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Growing a ClevelandRenaissance

November / December 2013

2 November/December 2013 / Rural Cooperatives

By Doug O’Brien, Acting Under SecretaryUSDA Rural Development

It may not be the major tourist attractionthat the Rock and Roll Hall of Fame is, butCleveland is now also home to what isbelieved to be the nation’s largest urbangreenhouse. This 3.25-acre expanse of glass

and greenery is a marvel of technology and humaninnovation. A number of varieties of lettuce and other leafyvegetables are being grown here hydroponically, without theuse of soil. The operation is helping to turn a strugglingneighborhood into a source of fresh, local food and jobs.

The workers here are not simply hourly wage earners —although hourly jobs are also a welcome addition to theeconomy of a neighborhood where jobs are scarce. Rather,they are set to become (after working for a year) worker-owners of Green City Growers (GCG), a worker cooperative.

GCG is part of Cleveland’s Evergreen family of workerco-ops, which also includes Evergreen Energy Solutions, aninstaller of solar heating systems, and the EvergreenCooperative Laundry (featured in the Nov.-Dec. 2010 issueof Rural Cooperatives, available on the USDA website), whichuses environmentally friendly technology to clean the laundryfor many of Cleveland’s largest institutions (such ashospitals).

While each of the three sister co-ops is involved inentirely different lines of work, one thing they all have incommon is that they are owned by their workers. The longera person works for the co-op, the more his or her equitystake in the business increases. In an inner-city neighborhoodwhere economic opportunity is scarce, these co-ops offer away up for their member-workers.

When a person evolves from “employee” to “worker-owner” of a business, the desire and motivation to see itsucceed increases exponentially. The fact that GCG ishelping to meet the growing public demand for local producemakes the co-op’s story even more compelling.

During a ceremony that marked the opening of thegreenhouse earlier this year, Cleveland Mayor Frank Jacksoncalled the operation an essential part of the city’s “SustainableCleveland 2019” effort, the goal of which is to create enoughnew industries and long-term jobs by the year 2019 to makethe city economy truly sustainable. Production of local food

is a key element in the plan, Jackson noted. GCG is far from the only urban farming operation that is

creating jobs and expanding the supply fresh, local producefor city dwellers.

In Milwaukee, Growing Power is an urban farming projectthat markets produce from its own 40-acre farm just west ofthe city. Its director, Will Allen, is a former professionalbasketball player whose parents were sharecroppers in SouthCarolina. His daughter, Erika, now runs an offshoot ofGrowing Power in Chicago. Detroit, which has been batteredby the loss of much of its industry during the past 20 years, isalso home to successful urban farming projects that growhope, along with food, in blighted neighborhoods.

Community wealth building is the goal of the Evergreenco-ops. The aim is to help “communities and individualsincrease asset ownership, anchor jobs locally, strengthen themunicipal tax base, prevent financial resources from ‘leakingout’ of the area and ensure local economic stability,” the co-op says.

The Evergreen cooperative strategy was designed to“cause an economic breakthrough in Cleveland. Rather thana trickle-down strategy, it focuses on economic inclusion andbuilding a local economy from the ground up,” according tothe co-op’s mission statement. “Rather than offering publicsubsidies to induce corporations to bring what are often low-wage jobs into the city,” it continues, “the Evergreen strategyis catalyzing new businesses that are owned by theiremployees; rather than concentrate on workforce training foremployment opportunities that are largely unavailable to low-skill and low-income workers, the Evergreen Initiative firstcreates the jobs, and then recruits and trains local residents totake them.”

Federal Reserve Board Governor Sarah Bloom Raskin hasnoted that the Evergreen Cooperatives model “is effectivebecause it capitalizes on local production and because itforges a local business-development strategy that effectivelymeets many of the anchor institutions’ own needs.”

So why does USDA Rural Development, whichadministers financial programs specifically targeted to ruralAmerica, have a stake in efforts such as GCG? Because it isalso home to USDA’s Cooperative Programs office, the onlyunit of the federal government specifically charged withhelping to “grow” the co-op business model; we strive to

Commentary Cleveland Rocks (and Grows)!

continued on page 38

Features

Rural Cooperatives / November/December 2013 3

Volume 80, Number 6November/December 2013

Rural Cooperatives (1088-8845) ispublished bimonthly by USDA RuralDevelopment, 1400 Independence Ave.SW, Stop 0705, Washington, DC. 20250-0705.

The Secretary of Agriculture hasdetermined that publication of thisperiodical is necessary in the transactionof public business required by law of theDepartment. Periodicals postage paid atWashington, DC. and additional mailingoffices. Copies may be obtained from theSuperintendent of Documents,Government Printing Office, Washington,DC, 20402, at $23 per year. Postmaster:send address change to: RuralCooperatives, USDA/RBS, Stop 3255,Wash., DC 20250-3255.

Mention in Rural Cooperatives ofcompany and brand names does notsignify endorsement over othercompanies’ products and services.

Unless otherwise stated, articles in thispublication are not copyrighted and maybe reprinted freely. Any opinions express-ed are those of the writers, and do notnecessarily reflect those of USDA or itsemployees.

The U.S. Department of Agriculture(USDA) prohibits discrimination in all itsprograms and activities on the basis ofrace, color, national origin, age, disabili-ty, and where applicable, sex, maritalstatus, familial status, parental status,religion, sexual orientation, geneticinformation, political beliefs, reprisal, orbecause all or part of an individual’sincome is derived from any publicassistance program. (Not all prohibitedbases apply to all programs.) Personswith disabilities who require alternativemeans for communication of programinformation (Braille, large print, audiotape,etc.) should contact USDA’s TARGETCenter at (202) 720-2600 (voice and TDD).To file a complaint of discrimination, writeto USDA, Director, Office of Civil Rights,1400 Independence Avenue, S.W.,Washington, D.C. 20250-9410, or call (800)795-3272 (voice), or (202) 720-6382 (TDD).USDA is an equal opportunity providerand employer.

Tom Vilsack, Secretary of Agriculture

Doug O’Brien, Acting Under Secretary,USDA Rural Development

Dan Campbell, Editor

Stephen Hall / KOTA, Design

Have a cooperative-related question?Call (202) 720-6483, or email:[email protected] This publication was printed with vegetable oil-based ink.

p. 8

04 Going Local in Big Sky CountryWestern Montana Growers Co-op to notch first $1 million sales year By Laura Ginsburg

07 USDA to fund advanced biofuels projects

08 Overseas co-op formations help reduce poverty, fight hunger By Paul Hazen

12 Growing a Cleveland RenaissanceUrban farming co-op aims to boost blighted neighborhood with local foods, new jobsBy Stephen A. Thompson

20 Essential economic roles of farmer co-opsBy K. Charles Ling

29 Article Index 2013

Departments02 COMMENTARY16 LEGAL CORNER18 MANAGEMENT TIP24 NEWSLINE

p. 12

ON THE COVER: William MacKey (left) and NatopiaScott transplant 12-day-old artisan lettuce seedlingsinto their new “hydroponic home” inside the GreenCity Growers cooperative greenhouse. The co-op,which is owned and operated by its workers, iscreating good jobs in an area of Cleveland that needsan economic lift. Photo by Lisa DeJong/ClevelandPlain Dealer

p. 40


Going Local in Big Sky Country

By Laura Ginsburg, Project Coordinator for Co-op DevelopmentMission Mountain Food Enterprise Center

Montana has always been known for beef, wheat andbeing “Big Sky Country.” As the local foodmovement sweeps the nation, Montana is gaining a

reputation for those who like to know where their food comesfrom. And in the western part of the state, the WesternMontana Growers Cooperative (WMGC) is leading the packfor local food aggregation, processing, and distribution. TheWMGC is celebrating its tenth year in 2013, with 38 farmer-members, and nearly $1 million in sales in 2012.

Western Montana Growers Co-opto notch first $1 million sales year

The Western Montana Growers Cooperative, making a delivery, is helping to meet rising demand for local food.The co-op has been in business for 10 years, and now has 38 farmer-members. Photo by Neva Hassanein.Bitterroot apples are one of the co-op’s more popular fruit offerings. Photo by Laura Ginsburg


In the fall semester of 2012, participants (led by Dr. NevaHassanein) in a graduate-level course from the University ofMontana Environmental Studies program completed a casestudy of the WMGC. The case study was funded by MissionMountain Food Enterprise Center, the USDA-fundedcooperative development division of Lake CountyCommunity Development Corporation, based out of Ronan,Mont.

Mission Mountain was an integral player in the formationof the co-op and has been instrumental in providingcooperative education and development and food handlingguidance and serves as the processing facility for WMGC’svalue-added products.

Three teams, each with own focus The students divided into three teams, each focusing on

either: (1) staff, partnerships and cooperative structure; (2)member-owners; or (3) wholesale and community supportedagriculture (CSA) customers. Each group decided on asampling platform and used methods such as interviews,surveys, document review and participant observation togather data for the report. All participants, regardless of whatgroup they were part of, were asked their thoughts on therole of the WMGC in the regional food system.

