Executive Summary: Overview
of the Study
I. Background
II. The Nature of NGCs
III. The U.S.
Experience
IV. The North
Dakota Experience: Key Factors
A. Motivation
B. Capabilities
C. Policy and Programs
V. Lessons for Manitoba:
Conclusions and Recommendations
Conclusions
Recommendations
I. Background
This is a study
about the formation of a new generation of agricultural cooperatives in
the United States. Most of this activity took place in the last decade
of the twentieth century in the northern plains states of North Dakota
and Minnesota. Several labels have been applied to these cooperatives
including "new wave", “new age”, and “new generation” cooperatives.
The term “new generation cooperatives” seems to have won the day, and this
is the term used in this study. For simplicity’s sake, the term “new
generation cooperative” is abbreviated as NGC.
The purpose of
this study is to examine developments in North Dakota and Minnesota regarding
NGCs and to evaluate the potential for NGCs in Manitoba, given the Amercian
experience.
Considerable time
has passed since 1995, when the Centre for the Study of Co-operatives at
the University of Saskatchewan tried to raise the profile of NGCs and stimulate
interest in Western Canada by showcasing the NGC developments that were
taking place in North Dakota and Minnesota. In Manitoba, Saskatchewan,
and other provinces there is now considerable interest in NGCs as a potential
tool for business and rural development.
It is our hope
and that of the Agri-Food Research & Development Initiative (ARDI)
that this study will assist in the formation of new generation cooperatives
and related business initiatives in Manitoba.
II. The Nature
of NGCs
NGCs are a distinct
type of cooperative. In turn, cooperatives themselves are a unique
type of business organization. There are many forms of business organization
in Canada and the United States such as the individual proprietorship,
partnership, and several forms of corporation, of which cooperatives are
one. Cooperatives are by no means restricted to agriculture.
They are found in many different sectors of the economy, including credit
and financial services, housing, utilities, health care, child care and
insurance. It is estimated that there are about 40,000 cooperatives
in the United States. As commercial business entities cooperatives
are particularly prevalent in agriculture. They range in size from
entities such as Farmland Industries with revenue in the 10 billion ($US)
range to smaller agriculture cooperatives that have only a few employees,
including farming and machinery cooperatives.
The modern history
of cooperatives is often traced back to the United Kingdom and the Rochdale
Pioneers in the 1840s. The modern international cooperative movement
is characterized by seven guiding principles. The seven international
principles are:
-
Voluntary and open membership
-
Democratic member control
-
Member economic participation
-
Autonomy and independence
-
Education, training and information
-
Co-operation among co-operatives
-
Concern for community
In the United
States, cooperatives are generally characterized by three primary principles
or characteristics. They are: user-owner,
user-control,
and user-benefits. In
contrast, investor-owned-firms (IOF) are shareholder-owned, shareholder-controlled
and benefits go to shareholders on the basis of investment.
The NGC is a cooperative
in that it meets the three user-owned, user-controlled and user-benefit
criteria. However, there is a subtle change in emphasis which moves
the NGC more towards the IOF model. The emphasis on the member as
the user remains; however, there is a significant increase in the emphasis
on the member as an investor. The member in the NGC begins to take
on many of the characteristics of the shareholder in an IOF.
The NGCs described
in this study represent attempts by producers to move up the value chain
and benefit from some processing or value added activity that occurs beyond
the farm gate. In some cases this encompasses supply chain management
right up to the consumer or retail level. The process, for example,
begins with a decision by producers to build a processing plant for their
commodity. Money is raised among the members to finance the plant.
Debt and, in some cases, preferred non-member shares are also utilized.
Total plant capacity is tied to the purchase by members of equity shares
that obligate them to deliver a certain amount of the commodity to the
cooperative. When capacity is fully subscribed the membership is
closed. These delivery shares are a two-way contract between the
producer-members and the cooperative. The shares are tradeable.
If the cooperative is successful these delivery shares can appreciate in
value. American Crystal Sugar Company and Dakota Growers Pasta Company
are often mentioned as examples where such appreciation of shares has taken
place.
The distinguishing
features of NGCs might simply be summarized as closed membership and delivery
shares:
1. Membership is “defined” or closed.
2. Delivery Shares
These delivery shares, in turn, have three
distinct features:
a) Shares usually represent a high
level of initial equity investment to which delivery rights are tied.
b) Shares embody these delivery rights
within contracts which define both rights and obligations of the producer
and the cooperative.
c) These shares are transferable or tradeable.
They can appreciate or depreciate in value.
