University of Wisconsin Center for Cooperatives
Balancing Forest Ecology and Economics:
Cooperative Development Services
The Executive Summary is organized in a "Question and Answer" format. This approach is intended to make the primary results of the business plan clear and accessible to Sustainable Woods Cooperative (SWC) members and other readers.
- What is the purpose of the business plan?
The primary purposes of the business plan are:
- to determine whether or not it makes sense to proceed with the development of SWC; and, if so,
- to propose a strategy and tactics for making the co-op profitable and for providing the services its members want.
There are three main audiences for this business plan:
- Those involved directly with SWC -- the members, the board of directors, consultants, advisers, and future employees;
- Potential lenders and other investors; and
- Other people interested in forming sustainable forestry cooperatives.
A. The Bottom Line
- Does it make sense to proceed with the development of SWC?
Yes. The research conducted for the business plan shows that:
- the forest owner-members of SWC want the services the co-op plans to provide;
- there is a market for SWC's wood products; and
- there are several different options for organizing the co-op that generate a profit for the co-op and substantial benefits for the members.
- What development approach makes the most sense?
There are several approaches that appear feasible. The board of directors and members of SWC should review the eight options presented in the Sustainable Woods Cooperative Start-Up Options Table at the end of the Executive Summary. This table is also presented in Chapter Five, Operations. Additional information on these options is presented in Chapter Six, Financial Analysis.
CDS consultants recommend a three stage start-up process:
- Begin operations in the current fiscal year (October 1998 - September 1999) with the Forestry Services Option. In the first year, the co-op would concentrate on the preparation of woodland managment plans and related resource management services to members. Members would purchase $5 of stock in the co-op for every forested acre they own to pay for start-up costs. The co-op could also engage in contract harvesting, contract sawing and other processing and test marketing activity on a limited, "experimental" basis.
- Make a transition to the Very Limited or one of the Limited Value-Added Options in the second year of operation (October 1999 - September 2000). This transition would require members to purchase an additional $5 in stock for each wooded acre they own. For the Limited Value-Added Options, the co-op would also need to borrow about $50,000. With these funds, the co-op would establish a sort yard; coordinate sawing, drying and floor manufacturing with contractors; and focus on the sale of dried lumber and flooring.
- When the co-op board of directors and members are ready, make the transition to one of the High Value-Added Options. This may happen in the third or fourth year of operation (October 2000 - September 2001 or October 2001 - September 2002). A major infusion of capital will be required at this point -- an estimated $1.2 million -- which would probably have to be pieced together from a variety of lenders. With these additional funds, the co-op would be able to shift from contract wood processing to "in-house" processing. The focus would be on the manufacture and sale of flooring, millwork and dimensioning (custom parts for furniture, doors and other wood products).
This recommendation may change depending on new opportunities or obstacles. For example, the co-op may find an affordable site this year that is well-suited for a sort yard and sawmill. The co-op may also identify a lender or partner that gives it access to investment capital sooner than anticipated. If these opportunities arise, the co-op should not feel bound by a slower timetable.
On the other hand, the co-op could develop more slowly than anticipated. One result might be to have the transition from the Forest Services Option to a High Value-Added Option take place over five years rather than over three or four years.
- What are the main benefits to members?
The primary benefit to members, regardless of which start-up approach is used, is a well-managed forest. As the analysis of member costs and benefits in Chapter Six, Financial Analysis, shows, SWC provides a means for members to dramatically improve the quality of their forests and, at the same time, make money on the sale of their wood through the co-op. Other approaches to timber stand improvement cost landowners money in the short term, rather than generating a return, even if landowners participate in state and federal cost-share programs.
Chapter Six also shows longer term economic benefits to members as they generate revenue from the selective harvesting of their forests every few years and, at the same time, add value to the standing forest by increasing the volume of high grade trees.
Then there are the non-economic benefits provided by working with the co-op's resource management consultants. With their help, members can establish and maintain well-managed forests, prairies and other ecosystems on their land. As these ecosystems are improved over the years, they can become better habitats for a wide variety of plants and animals. Their appearance can be improved. Depending on the preferences of landowners, they can have a wide variety of recreational uses, including hunting, hiking, cross country skiing, bird watching and other activities. Within the broad definition of "well-managed," the co-op will tailor its services to meet the needs of each landowner. Thus a major benefit of the co-op is the ready access it provides to members who want to improve the stewardship of their land. For additional information on these services, see Chapter One, Resource Analysis and Chapter Two, Member Services.
B. Information Leading to the Bottom Line
- What are the main forest-related resources of co-op members?
As of mid-October 1998, SWC had 125 members with about 29,000 acres of land. About 17,000 acres were forest land and 1,450 were prairies and savannas. Most of the remaining acreage was farmland. About two-thirds of the members' land is in Sauk, Iowa and Richland counties. The remaining one-third is dispersed across 10 additional Wisconsin counties. Red and white oak account for 40 percent or more of members' trees. About 15 percent of member' trees are maple, about seven percent are basswood, and the remainder are a variety of other species.
Members also have non-wood resources on their lands. These include prairies, savannas and other distinct natural communities; endangered plants and animals; and plants that can be sold as foods, medicines and other specialty products. The co-op is planning to focus on education of members related to these non-wood resources during the first several years of operation and is not planning to market specialty forest products during this time.
See Chapter One, Resource Analysis, for additional information.
- What services do members want?
Most members are interested in receiving a combination of services from SWC related to woodland management, harvesting, processing and marketing of timber and value-added wood products, and improvement of wildlife habitats and biodiversity. See Chapter Two, Member Services, for additional information.
