Updated January, 2002
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A Guide to Value-Added Cooperative Development *

William Patrie, Rural Development Director, Dakota Cooperative Development Center, North Dakota Association of Rural Electric and Telephone Cooperatives, 800-234-0518, bpatrie@ndarec.com

 

Cooperative development as defined here is not an end in itself, but rather a rural development strategy that seeks to achieve local ownership of enterprises, especially value-added agricultural processing facilities. These goals of rural development (new income for rural residents, new jobs in rural areas, expanded markets, and new and diversified agricultural products) are achieved because of the ability of cooperatives to create economies of size and raise equity to capitalize the business.

The process of cooperative development, apart from its unique features, is similar to developing other new businesses. The simplified steps involve:

The tasks involved in each of these steps are described in some detail so that the professional developer will have some idea of what to expect. Remember that this process is sequential. Taking these steps out of order often creates serious problems. The pressure to skip steps or take easier or faster routes to the successful completion of the project is intense.

A professional developer must begin each project with the end in mind. The process will not only severely challenge your skills, but also your commitment to professional standards. Here are some standards or principles that have been adopted by professional cooperative development practitioners. They should be shared with steering committee members, interim directors, and the producer groups to keep the development process within the bounds of ethical and professional behavior.

Madison Principles

In 1994, cooperative developers meeting in Madison, Wis., adopted these principles as guides to professional behavior:

1. Individuals providing technical assistance should subscribe to the highest level of ethics and declare any conflict of interest, real or perceived, so that they can be a credible source of objective feedback and an articulate advocate of the project as needed.

2. Cooperatives are development tools and should promote both social empowerment and economic goals.

3. Applied appropriately, cooperatives have value to all population groups and for all businesses and services in the public and private sectors.

4. Each cooperative responds to its unique economic, social and cultural context. Consequently, each cooperative is different.

5. There are essential steps that must be taken in a critical path to succeed.

6. An enthusiastic group of local, trustworthy leaders is a prerequisite for providing technical assistance. The effective cooperative development practitioner nurtures that leadership by helping them shape a vision that will unite members and provide ongoing training.

7. Cooperatives only work when they are market driven. The development practitioner seeks to ensure that accurate market projections precede other development steps.

8. Member control through a democratic process is essential for success.

9. Success also depends on the commitment of the member's time and financial resources.

10. There must be tangible economic benefits for members.

11. The cooperative's products and services must generate sufficient revenue so that the effort can be financially self-sustaining. Provisions must be made to share any surplus equitably.

12. Market opportunities exist throughout the world. Cooperatives and market development should transcend national boundaries.

13. Successful, established cooperatives should help emerging ones to develop. New and emerging cooperatives should be encouraged to communicate with and learn from successful ones.

These principles should be used to guide behavior in succeeding steps. They are meant to guide both the steering committee and the professional developer.

Finding the Project Champion

The need for professional principles is easily illustrated in this first task of cooperative development. Much has been said already about the importance of project champions or cooperative leaders. The sixth principle highlights quality leadership as a prerequisite for success. Making the judgement about the quality of that champion is extremely difficult for the cooperative development practitioner.

In two cases, the originator of the idea and the early stage project champion was replaced as the leader by someone else. In one case, the early organizer and president of the interim board was asked to leave the board and was barred from joining the cooperative.

The development practitioner may need to inform the interim board of observed problems in leadership but must allow the board to take appropriate action to fix them. This task is difficult and requires great sensitivity, yet toughness. Many interim boards don't like to police themselves or appear judgmental. In the early stages of cooperative development, it is often difficult to recruit directors. It is painful to replace or demote members who have been willing to serve but because of personality or reputation hurt future efforts.

It may be tempting to let the democratic process take care of the problem in the election of permanent directors. But, if the leadership problem is too great, there may never be a permanent board because the equity drive failed.

Litmus Tests

Project champions come to lead the organizational efforts in a variety of ways. Sometimes they emerge from the beginning as individuals knowledgeable and willing to lead (Ken Throlson of the North American Bison Cooperative). Others are recruited, such as Pat Benedict of the Golden Growers Cooperative. As a professional developer, I use several criteria in evaluating if an individual is acceptable as the project leader:

Credibility -- Is the individual personally credible in his/her neighborhood? They need not be the biggest farmer or the most active in commodity associations, but they must be respected for their judgement. Avoid individuals who have tried every new idea that has come around and are suckers for anything new. I look for people who finish what they start and can take a long-term view.

