cooperative development: business design and strategy timothy woods department of agricultural...
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Cooperative Development:Cooperative Development:Business Design and Business Design and
StrategyStrategyTimothy WoodsTimothy Woods
Department of Agricultural Department of Agricultural EconomicsEconomics
University of KentuckyUniversity of Kentucky
What is a Cooperative What is a Cooperative Business?Business?
A cooperative is a business voluntarily A cooperative is a business voluntarily owned and controlled by the people using owned and controlled by the people using its services its services may be operated on a non-profit basismay be operated on a non-profit basis
What’s on the Agenda?What’s on the Agenda?
General overview of CooperativesGeneral overview of CooperativesNew Generation CooperativesNew Generation CooperativesHow to develop a cooperativeHow to develop a cooperativeGeneral insights into the success of General insights into the success of
cooperativescooperatives
Growing Marketing BillGrowing Marketing Bill
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 19990
100
200
300
400
500Marketing Bill
Commodity Farm Value
•Source: USDA-ERS 2000
Common barriers facing Common barriers facing agricultural entrepreneursagricultural entrepreneurs
Where do Where do IDEASIDEAS come from? come from?How are How are MARKETSMARKETS developed? developed?Where is the Where is the CAPITALCAPITAL for a pioneering for a pioneering
idea?idea?How can How can REGULATIONREGULATION be a friend? be a friend?How have pioneers managed How have pioneers managed GROWTHGROWTH??
What is a Cooperative PrincipleWhat is a Cooperative Principle
A principle is an underlying doctrine or A principle is an underlying doctrine or tenet that defines or identifies a tenet that defines or identifies a distinctive distinctive characteristiccharacteristic
Cooperative PrinciplesCooperative Principles
Voluntary and Open MembershipVoluntary and Open Membership
Democratic Member ControlDemocratic Member Control
Members Have Economic ParticipationMembers Have Economic Participation
Autonomy and IndependenceAutonomy and Independence
Education, Training, and InformationEducation, Training, and Information
Cooperation Among CooperativesCooperation Among Cooperatives
Concern for CommunityConcern for Community
adopted by the ICA Centennial Congress 99/95adopted by the ICA Centennial Congress 99/95
What Does a Cooperative Do?What Does a Cooperative Do?
Provide its user-- Provide its user-- owners goods and owners goods and services at costservices at cost
Purchase inputs: Purchase inputs: seed-feed-fertilizers-seed-feed-fertilizers-chemicals-equipment-chemicals-equipment-suppliessupplies
Market members and Market members and non-members’ non-members’ productsproducts
Provide member with Provide member with services: insurance-services: insurance-credit-irrigation-credit-irrigation-custom fertilizer custom fertilizer spreading-telephone-spreading-telephone-electricity-marketingelectricity-marketing
Reasons for Joining a Reasons for Joining a CooperativeCooperative
EconomicEconomic Vertical integrationVertical integration
forwardforward backwardbackward
To obtain a fair or To obtain a fair or efficient priceefficient price
To reduce costs To reduce costs through economies of through economies of sizesize
To pool risksTo pool risks
To provide markets, To provide markets, supplies, and services supplies, and services that are missing or in that are missing or in danger of being lostdanger of being lost
To capture profits from To capture profits from another levelanother level
To benefit from To benefit from increased market increased market powerpower
Cooperative BenefitsCooperative Benefits
Allows farmers to pool their financial Allows farmers to pool their financial resources and conduct business activities resources and conduct business activities they could not independently perform as they could not independently perform as efficientlyefficiently
Allows farmers to respond to firms that Allows farmers to respond to firms that follow monopolistic practicesfollow monopolistic practices
Provides farmers with access to goods Provides farmers with access to goods and services neededand services needed
Disadvantages of CooperativesDisadvantages of Cooperatives
Access to capitalAccess to capitalCost of member and public educationCost of member and public education Investment in democratic processInvestment in democratic processLimit in scope of operationsLimit in scope of operationsCo-ops are only as good Co-ops are only as good
as their members ask them to be. as their members ask them to be.