As local foods continue to gain traction, particularly withthe movement into wholesale markets such as schools andinstitutions, it is important to understand how a cooperativelyowned business contributes to food system development. It ishoped that this case study will help inform those interested indeveloping cooperatively owned food hub businesses whilealso contributing to the academic literature regarding foodsystems.

Financially, the WMGC is expecting sales to top $1million in 2013. The previous year saw the co-op return aprofit for the first time, and annual growth for the previoussix years has averaged 30 percent. In the span of 10 years,WMGC has grown from nine members (who supplied onlyfruits and vegetables) to 36 members selling a “completegrocery basket,” including dairy and grains.

Similarly, the CSA program has grown to more than 160members since its inception in 2008 and now includesproduct-specific shares from local producers, including bread,coffee, cheese and beef. The recent financial success has beenbolstered by grants for specific projects and generous support

from financial donors who want to see the co-op succeed.

Co-op staff and producers interviewed

The student team focusing on the WMGC staff andpartners interviewed all of the staff and three key partners.The co-op employs a manager, assistant manager (a positionnow occupied by two people: one who manages finances, theother manages operations), a warehouse coordinator/primarydriver, a CSA coordinator and two or three additionalwarehouse packers and drivers.

The team that studied the grower-members chose tointerview the top 15 highest selling farmers in the co-op, whoaccount for more than 88 percent of annual sales. Thesefarmers sell a wide variety of products, ranging from fruitsand vegetables to meat and dairy products. Nearly two-thirdsof those interviewed reported that less than half of their totalsales go through the co-op.

Finally, the buyer team focused on wholesale customers(health food and grocery stores), emerging institutionalbuyers and CSA customers. Health food and grocery storescomprise 73 percent of the co-op’s total sales. The top 10wholesale buyers, all four institutions and all of the CSAmembers were targeted for interviews or surveys.

From staff perspectives, the aggregation and distributioncapabilities of the WMGC have allowed smaller farmers toreach more markets through wholesale distribution and withprocessed products. Staff members frequently mentioned thepride they felt in literally representing the fruits of thefarmers’ labor. They also said that being able to deliver high-quality, fresh and locally grown items was a key element oftheir work.

Partners were equally enthusiastic about the quality of theproduce and the ability of the WMGC to get local goodsinto more regional and statewide markets. Newly formedrelationships have led to WMGC items being sold acrossMontana through two multi-state distribution companies.Strong ties to Mission Mountain Food Enterprise Centerhave led to increased processing for fresh and frozenproducts, most of which go to area schools and institutions.

Co-op yields variety of benefitsGrower-members discussed a variety of co-op membership

benefits, focusing on either finances or community. In

interviews, 13 of the 15 farmers saw thedistribution of goods as being the primary benefitof the co-op, while seven farmers viewed thebenefits derived from aggregation of products asbeing the primary advantage of the co-op. Beingpart of a community of individuals doing similarwork was the highest community benefit,mentioned by 10 farmers.

Farmers echoed the thoughts of staff when theyspoke about the role of the WMGC in the westernMontana food system. Specifically highlighted wasthe function as aggregator, distributor and marketerof local foods, with many growers saying that the

WMGC was “the face” oflocal food.

Smaller scale farmersnoted that the aggregationservice of the co-op allowsthem to remain competitive.Growers also say the WMGCplays a critical role in rebuilding amore viable and sustainable food systemand serves as an example for other cooperatives.

The success of the co-op noted by staff andgrowers comes to fruition in the opinions ofwholesale and CSA customers. Buyers consider theWMGC a highly valued supplier, with nine of teninterviewees saying the freshness of the productswas superior to similar products from otherdistributors.

Another high point of membership is the directcontact and relationships the buyers have with co-op staff, including managers and drivers. Buyersappreciate that the co-op stands behind its productsand guarantees customer satisfaction.

With so many small-scale growers offeringproducts during Montana’s short growing season,buyers also appreciated the simplicity of makingonly one phone call to access goods from multiple

farms. Institutional and CSA customers reportedsimilar thoughts, and they appreciated the productquality, the relationships they had with WMGCstaff, and the ability to support multiple farmerswith ease.

Co-op expands producers’ market reach

As food systems develop in parts of the countrythat have lost the infrastructure to handle producefrom small and mid-scale farmers, the role of abusiness such as WMGC is to fill that void.Because the co-op picks up, aggregates, markets,

processes and sellsproduce from multiplefarmers to manyconsumers, it hasincreased the reach and

potential of each individualfarm.

The cooperative structurehas allowed farmers to share in the

risk of re-developing a localized food system — aprocess that does not happen quickly and requiresthe buy-in from many different people along thevalue chain. The cooperative structure may notalways be the easiest to operate, due to factors suchas competition, often low financial returns and astruggle to maintain member participation. But theWestern Montana Growers Cooperative has shownthat — with perseverance and dedication — astronger, better local food system can emerge.

As the WMGC celebrates its first 10 years, it isclear that Montana consumers are embracing amodel that supports their regional farm familiesand will keep small agriculture viable into thefuture. n


Through its many functions,the co-op has increased the reach

and potential of each individual farm.

Agriculture SecretaryTom Vilsack in October2013 announced theavailability of $181million to develop

commercial-scale biorefineries orretrofit existing facilities withappropriate technology to developadvanced biofuels. Farmer and utilitycooperatives are among those eligible toapply for the funds.

“This financing will expand the

number of commercial biorefineries inoperation in the U.S. that areproducing advanced biofuels from non-food sources,” Vilsack said. “USDA'sBiorefinery Assistance Program is yetanother way USDA is helping to carryout the Obama Administration’s ‘all-of-the-above’ energy strategy to developevery possible source of American-madeenergy. But the benefits go beyondreducing our dependence on foreign oil.These biorefineries are also creating

lasting job opportunities in ruralAmerica and are boosting the ruraleconomy as well.”

The Biorefinery Assistance Programwas created through the 2008 Farm Billand is administered by USDA RuralDevelopment. It provides loanguarantees to viable commercial-scalefacilities to develop new and emergingtechnologies for advanced biofuels. Inaddition to farmer and electric co-ops,other eligible entities include: Indian

USDA funds advanced biofuels projects

The Green Crude Farm in Columbus, N.M., (top) is the world’s first commercial, demonstration algae-to-energy facility. The project was awarded$104 million in federal funding, including a loan guarantee under USDA’s Biorefinery Assistance Program. Photo courtesy Sapphire Energy Inc. TheFreemont Community Digester in Freemont, Mich., (bottom) is the largest commercial-scale anaerobic digester in the United States. USDAsupported its development with a $12.8 million loan guarantee. Photo courtesy Novi Energy


Cooperatives areubiquitous in ruralAmerica. More than2,000 farm co-opsgenerate $235 billion in

annual sales. Nine hundred ruralelectric co-ops provide power to 42million people. And several hundredmore co-ops are bringing 21st centurytelecommunications technologies torural America.


Overseas co-op formations helpreduce poverty, fight hunger

Editor’s note: Hazen is executive director of the OverseasCooperative Development Council in Washington, D.C.Previously, he was CEO of the Washington-based NationalCooperative Business Association. Hazen speaks frequently atnational and international forums on the role of cooperatives incommunity and economic development. In 2001, he was namedCEO Communicator of the Year by the CooperativeCommunicators Association.

By Paul Hazen


Less well known is what U.S.cooperatives are doing around the globeto feed the hungry, reduce poverty andfoster democracy. U.S. cooperativeorganizations have been involved ineconomic development in poorcountries for more than 60 years. Theirwork grew out of the conviction that,having helped millions in this country,cooperatives can be adapted to helplow-income people everywhere.

In the “trade-not-aid” tradition,farmers in developing countries aretaught simple ways to increaseproduction and how to work togetherto increase output and income. As partof a group, they can negotiate higherprices for products, lower costs forinputs and better pursue opportunitiesin the marketplace. Rural electric andcommunications cooperatives bringelectricity and telecommunicationsservices to underserved areas of poorcountries, while credit unions makeloans to subsistence farmers and othersmall entrepreneurs, allowing them togrow their businesses.

Rather than simply offeringhumanitarian aid, cooperativedevelopment creates stable, self-sufficient businesses that improve lives.Increased agricultural production and

income helps create wealth while itreduces hunger, malnutrition andpoverty. It also offers impoverishedfarmers prospects that they could notachieve individually, such as helpingthem to secure land rights.

Co-ops teach basics of democracy

By working within a cooperative,poor people in underdevelopedcountries also learn democraticprinciples, including consensusdecision-making and electing leadersthrough a one-member, one-voteprocess. Becoming a member of acooperative is the first exposure manypeople in the developing world have tothe concepts of democratic governanceand local control.