Since the early
to mid-1990s, there have been a number of excellent articles published
surrounding the theory and characteristics of NGCs. Included has
been theory that outlines problems that develop as a cooperative matures,
such as the free rider, horizon, portfolio, control, and influence problems.
The literature explains how an NGC organizational structure can help to
reduce these problems. Important theoretical trail-blazing was carried
out at the University of Missouri by Michael Cook and his associates.
As well, the Centre for the Study of Cooperatives at the University of
Saskatchewan, under the guidance of Murray Fulton, has been an important
participant in developing this understanding. However, these and
other theorists were also observing the real world and trying to describe
and explain a “co-op fever” that was already galloping ahead of academic
understanding by capturing the minds, hearts, and pocketbooks of farmers
in North Dakota and Minnesota. Key figures in this “co-op fever”
were the cooperative leaders and champions who pioneered these initiatives.
In addition to the farm leaders themselves, Bill Patrie and his associates
with the North Dakota Economic Development Agency and subsequently the
North Dakota Association of Rural Electric and Telephone Cooperatives were
central to these efforts.
III. The
U.S. Experience
It was said in
the days of the Roman Empire that all roads lead to Rome. In terms
of the “American Experience” all roads lead to North Dakota and Minnesota
when it comes to new generation cooperatives. In an excellent USDA
publication, Creating Co-op Fever: A Rural Developer’s Guide to Forming
Cooperatives, Bill Patrie outlines that “the models most often used
to design new generation cooperatives come from American Crystal Sugar
Company and Minnesota Corn Processors”. The ideas of up-front equity
investment and producer agreements were ideas adopted from California experience
and creatively adapted to the northern Great Plains situation.
The American Crystal
Sugar model was attempted unsuccessfully a few times in the 1980s; however,
it was not until the Dakota Growers Pasta Company’s success in the early
1990s that a model and a development process fully emerged. At this
time, the stage was set and many other cooperatives were formed.
This study focuses primarily on the North Dakota experience.
Although the North
Dakota experience represents one model for stimulating economic development
through NGC formation, preliminary research at the University of Missouri
suggests at least four models. First, there is the North Dakota model
which carries the hallmark of top-down efforts to stimulate, facilitate,
finance, and organize NGCs. The words “top down” usually carry a
negative connotation these days and this is often unfortunate. The
central role and undisputed key to NGC development is the drive and involvement
of producers and producer “champions”. However, these dreams were
realized at least in part by the distinct, well planned, well executed,
and enthusiastic role of public and private support for these efforts.
Although Minnesota did not have the same extent of “top down” support and
focus of North Dakota in stimulating development, its experience has been
similar. This is most likely because Minnesota shares a closely knit
and interdependent farm economy with North Dakota, in which success in
the sugar beet industry is common to the two states.
Other states have
tried to duplicate the success of North Dakota and Minnesota. This
second model has been termed the “emulation model” by the Missouri researchers.
A third model might be called the “legislative” model. In states
like Illinois, the lawmakers of the state have tried to stimulate NGC development
by making legislation NGC friendly and by highlighting these legislative
developments. A fourth model has emerged in Kansas. This might
best be called the Kansas model to highlight the cooperative “21st Century
Alliance” which is characterized by a formal venture capital approach.
This approach first gathers potential farmer members/investors under a
common umbrella and then proceeds to identify NGC-type opportunities for
member consideration.
Other models that
are unique or that are a blend of these four models will develop in other
states and provinces. However, the basic framework and structure
of NGCs developed and refined in North Dakota will be central to these
developments. For this reason, much of the focus of this study is
on North Dakota.
Two questions
comprise the focus of this study:
-
What were the factors and circumstances that
led to the proliferation of NGCs in North Dakota in the 1990s?
-
Can this experience be transferred to Manitoba?
IV. The
North Dakota Experience: Key Factors
There is always
the temptation to search for single explanations for big events and developments.
Several single factors have been put forward as the driving force in the
North Dakota experience: cooperative roots, taxation, government vision,
financial support, cooperative development support, and so on. Perhaps
no one person has been closer to the overall North Dakota experience than
Bill Patrie of the North Dakota Association of Rural Electric and Telephone
Cooperatives. In reference to this new wave of cooperative formation,
he suggests:
“I do not profess to entirely
understand why this phenomenon has resurfaced in the 1990s.”
Patrie goes on to say
“The causes of ‘Co-op Fever’ are
multiple, but the courage, intelligence and willingness of farmers in the
Upper Plains to take a risk for reasonable returns is perhaps the single
greatest reason for this phenomenon.”
This study
agrees with the underlying sentiment that there is a complex set of several
interdependent factors. These might be classified into three broad
categories: motivation, capabilities, policies and programs. In all,
these factors add up to success.