Types of Agricultural Co-opsTypes of Agricultural Co-ops
Marketing Co-ops --Marketing Co-ops -- improve bargaining improve bargaining power, reduce costs, access new markets, power, reduce costs, access new markets, improve quality, and increase profits improve quality, and increase profits
Purchasing Co-ops --Purchasing Co-ops -- obtain needed obtain needed products and services, reduce or share costs, products and services, reduce or share costs, and increase profits and increase profits
Value-added ProcessingValue-added Processing Co-ops -- Co-ops -- access a access a more significant share of mark-ups available in more significant share of mark-ups available in the retail market & obtain better value from the retail market & obtain better value from lower grade produce/productlower grade produce/product
Fairview Produce AuctionFairview Produce AuctionFairview, KYFairview, KY
Auction patterned after Auction patterned after produce auctions in PA, produce auctions in PA, OH, and MOOH, and MO
Established by local Established by local Mennonite community in Mennonite community in 19971997
Metal frame building and Metal frame building and land purchased through a land purchased through a $72,000 stock drive$72,000 stock drive
100 shares of outstanding 100 shares of outstanding stock offered at $1,000 now stock offered at $1,000 now valued at $2,000-$2,500 per valued at $2,000-$2,500 per shareshare
$0$100,000$200,000$300,000$400,000$500,000$600,000$700,000
1997 1999
Annual Gross Sales
EquipmentProduce
FireFire
Iowa Soy Specialties, LLCIowa Soy Specialties, LLCVinton, IAVinton, IA
1995:1995: Benton County, IA, producers begin investigating Benton County, IA, producers begin investigating possibilities to add value to area agricultural productionpossibilities to add value to area agricultural production
1997:1997: Company shell established by Company shell established by farmersfarmers Marlin Marlin Jorgensen, Dave Van Steenhuyse, and Homer Jorgensen, Dave Van Steenhuyse, and Homer ShowmanShowman
Project Creation AssistanceProject Creation Assistance matching grant to begin pilot matching grant to begin pilot production of soy flour using mechanical (rather than chemical) production of soy flour using mechanical (rather than chemical) oil extrusion processoil extrusion process
Business planning assistance from Iowa Business planning assistance from Iowa REVAMPREVAMP and and $200,000 capital startup grant from Iowa $200,000 capital startup grant from Iowa VAAPFAPVAAPFAP
1998: 1998: Initial LLC stock drive attracts over 35 local Initial LLC stock drive attracts over 35 local ownersowners
Iowa Soy Specialties, LLCIowa Soy Specialties, LLCVinton, IAVinton, IA
1999:1999: Spins off Specialty Proteins LLC to manufacture Spins off Specialty Proteins LLC to manufacture textured soy protein soy flourtextured soy protein soy flour
Emphasis on non-GMO productsEmphasis on non-GMO productsStartup Budget: $900,000Startup Budget: $900,000
2000: 2000: Forms alliance with WholeSoy FoodsForms alliance with WholeSoy Foods Enters market with fully cooked, microwaveable Enters market with fully cooked, microwaveable
“Heartland Fields” soy barbecue“Heartland Fields” soy barbecueStartup Budget: $3.9 MillionStartup Budget: $3.9 Million
Cooperative Cooperative competes in the value competes in the value chain like any other chain like any other businessbusiness
Capital, management, Capital, management, marketing, and marketing, and strategy are equally strategy are equally critical factors for critical factors for coops and IOFscoops and IOFs
Fitting into the Supply Chain PictureFitting into the Supply Chain Picture
ABC Aquaculture Farmer’s Coop
Competing Processor
Competing Processor
Key Downstream Customer
Strategies for delivering value
low cost
unique product
added services
superior quality
more products, etc
Business Keys to SuccessBusiness Keys to Success
Thoroughly investigate the market opportunity; be Thoroughly investigate the market opportunity; be knowledgeable of customers and the marketplaceknowledgeable of customers and the marketplace
Make significant investments to capitalize the Make significant investments to capitalize the business business
Hire competent managementHire competent management““Survival as a niche company in such a climate takes a Survival as a niche company in such a climate takes a
specialized expert. So our advice is to raise the capital specialized expert. So our advice is to raise the capital to hire a trained, experienced professional. Don’t do-it-to hire a trained, experienced professional. Don’t do-it-yourself” on this one.” yourself” on this one.” Annie WilsonAnnie Wilson
Keys to SuccessKeys to Success Leadership Leadership
Assess all of your risks!Assess all of your risks!
Planning strategicallyPlanning strategically
Member/Board/Manager Member/Board/Manager communicationcommunication
““More often than not, an investment More often than not, an investment decision is made based on who is decision is made based on who is involved in the project rather than what involved in the project rather than what the project is all about.” the project is all about.” Steve NoakSteve Noak
types of riskstypes of risks productionproduction marketmarket constructionconstruction technologicaltechnological legal and sociallegal and social humanhuman
New Generation New Generation Cooperatives: A Cooperative Cooperatives: A Cooperative
Revival in Rural AmericaRevival in Rural America11
1Phrase taken from Lee Egerstrom’s book, Make No Small Plans: A Cooperative Revival for Rural America. Lone Oak Press, 1994.