Over the years, international

Providing mosquito netting is one way U.S. cooperatives are helping to protectpeople in Africa from the ravages of mosquito-borne malaria. Here, a nurse inUganda helps to properly hang the netting. Photo courtesy Overseas CooperativeDevelopment Council (OCDC). In Zambia (below), volunteers from Land O’ Lakes(an OCDC member) are helping farmers improve their livestock managementpractices. Photo courtesy Land O’ Lakes

cooperative development has producedsome impressive results. In the 1940sand 1950s, cooperatives helped createIndia’s White Revolution, making thatcountry the world’s largest milkproducer. They also played a key role inhelping Europe recover from WorldWar II, triggering the creation ofCARE, the international relief anddevelopment organization.

More recently, cooperatives broughtelectric service to 85 million people inthe Philippines and Bangladesh andopened lucrative global coffee marketsto thousands of small producers inAfrica, Indonesia and Central America.

Organizing cooperatives is also oneof the most cost-effective methods ofachieving development goals. For arelatively small investment, cooperativescan transform whole communities by

stimulating economic growth and byproviding social supports.

In the fledgling Southeast Asiancountry of East Timor, for example,coffee cooperatives — assisted by theNational Cooperative BusinessAssociation’s CLUSA InternationalProgram — realized their successdepended on the health of theirmembers. So they set up a network ofclinics that filled a major gap in thecountry’s health services.

Obama: goal is self sufficiencyPresident Barack Obama captured

the essence of cooperative developmentin a speech prior to a 2012 G-8Summit. “The whole purpose ofdevelopment is to create the conditionswhere assistance is no longer needed,”Obama said, “where people have the

dignity and the pride of being self-sufficient….”

Nine of the most active U.S.organizations in internationalcooperative development work togetheras the Overseas CooperativeDevelopment Council (OCDC). Theyare: ACDI-VOCA, CommunicationsCooperative International, CooperativeResources International, GlobalCommunities, HealthPartners, LandO’Lakes, NCBA CLUSA, NationalRural Electric Cooperative AssociationInternational (NRECA International)and the World Council of CreditUnions.

These nine organizations currentlyare involved in 200 developmentprojects in 70 countries. The projectsare funded through a variety of sources,with the Foreign Agricultural Service of


U.S. co-ops are helping farmers in Madagascar improve their rice yields.


the U.S. Department of Agriculturebeing a leading source of funds via theFood for Progress program.

Examples of OCDC members’ workaround the globe include:• In Ethiopia, ACDI/VOCA is usingcooperatives to boost the incomes of

thousands of small farmers. Strategiesinclude building feed- and dairy-processing plants and teaching farmerscompetitive bidding. • In Mongolia, Global Communities islowering farmers’ costs and raisingproductivity by teaching cooperative

approaches. These efforts have led tojoint production of crops, shared laborand lower cost access to veterinaryservices. • In Tanzania and Zambia, LandO’Lakes is using cooperatives to

Cooperative development could play a major role inmeeting one of the looming global challenges of the 21stCentury. The growing world population — projected toreach 9 billion by 2050 — will require at least a 70 percentincrease in food production at a time when farmlandexpansion has largely been exhausted, productivity growthhas leveled off and crops are increasingly diverted forenergy and other non-food purposes.

Bottom-up approach neededA growing list of national and international leaders

favors a shift to a more bottom-upapproach to development — one thatimproves lives through wealth building,rather than handouts. At the core ofthis approach is the cooperativebusiness model, which can help reducehunger by both increasing agriculturalproduction and increasing incomeamong small farmers.

The financial challenges of 2008-2009 has fueled an additional wave ofinterest in cooperatives. Historically, inany major economic downturn, peopleturn to cooperation to solve economicand social challenges. The UnitedNations declared 2012 the InternationalYear of Cooperatives, and the U.N. Foodand Agriculture Organization madecooperatives the theme of World FoodDay 2012.

There is also movement in thedirection of cooperatives in the ObamaAdministration’s $3.5 billion Feed theFuture initiative. The first grant underthis initiative went to an NCBA CLUSA

project that is reducing malnutrition and hunger amongSenegal’s rural poor. Feed the Future is designed to helpcountries grow enough food to feed their own people.

The gap between what we need to feed the world’s poorand the food the global market can produce is massive andgrowing. Over six decades, cooperative business has ledthe fight against malnutrition and starvation in developingcountries. With increased attention from policy makers andincreased investment from donor agencies, cooperativesare poised to play a major role in closing the global foodgap. n

Co-ops poised to help address world food challenge

In Sri Lanka, dairy production is improving thanks to help from U.S. cooperatives. Photocourtesy Land O’ Lakes



Urban farming co-op boosts strugglingneighborhood with local foods, new jobs

Growing a Cleveland RenaissanceBy Stephen A. Thompson, Assistant Editor

Demand for localfood is strong inOhio, an agriculturalstate that producesmore than 2,000

kinds of crops and is home tonumerous farmers markets, foodhubs and produce stands. But inCleveland, the local food movementmeans more than fresh, healthyproduce. Local food production is atthe heart of a grassroots effort toreclaim portions of the city sufferingfrom urban decay andunemployment.

Spearheading the effort in onestruggling Cleveland neighborhood isa workers’ cooperative that has built

a large-scale greenhouse that isproducing healthy food and creatingjobs in an area that desperately needsboth. Built on 11 acres, the GreenCity Growers greenhouse officiallyopened last Feb. 25. It has four acresunder roof, with 3.25 acres ofgrowing area.

Green City Growers employs 25people who produce high-quality,hydroponically grown leafyvegetables. Major crops are Bibblettuce, green leaf lettuce, gourmetlettuces and basil, which are sold torestaurants and retailers year-round.

City slammed by real estate bust

The real-estate bust of severalyears ago hit Cleveland hard. Thecity, already suffering economicdifficulties due to the closure ofmany factories, saw a rash offoreclosures that resulted inthousands of vacant houses andplummeting property values. TheU.S. Census Bureau estimates thatmore than 8,000 houses have beendemolished in the greater Clevelandmetropolitan area.

Left behind after each demolitionare bare foundations and vacant lotsthat are soon filled with weeds andtrash. These attract vermin andfurther damage neighborhoodproperty values and quality of life.


Constance Suggs tends organic lettuce, grown in nutrient-rich water, without soil.Living Lettuce (below) is the co-op’s brand of premium, organic lettuce. Photos byJerry Mann, courtesy Green City Growers (CGC).

Residents are fighting the decay with agrowing “community gardening”movement, in which neighbors areturning abandoned properties into smallgreenhouses and vegetable plots. Someparticipants are even working tooverhaul local ordinances thateffectively prohibit residents fromraising chickens.

The idea for a worker-ownedgreenhouse was first floated bycommunity leader Alayne Reitland. Amember of the board of the ClevelandFoundation, an organization dedicatedto the improvement of localcommunities, Reitland took the idea tothe leadership of EvergreenCooperatives. Evergreen is a projectthat promotes worker-owned businessesas a means of furthering economicdevelopment. Evergreen already hadsuccessfully started a worker-ownedlaundry and a workers’ cooperative thatinstalls solar panels (see Nov.-Dec. 2012Rural Cooperatives).

Cleveland Foundation funds feasibility study

Evergreen decided to forge ahead

with a feasibility study for an urbanfarming project, funded by a grant fromthe Cleveland Foundation. To conductthe study, the co-op hired MaryDonnell, a business consultant withmany years of experience in the freshproduce industry. Completed in 2010,the study found that the concept hadpromise.

The idea simmered for a year, saysDonnell. “When they decided to goforward with the idea, they asked me tobe the entrepreneur to build it out. Imoved to Cleveland from BowlingGreen, Ohio, in the spring of 2010.”

The neighborhood chosen for theproject certainly needs help. It has a 57-percent poverty rate and a medianincome of less than $18,500. Eventhough vacant land is plentiful in theneighborhood, finding a suitablebuilding site was not easy.

“We needed a big site, and it neededto be assembled,” says Donnell. “Mostoften in cities, there aren’t 11 acresalready ‘put together.’” Much of theland for the site chosen, she says, wasforeclosed property owned by banks.Some of the land was owned by the city,

while other portions were privately owned.“With any big development project

— especially in the city — there’s a lotof moving parts,” Donnell says. “Plus,there’s the design and site workconsiderations. Those all have to bedone almost concurrently so that you’reready to start the project. We startedinto development phase, land assembly,financing, planning, environmentalassessment, all at that time.”

With a little help from some friends

Evergreen didn’t blaze the trailalone. Kent State University’s OhioEmployee Ownership Center (OEOC),established in 1987, provides technicalassistance to worker ownership projectsand had helped with the previousEvergreen co-op projects. Roy Messing,OEOC’s interim director, helped pull itall together.

“Our motivation is to provideemployee ownership,” he says. “We’vedone a lot of work with conversions[from private to worker ownership], butthis was a chance to launch a project


“You have to a coalition of peoplewho believe in the project and can bring different skills to it.”

build

The Green City Growers’ greenhouse operation represents an investment of about $17 million. It is currently producingBibb lettuce, green leaf lettuce, gourmet lettuces and basil. Photos courtesy Green City Growers


The Ohio Employee Ownership Center (OEOC), a nonprofitprogram based at Kent State University, was established in 1987to provide outreach and technical assistance to Ohio employeesand business owners interested in employee ownership. OEOCprovides training to existing employee-owned firms and helpsestablish startup employee-owned ventures.

