Dnipro State Agrarian and Economic University, Ukraine
Agricultural
cooperatives have served producers well in the past with members joining the
ventures for a multitude of reasons. Primarily, commodity prices have
decreased, with cheaper foreign imports contributing to this dilemma, resulting
in reduced grower profits. There has also been a reduction in the number of
small and midsized family-owned farms and consolidation among food processors and
retailers has made it difficult for growers to access markets. NGC growers who
"pursue vertical integration" are paid for value added during
processing, hence, they benefit from this pursuit when commodity production is
"too low to sustain profitable farm operation".
"Safety in
numbers" may be a common characteristic among growers who realize and
understand the benefits of joining an agricultural cooperative. Though certain
organizational factors have changed with the creation of New Generation
Cooperatives (NGCs), the basic principle of growers bending together to remain,
or become, competitive is still valid. Members of a Traditional Cooperative
(TC) pool raw-goods and sell them to an intermediary who facilitates any
further processing. NGCs, however, shift the focus away from selling a
commodity to offering a value-added product. Benefits for growers include
increased profits resulting from their involvement in processing and
"enhancing" raw goods. Examples of established NGCs include: Mountain
View Harvest, Colorado, which became the nation's first farmer-owned bakery;
Northern Vineyards Winery, Minnesota; and Southwest Soy Cooperative, Iowa,
which processes soybeans.
A New Generation Cooperative (NGC) is a relatively new
type of cooperative used primarily in the value-added processing of
agricultural commodities. First used in the upper Midwest in the early 1970s,
the NGC organizational form became popular in the early- to mid-1990s for
producers interested in collectively adding value to their commodities. The NGC
model has since been used for hundreds of new cooperatives across the United
States, but has not yet been used extensively in Missouri.
There are six primary characteristics of NGCs:
1. Defined membership. Frequently,
NGCs are referred to as closed cooperatives. However, defined is a more
accurate term. The number of members in an NGC depends upon the proposed
capacity of the cooperative's operations. One of the key features of the NGC is
its ability to control supply or access to the cooperative's operations. In
other types of cooperatives, members can enter and exit as they please, and
cooperatives operating without marketing contracts with their members have no
way to guarantee a specific operating capacity at any one time. By limiting membership
to those members who purchase the right to supply the cooperative, the NGC is
able to ensure a steady supply of the agricultural inputs required for running
operations at the most efficient level possible. In an NGC, the membership is
generally not permanently closed.
2. Delivery rights: a right
and an obligation to deliver. Once members contribute equity
toward the NGC, they receive the right, and the obligation, to deliver a
specific quantity of the commodity each year.
3. Upfront equity required from
producers. Adding value to agricultural commodities can be
capital-intensive. Before lending money to a project, banks and other lending
institutions will require producers to raise part of the project cost. Often,
this means producers must raise 50 percent or more of the total project cost.
4. Delivery rights are
transferable and may fluctuate in value. The
delivery right is similar to a share of corporate stock because it represents a
firm's permanent equity. As with a share of corporate stock, the value of your
delivery right will depend on your firm's profitability. If an NGC is
successful and provides value for its members, the delivery right may
appreciate in value. If the NGC does not provide value to its members, the
value of the delivery right may decrease. Unlike stock in a public corporation,
however, the delivery right has a very limited resale or trading market. To
comply with antitrust, securities, tax, and incorporation statutes, NGC bylaws
limit transfer to other producers and usually require the board of directors to
approve any transfer.
5. Marketing agreement
entered into between member and cooperative. Upon
purchasing delivery rights, members are required to sign a marketing contract
outlining the duties of both the members and the cooperative toward each other
with respect to the delivery, quality, and quantity of producers' commodities.
These contracts are usually evergreen contracts, meaning they are for specified
periods of time (from one to five years). They are renewed automatically unless
either party gives notice to the other within a window of time specified in the
marketing agreement. The market agreement often specifies the high quality
standards required of members' commodities, especially in cooperatives
producing consumer-level goods. The marketing agreement outlines the specific
quality required to be delivered, how quality will be measured, and the
producer's rights and obligations if the quality standard is not met.
6. Members and their NGC
share three primary legal relationships.
·
Members
must purchase a share of common stock or other membership interest to enable
them to vote in all decisions set forth in the bylaws.
·
Members
also purchase delivery rights, which are both a right and an obligation to
deliver. The delivery rights are evidenced by legal documentation and are
usually transferable upon approval from the board of directors.
·
Finally,
members must sign a marketing agreement when purchasing delivery rights and
voting stock. The marketing agreement defines the rights and obligations of
both the member and cooperative toward each other with respect to the delivery
of commodities from the member to the cooperative.
As a result, members must pay money to the cooperative
for both the voting stock (usually very minimal) and the delivery rights.
Members also are required to deliver the specified quality and quantity of
commodities at pre-specified intervals for the length of the marketing
agreement. The cooperative, in turn, is required to pay members a pre-specified
price for the commodities delivered. The cooperative also is required to return
any profits to members on a pre-specified schedule determined by the board of
directors. Depending on operating cash requirements, the timeline for returning
profits could be immediately. Due to securities law issues, cooperatives are
not actively involved in the transfer of delivery rights. The cooperative
usually requires approval from the board of directors before any transfer is
complete, and sometimes an outside broker handles the actual transfer of
delivery rights.
The NGC is not a specific legal structure. Rather, the
term New Generation Cooperative is used to describe how a firm operates. It
primarily describes the relationship between the firm and its members and how
the firm is financed. Unlike traditional cooperatives, in which start-up
expenses are minimal and growth is financed through members' retained earnings,
permanent equity to fund NGC start-up and growth is financed through the sale
of delivery rights. These delivery rights represent a member's right to deliver
a specific amount of commodities to the cooperative. Members benefit in
proportion to their use, and nearly all NGCs are democratically controlled
through one member/one vote.
1.Anonymous, n.d. New generation
cooperatives: A primer for Missouri agricultural producers. Agriculture
Business Development Division Missouri Department of Agriculture
accessed 12 Oct. 2004.
2.Coltrain, D., D. Barton, and M.
Boland. n.d. Differences between new generation cooperatives and traditional
cooperatives. Arthur Capper Cooperative Center, Department of Agricultural
Economics, Kansas State University. accessed 2 Dec. 2004.
3.https://extension.psu.edu/an-introduction-to-new-generation-cooperatives