USDA Rural Development Rural Business Cooperative Service

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USDA Rural DevelopmentRural Business Cooperative
Service

• Cooperative Development for Value-added
  Agriculture Enterprises

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Why Cooperate?

• Commodity Value Chain
• Stabilize Communities
• Cooperatives What are They?
• Cooperative Finance
• New Generation Cooperative Overview
• Steps to Starting a Co-op

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Commodity Value Chain

• From field to pantry value is added by
  processing, distributing, and retailing
• From 1990-2000 Consumer Food expenditures rose
  51 (211 Billion )
• From 1991 2001 retail food prices rose 27
• 92 of this increase is due to marketing costs

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Commodity Value Chain

• US Consumers spend 10 of their disposable income
  on food 2,964 / person
• Per capita food costs will increase 7.1
  (3,174) by 2020
• Overall Food Costs will increase 26 by 2020

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Commodity Value Chain

• Marketing consumes .80 of the cost of Food to US
  Consumers
• Packaging, transporting, processing, retailing
• Farmer Gross Return is .20 of the US Food Dollar
• Farmers receive a disproportionately smaller
  return when they sell unprocessed commodities
• Net Return is less than .04

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Commodity Value Chain

• Market consolidation in agriculture compounds
  this problem
• To earn larger profits, farmers need to control
  more of the value chain
• Eliminate middlemen and move closer to the market
  place
• Shortening the value chain requires resources
  beyond the means of a single farmer

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Stabilize Communities

• Traditional marketing sells commodities outside
  the community taking money away
• Cooperatives stabilize communities by keeping
  jobs at home and making local investments
• Cooperative marketing allows
• Farmers to process the commodities,
• Keeps profits and jobs in the community,
• Helps raise capital,
• Helps obtain technical assistance

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Cooperatives What are They?

• A cooperative is a specialized type of
  corporation.
• A business owned and controlled by the people who
  use its services.
• Cooperative principles explain how a cooperative
  operates
• User Owned
• User Controlled
• User - Benefited

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Cooperative Finance

• Owner - Equity Capital
• Direct Contributions
• Membership fee
• Purchase of Shares or Stock
• Retained Patronage (Retained earnings)
• Per Unit Assessments
• Owner - Debt Capital
• Short Term Loans
• Long Term Loans

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New Generation Cooperative

• Equity Investment required up front
• Delivery Rights equal processing capacity
• Producer Agreements with Cooperative Link
  delivery of product to Equity Units purchased
• Members assume an obligation to deliver product
• Cooperative assumes the obligation to buy the
  production

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New Generation Cooperative

• Cooperative is authorized to purchase commodities
  for undelivered contracts
• Transferability of equity (delivery rights)
  assures market price for equity shares based on
  earnings potential
• Cash Patronage is usually higher since equity is
  achieved in advance of start up.

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Why Do Some Co-ops Fail?

• Members join but dont support the co-op
• Members and directors dont participate
• Lack of effective cooperative education
• Low cost management most expensive
• Insufficient member investment
• Concealing facts about the co-op good or bad
• Allowing cliques and special interest groups to
  thrive

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Why Do Some Co-ops Fail?

• Producer resistance to up-front equity
• Payments too high for raw commodity and not
  supported by end use market
• Producer resistance to grow the required crop
  variety to maximize yields price
• Producer resistance to follow recommended growing
  practices

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Lessons for Success

• Provide the goods and services the members use
• Adequate financing by members-
• the greater the ownership by members the more
  efficient the cooperative
• Members support the cooperative and use it
• Maintain open communication with members
• Select and develop a good management team
• Aggressively positioned for changes in markets,
  operations, and member needs

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Steps to Starting a Co-op

• Complete a comprehensive, honest, feasibility
  study
• Select a steering committee and advisory
  committee
• Complete a detailed Business Plan with financial
  forecasts and operating plan
• Select an Interim Board of Directors
• Establish a Search Committee and hire a Chief
  Executive Officer

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Steps to Starting a Co-op

• Conduct due diligence and launch equity campaign
• Price per Share is determined by dividing equity
  needed (40- 50) by the number of shares
• Prospective farmer investors may be required to
  have a minimum net worth
• Steering Committee must believe in the project
  and in the cooperative idea and be able to
  communicate these to the public

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Steps to Starting a Co-op

• May take up to two years to get the required
  equity
• It will take a lot of meetings
• It will have to survive negative and public
  scrutiny
• It may require a lot of members
• DONT RUSH TO THE END
• HIRE QUALIFIED CEO/CFO, LEGAL, and ACCOUNTING
  SERVICES EARLY

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Thank You!

• For assistance with starting a cooperative or
  improving its operations contact
• John Brugger
• Cooperative Development Specialist
• 8815 E. Mission, Ste B
• Spokane, WA 99212
• 509-924-7350 EXT 114
• Or E-mail john.brugger_at_wa.usda.gov