Startup projects, such as Green City Growers Cooperative, aremuch less numerous than are businesses converting from privateto employee ownership. The Center has participated in morethan 100 such conversions since its founding in 1987, accordingto Roy Messing, its interim director. “Our founder, John Logue,was looking at Employee Stock Ownership Plans as a way toextend the lives of steel and other companies that were having arough time in the late 1980s,” he says.

According to Messing, the majority of conversion projectshave been Employee Stock Ownership Plans, or ESOPs. In anESOP, shares in the company are given to employees as part oftheir compensation. The shares are held in trust until anemployee retires or leaves the company, at which point theshares are sold.

In effect, ESOPs function as retirement plans and aregoverned by the Federal Employee Retirement Income SecurityAct (ERISA). While ESOPs may be issued by a company in whichthe original owners still hold the majority of shares, in a “100-percent ESOP” the shares also provide a means by whichownership can be completely transferred to employees.

ESOPs offer tax advantagesESOPs can provide significant tax benefits to the original

owners. “If you sell at least 30 percent of your shares to youremployees, you can defer capital gains under Section 1032, sothat’s a benefit for the owner,” says Messing.

By making a 100-percent ESOP an S Corporation, all incometax can be avoided until shareholders receive cash from thetrust, usually in retirement, according to a pre-determinedformula. S Corporations (or S Corps) are corporations that —instead of paying federal income tax — pass corporate incometax liability through to their shareholders.

Shareholders of an S Corp report their portions of income andlosses on their personal tax returns and are taxed at theirindividual rates. That means S Corps shareholders avoid doubletaxation on the income from their shares.

“If it’s a 100-percent S Corp ESOP, 100 percent of the sharesare held by the ESOP itself and the S Corp, so all the earningsflow to the trust,” says Messing. “Therefore, there’s no incometax. We’re seeing a recent trend where many businesses aretransitioning to 100 percent ESOP and taking that tax benefit,[thereby] having a big windfall in the short term.” (Editor’s note:An article in the January-February 2009 issue of Rural

Cooperatives describes how a loan guarantee from USDA RuralDevelopment was used to finance a 100-percent employee-owned conversion of Doucette Industries Inc., which designsheating and cooling systems. Past issue of Rural Cooperativesmagazines can be accessed at: www.rurdev.usda.gov/BCP_Coop_RurCoopMag.html).

Tax benefits provide a powerful incentive to owners to go theESOP route, Messing says. “There’s not a great deal of taxincentives for a co-op, because you have 8 ½ months todistribute the patronage.” As a result, there are about 300traditional worker cooperatives in the United States as comparedto an estimated 10,000-to-11,000 ESOP companies, says Messing,“With the ESOP, you can still establish bylaws that are verycooperative in nature, so you can still have a democratically runbusiness.”

Co-op structure best for small companiesDespite the attractions of an ESOP, Messing believes there is

an important place in rural development for the workercooperative. “If you don’t have 20 employees or more, you can’tjustify an ESOP,” he says. “So smaller businesses go the moretraditional employee-co-op route. I think there are going to bemore opportunities for worker co-ops in rural America, whereyou’ve got these small towns and companies with 10 or 15workers, the owner is going to retire and there’s no son ordaughter to transition it to. So that’s something we’re going tocontinue to highlight.”

Motivations tend to differ between startups and conversions,says Messing. “With startups, there’s a mission involved,” hesays. “With conversions, retiring owners want to continue theoperation (once they are no longer owners). It’s an interestingblend. Some see their business as a legacy and they want theiremployees to continue that legacy. With others, they realize theiremployees helped get them where they are and they want tobenefit them.

“People ask what type of company is a good candidate forconversion to employee ownership,” Messing says. “And I sayit’s a profitable company, because you have to take out debt tobuy out the equity of the owner who is departing. We see caseswhere people want to transition to an ESOP or a workers co-op,and the numbers don’t work. In those cases, we advise them notto move forward.”

Possible stumbling blocks are numerous. “They may not havethe management capability, or the owner wants to step backfrom a management role,” says Messing. “Then they have tobring in the right people or train the right people to fill thatmanagement void. Each case is different.”

—Stephen A. Thompson

ESOPs, worker co-ops each have


advantages


By David Cook

Editor’s note: Cook is an attorney with thelaw firm of Autry, Horton & Cole, LLP inAtlanta, Ga., who practices in the area ofcooperative law and taxation. He previouslyworked as an auditor of cooperatives. Heregularly contributes to a cooperative lawblog at: www.ahclaw.com/cooperative.

In recognition of theremarkable assistancethey provide to ruralcommunities and theirunique attributes,

cooperatives receive various benefitsunder federal, state and local laws, suchas tax exemption and deductions. Oneof the key attributes cited in support ofthese benefits is the return of earnings,or margins, to members and patrons ona patronage basis. Cooperativesgenerally accomplish the return ofearnings and margins throughpatronage dividends (also calledpatronage refunds), per-unit retains, orretirement of capital credits.

This concept is best illustrated bycontrasting cooperatives with for-profitcompanies. Unlike for-profitcompanies, which normally returnequity (or accumulated earnings) inproportion to their owners’ capitalinvestment, cooperatives return equityin proportion to the amount of businessconducted with or for each member orpatron.

Courts and the Internal RevenueService (IRS) have reasoned that returnof equity on the basis of patronage isconsistent with the idea thatcooperatives are mere conduits oragents of their members and patrons.Accordingly, unlike for-profit

companies, cooperatives should not paytaxes on patronage earnings.

The obligation of cooperatives toreturn equity on a patronage basis arisesfrom a variety of sources, such as statelaws, federal tax laws, bylaws andcontracts with members and patrons.Whatever the source, cooperativesgenerally have a legal obligation toreturn their earnings on a patronagebasis when they are financially capable.This article addresses the importance ofreturning earnings to members andpatrons within a reasonable time. It alsodiscusses the risks associated withfailure (or a perceived failure) to do so.

Environment of increased risk In general, cooperative members and

patrons recognize the tremendousbenefits provided by cooperatives.Cooperatives are owned and effectivelycontrolled by members, who also aretheir customers. Thus, it should comeas no surprise that a huge majority of

patrons and members are deeplydedicated to their cooperative andsatisfied with the services it provides.

At the same time, cooperatives havelong faced the risk that members andpatrons will allege mismanagement ofthe equity of members and patrons(“member equity”). Such allegations ofmismanagement have involved, forexample, the timeliness of returningmember equity, discounting memberequity, setting off member equity withoutstanding debts of members andpatrons, and discrimination in thereturn of member equity.

In recent years, some cooperativeshave faced increased complaints andlitigation, including class actionlawsuits, arising from allegedmismanagement of member equity. Forinstance, plaintiffs in these lawsuits havealleged: • A cooperative failed to retire member

equity despite having the financialwherewithal to do so;

Legal CornerCo-ops should periodically evaluatetheir member equity practices

USDA graphic by

Stephen A. Thom

pson


• A cooperative violated its ownmember equity policy;

• A cooperative violated a state statuteconcerning return of member equity;

• A cooperative’s bylaws violated publicpolicy because they effectively re-sulted in forfeiture of member equity;

• A cooperative had no system in placeto routinely return member equity;

• A cooperative did not notify itsmembers and patrons of theirmember equity allocations;

• A cooperative’s practicesdiscriminated against classes ofmembers (e.g., former members) infavor of other members;

• A cooperative maintained an excessiveamount of member equity orunusually high equity-to-asset ratio,suggesting that it was not properlyand timely returning member equity;

• A cooperative improperly discountedmember equity and retained thediscount as permanent equity; and

• A cooperative’s board of directors hadconcealed the amount of eachmember’s equity by preventing accessto the cooperative’s books and recordsand denying members access to boardmeetings.These are serious allegations against

any cooperative. But given the largeamount of member equity held by somecooperatives, they can have a significantimpact on a cooperative’s finances andmember relations. Damages awarded inclass action lawsuits involving memberequity can be substantial, so the risk ofsuch complaints should be evaluatedand mitigated.

What are the risk factors?While most cooperatives will never

face such a complaint, all cooperativesshould evaluate their member equitypractices to limit their risk — and topromote goodwill with patrons andmembers. As with any risk analysis, thestarting point is to identify and quantifythe risk factors. The following arepotential risk factors to consider: • Magnitude of member equity: A

higher balance of member equity incomparison to debt indicates higherrisk.

• Age of member equity and length ofrotation periods: The longer acooperative retains member equity,the greater the risk.

• Turnover and contested elections:Intense election contests, and a highturnover of directors andmanagement, generally indicatehigher risk.

• Member or patron satisfaction: Asmembers and patrons feel lesssatisfied with their cooperative, therisk level increases.

• Cost/benefit comparison: Whencustomers perceive less benefit inrelation to cooperatives’ fees, the risklevel increases.

• Competitor pricing comparison:When customers perceive thecooperative’s costs and fees as greaterthan the fees of local competitors, riskincreases.

