An Introduction to New Generation Cooperatives

New Generation Cooperatives shift the focus away from selling a commodity to offering a value-added product.
An Introduction to New Generation Cooperatives - Articles
An Introduction to New Generation Cooperatives

A group of NGC members discuss their business plan and marketing options.

"Safety in numbers" may be a common characteristic among growers who realize and understand the benefits of joining an agricultural cooperative. Though certain organizational factors have changed with the creation of New Generation Cooperatives (NGCs), the basic principle of growers bending together to remain, or become, competitive is still valid. Members of a Traditional Cooperative (TC) pool raw-goods and sell them to an intermediary who facilitates any further processing (Coltrain, et al., n.d.). NGCs, however, shift the focus away from selling a commodity to offering a value-added product (Waner, n.d.; Torgerson, n.d.). Benefits for growers include increased profits resulting from their involvement in processing and "enhancing" raw goods. Examples of established NGCs include: Mountain View Harvest, Colorado, which became the nation's first farmer-owned bakery; Northern Vineyards Winery, Minnesota; and Southwest Soy Cooperative, Iowa, which processes soybeans.

Agricultural cooperatives have served producers well in the past with members joining the ventures for a multitude of reasons. Primarily, commodity prices have decreased (Waner, n.d.), with cheaper foreign imports contributing to this dilemma, resulting in reduced grower profits. There has also been a reduction in the number of small and midsized family-owned farms (Coltrain et al., n.d.) and consolidation among food processors and retailers has made it difficult for growers to access markets (Torgerson, n.d.). NGC growers who "pursue vertical integration" are paid for value added during processing (Anonymous, n.d.), hence, they benefit from this pursuit when commodity production is "too low to sustain profitable farm operation" (Groschen, n.d.).

Distinctions between Traditional Cooperatives and New Generation Cooperatives

Several differences are apparent when the structure of TCs (open membership) and NGCs (restricted or closed membership; Cropp, n.d.) are compared. According to Coltrain, et al. (n.d.), both NGC and TC members provide equity capital, though the investment for TC members is minimal, and members have an active roll in overseeing the cooperative's operation. NGC members are required to purchase a membership share (also referred to as equity stock), which establishes their voting right, usually giving each member only one vote, and to sign a marketing agreement stating that they will deliver raw goods for processing (Anonymous, n.d.; Olson, F., 1996). TCs, however, accept new members on a continual basis and allow any grower to join the cooperative and deliver raw goods. Some TCs do require members to sign an agreement with the understanding that they will deliver commodity goods that meet a certain production requirement and level of quality (Coltrain, et al., n.d.).

In addition to purchasing a membership share, NGC members also purchase delivery rights shares. The number of shares purchased represents the quantity of raw goods that they can realistically deliver to the cooperative for processing. NGC members can deliver no more or no less than the number of shares they purchase. If the quantity or quality of the good does not meet the NGC's standards, the grower will be required to purchase goods from another grower to fulfill their commitment. Otherwise, the grower is responsible for paying the difference, if any, that the NGC pays for raw goods they acquire from outside the cooperative to fill the void (Anonymous, n.d.). In turn, the purchase of shares ensures that the NGC will accept delivery of goods for the amount that the member purchased shares for. Prospective members should understand that the value of the shares could appreciate or depreciate based on the cooperative's performance, (Torgerson, n.d.). By committing to delivering a specified amount of raw goods, the NGC can rely on receiving a steady supply of inputs for processing (Anonymous, n.d.). Many NGCs also develop recommended production practices to ensure that growers supply a consistent quality of goods (Olson, F., 1996).

Another factor unique to a NGC is the restriction on transferring and selling of membership shares. Once a member of the NGC, a grower can choose to transfer or sell their shares, pending approval from the board of directors, to other members (Coltrain et al., n.d.). Members, however, do not have the right to sell shares to non-members. Only a decision by the board allows for the inclusion of new members, which usually occurs when the NGC chooses to grow and more shares need to be sold to finance the expansion (Cropp, n.d.).