This success,
however, must be qualified. First, NGCs are not a “silver bullet”
answer to increasing rural development and to decreasing the decline of
prairie communities. Second, these successes have not been accomplished
without their share of failure. In short, NGCs are not an automatic
formula for success. They are, however, a positive addition to the
available set of tools that can stimulate value-added activity on the Prairies.
A. Motivation
The adage that
necessity is the mother of invention applies to the discussion at hand.
Agriculture took a huge downturn in the 1980s in North Dakota and other
states. In the eighties, North Dakota lost 15 percent of its family
farms. Two professors from Rutgers University unwittingly motivated
North Dakotans through their infamous “Buffalo Commons” essay in 1987.
In this essay, the authors suggested that farm programs and other support
to sparsely populated areas of the Great Plains was a net drain on the
economy and that the United States would be better off to return much of
this region to natural grassland. This created tremendous hostility
toward the authors and the essay; however, it served as a catalyst in getting
North Dakotans to think about the plight of North Dakota and to look for
solutions. Interestingly, on October 19, 1999, Lawrence Solomon published
a similar view about grain farming in Canada in the National Post, stating
that “the farm economy now costs the country more on balance than it brings
in”.
North Dakota’s
overall situation was compounded by several factors, including the continuing
industrialization of agriculture, vertical integration, globalization,
changing farm programs and the declining farm value share of the food dollar.
The message was clear: farmers would either be victims of these trends
or they would have to begin to move beyond the farm gate to carve out a
greater presence in the entire supply chain. Farmers could become
entrenched as the suppliers of raw product to vertically integrated chains
owned and dominated by large companies, or they themselves could vertically
integrate upwards from the farm through mechanisms such as new generation
cooperatives.
B. Capabilities
Important capabilities
already existed in North Dakota, and these capabilities laid the foundation
for the surge of NGC development in the 1990s. First, cooperative
enterprise has typically been strong in North Dakota and Minnesota.
Lee Egerstrom points out in his timely and important book, Make no small
plans: a cooperative revival for rural America (1994), that much of
the region was settled by Northern Europeans who were accustomed to cooperatives
and cooperative approaches to enterprise, particularly in agriculture.
During the early
formation of cooperatives in the grain belt in North America, cooperative
approaches were largely defensive in nature. In economic terms, they
were a reaction to market failure of one form or another. Most often
they were a reaction to exploitative treatment of farmers by grain companies
and railways. By the time the American Crystal Sugar Company was incorporated
in 1973, however, cooperative efforts had a much more offensive tone.
They were not taking action to provide a check and balance on existing
investor-owned firms. In the case of American Crystal Sugar, they
were taking over an industry that would otherwise disappear, leaving beet
growers without a market. In this regard, a second “capability” that
we believe cannot be over-emphasized regarding the formation of NGCs in
the 1990s was the early model of success provided by the sugar beet industry.
As stated by Edmund Burke, “Example is the school of mankind and they will
learn by no other.”
These developments
in the sugar beet industry created a third set of capabilities that was
critical to NGC formation: a group of trained, skilled, and motivated farm
leaders who would go on to try to duplicate the model in other commodities.
Most of these subsequent leaders or “champions” had been chairpersons or
directors on the boards of the beet sugar cooperatives. These leaders
understood the NGC model and they understood farmers. In addition,
the leaders understood the mechanisms to stimulate public support for their
efforts and, most importantly, they understood success when it came to
moving up the value chain.
C. Policy and Programs
Several programs
and organizations provided support for the increase in cooperative activity
in the 1990s. In terms of these efforts, it is difficult to say which
came first. An important effort in the late 1980s was Vision 2000
and the subsequent “Growing North Dakota” initiatives undertaken by the
North Dakota government. The accompanying legislation in 1991 provided
both focus and key support for value-added initiatives. In particular,
the legislation provided a big boost to the funding capacity of the North
Dakota Agricultural Products Utilization Commission (APUC) through the
implementation of a Cooperative Marketing Grants program administered by
APUC. Grants administered by APUC played an important role for NGCs.
The first grant awarded from the Cooperative Marketing grant category went
to the Dakota Growers Pasta Company. North Dakota’s legislative initiatives
have continued with the “Enhancement to Growing North Dakota” program in
1997.
A second broad
category of support for the formation of NGCs arose through the North Dakota
Association of Rural Electric Cooperatives (NDAREC). In 1990, NDAREC
began its Rural Economic Development Program, at which time it hired Bill
Patrie as the director of the program. As well, NDAREC was instrumental
in creating the Dakotas Cooperative Business Development Center in 1994.
