How To Start A Cooperative (and why!)

1. How To Start A Cooperative(and why!) Constance L. Falk M. Eugene Sundt Honors Professor New Mexico State University Department of Agricultural Economics and Agricultural Business Presentation to the Idaho Women in Agriculture Conference March 2, 2013

2. Why start a cooperative? • Agricultural cooperatives enable producers to • Create a more democratic ownership/management business structure • Jointly purchase in bulk (input supply cooperatives) • Reduce input costs (hay for livestock growers, seed…) • Market output jointly (marketing cooperatives) • Increase market power • Increase prices • Access different markets • Hire marketing professionals, so farmers can farm • Create a branded product line, manage quality control easier

3. Why is this possible? • Capper-Volstead Act of 1922. • This law exempts farmers from prosecution under the Sherman Anti-trust Act. Arthur Capper, former governor of Kansas Source: Wikipedia Andrew Volstead, US congressman from Minnesota and “father” of prohibition Source: Wikipedia

4. Source of the principles of cooperatives • 1844, a group of 28 weavers and spinners, formed the Rochdale Society of Equitable Pioneers, for the purpose of jointly buying food together. They created these eight principles of cooperation, known as the Rochdale Principles, that are the basis of the modern cooperative movement. http://weaversway.coop/index.php?page=rochedale_principles

5. Rochdale Cooperative Principles

6. Adjustments in the cooperative model • Open membership, democratic control, and limited returns on investment in the modern cooperative movement have become sources of dissatisfaction. • Hybrids have emerged: “New generation” or closed cooperatives. Members can only join during the membership drive, and not after, unless they buy stock from an existing member. • New generation cooperatives tend to focus on creating and selling value-added products, not commodities. • Shares in NGC usually carry delivery rights and obligations, so that members are obligated to deliver product to the cooperative according to the number of shares purchased. Those shares and delivery rights/obligations are tradeable.

7. HOW to START A COOPERATIVE (USDA CIR 7, 1996) http://www.rurdev.usda.gov/rbs/pub/cir7/cir7rpt.htm • 1. Invite leading potential member-users to meet and discuss issues. Identify the economic need a cooperative might fill. • 2. Conduct an exploratory meeting with potential member-users. If the group votes to continue, select a steering committee. • 3. Survey prospective members to determine the potential use of a cooperative. • 4. Discuss survey results at a second general meeting of all potential members and vote on whether to proceed. • 5. Conduct a needs or use cost analysis. • 6. Discuss results of the cost analysis at a third general meeting. Vote by secret ballot on whether to proceed. • 7. Conduct a feasibility analysis and develop a business plan. • 8. Present results of the feasibility analysis at the fourth general meeting. If participants agree to proceed, decide whether to keep or change the steering committee members. • 9. Prepare legal papers and incorporate. • 10. Call a meeting of charter members and all potential members to review and adopt the proposed bylaws. Elect a board of directors. • 11. Convene the first meeting of the board and elect officers. Assign responsibilities to implement the business plan. • 12. Conduct a membership drive. • 13. Acquire capital and develop a loan application package. • 14. Hire the manager. • 15. Acquire facilities. • 16. Begin operations.

8. A few more details • 1. For marketing cooperatives, assess production capacity among likely producers, including volumes and any seasonality. • 2. Examine markets: locations, volume requirements, interest in purchasing from a cooperative, local and organic premiums if relevant, packaging requirements, prices offered or pricing system used, transportation costs. • 3. Conduct a financial feasibility analysis that incorporates what is learned in steps 1 and 2. The analysis should include several scenarios, or “what-if” analyses, in which prices, volumes, and costs are tweaked to examine the impact on financial results. The model should provide results for at least three years. You will need to have a clear business concept before undertaking this step, including location of the business. • 4. While 3 is underway, begin examining financing options. Co-Bank? Incorporate cost of capital into the financial feasibility model. • Get a lawyer who knows cooperative law to prepare legal incorporation papers and paperwork that meets SEC regulations on financial securities.

9. Business Planning • Mission Statement • What is the vision? • Marketing Study • What are the product lines, pricing strategies, target markets, consumer characteristics, advertising strategy, promotional budget, packaging requirements, volume expectations? • Organizational Plan • Who will manage this company? What are their qualifications? How will the company be structured? What are the lines of reporting and responsibility? Do you have an organizational chart? What kind of business will this be? (Private corporation? New Generation Cooperative? Closed cooperative?) • Financial Feasibility Study (my specialty) • Will this be profitable? Under what circumstances of volumes, prices, costs? How much financing is needed? • Financing Plan • How much financing is needed? What will it cost? What will be the combination of debt or equity financing? Who can provide this financing?

