Business Models for Marketing Agricultural Products

1. Business Models for Marketing Agricultural Products Prepared for IPCP

2. Lots of Names • Corporation • LLC • Cooperative • Association

3. Comes Down to Choices • What will it do? • Who will control or own it? • How will decisions be made? • How do the profits or surplus earnings get distributed? • How will it pay taxes?

4. LLC vs. Cooperative • Both allow control by producer owners • Both allow for profits to be passed through without being taxed. • Both offer members reduced risk or liability shield. • Both have to cover their costs. • Both have to cover their costs.

5. Features of LLCs • Owned by members – based on investment. • Profits are distributed in proportion to their investment. • Voting is proportional to level of investment. • Can be managed by members or by a professional management team.

6. Features of Co-ops • Democratic – one member one vote • Benefits proportional to use - not investment • Operate at cost – surplus earnings to members • Voluntary and open membership • Typically co-ops raise capital more slowly.

7. Retained Earnings • Keep part of the surplus – slow growth Sales price = $6.00 Cost of sales (tax, labor, supplies) =$1.50 Fixed Costs = $ 2.50 Surplus = $2.00 • Paid in cash - $1.50 • Kept in retained earnings - $.50

8. Retained earnings $50,000 to cover expansion Retain $.50 per dozen Need 100,000 dozen to raise the funds Five years at current production level

9. New Generation Model • Capital is raised up front by selling shares that are linked to right to deliver. • Member with more money to invest has to have more production to process. • Retained earnings are usually lower • Still not possible to raise money from outside investors. • Interest payments are capped. • Governance normally remains one vote per member. • Benefits accrue in proportion to use rather than investment.

10. Comparison Current • Each member invests the same amount • Each member can deliver as much as they can produce • One vote per person • Raise money through retained earnings New Generation • Members buy access to production capacity • Specific mutual obligations – co-op will buy and member will deliver • One vote per member • Raise money by selling access to processing capacity

11. Issues • Can selling production shares raise enough money? • Will members be willing to pay for capacity? • Is the co-op’s processing capacity limited? • Does the co-op have markets? – Can it cover its costs??

12. Advantages of Cooperatives • Co-ops are part of a community of likeminded businesses, • Co-ops can be an effective grassroots organization • Co-ops receive a favorable treatment by government,

13. Disadvantages of Co-ops • Coops depend on their member/owners to generate business • Cooperation may not come easily to your group • It is harder to raise capital • Co-op can be distracted from its basic business

14. The end! Prepared for IPCP