This project was funded by the Agricultural Institute of Management in Saskatchewan (AIMS). Murray Fulton and Brenda Stefanson developed a video and materials package designed to present the new generation co-operative model as a form of producer ownership of processing ventures. The model enables farmers to pool resources and share risks to solve problems or create opportunities. By vertically integrating forward in the distribution chain, farmers can maintain control over their operations, reduce risk, stabilize income, and secure markets. The video package resulting from the project was made available in September 1997. The following is an excerpt from one of the booklets included in the package.
New Generation Co-operatives: Responding to Change in Agriculture - Excerpt
Introduction
Prairie agriculture is facing many changes, including the loss of the WGTA, the move to vertical integration and contract farming, and the changes to supply management and marketing boards. The changes to long-standing institutions create a new framework within which farm managers must make decisions. The move to vertical integration and contract farming affect the control farmers have over production and marketing decisions, while deregulation creates uncertainty and shifts risk onto the farmer.
Farm managers require new information to enable them to operate effectively in this new environment. Farmers now need to understand chain management and how to position their farm operation in the distribution chain to minimize the negative impact and maximize their opportunities. The emphasis on adding value encourages farmers to reach for profit centres in areas in addition to raw agricultural commodities.
This booklet, materials package, and video entitled New Generation Co-operatives: Opportunities in Agricultural Processing are designed to present the new generation co-operative model as a form of producer ownership of processing ventures. The model enables farmers to pool resources and share risks to solve problems or create opportunities. By vertically integrating forward in the distribution chain, farmers can maintain control over their operations, reduce risk, stabilize income, and secure markets.
In Minnesota, the new generation co-operative concept has been in place since 1974. At that time, sugar beet growers were losing the market for their product because the company processing sugar beets was moving out of the state. In response, sugar beet growers formed a co-operative, American Crystal Sugar (ACS), and purchased the processing plant. Since that time, ACS has been operating successfully, using the features we now associate with the new generation co-operative. Sugar beet growers recognized the benefits of this structure and replicated it across the state. Involvement in the sugar beet co-operatives continues to encourage local farmers to use this structure to add value to the products they once sold as raw materials. Stories of the success of these ventures have travelled beyond the area of sugar beet production and spilled into a wide range of commodities. It is not uncommon for a farmer to be a member and director in four or five producer co-operatives and active in the development process of one or two more.
Conversations with these co-operatively active farmers reveal a different mind-set and an optimistic attitude. To these farmers, the co-operative processing operation is an extension of the farm operation. They are able to retain ownership of their farm product as it proceeds along the food chain. In doing so, they are able to access the returns from the processing and marketing of the food product that results from the processing of their raw commodity. They recognize two profit centres: the raw commodity and the processed product. They are able to make decisions and exercise control at both the production and the processing level. They have learned that collective action utilizing an effective and efficient business structure can solve problems and create opportunity.
The Transformation of Western Canadian Agriculture
Western canadian agriculture is in the process of a major transformation. Some of the forces behind this transformation are global in nature, while others are specific to the region.
At the global level, agriculture is undergoing a process of industrialization. The industrialization of agriculture has been defined as "the application of modern industrial manufacturing, production, procurement, distribution, and co-ordination concepts to the food and industrial product chain" (Boehlje). Key elements of this transformation are that markets are less commodity driven and more product driven; production is more capital intensive; decisions made by firms at all levels of the market are increasingly interdependent; price and production risks are replaced with risks surrounding relationships and food health and safety; and information becomes a prime source of control and power. These changes are resulting in increased vertical co-ordination and integration; in addition, firms are more and more frequently being asked to deliver products of consistent quality at the appropriate time (Boehlje, Drabenstott).
Another part of the global transformation is a major change in the role of government. Government is withdrawing from agriculture, whether it be in the removal of price-support programs and production-based subsidies, the deregulation of industries such as grain transportation, or the withdrawal from agricultural research. There is also a loss of support for marketing boards and government marketing agencies. The view that agriculture deserves special treatment no longer holds sway.
Some of the forces behind the transformation of agriculture in western Canada are unique to this region. Included in these regional forces are the removal of the Western Grain Transportation Act (WGTA) and the challenges to the Canadian Wheat Board (CWB). The removal of the WGTA has not only reduced the price of grain in western Canada, but it has resulted in the replacement of a highly regulated system with what many anticipate will be a market-based system. Although the CWB still retains single-desk selling authority in wheat and barley for export and for human consumption, firms are taking steps to position themselves for the possibility that the CWB will lose this authority in the next five to ten years.
The Implications for Farmers
The transformation described above has significant ramifications for farmers. The most immediate impact of the WGTA removal and the loss of government support programs is an expectation of less income from grain and oilseed production. Although the development of new value-added processing opportunities on the Prairies (e.g., canola-crushing plants and hog production) will provide some economic activity in rural Saskatchewan, these activities will not enhance the price of grain at the farm gate, which will continue to be set by the world price, less transportation costs. At the same time, the loss of government support means that farmers will have to deal with the full impact of future downturns in agricultural commodity prices.