10. Why are cooperatives especially relevant to farmers today? • The viability of medium-sized farms is increasingly tenuous. Fred Kirschenmann, distinguished fellow at the ISU Leopold Center for Sustainable Agriculture, has highlighted this problem of the “disappearing middle.”

11. The disappearing middle in Iowa

12. Agricultural Quadrants –Value & Scale Value- Added 2. Opportunity 1. Specialty Very Small Very Large 4. Death Zone 3. Price & Scale Commodity

13. Examples of Participants Value- Added 1. Specialty 2. Opportunity Organic Valley Oregon Country Beef Earthbound Farm Farm Stands Farmer’s Markets CSA’s Very Small Very Large 3. Price & Scale 4. Death Zone Commodity Family Farmers ADM; Con Agra Brazil; China Commodity

14. Option #1 – Get Big Value- Added 1. Specialty 2. Opportunity Option #1 Get Big Very Small Very Large 3. Price & Scale 4. Death Zone • Buy Out Farms • Consolidate • Industrial Inputs Commodity Family Farmers Commodity

15. Option #2 – Convert to Specialty Value- Added 1. Specialty 2. Opportunity • Switch to Specialty Crops • Sell via Specialty Markets • Convert to Organic Option #2 Convert to Specialty Very Small Very Large 3. Price & Scale 4. Death Zone Commodity Family Farmers Commodity

16. Option #3 – Create New Opportunity Value- Added 1. Specialty 2. Opportunity • Differentiate with Value-added Attributes. • Preserve local / regional focus. • Aggregate value chains. Very Small Very Large Option #3 AFF 4. Death Zone 3. Price & Scale Commodity Family Farmers Commodity

17. DELIVERY What is a value chain? A value chain is long-term network of partnering businesses working together to maximize value for the partners and the end customers of a particular product. Market Input Suppliers Farmers Packer(Primal cuts) Fabrication (PortionCuts) Food Service Distributor DELIVERY DELIVERY Market Vet Services Market Value chain – farmer as partner Supply chain – farmer as input supplier

18. Organic Valley Family of Farms

19. Organic Valley Family of Farms TM_________________________________________________________ Begun in 1988, and has become the largest organic farming cooperative in North America and one of the largest organic brands in the nation. Started with seven Wisconsin farmers. More than 130 organic products available, including milk, cheese, butter, spreads, creams, eggs, produce, juice and meats sold in food cooperatives, natural foods stores and supermarkets throughout the country. Web site is www.organicvalley.coop/index.html

21. Resources for Cooperatives • University of Wisconsin-Madison, Center for Cooperatives • Cooperative Development Centers • USDA Rural Development

22. University of Wisconsin-Madison, Center for Cooperatives • 2009 Study: Research on the Economic Impact of Cooperatives • http://www.uwcc.wisc.edu/

27. Rural Cooperative Development Centers • USDA RCDCs are competitively-funded cooperative development centers (by the USDA Rural Development). There were 40 as of mid 2012. Who covers southern Idaho? I asked Dan Hobbs, who works at the Rocky Mountain Farmers Union. He recommended: • Diane Gasaway at the NW Cooperative Development Center of Olympia. • The list of all the RCDCs can be found here: • http://www.extension.org/pages/63092/name-website-url-and-phone-number-of-us-rural-cooperative-development-centers • The USDA Rural Development State Office in Idaho is: • Wallace Hedrick, State Director9713 West Barnes Drive, Suite A1Boise, ID 83709Voice: 1 (800) 632-5991 (toll free) or (208) 378-5600 Fax: (208) 378-5643www.rurdev.usda.gov/id/

30. Mondragon Cooperative, Basque region of Spain • 83,000 employees • 9,000 students • Largest Basque company, 7th largest in Spain • 85% of industrial workers are members (owners) • Four major areas: Industry, Finance, Retail, Knowledge • Within Industry: Consumer Goods, Capital Goods, Industrial Components, Construction, and Enterprise Services • Within Consumer Goods: Refrigerators, Washing machines, dishwashers, ovens, office furniture, home furniture, sports equipment, bicycles, sporting guns, and fitness equipment.

31. Mondragon’s retail sales since 1991