What is a New Generation What is a New Generation Cooperative (NGC)Cooperative (NGC)
Focus is on value-added productsFocus is on value-added productsStructure and characteristics of NGC’sStructure and characteristics of NGC’s
delivery rightsdelivery rights limited membership a.k.a closed cooperativelimited membership a.k.a closed cooperativecooperative receives permanent capital/equity cooperative receives permanent capital/equity
investment and debtinvestment and debtpatronage paid only to memberspatronage paid only to membersappreciation of delivery rightsappreciation of delivery rights
Delivery RightsDelivery Rights
Four advantagesFour advantages adequate capital is adequate capital is
raised in the outset of raised in the outset of the businessthe business
capitalization is capitalization is distributed equitablydistributed equitably
investment=interestinvestment=interest may redeem invested may redeem invested
equityequity
ExampleExample plant can process $1 plant can process $1
million goats per yearmillion goats per year $500,000 equity may $500,000 equity may
be requiredbe required offer 500 shares at offer 500 shares at
$1,000 each$1,000 each each share equals each share equals
delivery of $2,000 worth delivery of $2,000 worth of goats each yearof goats each year
Limited MembershipLimited Membership
ReasonsReasons do not want to accept do not want to accept
more raw product than more raw product than co-op can absorbco-op can absorb
ensure purchase o f ensure purchase o f one share may be one share may be enough to justify enough to justify investmentinvestment
Ensure supply to Ensure supply to match demandmatch demand
Six Recommendations for Six Recommendations for Developing Successful NGCsDeveloping Successful NGCs22
Make significant investments to secure Make significant investments to secure appropriately sized facility and proper equipmentappropriately sized facility and proper equipment
Dual contract must commit farmer to specific Dual contract must commit farmer to specific delivery rights, co-op must accept those delivery rights, co-op must accept those deliveriesdeliveries
Professionalism is required on the part of the Professionalism is required on the part of the farmer, members, directors, and the hired farmer, members, directors, and the hired managementmanagement
2Recommendations were made by George Sinner at the “New Generation” Farmer Cooperatives Conference, April 1, 1996.
Six RecommendationsSix Recommendations
Co-op must be knowledgeable about its Co-op must be knowledgeable about its customers and marketplacecustomers and marketplace
Scale “Aim for a large share of whatever Scale “Aim for a large share of whatever market targeted”market targeted”
Net income must be returned to its members Net income must be returned to its members as cash at the end of the fiscal year!as cash at the end of the fiscal year!
Additional Keys to SuccessAdditional Keys to Success33
Quality peopleQuality peopleprofessionalism among farmers, members, professionalism among farmers, members,
directorsdirectorsmotivated, determined, and committedmotivated, determined, and committed
““project champion”project champion” Risk evaluationRisk evaluation
feasibility studies and financial projectionsfeasibility studies and financial projections Financial structureFinancial structure
liquidity, leverage, and profitabilityliquidity, leverage, and profitability
3Lee Estensen, CoBank, formerly the St. Paul Bank for Cooperatives.
General Guidelines on How to General Guidelines on How to Start a CooperativeStart a Cooperative
Have a Good Business Idea!Have a Good Business Idea!
Have a project championHave a project championGet an understanding of cooperative form Get an understanding of cooperative form
of businessof businessprinciplesprinciplespracticespractices types of cooperativestypes of cooperativesbenefits/limitations of cooperativesbenefits/limitations of cooperatives
Form Steering CommitteeForm Steering Committee
Producer SurveyProducer Survey Do a feasibility study/opportunities Do a feasibility study/opportunities
assessmentassessmentmarket assessmentmarket assessment financial assessmentfinancial assessmentmanagement/labor assessmentmanagement/labor assessmentother organization costsother organization costs
Have a vote to continue/stop development Have a vote to continue/stop development processprocess
Feasibility StudyFeasibility Study
Purpose is to Purpose is to determine if a determine if a business opportunity business opportunity is possible, practical, is possible, practical, and viableand viable
Enables persons to Enables persons to take a realistic look at take a realistic look at both the positive and both the positive and negative aspectsnegative aspects
Study helps many Study helps many owners make critical owners make critical decisionsdecisions
StatisticsStatistics 50% of start-ups are 50% of start-ups are
still in business after still in business after 18 months18 months
25% in business after 25% in business after 4 years4 years
Form an Interim BoardForm an Interim Board
Select legal and accounting consultantsSelect legal and accounting consultantsDevelop business planDevelop business planHire manager/CEOHire manager/CEOMarketing agreementsMarketing agreementsRecruit members/equity driveRecruit members/equity driveWrite Articles of Incorporation and Write Articles of Incorporation and
BylawsBylaws
Business PlanBusiness Plan
Description of Description of businessbusiness
The marketing planThe marketing plan
The management planThe management plan
The financial The financial management planmanagement plan
Is a New Generation Cooperative Is a New Generation Cooperative Right for YOU!Right for YOU!
Do you have a reliable source of raw Do you have a reliable source of raw product and grower/member commitment?product and grower/member commitment?
Is there market access and dependability?Is there market access and dependability? Are you adding value to products?Are you adding value to products? Enough return to justify equity investment?Enough return to justify equity investment?
Think big, start small and scale quicklyThink big, start small and scale quickly44
4 CoBank, Business Advisory Services 2001.