The Cooperative Model as a Strategic Alternative: The Landmark Services Cooperative case

1. The Cooperative Model as a Strategic Alternative: The Landmark Services Cooperative case Kim Zeuli Assistant Professor Agricultural & Applied Economics Department The University of Wisconsin Center for Cooperatives

2. Motivation • Landmark Services Cooperative was first “Wyoming Co-op Model” in WI. • Why did they choose to adopt this model? • Why not just organize as an LLC? • How is the model “operationalized”? • What has been the result of this decision? • For the cooperative and its members • For public policy The University of Wisconsin Center for Cooperatives

3. Overview • Wyoming Co-op Model (WCM) background • The Landmark case: why, how, and results • The future of the WCM—diffusion of innovation model • Rural development considerations The University of Wisconsin Center for Cooperatives

4. The Wyoming Co-op Model • 1999—Wyoming lamb producers sought to form a NGC to process lamb, but wanted to obtain equity from non-member investor. • A new Wyoming cooperative statute drafted by Mark Hanson and other Lindquist and Vennum attorneys. • Enacted July 1, 2001. The University of Wisconsin Center for Cooperatives

5. The Wyoming Co-op Model • Allows “outside” investors—bigger capital pool. • Two classes of members: • Patron members—those who use the co-op; • Investor members—those who invest in the co-op. • All members can have the same voting rights, but depends on bylaws. The University of Wisconsin Center for Cooperatives

6. The Wyoming Co-op Model • The statute regulates some member control: • Patron member votes are counted collectively • The board must include at least 1 patron member • Patron member votes  50% of total board votes. The University of Wisconsin Center for Cooperatives

7. The Wyoming Co-op Model Two net profit pools: • Patronage: patron members receive this based on use. • Patron members guaranteed 15% profit distribution. • Investment: investor members receive this based on equity investment. The University of Wisconsin Center for Cooperatives

8. Define need 5-Stage Organizational Innovation Process Find innovation Embed Clarification Adaptation Adapted from Rogers, Diffusion of Innovation. The University of Wisconsin Center for Cooperatives

9. Landmark Services Cooperative • “The hardest business to make money in is agronomy.” • Larry Swalheim, CEO of Cottage Grove Cooperative. • Labor and capital intensive, with shrinking margins. • For local co-ops, a lot of duplication, overlap in trade territories. • Co-op members expect personal service. The University of Wisconsin Center for Cooperatives

10. Cottage Grove Cooperative Core Divisions Feed Energy Grain Agronomy Supporting Divisions Hardware Stores Convenience Stores Truck Stop Heating & Cooling Transportation Services

11. Union Cooperative Core Divisions Feed Energy Grain Agronomy Supporting Divisions Convenience Stores Tire Sales Transportation Services

12. The University of Wisconsin Center for Cooperatives

13. Critical Events • Agriliance wanted to sell 4 agronomy centers in the trade area. • Proposed forming an agronomy LLC with Cottage Grove and Union: • Agriliance = 40% ownership (4 centers) • Cottage Grove = 40% ownership (3 centers) • Union = 20% ownership (2 centers) The University of Wisconsin Center for Cooperatives

14. Critical Events • Union unhappy with small ownership stake. • CG and Union had longstanding relationship; social capital. • Were looking for partnership opportunities. • Had already developed a joint venture in Precision Agriculture. • Some distrust of Agriliance (no social capital). • Decided better solution: JV and purchase the 4 agronomy centers. The University of Wisconsin Center for Cooperatives

15. Landmark Services Cooperative organized in October 2001

16. Why a WCM? • Two major factors for choosing WCM over LLC: • Larger pool of future members (for growth); and • Business would still have cooperative name. • Both co-ops believe “co-op” name has positive marketing benefits. • Their lawyer was involved with establishing other “Wyoming co-ops.” The University of Wisconsin Center for Cooperatives

17. Operations • Each co-op provided half the $3.15 million required to purchase the 4 Agriliance centers. • Landmark’s patronage refunds based on use (sales at local plants): • Cottage Grove = 60%; Union = 40% • Union can increase patronage to 50% The University of Wisconsin Center for Cooperatives

18. Operations • Landmark is a “virtual” company. • New equipment is purchased by Landmark. • Landmark leases existing facilities and equipment from the 2 co-ops. • Landmark employees are “leased” from the 2 co-ops. • Cottage Grove administers human resource programs. The University of Wisconsin Center for Cooperatives

19. Landmark Governance Structure Board of Directors Union Director Union CEO Union Controller CG Director CG CEO CG Controller Landmark GM Hub Managers Evansville Employees Cottage Grove Employees Juda Employees Edgerton Employees

20. Results • A success. • 2002: Landmark loses money, but expands business. • Purchases another agronomy center (10 total). • Typical benefits and challenges from a joint venture: better services, lower prices, loss of control, etc. The University of Wisconsin Center for Cooperatives

21. Results • Criticism over becoming too large, but no negative reaction to WCM. • Landmark creation approved by general membership of both cooperatives. • Were members aware of the implications (i.e., open door for outside investors)? The University of Wisconsin Center for Cooperatives

22. Results • Hope to establish additional Landmark JVs in other product areas. • CG and Union relationship strengthened. • October 2003: Merger of CG and Union  Landmark Services Cooperative. • Headquarters at CG • 18 community locations The University of Wisconsin Center for Cooperatives

23. Results • Wyoming co-op (Landmark Agronomy Services) still exists; “inactive shell.” • Ready for future joint ventures with other firms. The University of Wisconsin Center for Cooperatives

24. The Future of the WCM • Innovation characteristics determine its rate of adoption (Rogers, others): • Relative advantage • Compatibility • Complexity • Ability to be tried out • Observability • Other significant variables: communication channels and promotion by “change agents.” The University of Wisconsin Center for Cooperatives

25. Innovation Adoption Wyoming lamb producers Landmark Source: Rogers, Diffusion of Innovation, p. 262. The University of Wisconsin Center for Cooperatives

26. The Future of the WCM • Change agents: lawyers, state co-op councils, university-based co-op centers. • Nothing new for cooperative innovation. • Similar MN law (308B) enacted Aug 1, 2003. • Others introduced into legislative sessions in WI and Iowa. • Early MN adopters (8): health care, software, financial, fertilizer, and ethanol. The University of Wisconsin Center for Cooperatives

27. The Future of the WCM • For now, debate over the model is at scholarly level, but may start taking place at farm-member level. • WFU and WFB board member/meetings • Adoption rate and adopters does not suggest all new co-ops (ag co-ops) will be WCM. • Is fear that Capper-Volstead protection and CoBank mission will be challenged rational? The University of Wisconsin Center for Cooperatives

28. Rural Development • The implications for rural development haven’t really entered the debate over the WCM. • The WCM opens the door to many new opportunities for local (community) ownership and control. • NGC with community investors. • Non-agricultural ventures. The University of Wisconsin Center for Cooperatives

29. Conclusions • In agriculture, Wyoming Co-op Model most likely adopted by strategic value-added firms looking at future growth. • Existing co-ops may adopt for new joint ventures expected to require substantial capital (substitute or pre-cursor to mergers?) • Rural communities should be considering the WCM, but will need change agents. The University of Wisconsin Center for Cooperatives

30. Contact Information Kim Zeuli zeuli@aae.wisc.edu 608-263-3981 The University of Wisconsin Center for Cooperatives