• Economic conditions of thecommunity: When the economy ofthe cooperative’s community declines,risk increases.

• Media exposure: Negative mediaexposure can increase risk.

After evaluating these and otherfactors, cooperatives should look attheir current policies and practices tomitigate their risk.

Tips for effective managementof member equity

There are several ways to reduce therisk of complaints concerning memberequity management. The first, and mostimportant, method is to document andadhere to a rational member equitymanagement plan. Such plans arenormally adopted by the cooperative’sboard of directors, board of trustees orsimilar board through a bylaw provisionor board policy.

Second, cooperatives should appointsomeone, preferably from the board ormanagement, to oversee compliancewith the plan. Since some boardmembers may not be as familiar withcooperative principles, they may notunderstand the importance of followinga member equity management plan.The appointed person should become

familiar with the plan and periodicallyreview the cooperative’s practices toverify the cooperative’s adherence to theplan.

Third, the cooperative’s financialofficer or accountant should specificallydedicate a portion of his or her time toevaluating the cooperative’s ability toreturn member equity and explainingsuch evaluation to the board. Anydecision to return member equity willnecessarily impact the cooperative’sfinancial situation. As a result, acooperative’s board should consult withits financial advisors about the proprietyof any decision concerning memberequity.

Fourth, cooperatives should educatetheir board members, management andstaff, along with their members andpatrons, about the role of memberequity. Cooperative boards andmanagement need to understand theimportance of member equitymanagement, and the associated legalrequirements and restrictions.

Just as important, cooperativesshould educate their members andpatrons about member equity and itseventual return. It not only serves toreduce the risk of unfoundedcomplaints, but it also can be used toillustrate the unique benefits of being acooperative member or patron —especially in contrast to for-profitcompanies.

Finally, there is no better way toeducate members than by sending thema check in return of member equity,along with an explanation of why theyare receiving the check.

Cooperatives provide valuablebenefits to their members and patronsin a manner that justifies specialbenefits under the law. Although mostcooperatives will never face complaintsover member equity mismanagement, itwould benefit any cooperative toevaluate its current policies andpractices to ensure their legalcompliance and — just as importantly— promote goodwill with members andpatrons. n

By Jay Lux Vice President of Talent ManagementFCC Services

Editor’s note: This is the third and finalin a series of articles provided by FCCServices.

The best team wins.We all know this. Wealso know this doesn’thappen by accident.Having a plan and

structure for selecting and developingthe right talent, moving it to the rightplace at the right time, and under-standing key areas of engagement toretain and motivate that talent will setyour team apart from the competition.Talent management strategy not onlymakes sense, but research also supportsits effectiveness.

In one recent study, conducted byRight Management group, 49 percentof 628 senior managers and humanresource professionals surveyed citedtalent management as their company’stop priority. However, the study alsoshowed that only 12 percent of majorNorth American organizations have afully implemented talent managementstrategy.

Significant research and best-practiceliterature cite a few key components inthe strategy process:• Selection and recruitment;• Succession management; • Employee engagement.

Selection and recruitmentSuccessful talent management

strategy begins with selecting the rightperson for each position. Hiring people

can be risky, but hiring the right personbased on data — not intuition — canminimize risks and increase thelikelihood of success.

Every person has talents andabilities. The challenge is to fit thosetalents to the right position. Forexample, some people are naturallymore introverted and some are betterable to interact with others. Somepeople are naturally good at workingwith details while some are less inclinedto excel at those kinds of tasks.

Effective selection begins withidentifying the appropriate skills for therole. Clarifying with great specificitythe skills needed for success will allowyou to better assess potentialcandidates. Measuring candidates’ skillsand comparing them to your needsincreases the chances of success for allinvolved.

Placing an introverted individual intoa job that requires considerableinteraction with others will surely resultin frustration and, ultimately, hinderperformance. There are, of course, noabsolutes (even some of the mostintroverted people can interacteffectively with others at times). Butpeople do have personality tendencieswhich help show where people fit bestand where they may struggle.

Maximizing the fit between anindividual and the role will enhance rolesatisfaction and performance on the job.

Technology can helpHow do you drive this

understanding? Using a robustassessment process for hiring the rightpeople goes a long way to building thebest team. Use of statistically reliableselection instruments is one key.

These tools used to be expensive andcumbersome. But with today’stechnology, most assessments arecompleted online with ease, speed andlittle expense. And they also addmeasurability to what is otherwise anintuitive process.

Statistical reliability is criticallyimportant to the effectiveness andquality of whatever assessment youchoose to use. FCC Services uses avariety of statistically validated selectioninstruments.

The assessment instruments listedbelow meet the strictest qualitystandards and exceed the AmericanPsychological Association’srecommendations on reliability. It isimportant to match the tool with theobjective of the selection process.

The Predictive Index (PI) — This

Management TipTalent Management: It goes way beyond recruiting



measures individuals for key aspects ofpersonality: Dominance, extroversion,patience and formality. In addition,clients complete the PI PerformanceRequirement Options, an instrument toidentify the levels of each trait thatwould most effectively driveperformance in a given role.

The Kenexa Structured Interview— Kenexa brings years of selectionexperience to its formalized interviewprocess to help uncover key personalitytraits that motivate the candidate.These key motivators are fundamentalaspects of individual behaviors andperformance.

The Hogan Lead — The Hoganhas multiple instruments to give themost reliable data for selection, as wellas development of potential employees:personality style and motives/preferences/interests.

The Watson Glaser CriticalThinking Assessment — Thismeasures applicants on key aspects ofcritical thinking style — recognition ofassumptions, evaluation of arguments,and deductive reasoning. In addition toindividual personality styles andperformance in an executive role,critical thinking and cognitive skillsrank among the most important talents.

The Emotional CompetenceInventory (EQi) — EmotionalIntelligence is one aspect of how peopleconduct themselves and is consistentlyrelated to top performance. The EQi isan instrument that measures levels ofhow people interact with others, whichis a driver of effective performance inthe workplace.

In addition to solid assessment tools,a consistent approach to interviewingcandidates adds to the reliability of yourselection process.

Behavioral interviewingFCC Services recommends an

approach referred to as “behavioralinterviewing.” The premise of thismethod is that the best predictor offuture performance is past performance

in similar circumstances. In this approach, interview questions

are designed so that the candidates mustrelate specific examples of how theyhave previously used the criticalcompetencies or skills required in a job.For example, if a job requires goodorganizational skills, you would notsimply ask, “Are you an organizedperson?” but rather, “Tell me about alarge project where you wereresponsible for organizing andmanaging all the details.”

With behavioral interviewing, theamount of information and insightgarnered from each question is fargreater than traditional interviewquestions.

Succession management Once you’ve hired the right people,

moving them into the right positions atthe right times throughout their careeris critical. Understanding where yourtalent is on their development path isan indispensable strategic businessobjective.

A regular review of the organization’stalent is key to achieving results todayand into the future. A structuredtracking system for human capital is acompetitive advantage that will keepyou ahead of the industry.

A sound succession managementstrategy tied to overall businessobjectives brings a structured approachto your organization to ensuremaximization of human resources. Itstrives to retain and develop intellectualcapital and knowledge for the futurethrough:• Achieving long-term business results; • Growing internal capacity – skills,

leadership; • Driving individual developmental

activities;• Identifying positions and/or

employees at risk;• Maximizing diversity; • Identifying areas where external

selection may be the mostappropriate.

A well-proven succession-management program generally followsa few key steps:

Begin with a review of organiza-tion strategy — It is criticallyimportant that the strategic needs of theorganization drive the talent and skillsthat support that strategy. Successionmanagement activities that are not fullyaligned with the business strategy mayresult in hiring or developing for skillsthat are not supportive of the strategyor, worse yet, oppositional to it.

Identify key roles critical to thatstrategy — Once the strategy has beenclearly articulated and discussed, it isimportant to evaluate the key roles thatare needed to support the business anddetermine if any of those positions (orpeople in them) are at risk of changing(i.e., retirement).

Define the competencies (skills)needed to perform effectively in thekey roles — A clear agreement onexactly what competencies (skills) define“talent” in your organization isessential. This can be more challengingthan it sounds. For example, clearlyunderstanding and agreeing on theskills that managers must have beyondtechnical know-how in their specificareas may require lengthy discussions togain consensus from all involved.

Leaders observe and evaluateindividual proficiency with thecompetencies — Once thecompetencies for success have beendefined, leaders must take the time toobserve individuals to see how theyperform relative to those competencies(not just their current position). Thetask then is to evaluate thatperformance and place a value on it.

Key leaders discuss theevaluations (“talent review”) — Thetalent review session is typicallyconducted twice a year. In thesesessions, leaders come prepared todiscuss what they have observed. This isgenerally when some rating orevaluation process takes place (i.e., does



By K. Charles Ling, Ag EconomistUSDA Rural Development e-mail: [email protected]

Editor’s note: This article focuses on thecore points of the author’s presentation,“Farmer Cooperatives and Value Creation:the Example of Dairy Farmers in theUnited States,” delivered at the 5thmeeting of the Organization for EconomicCooperation and Development (OECD)Food Chain Analysis Network, Oct. 30-31in Paris. It is also a concise summary of arecently completed study into the nature ofthe cooperative, as reported in two recentresearch reports available from USDARural Development (RR 221 and 224) anda series of nine articles that have appearedin Rural Cooperatives magazine.

