|
return to Farmers Independent Weekly
July 14, 2005
by Jared Carlberg, Department of Agribusiness and Agricultural Economics |
New Generation Co-operatives in Manitoba—What’s the Hold-Up?
New Generation Co-operatives (NGCs) are relatively new type of business organization. They have been used successfully in many U.S. states as a way for farmers to capture some of the downstream value-added generated by their raw commodities.
NGCs retain many of the characteristics of traditional co-operatives, but have two additional distinct features. First, delivery rights are tied to investment. This means that a producer who makes a $10,000 investment in an NGC would have the right to deliver twice as much of his raw commodity for processing as someone who invested only $5,000. Second, NGCs are typically closed co- operatives: once a processing facility has been constructed and the initial share offering purchased, no new delivery rights shares will be offered. It is usually the case, however, that shares can be traded among members.
An NGC study funded by the Manitoba Rural Adaptation Council is ongoing in the Department of Agribusiness and Agricultural Economics at the University of Manitoba. Its goal is to determine the reasons why NGCs have not taken off as quickly in Manitoba as they have in our neighbouring states. Minnesota and North Dakota have over 50 NGCs between them; Manitoba has almost none. The first phase of the U of M study is now complete.
The study investigates ten possible reasons for the slow adoption rates for NGCs in Manitoba. They are:
- that U.S. farmers have greater amounts of capital available for investment;
- that there is inertia in the formation of new agricultural enterprises that takes start-ups toward alternative ownership forms;
- that Manitoba producers lack interest in and knowledge of NGCs;
- that the struggles of other large prairie co-operatives have made producers wary;
- that Canada lacks successful NGCs to serve as role models for new enterprises;
- that professional advisors do not recommend NGCs as a preferred form of business organization;
- that the Canadian Wheat Board is a hindrance to NGC development;
- that regulatory mechanisms to encourage NGCs are not in place;
- that there is a lack of jurisdictional coordination among and within governments; and
- that a lack of development assistance has critically hindered NGCs.
We found that several of these factors may contribute to the difference in adoption of NGCs in the two countries. For instance, our study shows that farm income levels, due in considerable part to farm program payments, are pervasively higher in Minnesota and North Dakota than Manitoba.
It is also clearly the case that the regulatory framework in the U.S. is much more NGC-friendly than in Manitoba. For instance, most NGCs south of the border are organized as so-called “521 co-ops” (so named for the section of the U.S. Internal Revenue Code that applies to such enterprises), which allows for additional tax deductions and provides securities exemptions that greatly reduce start-up costs.
Most importantly, the resources available for NGC development in states such as North Dakota far exceed those available here in the critical areas of expert advice in planning, funding for feasibility studies and business plans, and longer term sources of start-up and equity funding, as well as access to credit. Additionally, a survey of these advisors in Manitoba revealed that they know very little about NGCs, and as such are not comfortable advising clients about them.
By contrast, a few of the factors are not supported by our study. For instance, there is little evidence that the Canadian Wheat Board presents a serious barrier to NGC development, even for a business like a pasta plant. The Board’s stock-switching program is potentially important, as is its ability to exempt NGC members from maximum acceptance levels.
There is also little reason to believe that farmers do not have an interest in NGCs. A survey of Manitoba agricultural producers to assess their attitudes toward and knowledge of NGCs found that producers did not know a great deal about them, but that they would be keen to invest if a viable business plan were presented to them. Producers identified the creation of new markets for their products and the potential for capturing downstream economic rents generated by their commodities as the factors that would be most important to them when considering investing in an NGC.
Our study recommended that an independent task force be convened to further investigate what would have to be done to spur investment in NGCs in Manitoba. The task force could focus on the biggest impediments to NGC development as identified by our study and the steps required to address these impediments.
|
