Welcome & Opening Remarks LeAnn Oliver, Deputy Administrator for Co-op Programs

1. ORGANIZATIONAL STRUCTURES TOFACILITATE SMALL FARMERS IN LOCAL FOOD DISTRIBUTIONTuesday, May 25, 2010, 2:30-4:00 PM Eastern • Welcome & Opening Remarks • LeAnn Oliver, Deputy Administrator for Co-op Programs • Tom Stafford, Chair, Research Advisory Committee, Co-op Programs if LeAnn is late from concurrent meeting • Overview of California Collaborative Projects • Karen Firestein, Business & Cooperative Specialist, USDA Rural Development, Davis, CA • CAFF’s Growers Collaborative: Evolution of Local Produce Distribution • David Runsten, Director of Policy and Programs, Community Alliance with Family Farmers, Davis, CA • Cooperative Possibilities: Local Growers Guild • Ellen Michel, Marketing and Outreach, Bloomingfoods Cooperative, Bloomington, IN • How Do They Differ: Co-ops, C-Corps, LLCs, Nonprofits, L3Cs, CMGs • Stephanie M. Smith, Esq., Senior Legal Advisor for Cooperative Programs, USDA Rural Development • Open Discussion on Organizational Structures Needed to Facilitate Small Farmers in Local Food Distribution • LeAnn Oliver, Deputy Administrator for Co-op Programs, Moderating

2. Overview of California Collaborative Projects Karen Firestein, USDA Rural Development, Cooperative Specialist, Davis, CA Karen.firestein@ca.usda.gov 530-792-5829

3. What is a Collaberative? Collaboration is a recursiveprocess where two or more people or organizations work together in an intersection of common goals — for example, an intellectual endeavor[1][2] that is creative in nature[3]—by sharing knowledge, learning and building consensus. From Wikipedia

4. Who are the collaborators? Farmers Non profits Institutions –schools, hospitals, restaurants Consumer groups Local Government- public health officials Foundations

5. Why are they being considered? There is a common need within the group that is a broader than the farmers’ needs The goal is to develop a local food distribution system to provide healthy food to consumers.

6. Examples Kaiser Permanente’s Medical Center’s with farmers markets -A collaboration with local farmers markets organizations, hospital, non profits

7. Examples In some cases, a cooperative is formed in collaboration with other organizations. A non profit was formed first to promote locally grown agriculture: Central Coast Grown

8. Central Coast Agricultural Cooperative

9. Coast Grown Their philosophy is that everyone benefits from good, healthy, locally-grown foods. They benefit, our children benefit, schools and hospitals benefit, retailers benefit, the local economies benefit, and the environment benefits.

10. Tierra Miguel Foundation A non profit agricultural education program is collaborating with San Diego County School District, Farm Bureau, Occidental College’s Center for Food and Justice, California Center for Cooperative Development and local farmers to develop a local distribution system that will deliver foods to schools and institutions.

11. San Mateo County Project County initiative to purchase locally grown food is driving this collaborative effort that involves San Mateo County Farm Bureau, county health officials, and agricultural non profit formed to benefit local farms.

12. What is a Food Collaborative? “collaboratives”, can be defined for this discussion as non-profit organizations, acting as marketing agents for farmers to sell directly to local institutions. Example Growers Collaborative systems set up in the Bay Area, Central Coast, and Ventura.

13. Why are they different? Farmers do not want to take the risk or have the “economic incentive” to form a marketing corporation. Consumers/institutions do not want to take the risk or have the authority to start a buying corporation.