- What services will the co-op provide?
The co-op will provide all of the services listed above. The resource management-related services -- particularly woodland management plans -- will be a priority during the first year of operation. We estimate that the co-op will be able to carry out between 50 and 70 plans between October 1998 and September 1999.
Depending on the particular start-up approach selected by the board of directors and members, services related to harvesting, processing and marketing may also begin in the first year or they may be deferred until the second or third year. See Chapter Two, Member Services, and Chapter Five, Operations, for additional information.
- What is the market for SWC's forest products?
The market is good to very good for SWC's forest products. The business plan has identified opportunities to market sawlogs and bolts, firewood, veneer, pulpwood, pallet parts, dried lumber, millwork, flooring and dimensioned products. The last four items are higher value items. See the processing flow chart at the end of the Executive Summary.
The plan also identifies opportunities for certified wood sales. Sustainable forest certification is at an early stage of development in the United States. As a result, it appears that SWC's wood products may be able to gain access to markets because of their certified status, but in most cases won't receive a premium price at this time. There may be more opportunities in the future for certified wood products to receive price premiums. See Chapter Three, Market Analysis, for more information.
- How is SWC going to market its products?
The co-op faces two primary marketing constraints:
- SWC's operating costs will be higher than the industry average, because of the small scale of the co-op's operation; and
- the co-op will need to find a market for products from low grade wood, because it will be selectively harvesting primarily low grade wood during the early years.
To compensate for these constraints, the strategy of the co-op will be:
- to add as much value as possible to all wood harvested through processing;
- to process low grade wood into value-added products (e.g., rustic flooring and dimensioned products); and
- to maximize retail sales.
The business plan provides two sets of marketing assumptions based on "conservative" and "optimistic" estimates of retail sales projections. See Chapter Three, Market Strategy, Chapter Five, Operations, and Chapter Six, Financial Analisys.
- How is SWC going to operate as a business?
As mentioned above under Question Three, the co-op has a number of start-up strategies that appear viable. In the answer to Question Three, we recommended a phased-in start-up strategy beginning with the Forest Services Option and transitioning to the Very Limited Value-Added Option or one of the Limited Value-Added Options and then to one of the High Value-Added Options.
There are two reasons for this start-up strategy (or a similar kind of graduated approach):
- The co-op should walk before it runs. That is, if SWC starts out gradually, it is likely to avoid big mistakes and develop practical operating experience before moving on to a more complex level.
- The co-op will need to raise a lot of money before it can engage in high value-added processing. A track record at a lower operating level may be very important in accessing capital for a more ambitious level of operation.
- How much money does SWC need to operate?
The business plan identifies a low-end estimate of about $76,000, a high end estimate of about $1.4 million and six additional options in between. The low end estimate for the Forestry Services Option does not result in the development of a profitable co-op. There is not enough service activity to support operations. All of the other options do generate a profit for the co-op by the third year of operation.
The High Value-Added/Optimistic Sales Option generates about twice the return to co-op members as the Very Limited Value-Added Option. It also requires almost ten times as much capital to start up. Because of the higher capital costs of the Moderate and High Value-Added Options, it is probably more realistic for the co-op to start out with an option requiring less capital and then build up to a high value added option.
- Where will SWC get its financing?
Primarily from members in Options One through Four and primarily from lenders in Options Five through Eight.
C. Next Steps
- Where does SWC go from here?
We recommend the following next steps:
- The board of directors should review the business plan and recommend a start-up strategy to the members;
- At a general membership meeting, the members should vote on the co-op's start-up strategy;
- The co-op should then carry out a member equity drive (either $5 per acre or $10 per acre) depending on the strategy selected;
- At the same time that these decisions are being made and the equity drive is occurring, the board of directors should develop procedures for resource management services and the co-op should formally begin providing these services.
|Option||Primary Activities||Capital Required ($)||Net Income of the Co-op in the 3rd Year||Return to Members in 3rd Year|
|1. Forestry Services||woodland management plans and related services||75,600||(32,330)||no return|
|2. Very Limited Value-Added||forestry services; sort yard; sale of bolts and sawlogs; firewood processing and sales||151,200||4,015||$.17 per board foot|
|3. Limited Value-Added/ Conservative Sales||forestry services; sort yard; sale of bolts and sawlogs; firewood processing and sales; contract sawing; contract kiln drying; sale of lumber||201,200||3,915|| .14/bf
|4. Limited Value-Added/ Optimistic Sales||forestry services; sort yard; sale of bolts and sawlogs; firewood processing and sales; contract sawing; contract kiln drying; contract manufacturing of flooring; sale of lumber and flooring||201,200||43,949||.20/bf|
|5. Moderate Value- Added/ Conservative Sales||forestry services; sawing of bolts and sawlogs; in-house and contract kiln drying; contract manufacturing of flooring; sale of lumber and flooring||1,229,800||58,957||.26/bf|
|6. Moderate Value-Added/ Optimistic Sales||forestry services; sawing of bolts and sawlogs; in-house and contract kiln drying; contract manufacturing of flooring; sale of lumber and flooring||1,154,800||129,047||.30/bf|
|7. High Value-Added/ Conservative Sales||forestry services; sawing of bolts and sawlogs; in-house and contract kiln drying; manufacturing and sales of flooring, millwork and dimensioning||1,454,800||58,056||.32/bf|
|High Value-Added/ Optimistic Sales||forestry services; sawing of bolts and sawlogs; in-house and contract kiln drying; manufacturing and sales of flooring, millwork and dimensioning||1,404,800||89,460||.37/bf|