Key terms: membership
share; equity
share; preferred
share; select or closed
membership
The New Generation Co-operative (NGC) concept is attracting attention as a way for farmers to increase their incomes and to offset some of the negative impacts of recent changes in agriculture. Saskatchewan has new legislation that makes it possible to achieve all the benefits of the NGC model. The purpose of this note is to provide a brief summary of the characteristics of the New Generation Co-operative model.
The agricultural system is undergoing dramatic change. Changes in technology, institutional structures, regulations, integration of value chains, and the globalization of agricultural markets are resulting in an integrated system where the family farm is increasingly interwoven into the food distribution chain. Consumers today are increasingly demanding choice, quality, consistency, and value. Producers and the food industry are capable of providing what the consumer wants, but only if changes are made to the structure of agriculture. Advances in biotechnology and information technology make it possible to engineer food at every level, from farm gate to dinner plate. Biotechnology enables the isolation and incorporation of specific traits in plants and animals, effectively providing what the consumer wants. Information technology enables the industry to monitor consumer preferences and track products throughout the value chain, incorporating this information at all levels.
These technological changes also necessitate changes in marketing channels. Preservation of product identity is required to assure the character-specific product reaches the consumer demanding it. Commodity markets (where products are gathered, mixed, and passed to processors who produce generic food goods) are not structured to accommodate the designer products of the modern food chain. More direct marketing channels, such as production contracts and vertical integration, are required to maintain the identity of genetically altered or organically grown agricultural products. Experts predict that vertical integration of marketing channels will continue to escalate.
Another change that heavily affects Saskatchewan farmers is the loss of the WGTA, or "Crow" subsidy. Farmers now shoulder the full cost of transporting their raw commodities to distant ports. Saskatchewan producers half-way between Vancouver and Thunder Bay have witnessed the result of this change.
The net effect of all these changes is obvious to the farmers: lower returns to primary production. Farmers have done everything in their power to adjust to these changes. They have increased their acreage, diversified into special crops and livestock, and reduced costs wherever possible. New strategies, different organizational structures, and new attitudes are necessary to help Saskatchewan agriculture survive.
Farmers can exploit their position within a vertically integrated agricultural system if they retain ownership of their products beyond the farm gate and invest in ventures that add value to those products. The New Generation Co-operative (NGC) model offers farmers the opportunity to join together to move up the value chain and capture some of the profits. The success of this structure has been witnessed in Minnesota and North Dakota, where sugar beet (since 1974), bison, and durum (since 1990) producers have owned processing facilities and gained returns (in the form of dividends) from those ventures. Other examples of NGCs include facilities to process organic grains, soybeans, eggs, specialty cheeses, and edible beans.
The NGC structure is unique, particularly in its share structure, which is characterized by three classes of shares: membership, equity, and preferred. The membership share gives the holder the right to vote and the right to purchase equity shares, which are attached to delivery rights. NGCs are organized to add value to an agricultural commodity such as bison or durum. Only producers of the commodity can hold membership shares, thereby ensuring that control of the venture remains in the hands of the producers. NGCs adhere to the basic principle of co-operation set out by the Rochdale Society of Equitable Pioneers in 1844: democratic control, one member, one vote. Voting rights are tied to membership, independent of the level of investment. This ensures that no one member can exercise control over the group.
The equity share allocates delivery rights to the co-operative and raises the capital necessary for establishing the venture. Each equity share purchased gives the member the right and the obligation to deliver one unit (i.e., one bison or one bushel of durum) of product to the co-operative for processing. This delivery contract is a two-way contract; the member is committed to deliver and the co-operative is committed to take delivery. The contract sets out the standards for quality, and delivery is regulated to keep the plant running at capacity at all times. In today's market, quality and consistency are very important. Therefore, the delivery contract sets out specific quality conditions. The co-operative can reject deliveries of product if they do not meet these quality standards. Rarely is this necessary, however, because the members contract only a portion of their production to the co-op and select the highest quality product for delivery to their own processing plant. In the event that a member is unable or unwilling to make delivery, the co-operative will purchase the amount of the product covered by the contract and charge the cost towards the member's equity account. This strategy ensures that the co-op will have a consistent quality and quantity of product and can focus on developing markets.
The purchase of delivery rights (equity shares) represents a significant investment on behalf of producer-members and a significant equity infusion for the co-operative. For example, in 1990, the North American Bison Cooperative sold 180 membership shares at a cost of US$100 each. These 180 members purchased a minimum of 10 equity shares at a cost of US$250 each, a minimum investment of US$2500. The sale of delivery rights is a mechanism for securing start-up capital. Member equity investment represents 35&endash;50 percent of the start-up costs. The obvious benefit to the co-operative of low debt is augmented by the benefit of member commitment. The loyalty of members is locked in through the contract and the investment. The member has made a large investment and will act to ensure success of the venture. The equity shares are tradable and transferable. The shares have value and can be sold to other producers with the approval of the board of directors. Shares can be passed on to the next generation along with other assets.
The preferred share allows the co-operative to invite investment from nonproducers. Preferred shareholders cannot vote except in certain circumstances as described in the legislation. The preferred share offers a limited, fixed rate of return. Communities and nonproducers choose to purchase preferred shares because they want to support development in their communities and encourage job and wealth creation close to home.
NGCs are select or closed membership co-operatives. The feasibility study determines the most efficient plant size, which determines the amount of product the plant can accept. Equity shares are issued to members based on the capacity of the plant. Once the allotment of shares is sold, the membership is closed. New members will be accepted and additional equity shares issued if the plant expands.
Comprehensive feasibility studies and business plans are critical to the success of these ventures. NGCs often operate in niche markets where it is important to understand the type, quality, and quantity of product demanded. A clear understanding of markets and consumers has enabled these ventures to serve markets that large corporations cannot.
Although some co-operatives have actually increased the price of the raw commodity, the primary economic benefit to members flows from the dividends to processing and marketing. Producers are paid market price for the delivery of their raw commodity, but because they own the processing plant, they gain returns from processing activities. They have vertically integrated upwards in the food industry and captured the returns to primary and secondary processing.
The vertically integrated structure encourages the effective use of market and production information. The structure enables market information to be combined with local production knowledge to produce the type of product required to serve lucrative niche markets.
The term New Generation Co-operative is not a magic structure and it should not be applied to ventures that do not incorporate the strategies of two-way delivery contracts and high member equity investment. Producers must be willing to commit time to the development process, to invest sufficient equity to capitalize the project, and to contract product to supply the plant, or the project will not succeed. If producers are not committed through delivery contracts and investment, it will be difficult to leverage other investment funds either as debt or outside investment capital. If the two-way contracts are replaced with softer delivery agreements, the risks to the co-operative venture increase because the co-operative will not have a secure supply of product.