14. Why are they different? Economic goals are not the primary force behind collaborative efforts. Larger role of nonprofit or public institutions in organizational efforts Grants usually required for start-up costs

15. CAFF’s Growers Collaborative: Evolution of Local Produce Distribution Dave Runsten, CAFF Director of Policy and Programs

16. History of CAFF’s Growers Collaborative Jim Churchill, an Ojai citrus grower, was delivering fruit to Juanamaria Elementary School in Ventura in one of the first farm to school efforts He wanted a more organized approach to aggregating and delivering local produce CAFF agreed to sponsor the project and administer grants First grants in 2004, including a 2-year USDA VAPG of $210,000 Interviewed all local distributors asking if they would deliver local produce and they all said no Asked growers if they wanted a cooperative or some ownership and they all said no So created a non-profit distribution entity: old trucks picked up and delivered, took title to produce, used local food bank’s cooler

17. History of CAFF’s Growers Collaborative In 2006, started another hub in Davis to deliver to Sacramento and the San Francisco Bay Area with 2-year USDA VAPG of $215,000. Also started some sales from Fresno. Shifted to for-profit LLC, seeking private investment By early 2008, monthly sales of combined hubs averaged $85,000, or over $1 million per year Customers included: Bon Appetit Management Co. Dreamworks, Getty Museum, Biola University, Intel…and 25 more Schools, such as Ventura USD Hospitals, such as Kaiser Permanente Universities, such as Stanford, UC Berkeley, UC Davis The Fruit Guys, who deliver to corporations A company providing organic school meals

18. Obstacles and Outcomes Undercapitalized, like many small businesses. Private investment did not materialize. Could not increase sales sufficiently to cover fixed costs, so CAFF constantly covering losses Trucking inefficient Too much seasonal variation in local to be stand-alone distributor But was a successful demonstration project, allowed many institutions to source local produce and to demand it from their mainstream distributors The produce distribution industry then realized that they needed to find ways to access local produce to satisfy this demand, and that is the process going on now across the country CAFF’s solution is to shift GC to a series of aggregation hubs and work with conventional produce distributors.

19. ag·gre·ga·tion: the collecting of units or parts into a mass or whole CAFF is working hand-in-hand with private companies to establish local food aggregation hubs at strategic locations throughout California. They will be staffed and operated by professional food distribution entities. These aggregation hubs will sell to mainstream food distributors, thereby significantly impacting the regional infrastructure for local food while maintaining a fiscally sustainable model.

20. Growers Collaborative aggregation hubs will: Growers Collaborative Bay Area opened for business in November 2009. GCBA is currently doing business with several mainstream distribution companies, including Fresh Point, San Francisco Specialties, and Daylight Produce. Work with more farmers Access more trucks & capacity Access more customers Get more source-identified local food into more retail & food service operations

21. publishes weekly product availability lists receives productidentifies and labels productprocesses orders from distributors The Growers Collaborative hub aggregates product: The hub collects, identifies, and sells local food.

22. CAFF works in the value chain on either side of the aggregation hub, stimulating both increased supply from local family farmers and increased demand from mainstream distribution companies. CAFF grower outreach GC hub CAFF marketing CAFF consumer education

23. CAFF… • Conducts outreach to new grower suppliers • Markets the aggregation hub to mainstream distributors • Develops and distributes marketing materials for use by distributors’ salespeople • Trains distributors’ salespeople to sell local food to retail and food service operations • Develops and distributes marketing materials for use by customers in the retail environment • Grows consumer demand for local food through ongoing consumer education programs, including Buy Fresh Buy Local.

24. GC Bay Area currently in operation GC Sacramento estimated to open June 2010 GC Humboldt under discussion GC Santa Rosa planning grant submitted GC Central Coast planned GC Los Angeles estimated to open June 2010 GC San Diego possible

25. Cooperative Challenge:The Local Growers Guildof Southern Indiana Ellen Michel Marketing and Outreach Bloomington Cooperative Services Bloomingfoods Market and Deli Board Member - Local Growers Guild

26. The Local Growers Guild The Local Growers Guild is a cooperative of farmers, retailers and community members dedicated to strengthening the local food economy in Southern Indiana through education, direct support and market connections. Mission:The Local Growers Guild creates a local foods system that provides quality food to communities through direct markets and retailers; preserves the viability of family farms; improves the quality of life for growers; makes food issues visible; and promotes practices that preserve and protect the Earth.