How Profits are Returned to NGC Members

A TC pays members the current market price for commodities at the time the goods are transferred to the cooperative. NGC members, however, are offered a contracted price, which could actually be higher or lower than the market price when the goods are delivered, when they sign the marketing agreement (Coltrain, et al., n.d.). NGC members earn income based on a cash patronage rate, a payment made to individual members based on the quantity or value of business done by each member. A portion of the cash patronage rate is actually paid to the member (approximately 65 to 85%), while the remainder is treated as an equity investment and retained by the NGC. Since the NGC acquires a greater amount of equity financing than TCs, through the sale of membership shares, the NGC can return a greater portion of cash patronage than TCs (Bielik, n.d.). As with any business, the NGC may not be financially sustainable in the first year, instead it may take several years for the cooperative to reach this goal (Olson, F.,1996).

Creating the NGC

The core group is a collection of growers who have an interest in implementing a new idea or want to improve on existing modes of operation and initiate the process of developing a cooperative. Core group members need to be progressive growers who have an abundance of fresh ideas. These individuals may be experienced growers in the community that other growers seek out for advice. Core group members will be responsible for developing the initial cooperative idea and defining a potential market, as well as overseeing the business plan, feasibility study, and equity drive.

A group of NGC members discuss their business plan and marketing options.

Developing an Idea

Starting a NGC entails identifying a consumer need that is not currently being met, or improving upon an existing product. A "brain storming" session involving the core group would be ideal. Prior to discussing potential ideas, some understanding of current consumer and food trends is necessary. Supermarket industry trade journals, as well as journals for specialty food-retailers and professional chefs describe current consumer food purchasing trends and showcases goods and value-added products that are available for consumer purchase. High-end food catalogs are another source for inspiration. Learning about consumer food interest, such as the appeal of ethnic food, emergence of the next "diet trend," and necessity for single-serving sized food portions can help guide the brainstorming discussion and keep the core group on track.

Business Structure and Creating Bylaws

Anyone who starts a new venture should carefully choose a business structure that will work best with their goals and objectives: sole proprietorship, partnership, corporation or limited liability company. NGCs, as well as TCs, serve as a type of corporation. For each member their liability is limited to just what they invest in the cooperative. For more information on corporations and other business structures, refer to the Small Business Adminstration's website. As with any venture, a set of bylaws should be written and approved by NGC members so that they, and future members, have a clear understanding of their rights and responsibilities. According to Rapp and Ely (1996) bylaws "must be consistent with both State statutes and the articles of incorporation...[and should be written] with the help of an attorney." Articles contained within the bylaws primarily pertain to: membership (qualifications and basis for expulsion); meetings (schedule, voting and procedures); election of board of directors and officers and their duties; how delivery rights share prices will be determined and how members will be paid; as well as other matters pertinent to the success of the cooperative.

Where is the market?

A great idea will only prove its resourcefulness if there are one or more groups of consumers who have a need for the product, have an interest in the product, and have the resources necessary to purchase the product. Questions to consider: Where is the market located? If not in the locality of the processing plant, is it feasible and cost effective to serve the market? Who are potential competitors and what relative advantages could the NGC possess? Understanding these concepts and being able to find evidence that a viable market exists, is a crucial starting point. An investment early in the planning stage will help prevent product failure. Take the time to find an analyst who is familiar with the goods you produce, the value-added product(s) you intend to focus on, as well as potential markets.

Business Plan and Feasibility Study

A business plan is an essential document that will help guide the NGC though the process of: a) defining what the business will be, how it will be managed, and who will be involved; b) organizing information for the loan application, calculating a breakeven analysis and projected profit and loss and cash flow statements; and c) gathering supporting documents such as licenses and core group members' resumes. In addition, if the processing facility is already an established business, three years of financial records (tax returns, balance sheet, and profit and loss statements) should be obtained from the current owner. Business plans should be available to both financial institutions and prospective NGC members.

