Cooperative Development:
Business Design and
Strategy
Timothy Woods
Department of Agricultural
Economics
University of Kentucky
What is a Cooperative
Business?

A cooperative is a business voluntarily
owned and controlled by the people using
its services

may be operated on a non-profit basis
What’s on the Agenda?
General overview of Cooperatives
 New Generation Cooperatives
 How to develop a cooperative
 General insights into the success of
cooperatives

Growing Marketing Bill
•Source: USDA-ERS 2000
Common barriers facing
agricultural entrepreneurs
Where do IDEAS come from?
 How are MARKETS developed?
 Where is the CAPITAL for a pioneering
idea?
 How can REGULATION be a friend?
 How have pioneers managed GROWTH?

What is a Cooperative Principle

A principle is an underlying doctrine or
tenet that defines or identifies a distinctive
characteristic
Cooperative Principles

Voluntary and Open Membership

Democratic Member Control

Members Have Economic Participation

Autonomy and Independence

Education, Training, and Information

Cooperation Among Cooperatives

Concern for Community
adopted by the ICA Centennial Congress 99/95
What Does a Cooperative Do?

Provide its user-owners goods and
services at cost



Purchase inputs:
seed-feed-fertilizerschemicals-equipmentsupplies
Market members and
non-members’
products
Provide member with
services: insurancecredit-irrigationcustom fertilizer
spreading-telephoneelectricity-marketing
Reasons for Joining a
Cooperative

Economic

Vertical integration






forward
backward
To obtain a fair or
efficient price
To reduce costs
through economies of
size
To pool risks


To provide markets,
supplies, and services
that are missing or in
danger of being lost
To capture profits from
another level
To benefit from
increased market
power
Cooperative Benefits
Allows farmers to pool their financial
resources and conduct business activities
they could not independently perform as
efficiently
 Allows farmers to respond to firms that
follow monopolistic practices
 Provides farmers with access to goods
and services needed

Disadvantages of Cooperatives
Access to capital
 Cost of member and public education
 Investment in democratic process
 Limit in scope of operations
 Co-ops are only as good
as their members ask them to be.

Types of Agricultural Co-ops



Marketing Co-ops -- improve bargaining
power, reduce costs, access new markets,
improve quality, and increase profits
Purchasing Co-ops -- obtain needed
products and services, reduce or share
costs, and increase profits
Value-added Processing Co-ops -access a more significant share of markups available in the retail market & obtain
better value from lower grade
produce/product
Fairview Produce Auction
Fire




Fairview, KY
Auction patterned after
Annual Gross Sales
produce auctions in PA,
OH, and MO
$700,000
$600,000
Established by local
$500,000
Mennonite community $400,000
Equipment
$300,000
in 1997
$200,000
Produce
$100,000
Metal frame building
$0
1997
1999
and land purchased
through a $72,000 stock
drive
100 shares of
outstanding stock
offered at $1,000 now
valued at $2,000-$2,500
per share
Iowa Soy Specialties, LLC
Vinton, IA

1995: Benton County, IA, producers begin investigating
possibilities to add value to area agricultural production

1997: Company shell established by farmers Marlin
Jorgensen, Dave Van Steenhuyse, and Homer Showman



Project Creation Assistance matching grant to begin pilot
production of soy flour using mechanical (rather than chemical)
oil extrusion process
Business planning assistance from Iowa REVAMP and
$200,000 capital startup grant from Iowa VAAPFAP
1998: Initial LLC stock drive attracts over 35 local owners
Iowa Soy Specialties, LLC
Vinton, IA

1999: Spins off Specialty Proteins LLC to manufacture
textured soy protein soy flour
 Emphasis
on non-GMO products
 Startup Budget: $900,000

2000: Forms alliance with WholeSoy Foods
 Enters market with fully cooked, microwaveable
“Heartland Fields” soy barbecue
 Startup Budget: $3.9 Million