The changing structure of agriculture also has implications. In traditional agriculture, farm production was a distinct stage in the product chain and farmers could concentrate on it exclusively. The movement towards specialized production and much greater integration with input suppliers or processors means farmers can no longer view themselves as independent. The emergence of niche markets, for instance, not only creates a need for specialized inputs, both by processors and by farmers, but it also demands that decisions at the farm input level, farm production level, and processing level be co-ordinated to achieve economies of scale. As long as these activities remain independent, all players fail to achieve an optimal scale. The result is that farmers can expect increasing levels of contracting and vertical integration.
The emergence of greater contracting and vertical integration, however, raises questions about control and power. Farmers can expect increasingly to give up control over farm-level production decisions. Because of the information agribusiness firms possess about product quality and its importance, these firms are likely to have the power to set contract terms. With greater contracting, farmers also face new risks, such as the possibility that a processor, for instance, will change the contract terms once farm production has occurred. This risk increases as the assets needed for agricultural production become more and more specific to a particular product.
Co-operative Strategies in Response
The changes and ramifications outlined above suggest that farmers need to become more involved in the provision of agricultural inputs and the processing of agricultural products than they have been to date. Lower prices for grain and oilseed products, for instance, mean that farmers that continue to be involved only in farm-level production will find themselves being increasingly subject to control from input suppliers or agricultural processors.
It is difficult for farmers to involve themselves in the provision of agricultural inputs and the processing of agricultural products. Only the most prosperous have the financial ability to invest in processing or input activities, and even then only at a fairly modest level. Large-scale involvement in these activities takes much more capital, time, and expertise than is available to any single farmer.
One way for farmers to become involved in processing or input activities is through some sort of joint activity. The New Generation Co-operatives (NGCs) that have formed in North Dakota and Minnesota are a good example of farmers getting together to do something they could not do individually. Curt Watson, president of the hog production co-operative, ValAdCo, in Renville, Minnesota, puts it very well when he says that the reason he became involved in ValAdCo is that it was only by joining together with his neighbours that he was able to own a large-scale processing operation.
Although farmer involvement in processing can take many forms, the formation of co-operatives must be given special attention. Historically, co-operatives have been the natural response of farmers to rapid economic and social change. By allowing farmers to retain ownership and control, co-operatives have proven themselves capable of retaining political and economic power for their members. Only by acting together can farmers address problems of market power imbalance, undertake processing activities and vertical integration on a significant scale, or provide sufficient levels of products meeting closely specified characteristics.
New co-operative structures are required to meet the challenges of the new agriculture. The NGCs formed in North Dakota and Minnesota provide an excellent model. NGCs are producer-owned, restricted-membership co-operatives formed to process the agricultural products of their members. Examples of co-ops that have recently formed include a bison processing co-op, a pasta plant, an organic grain mill, a vegetable processing operation, sugar beet processing plants, and hog operations.
Capital requirements are met, to a large extent, by members purchasing delivery-right shares up-front. These shares provide members with a feeling of ownership, ensure low levels of debt in the co-op, and promote member commitment. The result is an increased potential for the long-term success of projects adopting this organizational structure.
Delivery contracts specify grade, quality, and production standards, enabling the co-operative and its members to access niche markets through identity preservation and quality control. Success in niche markets is dependent on assurances of quality as well as quantity. Consumers, increasingly concerned with health issues and food safety, are demanding chemical- and hormone-free foodstuffs. The co-operative is able to assess consumer preference and pass that information back to the producer-members, who, with this market information, can adjust production practices to meet the requirements of the consumer.
The structure adopted by NGCs parallels many of the changes occurring in the larger agricultural industry. High equity levels are required for the capital-intensive activities in which the NGCs are involved. Delivery contracts, often incorporating tight quality specifications, achieve the co-ordination required to maximize system performance. Most importantly, however, producer ownership provides farmers with information of what is valued in the market and reduces relationship risk. By owning the processing plant, producers can ensure they have an outlet for their production and that they obtain the benefits of providing quality products in a timely manner.
A more detailed description of the NGC structure can be found in the booklet New Generation Co-operatives: Rebuilding Rural Economies and the video New Generation Co-operatives: Opportunities in Agricultural Processing, which are enclosed in the NGC video package. Check our NGC web pages for other links of interest and information.
For information about purchasing the video package please contact:
Centre for the Study of Co-operatives
101 Diefenbaker Place
University of Saskatchewan
Saskatoon, SK
S7N 5B8
CANADAPhone: (306) 966-8509
Fax: (306) 966-8517
e-mail: coop.studies@usask.ca
You can download both NGC booklets and a booklet on strategic alliances in agriculture as PDF files, and you can also access our strategic alliances site at http://coop-studies.usask.ca/strategic/home.html
Networking for Success: Strategic Alliances in the New Agriculture. Mona Holmlund and Murray Fulton, 1998. (PDF file)
New Generation Co-operatives: Responding to Changes in Agriculture. Brenda Stefanson and Murray Fulton, 1997. (PDF file)
New Generation Co-operatives: Rebuilding Rural Economies. Brenda Stefanson, Murray Fulton, and Andrea Harris, 1995. (PDF file)