How To Start A Cooperative(and why!)

Constance L. Falk

M. Eugene Sundt Honors Professor

New Mexico State University

Department of Agricultural Economics and Agricultural Business

Presentation to the Idaho Women in Agriculture Conference

March 2, 2013

Why start a cooperative?

Agricultural cooperatives enable producers to Create a more democratic

ownership/management business structure

Jointly purchase in bulk (input supply cooperatives)

Reduce input costs (hay for livestock growers, seed…)

Market output jointly (marketing cooperatives)

Increase market power

Increase prices

Access different markets

Hire marketing professionals, so farmers can farm

Create a branded product line, manage quality control easier

Why is this possible?

Capper-Volstead Act of 1922.This law exempts farmers from

prosecution under the Sherman Anti-trust Act.

Arthur Capper, former governor of KansasSource: Wikipedia

Andrew Volstead, US congressman from Minnesota and “father” of prohibitionSource: Wikipedia

Source of the principles of cooperatives

1844, a group of 28 weavers and spinners, formed the Rochdale Society of Equitable Pioneers, for the purpose of jointly buying food together. They created these eight principles of cooperation, known as the Rochdale Principles, that are the basis of the modern cooperative movement.

http://weaversway.coop/index.php?page=rochedale_principles

Rochdale Cooperative Principles

1. OPEN, VOLUNTARY MEMBERSHIP.

2. DEMOCRATIC CONTROL. (one member, one vote)

3. LIMITED RETURN, IF ANY, ON EQUITY CAPITAL. Share capital should only receive a strictly limited rate of interest.

4. NET SURPLUS BELONGS TO USER-OWNERS. Profits are typically distributed among the members in proportion to their transactions (patronage dividends).

5. HONEST BUSINESS PRACTICES. Cooperatives should deal openly, honestly, and honorably with their members and the general public. 6. ULTIMATE AIM IS TO ADVANCE COMMON GOOD. The ultimate aim of all cooperatives should be the advancement of the common good.

7. EDUCATION. All cooperative societies should engage in education of their members, officers, and employees and the general public in the principles and techniques of cooperation, both economic and democratic.

8. COOPERATION AMONG COOPERATIVES. All cooperative organizations, should actively cooperate in every practical way with other cooperatives at local, national, and international levels.

Adjustments in the cooperative model

Open membership, democratic control, and limited returns on investment in the modern cooperative movement have become sources of dissatisfaction.

Hybrids have emerged: “New generation” or closed cooperatives. Members can only join during the membership drive, and not after, unless they buy stock from an existing member.

New generation cooperatives tend to focus on creating and selling value-added products, not commodities.

Shares in NGC usually carry delivery rights and obligations, so that members are obligated to deliver product to the cooperative according to the number of shares purchased. Those shares and delivery rights/obligations are tradeable.

HOW to START A COOPERATIVE (USDA CIR 7, 1996) http://www.rurdev.usda.gov/rbs/pub/cir7/cir7rpt.htm

1. Invite leading potential member-users to meet and discuss issues. Identify the economic need a cooperative might fill.

2. Conduct an exploratory meeting with potential member-users. If the group votes to continue, select a steering committee.

3. Survey prospective members to determine the potential use of a cooperative. 4. Discuss survey results at a second general meeting of all potential members and

vote on whether to proceed. 5. Conduct a needs or use cost analysis. 6. Discuss results of the cost analysis at a third general meeting. Vote by secret

ballot on whether to proceed. 7. Conduct a feasibility analysis and develop a business plan. 8. Present results of the feasibility analysis at the fourth general meeting. If

participants agree to proceed, decide whether to keep or change the steering committee members.

9. Prepare legal papers and incorporate. 10. Call a meeting of charter members and all potential members to review and

adopt the proposed bylaws. Elect a board of directors. 11. Convene the first meeting of the board and elect officers. Assign responsibilities

to implement the business plan. 12. Conduct a membership drive. 13. Acquire capital and develop a loan application package. 14. Hire the manager. 15. Acquire facilities. 16. Begin operations.

A few more details

1. For marketing cooperatives, assess production capacity among likely producers, including volumes and any seasonality.

2. Examine markets: locations, volume requirements, interest in purchasing from a cooperative, local and organic premiums if relevant, packaging requirements, prices offered or pricing system used, transportation costs.

3. Conduct a financial feasibility analysis that incorporates what is learned in steps 1 and 2. The analysis should include several scenarios, or “what-if” analyses, in which prices, volumes, and costs are tweaked to examine the impact on financial results. The model should provide results for at least three years. You will need to have a clear business concept before undertaking this step, including location of the business.

4. While 3 is underway, begin examining financing options. Co-Bank? Incorporate cost of capital into the financial feasibility model.

Get a lawyer who knows cooperative law to prepare legal incorporation papers and paperwork that meets SEC regulations on financial securities.

Business Planning Mission Statement

What is the vision?

Marketing Study What are the product lines, pricing strategies, target markets, consumer

characteristics, advertising strategy, promotional budget, packaging requirements, volume expectations?

