Agricultural Cooperatives

1. Agricultural Cooperatives Jeff Bitter Allied Grape Growers November 5, 2018

2. What is Allied Grape Growers? • Allied Grape Growers is an agricultural cooperative thatexists for the purpose of effectively and competitively marketing its members winegrapes. In short – WE SELL GRAPES!

3. What is a cooperative? • An autonomous association of persons who voluntarily cooperate for their mutual and economic benefit. • A farm, business, or other organization that is owned and run jointly by its members, who share the profits or benefits.

4. What is a cooperative? • An autonomous association of persons who voluntarily cooperate for their mutual and economic benefit. • A farm, business, or other organization that is owned and run jointly by its members, who share the profits or benefits.

5. Agricultural Cooperatives • Agricultural cooperatives are organized to help farmers gain market power by joining together to market their crops, increase their bargaining power by achieving economies of scale, processing their commodity to add value, and/or to purchase supplies and services. • Benefits and profits gained from the cooperative are distributed equitably to member-farmers on the basis of use of the cooperative.

6. Agricultural Cooperatives

7. Agricultural Cooperatives • Processing, service and supply cooperatives are the most common types of agricultural cooperatives in the United States. • Processing cooperatives assemble, pack, process, and sell members’ products. By joining together, producer members are assured a “home” for their product. • Service cooperatives offer service(s) to members such as selling members’ products (in raw form) or bargaining for a commodity price. By joining together, producer members don’t have to be concerned with securing markets individually and can leverage the power associated with volume to effectively market their crops. • Supply cooperatives offer products (generally farm inputs) purchased in volume and pass the savings along to members giving smaller producers the pricing of large volume buyers.

8. What makes cooperatives different or special from other forms of businesses? In other words, what charter to they operate under that separates them from other business structures?

9. The Capper-Volstead Act of 1922 • The Capper Volstead Act authorized various kinds of agricultural producers to form voluntary cooperative associations for purposes of producing, handling and marketing farm products - that is, it exempts such associations from the application of the antitrust laws. • The United States Secretary of Agriculture has the authority to prevent such associations from achieving and maintaining monopolies. • What are the United States’ antitrust laws?

10. United States’ Antitrust Laws • What are the United States’ antitrust laws? • Sherman Act (1890) • Clayton Act (1914) • Federal Trade Commission Act (1914) – Formed the FTC • The “Acts” work in junction with each other. They were created for the sole objective to protect the process of competition for the benefit of consumers, making sure there are strong incentives for businesses to operate efficiently, keep prices down, and keep quality up. These acts are considered the core of antitrust laws.

11. The Capper-Volstead Act of 1922 • The United States Secretary of Agriculture has the authority to prevent cooperative associations from achieving and maintaining monopolies. • He/she may hold hearings, determine facts and issue orders, ultimately subject to review by federal district courts.

12. Cooperative Governance • Cooperatives are democratically controlled by the farmers who own and use the business. Members elect a board of directors that sets the overall operating policies, approves annual budgets, and oversees and hires professional management. Management implements policies established by the board and handles day-to-day operations including staffing and general business decisions.

13. Agricultural Cooperatives • Cooperatives are user-owned and user-controlled businesses and many of their products have been mainstream items on super-market shelves for more than a century. • California has about 200 agricultural cooperatives, and there are approximately _________ nationwide.

14. Tax status of a cooperative • For-profit cooperative corporations are given special treatment with respect to federal taxation. The taxation of cooperative corporations in the United States is subject to special rules under subchapter T of the Internal Revenue Code, different from both subchapter C and subchapter S corporations. Although they are generally taxed as normal corporations, they can reduce their tax exposure by issuing what are known as “patronage dividends” to patrons of the cooperative.

15. Tax status of a cooperative • A “patronage dividend” is essentially a refund issued to those who purchase goods or services from a cooperative, and is calculated based upon the amount that each patron spends at the cooperative in a given taxable year. 26 U.S.C. § 1388(a). When filing its federal tax returns, a cooperative may deduct the amount of the patronage dividends that it issues in a particular tax year from its gross income in that year. 26 U.S.C. § 1382(b). As a result, this income is not taxed at the corporate level.

16. Tax status of a cooperative • “Patronage dividends” are distinct from the more familiar “stock dividends” that a corporation pays to its shareholders in an amount proportional to their respective ownership of the corporation. • The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

17. What is Allied Grape Growers, and what does a marketing cooperative do? • Allied Grape Growers is a grape marketing cooperative that believes there is strength, efficiency and benefit in numbers. • A marketing cooperative can utilize its size/strength/scope to negotiate grape contracts and maintain grower/vintner relationships.

18. What do Allied Grape Growers’ marketing efforts look like? • Pool marketing • Vineyard Specific marketing (Direct contract) • Wine marketing (Bulk wine)

19. What does a marketing co-op not do? • We don’t “buy” grapes. • We don’t “guarantee” a market for grapes where there is no market. • We don’t spend time and resources on grapes that are not signed into membership. • We don’t represent interests other than the grower’s or the co-op’s as a whole.

20. The Reality of Being a Co-op Member • The cooperative has title to the grower’s grapes for marketing purposes. • The relationship is a mutual commitment between the co-op and the grower that grapes will be contracted through the co-op

21. Disadvantages of Cooperatives • Obtaining Capital through Investors/Members • Cooperatives may suffer from slower cash flow since a member's incentive to contribute depends on how much they use the cooperative's services and products. • Lack of Membership and Participation • If members do not fully participate and perform their duties, whether it be voting or carrying out daily operations, then the business cannot operate at full capacity. If a lack of participation becomes an ongoing issue for a cooperative, it could risk losing members.

22. The Ownership Side of the Co-op • Example (assuming $100,000,000 insales): • $100,000,000 X’s member’s 2% = $2,000,000 in companyrevenue • $100,000,000 X’s winery’s 1% = $1,000,000 in companyrevenue • $300,000 interest earned on equity balance and other incidental income. • Total of $3,300,000 in co-op revenue • Assume $2,300,000 in expenses (employee salaries & benefits, depreciation, rent, etc.) • $1,000,000 in profit (this amount allocated back to the members) • This $1,000,000 is placed in the equity fund and will be revolved out in the future. • Each year, with Board approval, equity payments (dividends) are paid to co-op members of past years who contributed to the equity fund via their membership • Equity fund is made up of a composite of profit from multiple crop years

23. Other Benefits of Being a Member • Full-time, year round field staff • Viticulture consulting • Market updates and information • Facilitate & negotiate “other” marketing alternatives • Group discounts on products/services • Grape sales are administered through one entity, even if there are multiple buyers of the grapes • Other financial benefits: • Harvest advances upon request • Deferred payment ability • Quick crop payment (30 days)

24. Thank you.