A component of the business plan phase is the feasibility study. Analysts who perform this crucial step help determine whether the business plan is based on sound principles, that the prospective cooperative can actually perform the duties outlined in the business plan, and that the cooperative has potential to be profitable. Basically, an analyst will have to answer the core group's question: Can what we propose to do be done with what we have to offer? Though the NGC's idea might not be rejected outright, the analyst may suggest changes for improving and strengthening the effort.

Equity Drive

The next step toward establishing a NGC is to acquire start-up capital from prospective NGC members, in the form of shares. The delivery rights share price is calculated by dividing the amount of capital needed by the number of units of product needed to be successful. Once the number of delivery rights shares is sold, no additional memberships are accepted. An amount of shares is sold with the goal of providing roughly 50% of the needed start-up capital (Anonymous, n.d.; Waner, n.d.).

The value of the shares can increase and decrease throughout the year based on the NGC's performance (Cropp, n.d.). For example, if the NGC is successful, value increases. However, value also decreases if the NGC is not successful (Anonymous, n.d.). Purchasing shares shows the true commitment of members, as they are required to invest in the venture (Waner, n.d.). Capital can be derived from shares, grants, low interest loans, and tax credits (Waner, n.d.), matching grants and seed money from prospective members (Cobia, n.d.).

The planning and organizing that is necessary to ensure a successful NGC should be a priority for all members. Continue to evaluate the progress that the NGC is making, as well as consumer and food trends that appear to be garnering attention. As with any venture it will be necessary to remain competitive and relevant to the market you are supplying. In addition, learn about other NGCs in your state or region. By gathering information from a NGC that could serve as a model, members might find that implementing their idea is possible and that other producers have traveled down this road and are on their way to becoming more sustainable.

Literature Cited

  • Anonymous, n.d. New generation cooperatives: A primer for Missouri agricultural producers. Agriculture Business Development Division Missouri Department of Agriculture accessed 12 Oct. 2004.
  • Bielik, M. n.d. New generation cooperatives on the northern plains. Department of Agricultural Economics and Farm Management, University of Manitoba. accessed 12 Oct. 2004.
  • Cobia, D.W. n.d. New generation cooperatives: External environment and investor characteristics. University of Wisconsin Center for Cooperatives accessed 12 Oct. 2004.
  • Coltrain, D., D. Barton, and M. Boland. n.d. Differences between new generation cooperatives and traditional cooperatives. Arthur Capper Cooperative Center, Department of Agricultural Economics, Kansas State University. accessed 2 Dec. 2004.
  • Cropp, R. n.d. New generation cooperatives defined. University of Wisconsin Center for Cooperatives. accessed 12 Oct. 2004.
  • Groschen, R. n.d. New generation cooperatives (NGC). Minnesota Department of Agriculture. 12 Oct. 2004.
  • Olson, F. 1996. Five questions to ask before joining a new processing cooperative. Quentin Burdick Center for Cooperatives accessed 12 Oct. 2004.
  • Olson, B. 1996. New generation cooperatives on the northern plans: Cooperatives in the United States. University of Manitoba. accessed 20 March 2005.
  • Rapp, G. and G. Ely. 1996. Bylaws for cooperatives, including a sample outline, from How to start a cooperative, Cooperative Information Report 7, United States Department of Agriculture, Rural Business-Cooperative Service. accessed 20 March 2005.
  • Torgerson, R.E. n.d. A critical look at new-generation cooperatives. USDA Rural Business-Cooperative Service. accessed 2 Dec. 2004.
  • Waner, J. n.d. New generation cooperatives: Case study. Illinois Institute for Rural Affairs, Macomb, IL. accessed 2 Dec. 2004.

Prepared by Kathleen M. Kelley, Assistant Professor of Consumer Horticulture


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