Organizational Plan Who will manage this company? What are their qualifications? How will the

company be structured? What are the lines of reporting and responsibility? Do you have an organizational chart? What kind of business will this be? (Private corporation? New Generation Cooperative? Closed cooperative?)

Financial Feasibility Study (my specialty) Will this be profitable? Under what circumstances of volumes, prices, costs?

How much financing is needed?

Financing Plan How much financing is needed? What will it cost? What will be the

combination of debt or equity financing? Who can provide this financing?

Why are cooperatives especially relevant to farmers today?

The viability of medium-sized farms is increasingly tenuous. Fred Kirschenmann, distinguished fellow at the ISU Leopold Center for Sustainable Agriculture, has highlighted this problem of the “disappearing middle.”

The disappearing middle in IowaPercent Change in Iowa Farms Based on Sales Category, 1997 to 2002

24%

-15% -15%

-18% -19%

17%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

< $5,000 $5,000 to $25,000 $25 to $49,999 $50 to $99,999 $100 to $499,999 > $500,000

Agricultural Quadrants – Value & Scale

Value-Added

Commodity

Very Small

Very Large

1. Specialty

2. Opportunity

3. Price & Scale

4. Death Zone

Examples of Participants

Value-Added

Commodity

Very Small

Very Large

1. Specialty

2. Opportunity

3. Price & Scale

4. Death Zone

Farm StandsFarmer’s Markets

CSA’s

Organic ValleyOregon Country Beef

Earthbound Farm

CommodityFamily Farmers

ADM; Con AgraBrazil; China

Option #1 – Get Big

Value-Added

Commodity

Very Small

Very Large

1. Specialty

2. Opportunity

3. Price & Scale

4. Death Zone

Option #1Get Big

CommodityFamily Farmers

Buy Out FarmsConsolidateIndustrial Inputs

Option #2 – Convert to Specialty

Value-Added

Commodity

Very Small

Very Large

1. Specialty

2. Opportunity

3. Price & Scale

4. Death Zone

Option #2Convert to Specialty

CommodityFamily Farmers

Switch to Specialty CropsSell via Specialty MarketsConvert to Organic

Option #3 – Create New Opportunity

Value-Added

Commodity

Very Small

Very Large

1. Specialty

2. Opportunity

3. Price & Scale

4. Death Zone

Option #

3

AFF

CommodityFamily Farmers

Differentiate with Value-added Attributes.

Preserve local / regional focus.

Aggregate value chains.

What is a value chain?

A value chain is long-term network of partnering businesses working together to maximize value for the partners and the end customers of a particular product.

FarmersPacker (Primal cuts)

Fabrication(Portion

Cuts)

Vet Services

Input Suppliers

DELIVERY

Food Service

Distributor

Market

DELIVERY DELIVERY

Market

Market

Value chain – farmer as partnerSupply chain – farmer as input supplier

Organic Valley Family of Farms

Organic Valley Family of Farms TM

_________________________________________________________ 

Begun in 1988, and has become the largest organic farming cooperative in North America and one of the largest organic brands in the nation.

Started with seven Wisconsin farmers.

More than 130 organic products available, including milk, cheese, butter, spreads, creams, eggs, produce, juice and meats sold in food cooperatives, natural foods stores and supermarkets throughout the country.

Web site is www.organicvalley.coop/index.html

Resources for Cooperatives

University of Wisconsin-Madison, Center for Cooperatives

Cooperative Development CentersUSDA Rural Development

University of Wisconsin-Madison, Center for Cooperatives

2009 Study: Research on the Economic Impact of Cooperatives

http://www.uwcc.wisc.edu/

Rural Cooperative Development Centers USDA RCDCs are competitively-funded cooperative development centers (by

the USDA Rural Development). There were 40 as of mid 2012. Who covers southern Idaho? I asked Dan Hobbs, who works at the Rocky Mountain Farmers Union. He recommended: Diane Gasaway at the NW Cooperative Development Center of Olympia.

The list of all the RCDCs can be found here:

http://www.extension.org/pages/63092/name-website-url-and-phone-number-of-us-rural-cooperative-development-centers

The USDA Rural Development State Office in Idaho is:

Wallace Hedrick, State Director9713 West Barnes Drive, Suite A1Boise, ID 83709Voice: 1 (800) 632-5991 (toll free) or (208) 378-5600 Fax: (208) 378-5643

www.rurdev.usda.gov/id/

Mondragon Cooperative, Basque region of Spain

83,000 employees

9,000 students

Largest Basque company, 7th largest in Spain

85% of industrial workers are members (owners)

Four major areas: Industry, Finance, Retail, Knowledge

Within Industry: Consumer Goods, Capital Goods, Industrial Components, Construction, and Enterprise Services

Within Consumer Goods: Refrigerators, Washing machines, dishwashers, ovens, office furniture, home furniture, sports equipment, bicycles, sporting guns, and fitness equipment.

Mondragon’s retail sales since 1991