The Center is primarily funded by NDAREC and the Rural Business Cooperative
Service of USDA. Through rural electric and telephone cooperatives,
the Center provides loans, often at zero interest, to new or expanding
rural businesses. The finances provided were important. However,
the talent, enthusiasm and support for NGC formation provided by NDAREC
through its economic development programs was an important factor in North
Dakota’s success regarding NGCs. Bill Patrie and his team of development
specialists were provided the funding to assist in cooperative development
and were then given the freedom to pursue these goals. It is unlikely
that this same role could be carried out by either government employees
or private consultants.
A third broad
category of support came from the banking and finance sector. Two
institutions were important. Clearly the more important of the two was
the St. Paul Bank for Cooperatives, which in 1999 merged with CoBank.
The St. Paul Bank for Cooperatives acted as a business support system for
cooperatives. It was involved in the start-up of many NGCs.
Its leadership was very supportive of NGC activity, and its loan officers
provided the expertise needed to educate and guide potential start-ups
regarding the challenges and requirements involved in forming a cooperative.
A second important institution was the Bank of North Dakota, the only state-owned
bank in the United States. It was aggressive in providing support
for value-added processing ventures in North Dakota.
V. Lessons for
Manitoba: Conclusions and Recommendations
Conclusions
There are several
important conclusions to this study. Some of these conclusions are
not new but they bear repeating.
1. New Generation Cooperatives are an important
new development tool for rural economies. In future years, it will
be shown thay they were not an isolated phenomenon or oddity peculiar to
North Dakota or Minnesota. The models developed in these states are
spreading to other regions and countries, including Canada.
2. The NGC model is an outgrowth of the
traditional agricultural business cooperative. Forces external to cooperatives
(such as the industrialization of agriculture and globalization), and forces
internal to cooperatives (free rider, horizon, control, portfolio, and
influence problems) present significant challenges to the survival and
success of traditional cooperatives. Traditional cooperatives are
striving to meet these challenges in different ways. For new cooperatives,
the NGC model deals with many of these same challenges.
3. One of the big challenges is the industrialization
of agriculture. The NGC is often well suited to deal with this challenge.
The advantages are perhaps greatest in single commodity niche markets where
there is scarce investor-owned firm involvement or interest. The NGC provides
producers with an opportunity to create a market for their product and
participate in the supply chain for that product beyond the farm (e.g.,
bison, sugar beets).
4. A potential competitive advantage of
the NGC over other firms is the tied integration of processing with the
business of the farm. The farmer owner develops a greater knowledge of
processing and of the demands of the consumer. This knowledge, when applied
back at the farm level, results in improvements in product quality as well
as farmer/processor relations.
5. There are several factors that explain
the high level of interest in NGCs in North Dakota and Minnesota. First,
the NGC may provide a market for the producer which would not otherwise
exist (e.g., American Crystal Sugar Company). Second, the NGC may represent
an attempt to increase local competition for the product and tighten the
“basis”. Third, the NGC may simply be an investment vehicle for the farmer,
allowing the farmer to participate in the investment of his commodity beyond
the farm. The distinction between the farmer-as-owner and the farmer-as-venture
capitalist in many cases may not be great. Finally, the NGC may be seen
as a vehicle for rural development and community renewal.
6. The rural development motive is a two-edged
sword. For the farmer/entrepreneur the compelling reason behind all investment
decisions must be the business case. In the competitive world of agriculture,
developing business solely for social reasons will likely fail. However,
the rural development and community renewal motive is a powerful reason
for both government and the public to participate. They do this by
developing a vision and direction for the province/state, and by facilitating
development of new cooperatives through cooperative development support
and start-up cost support.
7. In some cases, the NGC will be the most
appropriate legal form of organization for the business. In other
cases, different forms of partnership, corporation or traditional cooperative
will be more appropriate.
8. The NGC is an important tool for rural
development but it is not a "silver bullet". Sound business opportunities
must exist and there will be failures.
9. It is important that legislation be
accommodating to NGC formation. For example, legislation that requires
costly and unnecessary steps regarding securities and disclosure can be
a major disincentive to business development.
10. When choosing the legal form of the
proposed enterprise, taxation may be an important factor. In the United
States, cooperatives are accorded single tax treatment status for qualified
profits allocated to members. In other words, the member pays taxes on
these allocations while the cooperative can treat these allocations as
eligible deductions. Similar status has evolved in the United States for
certain types of private investor-owned firms, particularly the limited
liability company.
11. The US experience regarding NGCs was
driven by the coincidence of several factors. Many of these factors
are common to both Manitoba and North Dakota, such as the regions’
strong cooperative heritage, poor commodity prices, enterprising crop and
livestock producers, and the effects of industrialization and globalization.
