Cooperatives are formed based on some collective economic need, for example, to combat unfair market power, to gain cost efficiency, or to access supply chain services that might not otherwise be available. Despite their ability to overcome these challenges, a traditionally structured cooperative might have difficulty growing and sustaining a profitable business in certain situations.
Cooperatives that are formed to further process commodities into branded food products have added challenges. For example, a cooperative of wheat farmers that would manufacture and market pasta may face sizeable capital requirements and a require a consistent flow of production. A traditional cooperative model with open-ended commitments from its members may not be geared to these needs. Food processing facilities are designed for a specific capacity and may not operate profitably if forced to purchase unneeded inputs in a surplus year or to operate below break-even in a short crop year. Furthermore, lags and disturbances in the distribution of value-added, branded products may alienate wholesalers, retailers, and consumers, resulting in lost sales and reduced access to retail shelf space.
Does this mean that agricultural producers can’t cooperate in these value-added markets? No, there is an alternative. A “new generation cooperative” differs from a traditional cooperative in a few important ways:
- Membership is closed
- Participation is contracted
- Member equity is tied to investment, not use
- Ownership is transferrable and can appreciate/depreciate in value
Closed Membership
Membership in the new generation cooperative is determined by purchasing a limited number of shares. Each share allows its holder to deliver a specified amount of their crop to the facility. The number of shares available is determined by the annual production needs of the facility. The sale of all shares covers the equity investment needed for the cooperative.
Contracted Participation
The purchase of a share in a new generation cooperative provides the right to deliver a specified amount of a commodity, but also the obligation to deliver the commodity. This ensures the cooperative that it will receive the required amount of input. Members who did not grow enough of the commodity to fill their obligation can make up the difference by purchasing the commodity on the open market.
Member Equity
Because the cooperative requires the purchase of shares to do business with the cooperative, equity is received up front, and not tied to participation from year to year. This gives the cooperative an added degree of security and resilience.
Value of Ownership
In a traditional cooperative, profits are allocated to members based on their use of the cooperative. A portion of that allocation is paid to the member in cash, and the rest is held by the cooperative in the member’s name. These “book credits” represent the member’s equity ownership of the cooperative and will be redeemed at some unspecified time in the future at face value. The equity investment in a new generation cooperative lies in the up-front purchase of shares. These shares are transferrable at market value.
The new generation cooperative provides an alternate business form that might help groups of producers seeking to enter value-adding industries. Interested groups can contact their lawyer, accountant, or cooperative Extension specialist for more information.
Park , John. “What is a New Generation Cooperative?” Southern Ag Today 4(9.5). March 1, 2024. Permalink
