Farm Cooperatives FAACT – March 11, 2013

1. Farm Cooperatives FAACT – March 11, 2013 Jeff Bitter Allied Grape Growers

2. 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.

3. The Capper-Volstead Act of 1922 • The act authorized various kinds of agricultural producers to form voluntary co-operative associations for purposes of producing, handling and marketing farm products - that is, it exempted such associations from the application of the antitrust laws. The United States Secretary of Agriculture was given power, on his own motion, to prevent such associations from achieving and maintaining monopolies. He could hold hearings, determine facts and issue orders ultimately subject to review by federal district courts.

4. Tax status of a cooperative • Federal tax law recognizes that cooperatives provide patron benefits instead of profits to investors, and that their residual earnings are passed through to patrons. These earnings typically are taxed once, at the patron level. • Federal tax code also grants tax exemptions to certain cooperatives operating in specific sectors, treating them as not-for-profit entities. Mutual utilities, credit unions, mutual insurance companies, farm credit organizations, and some farmer cooperatives are examples of cooperative sectors that receive federal tax-exempt designations.

5. Farm 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. Farm Cooperatives • Processing and/or marketing, supply, and service cooperatives are the most common types of agricultural cooperatives in the United States. • Processing/marketing cooperatives assemble, pack, process, and/or sell members’ products in both domestic and foreign markets. By joining together, producer members are assured a “home for their product,” and don’t have to be concerned with securing markets individually.

7. Farm Cooperatives • They 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 the annual budget, and oversees professional management. Professional management implements policies established by the board and handles day-to-day operations.

8. Farm 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 approximately 200 agricultural cooperatives and there are more than 4,000 nationwide.

9. Farm Cooperatives - Examples • Sun-Maid (Raisins) • Blue Diamond (Almonds) • Land O’Lakes (Dairy) • Welch’s (Grape Juice) • Ocean Spray (Fruit Juice – Cranberry) • Sunkist (Citrus)

10. 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.

11. 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.

12. 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

13. 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 co-op revenue • $100,000,000 X’s winery’s 1% = $1,000,000 in co-op revenue • $250,000 interest earned on equity balance in the bank • Total of $3,250,000 in co-op revenue • Assume $1,250,000 in expenses (employee salaries & benefits, autos, rent, etc.) • $2,000,000 in profit (this amount allocated back to the members) • This $2,000,000 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

14. 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)

15. Thank you.