However, there were several key factors unique to North Dakota. If
these factors can be ranked in importance, the first might be the existence
of the sugar beet industry’s experience with the “American Crystal Sugar”
model and its related impacts (success, knowledge, and experience). The
second was the existence of cooperative development units that were allowed
to operate with a high degree of freedom (in particular, the NDAREC’s cooperative
development specialists). The third factor was the support and financial
assistance provided by APUC, the St. Paul Bank for Cooperatives, the federal
government, and the state-owned Bank of North Dakota. Manitoba’s
success will be determined in part by our ability to develop similar approaches
and competencies.
12. Although there are many critical success
factors, three are highlighted. The most important is the soundness of
the business opportunity. The NGC form of business is no substitute for
good business sense. Second, timing of the fund raising can be critical.
For example, Northern Plains Premium Beef seemed to be plagued by inopportune
timing within the cattle sector. Many ventures in 1995/96 had opportune
timing due to farm program payments and high grain prices. Third,
timing of entry into the business can be critical. For example, the
actions of Dakota Growers Pasta Company were advantageous in terms of industry
timing.
As a closing comment, this study affirms
the conclusion by many that there was a very exciting and distinct environment
in North Dakota and Minnesota in the 1990s surrounding the formation of
this new generation of cooperatives. This environment was highlighted by
a quantum shift in entrepreneurial culture beyond the farm gate. It was
nurtured by government and key organizations. It was aided by the sugar
beet experience, high farm income in the mid-nineties, and several early
success stories. It was implemented by farmers willing to take risks with
their time, their money, and their products. To quote Bill Patrie
(in conversation): “What I like about New Generation Cooperatives is the
direct involvement and commitment by producers with their dollars and their
products.”
Recommendations
There are clearly
some unique circumstances that propelled North Dakota to the forefront
of NGC development. In particular, the state had potential NGC leaders
and development assistance in place. These factors, when added to
other more commonly found factors, ignited the spark for the North Dakota
experience. This combination of factors explains, in large part,
why North Dakota was the innovator and not Manitoba, Nebraska or other
states or provinces. However, Manitoba has already taken several
steps to encourage the development of NGCs. The following points
underline these efforts and outline additional initiatives to encourage
NGC development.
1. NGC friendly legislation
The Cooperatives Act (Chapter C223)
has recently been updated and changed in Manitoba. Some of these
changes to the Act will be more accommodating to NGC formation than
previously.
2. A long-term strategy
A consistent, high profile, long-term strategy
toward value-added processing and the formation of NGCs is needed.
In North Dakota, a direction developed with the Vision 2000 process and
was reinforced with the “Growing North Dakota” initiatives. A dedicated
process in Manitoba with the goal of defining an understandable, visible,
long-term strategy regarding value-added cooperative development is necessary.
3. Coordinated provincial public sector
efforts
A number of provincial departments currently
play a role in NGC initiatives. The department of Industry, Trade
and Mines has responsibility for cooperative development. NGCs are
primarily agricultural and therefore Manitoba Agriculture and Food is involved.
Because NGCs provide an additional tool for rural and community development,
Intergovernmental Affairs is involved. Other departments, including
the Registrar of Cooperatives within Consumer and Corporate Affairs, are
becoming interested and involved in NGC development. Other interested
parties include the University of Manitoba, ARDI, Manitoba Rural Adaptation
Council (MRAC), and the Manitoba Agricultural Credit Corporation.
It is important that all of these efforts be centrally coordinated.
4. NGC start-up support
More support for the start-up of NGCs is
needed. The early legal and consulting costs regarding formation,
feasibility and funding are often modest in the broad scheme of things;
however, it is precisely at this stage when funds are hardest to procure.
In this area, the Manitoba Agricultural Credit Corporation is clearly a
key player in the absence of institutions like the St. Paul Bank for Cooperatives
and the Bank of North Dakota. The assistance provided in Manitoba
by the Manitoba Rural Adaptation Council and provincial programs has been
important in developments to date.
5. Manitoba Cooperative Business Development
Centre
In North Dakota, the efforts of Bill Patrie
and others through the North Dakota Association of Rural Electric and Telephone
Cooperative's economic development programs were central to the formation
of many NGCs. As part of the province’s long-term strategy, a Centre
should be developed in Manitoba to carry out these same functions.
Such an approach requires that the Centre be funded and then given the
independence to pursue NGC development without the constraints of government
or the narrower focus of private consultants. Both the public and
private sectors are important. However, such a Centre would complement
these efforts while filling a void that neither can easily fill.
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