specific delivery rights, co-op must accept those delivery rights, co-op must accept those deliveriesdeliveries

Professionalism is required on the part of the Professionalism is required on the part of the farmer, members, directors, and the hired farmer, members, directors, and the hired managementmanagement

2Recommendations were made by George Sinner at the “New Generation” Farmer Cooperatives Conference, April 1, 1996.

Six RecommendationsSix Recommendations

Co-op must be knowledgeable about its Co-op must be knowledgeable about its customers and marketplacecustomers and marketplace

Scale “Aim for a large share of whatever Scale “Aim for a large share of whatever market targeted”market targeted”

Net income must be returned to its members Net income must be returned to its members as cash at the end of the fiscal year!as cash at the end of the fiscal year!

Additional Keys to SuccessAdditional Keys to Success33

Quality peopleQuality peopleprofessionalism among farmers, members, professionalism among farmers, members,

directorsdirectorsmotivated, determined, and committedmotivated, determined, and committed

““project champion”project champion” Risk evaluationRisk evaluation

feasibility studies and financial projectionsfeasibility studies and financial projections Financial structureFinancial structure

liquidity, leverage, and profitabilityliquidity, leverage, and profitability

3Lee Estensen, CoBank, formerly the St. Paul Bank for Cooperatives.

General Guidelines on How to General Guidelines on How to Start a CooperativeStart a Cooperative

Have a Good Business Idea!Have a Good Business Idea!

Have a project championHave a project championGet an understanding of cooperative form Get an understanding of cooperative form

of businessof businessprinciplesprinciplespracticespractices types of cooperativestypes of cooperativesbenefits/limitations of cooperativesbenefits/limitations of cooperatives

Form Steering CommitteeForm Steering Committee

Producer SurveyProducer Survey Do a feasibility study/opportunities Do a feasibility study/opportunities

assessmentassessmentmarket assessmentmarket assessment financial assessmentfinancial assessmentmanagement/labor assessmentmanagement/labor assessmentother organization costsother organization costs

Have a vote to continue/stop development Have a vote to continue/stop development processprocess

Feasibility StudyFeasibility Study

Purpose is to Purpose is to determine if a determine if a business opportunity business opportunity is possible, practical, is possible, practical, and viableand viable

Enables persons to Enables persons to take a realistic look at take a realistic look at both the positive and both the positive and negative aspectsnegative aspects

Study helps many Study helps many owners make critical owners make critical decisionsdecisions

StatisticsStatistics 50% of start-ups are 50% of start-ups are

still in business after still in business after 18 months18 months

25% in business after 25% in business after 4 years4 years

Form an Interim BoardForm an Interim Board

Select legal and accounting consultantsSelect legal and accounting consultantsDevelop business planDevelop business planHire manager/CEOHire manager/CEOMarketing agreementsMarketing agreementsRecruit members/equity driveRecruit members/equity driveWrite Articles of Incorporation and Write Articles of Incorporation and

BylawsBylaws

Business PlanBusiness Plan

Description of Description of businessbusiness

The marketing planThe marketing plan

The management planThe management plan

The financial The financial management planmanagement plan

Is a New Generation Cooperative Is a New Generation Cooperative Right for YOU!Right for YOU!

Do you have a reliable source of raw Do you have a reliable source of raw product and grower/member commitment?product and grower/member commitment?

Is there market access and dependability?Is there market access and dependability? Are you adding value to products?Are you adding value to products? Enough return to justify equity investment?Enough return to justify equity investment?

Think big, start small and scale quicklyThink big, start small and scale quickly44

4 CoBank, Business Advisory Services 2001.