This summary addresses four salientpoints:

1. Economic structure of cooperatives —what are cooperatives?

2. Market performance of cooperatives— what do cooperatives do?

3. Transaction governance roles ofcooperatives — how do cooperativesinteract with other marketparticipants?

4. Variations on the cooperative businessmodel.

Economic structure of cooper-atives — what are co-ops?

In his 1942 book, Economic Theory ofCooperation: Economic Structure ofCooperative Organizations, Ivan V.Emelianoff said that for economicanalysis of cooperatives, the economicstructure of cooperative organizationsshould be clearly defined, and the

definition should be free from theencumbrance of sociological, legal,technical, social-philosophical andethical considerations.

His definition: “Cooperativeorganizations represent the aggregatesof economic units.”

“Aggregate” is commonly defined as:“Any total or whole considered withreference to its constituent parts; anassemblage or group of distinctparticulars massed together.”

As defined by Emelianoff: “Aneconomic unit, or economic individual,is an economic body admittedlycomplete and sufficiently integrated forindividual existence and independent (inconditions of an exchange economy —interdependent) economic functioning.”

This economic definition ofcooperatives seems to be simple, yet itis very robust. What naturally flowsfrom this definition are what peopleoften call “cooperative principles,” suchas: members own, members control,members use, and members benefitfrom the cooperative.

Following Emelianoff’s definition,these are the characteristics ofcooperatives: • A cooperative is an agency owned and

controlled by members and throughwhich they conduct their business.

• Each member-farm fully retains itseconomic individuality andindependence.

• The board of directors is elected fromamong member-farmers.

• Proportionality and service at-cost aretwo basic working principles.

• Members provide advances (i.e.,

equity capital) for financing thecooperative.

• Patronage refunds are returned tomembers who have been underpaid orovercharged.

• Dividend on capital, if any, is interestpayment for using members’ capital.

• The cooperative is neither ahorizontal integration of its membersnor a vertical integration between thecooperative and its members. “It is athird mode of organizing coordin-ation.” (Shaffer)

Market performance ofcooperatives — what docooperatives do?

The first academic paper on thetheory of cooperation, “EconomicPhilosophy of Co-operation,” by EdwinG. Nourse, was published in 1922 inthe American Economic Review. His ideasstill have relevance to the reality ofmarket performance of cooperativestoday.

Several examples from the paperillustrate how farmers organized inagricultural cooperatives can jointlyperform certain market functionsefficiently — functions which usuallycannot be satisfactorily carried outalone by individual farmers. Theseinclude:• Cooperation to gain market access for

producers who otherwise do not havea market outlet.

• Local and regional coordination ofcooperatives to compete with privatecompetitors that have grown to greatsizes.

• Formation of region-wide associations of

Essential economic rolesof farmer co-ops


growers, often in horticulturalregions, to assemble, process anddistribute their products.These examples show how

cooperatives are organized and grow toenable farmers to exercise counter-vailing power and compete. AlthoughNourse did not directly use the term“countervailing power” (the term wascoined later, by Galbraith in 1956), hedid state that the keynote of thephilosophy of cooperation was foragriculture to have a type oforganization of the size that has aneffective bargaining position in dealingwith commercial organizations.

Another term in the cooperativelexicon that is attributable to Nourse is“competitive yardstick,” following his“brief remark” in 1945, in which he saidthe place for the agriculturalcooperative in the nation’s business “isprimarily that of ‘pilot plant’ and

‘yardstick’ operation. Its objective is notto supersede other forms of business,but to see that they are kept trulycompetitive.”

This is the summary of Nourse’sideas regarding the roles cooperativesplay in the marketplace:• Cooperatives are organized for

efficiently carrying out specificbusiness functions.

• Cooperatives can be of any size andgeographical scope that allows themto function efficiently in themarketplace.

• Cooperatives afford farmers theorganizational sizes for exercisingcountervailing power.

• Cooperatives are pro-market; they letthe market supply-and-demand pricebe the guidance for producers.

• Cooperatives are a means for farmersto promote and maintain competition― as the competitive yardstick of

efficient operations.• In those fields where the market has

become truly competitive and farmerscan be well served by other firms,cooperatives may want to cede thefield and assume only a stand-byposition (to preserve members’capital, time and efforts for use on thefarm), while maintaining the legalinstitutions and organizationalcapacity to step in if there is a relapseof market inadequacy.

[Author’s note: Whether the market couldever be truly competitive is debatable.]

Transaction governance roles of cooperatives — how do cooperatives interact withother market participants?

Cooperatives interact with othermarket participants through their rolesin transaction governance, or “inaligning incentives and crafting

Figure 1 — A simple contractual schemaAdapted from Williamson, 2005, Figure 1: Simple Contractual Schema.

credible contracting

administrative

k = 0

k > 0

D (Hierarchy)

B (Unrelieved hazard)

C (Hybrid)

A (Unassisted market)

s > 0

s = 0

“Each member farm fully retains its economicindividuality and independence,” according tothe co-op attributes outlined by economistIvan V. Emelianoff. Seen here is the HeplerHomestead dairy farm, near Pitman, Pa., amember of the Dairylea Cooperative. Photo byMitch Wojnarowicz, courtesy Dairylea


governance structures that are betterattuned to their exchange needs.”(Williamson, 2002, p. 172).

In marketing milk and milk products(for example), farmers and theircooperatives may engage in thefollowing transaction scenarios.

Scenario I. In a subsistenceagricultural economy, farm productionin excess of family consumption may besold off farm. There could be manysellers and buyers. The transactions areincidental to subsistence farming, donot require specific assets, and primarilybelong to a bygone era.

Scenario II. Commercial milkproduction requires capital investmentin specialized assets that cannot beeasily employed for alternative uses.Asset specificity, product perishabilityand market volatility cause uncertaintyand pose hazards to the investment ofdairy farmers. They are vulnerablewhen dealing with a small number ofmilk buyers (processors). They mayorganize cooperatives to gaincountervailing power. However,contracts that spell out the terms oftrade as legal rules may not relieve thehazard. It is impossible to foresee andencompass all contingencies in acontract due to human limitations;

relying on courts for relief is time-consuming and costly.

Scenario III. Cooperatives areorganizations of farmers and havecomparative advantages of workingclosely with members for assemblingmilk, providing field services andperforming farm-related functions.Many processors have chosen to rely oncooperatives for milk supplies that aretailored to their requirements forvolume, quality, composition and/ordelivery schedule. Under such anarrangement, the transactions areassisted with what is called crediblecontracting and supported by inter-firmcontractual safeguards. Instead of a setof legal rules with court enforcement,the contract here is a framework or aset of guidelines for interactionsbetween the firms. Discrepancies inperformance are resolved throughamicable consultation or negotiation orby arbitration.

Scenario IV. In addition to sellingmembers’ milk, it may be necessary fora dairy cooperative to forward-integrateinto processing dairy products tobalance milk supply or to generatehigher margins from the market formembers’ milk. These processingenterprises are under the cooperative’s

hierarchical administrative control .The roles of a cooperative in the

above scenarios fit with the analysis ofthe roles of a firm in transactiongovernance that constitute the core oftransaction-cost economics (Williamson,2010, 2007, 2005 and 2002). The fourscenarios correspond to the fourtransaction modes in table 1 that isadapted from Williamson’s SimpleContractual Schema (figure 1).

The transaction governancestructure Mode A is the unassistedmarket. The governance structureMode B is the market where assetspecificity exposes transacting parties touncertainties and, without safeguards,to unrelieved contractual hazards totheir investments. Mode C is where themarket is assisted with crediblecontracting. All successive productionstages are integrated under hierarchicalcontrol in transaction governance ModeD.

The attributes of a market mode arehigh-incentive intensity, littleadministrative control, and a legal-rulescontract regime. On the other hand,attributes of hierarchy are low-incentiveintensity (where pricing for thesuccessive stages is at cost-plus),considerable administrative control (by

Table 1 — Transaction governance modes and attributes

Transactiongovernance mode

A: Unassisted market

B: Unrelieved hazard

C: Hybrid(Credible contracting)

D: Hierarchy(Administrative)

Asset specificity (k)

0

>

>

>

Investment hazardsafeguard (s)

0

0

>

>

Incentive intensity

High

<

<

Low (pricing forsuccessive stages iscost plus)

Administrativecontrol

Little

>

>

Considerable (by fiat)

Contractlaw regime

Competitive norm

Legal rules contractregime

Credible contracting

Internal implicitcontract law(Forbearance)

Source: Adapted from Williamson, 2005, Figure 1: Simple Contractual Schema.Note: “>” indicates a mode having a higher intensity of the particular attribute than the mode above it.

