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 and purpose.

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:

• 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 equity;
• 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.

• 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 be achievable.
• 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 to success.
• 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 debt financing.
• 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.

• 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.