Cooperative
competes in the value
chain like any other
business
Capital, management,
marketing, and
strategy are equally
critical factors for
coops and IOFs
Fitting into the Supply Chain Picture
Strategies for delivering
value
low cost
Competing Processor
unique product
added services
superior quality
ABC Aquaculture Farmer’s Coop
Competing Processor
more products, etc
Key Downstream Customer
Business Keys to Success



Thoroughly investigate the market opportunity;
be knowledgeable of customers and the
marketplace
Make significant investments to capitalize the
business
Hire competent management
“Survival as a niche company in such a climate takes a
specialized expert. So our advice is to raise the
capital to hire a trained, experienced professional.
Don’t do-it-yourself” on this one.” Annie Wilson
Keys to Success

Leadership

Assess all of your risks!

Planning strategically
“More often than not, an
investment decision is made
based on who is involved in the
project rather than what the
project is all about.” Steve Noak
types of risks



Member/Board/Manager
communication




production
market
construction
technological
legal and social
human
New Generation
Cooperatives: A Cooperative
1
Revival in Rural America
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
Cooperative (NGC)
Focus is on value-added products
 Structure and characteristics of NGC’s

delivery rights
 limited membership a.k.a closed cooperative
 cooperative receives permanent capital/equity
investment and debt
 patronage paid only to members
 appreciation of delivery rights

Delivery Rights

Four advantages




adequate capital is
raised in the outset of
the business
capitalization is
distributed equitably
investment=interest
may redeem invested
equity

Example



plant can process $1
million goats per year
$500,000 equity may
be required
offer 500 shares at
$1,000 each

each share equals
delivery of $2,000 worth
of goats each year
Limited Membership

Reasons



do not want to accept
more raw product than
co-op can absorb
ensure purchase o f
one share may be
enough to justify
investment
Ensure supply to
match demand
Six Recommendations for
Developing Successful NGCs2



Make significant investments to secure
appropriately sized facility and proper equipment
Dual contract must commit farmer to specific
delivery rights, co-op must accept those
deliveries
Professionalism is required on the part of the
farmer, members, directors, and the hired
management
2Recommendations
were made by George Sinner at the “New Generation”
Farmer Cooperatives Conference, April 1, 1996.
Six Recommendations



Co-op must be knowledgeable about its
customers and marketplace
Scale “Aim for a large share of whatever
market targeted”
Net income must be returned to its members
as cash at the end of the fiscal year!
Additional Keys to Success3

Quality people

professionalism among farmers,
members, directors
 motivated,


“project champion”
Risk evaluation


determined, and committed
feasibility studies and financial
projections
Financial structure

liquidity, leverage, and profitability
3Lee
Estensen, CoBank, formerly the St. Paul Bank for Cooperatives.
General Guidelines on How to
Start a Cooperative
Have a Good Business Idea!
Have a project champion
 Get an understanding of cooperative form
of business

principles
 practices
 types of cooperatives
 benefits/limitations of cooperatives

Form Steering Committee
Producer Survey
 Do a feasibility study/opportunities
assessment

market assessment
 financial assessment
 management/labor assessment
 other organization costs


Have a vote to continue/stop development
process
Feasibility Study


Purpose is to
determine if a
business opportunity
is possible, practical,
and viable
Enables persons to
take a realistic look at
both the positive and
negative aspects


Study helps many
owners make critical
decisions
Statistics


50% of start-ups are
still in business after
18 months
25% in business after
4 years
Form an Interim Board
Select legal and accounting consultants
 Develop business plan
 Hire manager/CEO
 Marketing agreements
 Recruit members/equity drive
 Write Articles of Incorporation and
Bylaws

Business Plan

Description of
business

The marketing plan

The management
plan

The financial
management plan
Is a New Generation Cooperative
Right for YOU!

Do you have a reliable source of raw
product and grower/member commitment?
Is there market access and dependability?
Are you adding value to products?
Enough return to justify equity investment?

Think big, start small and scale quickly4



4 CoBank, Business Advisory Services 2001.