“


Table 2 — Variations on the cooperative business model

Types of cooperatives

Dairy cooperatives1

Agricultural marketingcooperatives

New-generationcooperatives

Purchasingcooperatives2

Affordable Care ActCO-OPs3

Multi-stakeholdercooperatives4

Farm productioncooperatives

Cooperatives withnon-patronagemembers

Structure

Aggregates ofeconomic units




Aggregates ofeconomic units (healthinsurance subscribers)


Aggregates ofeconomic units that arenot independent inproduction operation

Mixture of patron andnon-patron members

Organization

Centralized memberorganizations

Mostly centralizedmember organizations;some are federated

Centralized memberorganizations

Local (retail) coopera-tives are centralized;many federated withother locals; federatedcooperatives may havedirect members

Organized by sponsors;then become local (in-State) centralizedmember organizations

Centralized memberorganization

Centralized memberorganization

Defined by state laws

Governance

Member-governed

Member-governed

Member-governed

Member-governed

Initially formationboard; then member-governed

Member-governed

Member-governed

Defined by state laws

Source of equity

Members

Members

Members; tied todelivery rights

Members

Sponsors andsupporters;accumulated surpluses

Members

Members

Defined by state law

Operation

Members' exclusivemarketing agent―uniqueeconomics

Unique economics ifexclusive marketingagent; otherwise, likeother firms

Business volume definedby delivery rights

Sourcing supplies orservices for sale tomembers and patrons

Operations are the sameas other insuranceissuers in the relevantmarkets; must meet CO-OP Program standardsand requirements

A framework for multi-party, multi-stagecredible contractingamong members

A vertical integrationbetween members andthe cooperative inproduction

Defined by state laws;most likely member-patrons’ business

fiat) and forbearance is the implicitcontract law of internal organization(the parties must resolve theirdifferences internally).

Cooperatives are transactiongovernance structures, as are non-cooperative firms. Depending on thelines of business, transactions can occurunder all possible governance modes.Cooperatives adapt to variousgovernance modes for economizing on

the transaction cost.For entering into credible

contractual relationships with buyers,the cooperative’s functions of providingmarket access and exercisingcountervailing power put its members,collectively through the cooperative, ona relatively more equal footing withbuyers. This should make crediblecontractual relationships between sellersand buyers more attainable and stable.

Furthermore, as its members’collective marketing agency, thecooperative serves as a singletransaction entity for crediblecontracting with buyers. Therefore, itintroduces order and eliminatesconflicts among members who wouldotherwise be competing individually forcustomers. All these should contributeto lower the transaction cost.

1Separately listed and used as the standard bearers of traditional cooperative business model.2Include farm supply cooperatives, utility cooperatives, service cooperatives, consumer cooperatives, credit unions, etc.3Qualified Nonprofit Health Insurance Issuers under the Consumer Operated and Oriented Plan (CO-OP) Program.4Defined as cooperatives having, for example, farmers, final customers and intermediaries in the supply chain as members.



USDA helping utility co-ops expand services

Agriculture Secretary Tom Vilsack inOctober announced funding for ruralelectric utility system improvementsthat will benefit residential and businesscustomers in 23 states. The projectsinclude more than $14.3 million toimplement smart grid technology andnearly $11 million to improve electricservice for Native Americans.

The $960 million in USDA loanguarantees will help build 3,587 milesof line that benefit about 17,000 ruralresidential and business customers. TheObama Administration has invested$152 million in smart grid technologiesnationwide during 2013.

John Padalino, administrator ofUSDA’s Rural Utilities Service, madethe announcement on the Secretary’sbehalf while addressing a regionalmeeting of the National Rural ElectricCooperative Association (NRECA) inSan Antonio, Texas. “These investmentswill ensure that rural electric infra-structure will continue to meet theelectricity needs of rural residents,farmers, and commercial and industrialcustomers,” Padalino said. “Thisfunding is part of the ObamaAdministration’s vision for a new ruralenergy economy.”

Callaway Electric Cooperative inMissouri, which serves 13,000customers, received a $9.3 million loanguarantee. The funds will be used tobuild 40 miles of distribution line andmake other system improvements. Theloan includes $1.9 million for smart-grid projects.

In September, USDA announcedfunding to improve service for about7,000 additional rural customers in

seven states. The more than $136million in USDA loan guarantees willhelp build more than 2,200 miles ofelectric lines, fund more than $5 millionin smart-grid development and providenearly $3 million to improve electricservice for Native Americans.

In Minnesota, USDA will financenearly $16 million in loan guarantees tobuild more than 200 miles of electricline and finance more than $1.7 millionin smart-grid technologies for twoprojects. North Itasca Electric Co-opwill receive nearly $6 million, and MilleLacs Energy Cooperative will get nearly$10 million to keep electric powerreliable and affordable for ruralcustomers.

For a full list of fund recipients, visitthe newsroom at: www.rurdev.usda.gov.

Poll shows strong preference for co-ops

About 74 percent of surveyedconsumers in Minnesota and Wisconsinprefer doing business with a cooperative

over an investor-owned businesses,according to the results of a surveyconducted by St. Norbert College’s (DePere, Wis.) Strategic Research Institute.The survey was commissioned by theCooperative Network, which providesgovernment relations, education,marketing and technical services for its600 member co-ops in the two states.The survey results were announced tohelp celebrate National CooperativeMonth during October.

The study, funded by CHS Inc.,asked more than 400 people in the twostates about their opinions of, and useof, cooperatives. The pollsterscontrasted results to a comparable studyperformed in 2007 (prior to therecession).

This year’s results (2013) revealedthat nearly three of every four (74percent) respondents who indicatedthey were members of a cooperativesaid they were more likely to choosecooperatives over other businesses,based on their past experiences. That is

NewslineSend co-op news items to: [email protected]

Co-op developments, coast to coast

A crew from Callaway Electric Cooperative (CEC) works on power lines in its rural Missouriservice territory. Photo courtesy CEC


up from 71 percent in 2007.Other notable findings included:

• 47 percent of people surveyed had atleast one member of their family whobelonged to a co-op, compared to 36percent in 2007.

• 69 percent of people who ran abusiness within their home were alsomembers of a co-op, statisticallysimilar to 2007 results.

• 18 percent of people associated thewords “teamwork/collaboration” with“co-op” or “cooperative” — acorrelation that did not appear in the2007 study. “Minnesota and Wisconsin have a

rich cooperative history and are hometo nearly 2,000 cooperative businesses— one of the highest concentrations inthe U.S.,” says Bill Oemichen,president and CEO of CooperativeNetwork. “It is appropriate that thisyear’s Co-op Month theme was‘Collaborate, Communicate,Cooperate,’ three simple words thatillustrate the bedrock of cooperativebusiness.”

Wisconsin Governor Scott Walkerand Minnesota Governor Mark Daytonboth signed Co-op Monthproclamations (as did many othergovernors, as well as U.S. Agriculture

Secretary Tom Vilsack) recognizing thesignificant contributions co-ops make tothe states’ economies.

Co-op statistician Bette Simmons dies

Elizabeth “Bette” J. Simmons, 86, aformer member of the co-op statisticsunit of USDA’s Farmer CooperativeService (now the Cooperative Programsof USDA Rural Development) diedSept. 16 in Greenbelt, Md. Burial wasSept. 26 at Gate of Heaven cemetery inSilver Spring, Md.

In the late 1970s and early 1980s,Simmons played a key role in the

The board of DairyleaCooperative Inc., Syracuse, N.Y., hasvoted to merge with Dairy Farmersof America (DFA). The mergerproposal, presented to members Oct.16 at Dairylea’s annual meeting,“reflects a desire to position Dairyleafor the future amid rapidly evolvingmarket dynamics,” according to apress release issued by the twocooperatives.

DFA’s board has endorsed themerger, which requires approval byDairylea’s members, who will voteon the proposal during a specialmeeting in February. Prior to thevote, a series of informationalsessions will be held to provideDairylea members with acomprehensive overview of theproposed merger, a more detailedexplanation of the voting process andthe chance to have their questionsanswered.

DFA was the nation’s third largestfarmer-owned co-op in 2012, with$11.9 billion in sales. Dairylea wasthe 16th largest farmer co-op, withnearly $1.6 billion in 2012 sales.

“Today’s dairy industry is

undergoing unprecedented change,”says CEO Greg Wickham ofDairylea. “From consolidation in themarketplace and changing farmdemographics to a movement towarda global dairy industry, this changepresents both challenges andopportunities.”

Dairylea’s farmer board ofdirectors spent the past three yearsin a comprehensive examination ofhow to best position Dairylea’smembers for the future. This effortinvolved soliciting member input andguidance from the “2020 Group,” acommittee formed in 2010 to gatherideas on generating value beyond thetraditional cooperative structure.Among many topics, the groupexplored how to create marketopportunities for its members thatpeer cooperatives with investmentsin processing are attaining.

