University of Wisconsin Center for Wisconsin
Farmer Cooperatives, October 1995 Vol.62 No.7
Published by the Rural Business and Cooperative Development Service
Surfing the New-Wave Cooperatives
by Dennis A. Johnson
President and CEO
St. Paul Bank for Cooperatives
The "St. Paul Pioneer Press" of Aug. 9, 1994, listed 50 new-wave and
community development cooperative ventures in Minnesota, North Dakota and
Wisconsin, noting that plans were being studied for another 50 or more.
They ranged from dairy, pork, corn, pasta, potato and vegetable to other
production, processing and marketing cooperatives. The St. Paul Bank has
helped finance many of them. Most have been, or are being, formed to move
the producer one or more steps up the food chain and one or more steps
closer to the consumer of agricultural products. These cooperatives raise
the value of local farm commodities and natural resources, provide rural
development and income opportunities and help stabilize the rural communities
that foster them.
Some of these new cooperatives reach out horizontally to produce new
crops and products, benefiting communities through economic diversification.
Some reach vertically, creating new jobs in communities and bringing producers
a share of the proceeds from the processing of their products.
Cooperatives are sensitive to the business conditions of an area and
the needs of its people. They bring together people, capital, business
functions and services in effective, competitive economic units under local
ownership and control. They are created and serve to fill an economic function
Economics prompted the Rochdale weavers to initiate the cooperative
form of business we know today. Economics fostered formation of cooperatives
in the 1920s and 1930s. But in later years this fundamental purpose - serving
an economic need - sometimes was lost or overlooked.
From the 1950s through the 1970s, lack of economic performance by some
cooperatives was often rationalized as a result of lack of cooperative
education and understanding. Education and understanding have their roles,
but the real name of the game is economics. A cooperative's success or
failure depends on how well it performs its economic purpose.
The rise of new cooperatives in the Upper Midwest that began with sugar
cooperatives in the early 1970s has become a virtual explosion. New cooperatives
for processing and/or marketing grains, oilseeds, wild rice, potatoes and
fruit came along during the mid to late 1970s. The 1980s brought further
expansion and new cooperatives for such ventures as processing corn, marketing
wine and providing financial services.
The 1990s have already brought new cooperatives to deal with alfalfa,
aquaculture, bison, new and expanded processing of corn into fructose and
ethanol, flour niilling, frozen bread dough, ostriches, pasta, potatoes,
poultry and egg production, sugar beet processing, senior housing, sweetener
marketing, vegetable processing and more.
The resurgence of cooperatives (at least as we know them in the Upper
Midwest) in the late 1980s and in the 1990s has been driven by economics,
pure and simple. Opportunities are great, but successful new cooperative
ventures do not spring up overnight. Large amounts of due diligence, time
and hard work precede the startup of operations.
Characteristics of Successful New-Wave Cooperatives:
Success Factors for New Cooperative Ventures:
Value-added investment orientation to process commodities into higher-value
products, moving producers further up the food chain;
Significant out-of-pocket investment by members to provide the initial
Defined or selected membership rather than open membership;
Long-term delivery rights and obligations of a specific commodity, with
investment level tied to delivery rights;
Recognition that delivery or membership rights have value and can be traded;
Pooling of commodities and products with value-added payments to the members
only as they are earned;
Expansion typically funded by new investment related to the additional
delivery or membership rights;
More frequent use ofjoint ventures and alliances.
Successful Strategies of Traditional Cooperatives
Local leadership -- Cooperatives are successful if they're created "from
the ground up." This requires local leadership with the vision, spirit,
time and commitment to develop the idea, solicit the support and create
the new organization.
Realistic goals and assumptions -- Objectives of the new organization must
Honest, open communications -- All involved stakeholders must have a clear
understanding of what is expected and how it is to be achieved.
Realistic market-entry strategies -- Marketing the finished product is
a major challenge for all cooperatives. For a new player entering an established
market, the ability to market the end product successfully is critical
Experienced consultants -- New-wave co-ops require experienced outside
resources for the due-diligence process -- attomeys, accountants, lenders
and knowledgeable industry experts who can develop reasonable and appropriate
organizational structures and business and financial plans.
Comprehensive business plan -- A business plan that addresses challenges
and opportunities is critical in demonstrating potential for the project,
determining required capital, raising equity capital and securing needed
Engineering and design -- Many newwave ventures are based on technology
to process raw commodities into value-added products. Plant design and
engineering are critical to successful plant operation and to production
of quality products.
Capable management -- Management must be capable of successfully implementing
and managing a sound, comprehensive business plan.
Sufficient member equity -- Owners will benefit most from success and must
bear the risk. Equity capital from members must be sufficient to attract
needed debt financing to support the entire business, especially through
start-up operations. Depending on the risk analysis, a 40 - to 50-percent
member equity position is often specified for new cooperatives.
Commitment to pooling -- New ventures are generally structured so that
members are paid on a progressive basis as the crop is received, processed,
and -- most important of all -- marketed.
The new-wave cooperatives embody the principles of the Rochdale weavers,
established more than 150 years ago but modified to function successfully
today. They are based on the successes of traditional cooperatives and
the experience of the new-wave cooperative ventures. They are serving well
in rural America and may fill a need in your community.
Providing new services -- As agriculture has adopted new technologies and
become more specialized, producers seek additional services. Plant food
and crop protection applications, crop monitoring, livestock production
services and credit, are examples.
Increasing market share -- In some cases, traditional cooperatives have
increased market share through new product development, mergers and consolidations
with other cooperatives and acquisitions of noncooperative businesses.
Vertical integration -- This strategy has often succeeded in livestock
production where traditional cooperatives support production facilities
in hog, poultry and cattle production. Additional dairy and grainmarketing
cooperatives have diversified and expanded through additional value-added
processing and marketing ventures.
Adding value and diversification -- The traditional federated and local
cooperatives have created new organizations, including new cooperatives,
joint ventures and strategic alliances. They also have added services to
meet the needs of rural America, such as energy production and distribution,
telecommunications and information services and local services such as
convenience stores, restaurants and truck stops.