27. Accomplishes a lot with very limited budget Two part-time staff Low wages, no benefits Grassroots origins with volunteers Collaborative effort with many players Challenges: • creating an enduring structure with resources to maintain and grow the organization • engaging members at three levels (grower, retailer, community), and helping them be committed champions of the local foods movement • recognizing funding opportunities and being prepared to act when they arise • responding to member diversity, expectations and needs

28. Cooperative principle #6: Cooperation among cooperatives Origins: The Local Growers Guild received seed money from Bloomingfoods in 2005 when the food co-op received an equity windfall from the Blooming Prairie Cooperative Warehouse after it was sold to natural foods distributor UNFI (United Natural Foods, Inc.) Full circle: distribution challenge

29. Co-op retail supporter Bloomington Cooperative Services is a member-owned mutual benefit corporation whose purpose is to expand and sustain the cooperative business model. We promote community involvement, consumer education, and the benefits of member-ownership. Bloomingfoods Market and Deli is a member-owned grocery providing Southern Indiana with healthful, high quality, and environmentally sound products at a fair price. We promote locally grown, nutritious and non-chemically produced foods. We emphasize consumer education, community involvement, and excellent customer service. The bottom line: We know that our customers want (and need) more local, organic, sustainable food.

30. A Grower’s Perspective:A Growing Crisis “We are suffering from the loss of knowledge and the missed opportunity of competitive innovation regarding how food works on anything but a large, national/international distribution model.” Knowledge gaps: Growing Cooking Distribution

31. Growing Crisis is also a Health CrisisCustomers and growers tell us: The agricultural products that are subsidized and supported are not the ones that consumers desire in order to make an impact on their health or on the health of the environment.

32. Our Co-operative and Collaborative Challenge: Retaining valuable skills from agricultural past, including the ability to cooperate: best of the past Becoming more successful technological innovators, at small, urban, rural and suburban (local) scale: best of the future Building a new infrastructure for local foods

33. HOW DO THEY DIFFER: Co-ops, C-Corps, LLCs, Non-Profits, L3Cs, CMGs U.S. Department Of Agriculture (USDA) Stephanie M. Smith Senior Legal Adviser for Cooperative Programs USDA Rural Development Washington, DC

34. Business Organizations Most business organizations form legal business entities to validate their business activities with the federal, state and local governments; and the general public. The Internal Revenue Service (IRS) is able to tax these business activities of the particular business organization according to the very characteristics and purpose of the legal business entity created.

35. Various Types of Organizational Options Cooperatives (Co-ops) are organized by the people who use its services and whose benefits are derived and distributed equitably on the basis of use C-Corporations (C-Corps) are organized for-profit entities to distribute wealth to employees and shareholders Limited Liability Companies (LLCs) are organized for-profit entities for a single business purpose Non-Profit Organizations (Non-Profits) are organized solely to provide programs and services that are of self-benefit Low Profit Limited Companies (L3Cs) are organized to bridge the gap between non-profit and for-profit investing Collaborative Marketing Groups (CMGs) are organized to directly market and distribute products on behalf of farmers as either a co-op, corporation or LLC

36. WHAT DO THEY HAVE IN COMMON? They all provide goods and services They all are recognized by the IRS for tax paying purposes, if applicable They all are organized via state statutory laws They all have an ownership or management structure They all operate under a particular goal, mission or purpose Co-ops C-Corps LLCs Non-Profits L3Cs CMGs

37. HOW DO THEY DIFFER ? Each organization is taxed differently by the IRS based on the organization’s unique characteristics The ownership or management structure is not equally structured Each business organization is structured with different goals or purposes in mind Co-ops C-Corps LLCs Non-Profits L3Cs CMGs

38. How Do They Differ: Ownership Structure Co-ops - Member/Patrons C-Corps - Stockholders LLCs - Member/Shareholders Non-Profits - Nobody L3Cs - Member/Shareholders CMGs - Member/Patrons/Shareholders