“Ultimately, the board determinedthat merging with DFA, already alongtime partner in Dairy MarketingServices, would best complementDairylea’s capabilities and resources,while securing flexibility andincreasing value for our members,”

Wickham says. Since 2002, Dairylea has been a

member cooperative of DFA.Wickham says the proposed mergerwill provide Dairylea membersaccess to growing national andinternational milk markets, ongoingpatronage dividends, tax benefits andother opportunities. The mergerprovides DFA members with long-standing customer relationships inthe Northeast marketplace,enhanced farm services andexpanded access to capital tofacilitate strategic growth.

“In many ways, a merger withDFA is simply a continuation of theworking relationship that Dairyleahas forged with DFA during the past12 years,” says Rick Smith, DFApresident and CEO.

If the merger is approved bymembers, six seats will be added toDFA’s board to represent expandedmembership in the Northeast, andDFA’s Northeast Area Council willmaintain local governance and agrassroots structure familiar toDairylea members. n

Dairylea, DFA pursue merger


transition from the manual preparationof cooperative statistics to the use of anelectronic data processing(EDP) system to process statistics. Sheretired from USDA in 1985.

Simmons was a native ofCarbondale, Pa., whose husband,Kenneth, died in 1969.

“Bette was a very dedicated workerand played an important role intracking and compiling the data neededto document the vital role farmer co-ops play in the U.S. farm economy,”says Ralph Richardson, also a retiredUSDA co-op statistician.

USDA funds to aid small-scale producers

Agriculture Secretary Tom Vilsack inSeptember announced grants beingmade by USDA to support small,socially disadvantaged agriculturalproducers, including a number ofcooperatives. “These grants will helpsocially disadvantaged business ownersget the tools they need to succeed andexpand markets across the nation,” hesaid.

Funding is provided through USDA’sSmall Socially Disadvantaged ProducerGrant program, which offers technicalassistance to help producers developnew markets and grow their operations.For example, the Latino EconomicDevelopment Center in Minneapolishas been selected to receive a $200,000grant to provide legal and businesstraining to small Latino and Hmongagricultural producers.

A complete list of grant recipientsfollows. The funding is contingentupon the recipient meeting the terms ofthe grant agreement. Alabama • Alabama A&M University – $195,730

grant to help socially disadvantagedproducers build sustainable farmingand agricultural businesses.

California• Southern California Focus on

Cooperation – $200,000 grant toprovide technical assistance andcooperative education to refugee andimmigrant farmers.

Hawaii• The Kohala Center Inc. – $151,913

grant to provide technical assistanceto Palili ‘O Kohala Cooperative, MauiAquaponics Cooperative, KauAgricultural Water Cooperative andCho Global Farming Cooperative.

Illinois • Pembroke Family Farmers

Association – $153,925 grant to helpcreate business management practices.

Kentucky• Kentucky State University – $103,450

grant to help small sociallydisadvantaged producers developcooperatives, register and secureproper title to farmland and fully usevarious USDA programs that assistsmall farmers.

Massachusetts• Cooperative Development Institute –

$45,192 grant to help partnerorganizations in Maine, NewHampshire and Vermont providetechnical assistance to immigrant andrefugee farmers from Bhutan,Somalia, Burundi, Sudan and theCongo.

Minnesota• Latino Economic Development

Center – $200,000 grant to provide

legal and business training to smallLatino and Hmong agriculturalproducers.

New Mexico• Southwest Development Center Inc.

– $150,000 grant to help set up andmanage two food hubs at a foodcooperative.

North Carolina• North Carolina A&T State

University – $196,120 grant to helpfarm businesses develop marketingplans.

New York• North Country Grown Cooperative

Inc. – $109,552 grant to providetraining on peer-to-peer learning andbusiness development practices.

Puerto Rico • Cooperativa De Ganaderos De Carne

De Res – $123,800 grant to develop amarketing plan, provide legalassistance and animal health andhumane treatment training.

South Carolina• Farmers Cooperative/Community

Improvement – $40,700 grant toprovide legal assistance, leadershiptraining and identify ways to expandagricultural production.

South Dakota

William “Tubz” Kalipi demonstrates a hand-driven piece of equipment during a grower field day.The Makakuoha Cooperative helps Native Hawaiian beginning farmers on the island of Moloka‘i.


National Cooperative Bank (NCB)has released its annual list of thenation’s top 100 cooperatives, showingthat businesses on the list generated$226.4 billion in sales in 2012, a 5-percent increase from 2011. The NCBCo-op 100 includes co-ops from allsectors of the economy, whereas thetop 100 co-ops list USDA compiles (seethe September-October 2013 issue ofRural Cooperatives) is limited toagricultural co-ops.

“The NCB Co-op 100 is a greatreminder of the substantial impact andimportant role cooperative businessesplay in our national economy acrossevery sector,” says Charles E. Snyder,president and CEO of NCB. “As wecontinue to see improvements in themarket, there is an increase in theformation of new cooperatives inurban, suburban and rural settings,offering competitive goods andservices to meet the needs of thesecommunities.

“As a socially responsible financialinstitution, created to address theneeds of our nation’s cooperatives, weare proud of our role in supporting thegrowth of these organizations, whilealso giving back to the communitiesthey serve,” Snyder adds.

Below are the top two co-ops ineach of the major business sectors ofthe NCB Co-op 100 (followed by theirheadquarters location, 2012 revenueand overall ranking on the list):

Agriculture:• CHS Inc., Saint Paul, Minn. — $40.6billion, ranking first overall;

• Land O’ Lakes, Saint Paul, Minn. —

$14.1 billion, ranking second overall; Grocery: • Wakefern Food Corp, Keasbey, N.J.— $11 billion, fourth overall.

• Associated Wholesale Grocers Inc.,Kansas City, Kan. — $7.8 billion, sixthoverall.

Hardware & Lumber:• ACE Hardware, Oakbrook, Ill. — $3.8billion, 10th overall;

• Do It Best Corp., Fort Wayne, Ind. —$2.6 billion, 15th overall;

Finance:• Navy Federal Credit Union, Merrifield,Va. — $3.6 billion, 12th overall;

• CoBank, Greenwood, Colo. — $2.1billion, 20th overall;

Healthcare:• HealthPartners Inc., SouthBloomington, Minn. — $3.9 billion,ninth overall;

• Group Health Cooperative, Seattle,Wash. — $3.6 billion, 13th overall;

Energy & Communications:• National Cooperative Refinery Assoc.,McPherson, Kan. — $4 billion, eighthoverall;

• Basin Electric Power Cooperative,Bismarck, N.D. — $1.9 billion, 24thoverall.

While the companies and rankingsof the list change every year, theoverall cooperative sector continues toadvance, playing an increasinglyinfluential role in the global economy.As a long-time advocate forcooperatives, NCB notes that itsmission is “to provide critical financingto promote the growth and expansionof these businesses, while alsodeploying hundreds of millions ofdollars to support underservedcommunities and cooperativeexpansion initiatives.”

The entire NCB Co-op 100 report isavailable at: www.coop100.coop. n

NCB Co-op 100 tops $226 billion in sales

• Intertribal Buffalo Council –$200,000 grant to provide bestmanagement practices training onlow-stress handling methods forbuffalo.

New co-op dairy plant for Michigan

Dairy Farmers of America (DFA) in

September broke ground on aningredient processing facility in CassCity, Mich. The $40 million plant willserve a region where milk production issteadily outpacing local plant capacity.

At completion next fall, the 33,000-square-foot plant will process up to 3million pounds of fresh milk daily, to besupplied by DFA member farms in the

Michigan Thumb area. Initially, theplant will produce condensed whole andskim milk, as well as cream. A phased-construction plan will allow for growthamong current and future DFAmembers, with the potential to addadditional manufacturing of value-added dairy products.

“This plant will provide a local home

Navy Federal Credit Union (NFCU) is thetop-ranked financial credit union on theNCB Co-op 100 for 2012. Photo courtesyNFCU


for our members’ milk, answering thegrowing need for Michigan plantcapacity while building a base for value-added processing in the future,” saysMark Korsmeyer, executive vicepresident of DFA.

Numerous partner agenciescontributed substantial support to theplant. The Michigan Strategic Fund(MSF) approved a $500,000 MichiganBusiness Development Program grantand a $1 million CommunityDevelopment Block Grant, while theMichigan Economic DevelopmentCorporation is contributing $300,000 incorporate funds. MSF also awardedTuscola County and Cass City a new15-year Agriculture ProcessingRenaissance Zone designation for theproject.

The Village of Cass City also offeredsupport by providing revenue bondingvalued at about $6.7 million for awastewater pretreatment system andpublic infrastructure improvements. In addition to creating at least 25 full-time positions at the facility, increasedemployment opportunities are expectedto occur on member farms and inagriculture support industries.

DFA also announced in September itwould be joining with Craigs StationVentures (CSV) to build a $12 millioncold milk separation facility in York,N.Y. The collaboration is the first inwhich DFA is partnering directly with afarmer group for a project that willbenefit all of the cooperative’s farmerowners.

At completion, expected in thesummer of 2014, the plant will beginprocessing nearly 1 million pounds ofmilk daily, with the capability toincrease to 2 million pounds. Thefacility, which will employ 11 full-timestaff, wi