39. How Do They Differ:Organizational Structure Co-ops - Board of Directors elected by patron members C-Corps - Board of Directors elected by shareholders LLCs - LLC Members Non-Profits - Board of Directors L3Cs - L3C Members CMGs - Board of Directors elected by patron members, shareholders or LLC members

40. How Do They Differ:Investment Costs Co-ops - One share/fee to establish membership C-Corps - One share of stock LLCs - At discretion of LLC members Non-Profits - Membership fee L3Cs - At discretion of LLC members CMGs - Based on their chosen business entity

41. How Do They Differ: Purpose Co-ops - To meet member needs for goods or services, market members’ products and earn a return on member investment C-Corps - To earn a return on owner investments LLCs - To earn a return on members’ investments; to provide employment for members Non-Profits - To provide services or information L3Cs - To provide a structure that facilitates investments in socially beneficial, for-profit ventures CMGs - To provide a structure for farmers to work together over an extended time period to market their agricultural products

42. How Do They Differ: Legal Liability for Individual Owner/Member Co-ops - Limited to members’ investment in the cooperative C-Corps - Limited to shareholder’s investment in the corporation LLCs - Limited to LLC member(s)’ investment in the LLC Non-Profits - Limited to assets of the organization L3Cs - Limited to L3C member(s)’ investment in the L3C CMGs - Based on the chosen business entity’s limitations as stated above

43. How Do They Differ: Financial Structure Co-ops - Retained profits; sale of shares to members and outside investors C-Corps - Retained profits and sale of shares to investors LLCs - LLC members’ investments and retained profits Non-Profits - Grants, individual contributions, fees for services L3Cs - L3C members’ investments and retained profits CMGs - Based on the chosen legal entity

44. How Do They Differ: Profits/Gains Structure Co-ops - Members in proportion to their use; preferred shareholders in proportion to investment, up to 8% C-Corps - Shareholders in proportion to investment LLCs - LLC members in proportion to investment or by agreement Non-Profits - Retained within the organization L3Cs - L3C members in proportion to investment or by agreement CMGs - Based on the chosen business entity

45. How Do They Differ:Individual/Entity Tax Structure Co-ops - Members pay on qualified allocated profit and cash received; Co-op pays on nonqualified and unallocated profits C-Corps - Shareholders pay individual capital gains rate on dividends; C-Corp pays corporate rate on profits LLCs - LLC members pay individual rate, or can elect to be taxed as a corporation Non-Profits - Not Applicable L3Cs - L3C members pay individual rate, or can elect to be taxed as a corporation CMGs - Based on the chosen business entity

46. A Note on L3Cs and CMGs… L3Cs- L3Cs are considered hybrid for/non-profits, but are not tax exempt charities unless they meet the IRS’s 501(c)(3) requirements. As late as August, 2009, there are currently 8 jurisdictions to recognize L3Cs to include, Vermont, Illinois, Michigan, Wyoming, Utah, Maine, the Crow Nation and the Oglala Sioux Tribe. CMGs- CMGs may be formally established business organizations or informal associations. Some CMGs are based on significant investments in processing and distribution facilities, while others rely on the human capital embodied in their members’ ideas and the social capital embodied in their collaborative spirit. See University of Minnesota Extension Services discussion on CMGs.

47. Conclusion You may contact Stephanie M. Smith at (202) 690-1411 or stephaniem.smith@wdc.usda.gov for more detailed information about this presentation. Thank you.

48. Discussion on Organizational Structures to Facilitate Small Farmers in Local Food Distribution • Are collaborative marketing groups needed to facilitate local food distribution? • What form of collaboration works best? • What are the drawbacks? • Should it be different for larger farmers? • Does a regional approach vs. local change the discussion?

49. Next Scheduled “Discussion Meeting” • Tuesday, June 29, 2010 • 2:30 – 4:00 PM Eastern • Discussion About Raising Equity or Near Equity Capital from Non-Members for A New or Expanding Cooperative • To be determined, Coastal Enterprises, Inc. • Christina Jennings, Northcountry Cooperative Development Fund • Mary Griffin, National Cooperative Business Association