Financial Stability -- Is the individual capable of keeping his/her house in order? Producers who have failed before (especially if they have gone through personal bankruptcy) usually lack the credibility with other producers and lenders to lead the project. They must be able to devote time away from their personal business to help develop the cooperative. This criterion is extremely limiting because many producers lack the time it takes to do the work without jeopardizing their individual operations. I once worked with a cooperative whose interim board chair wanted to use organizational funds to buy clothes. Her argument was that she would make a better impression on investors if she could afford to dress well.

Basic Knowledge of the Industry -- Is the individual familiar with the industry in a comprehensive way? Most value-added cooperatives are also vertically integrated. The project champion must have a basic understanding of the entire industry-from the first steps of production through processing to marketing to the final consumer. This is a tall order and can't be easily filled. The "Madison Principles" are critical at this stage of leadership selection.

Often, producers become enamored of a manufacturing technology or an available building and want to quickly close the deal to own the facility or the equipment. A true project champion must lead the group through a market analysis prior to analyzing processing facility and equipment needs. If an individual can't be found who has this basic understanding of the industry, then I look for a person who is willing to learn.

Willingness to Accept the Servant Leadership Role -- The project champion is often uncompensated. They will frequently be criticized, often unfairly, and sometimes insulted. Thin-skinned or quick-tempered people often do not last in the pressure-cooker environment of creating a new cooperative enterprise. I look for a project champion who has balance in her/his life. They must have patience, people skills, a good sense of humor, and a sense of what is ridiculous.

A Developer, Not a Promoter -- This is development work, not promotion. Promotion may get column inches in the local paper and a 30-second spot on the 6 o'clock news, but it won't build a financially viable company. While enthusiasm is important, it can't replace critical common sense and solid business judgement.

While this task of accessing leadership skills falls initially to the professional development practitioner, a word of caution is advised. Don't operate behind the back of the board member or leader. Direct conversation with honest expression of concern is the best policy. Seeking advice from other cooperatives in the area is also helpful. In some cases, these individuals have been so dedicated to making the emerging cooperative successful that once they have been made aware of the problems, they resign for the good of the cause and continue to be supportive.

Steering Committee

Once identified, the project champion and the professional developer usually work together to fill in the initial project steering committee. It will work with the professional developer in identifying critical questions to be answered. They will build a budget and a schedule of tasks necessary to answer these questions.

The steering committee will handle the following tasks:

The steering committee is an informal organization that usually consists of a majority of producers but includes representatives of funding organizations and commodity associations. Dakota Growers Pasta Cooperative's interim board of directors evolved from a steering committee that included representatives from AgPUC, ND Farmers Union, rural electric cooperatives, the State economic development office, and the ND Wheat Commission.

The development professional and the steering committee chairperson usually draft a proposed budget and timeframe and set meeting and task completion dates. The budget for this phase is driven by the expected cost of the feasibility consultant and meeting room, plus per diem and travel expenses of the committee members.

To get an estimate of the probable cost of a feasibility study, I fax a copy of the proposed call for proposals to two or three consultants, average their estimates, and prepare a formal request for proposals.

If a particular industry has been studied extensively in the past, only updates may be necessary. Getting access to previous studies may require some cash payment or at least diplomacy by the steering committee chair or the professional developer. Sometimes a pre-feasibility study may determine if there is a need for a new study.

These preliminary studies are simply scans of the information already published. A consultant determines if a significant market may exist. Sometimes these studies are called environmental scans or a quick look at the industry to determine if further study is needed.

These studies can also redirect the original plans of the steering committee to more promising study targets. Pre-feasibility studies or scans should cost between $1,000 and $3,000 and take only two or three weeks to complete. This is usually ample time because the information is already published and simply needs to be organized.

Hiring the wrong consultant to do a pre-feasibility study can be costly and produce poor advice. If the consultant is new to the industry, it will take an inordinate amount of time to accumulate data. The firm will lack internal knowledge necessary to render good judgements.

The steering committee will frequently hear common complaints about its proposals to study the feasibility of an idea:

The steering committee often struggles to raise money for the feasibility study because of these complaints and the general misunderstanding about a study. It is critical that agricultural producers make the first contributions to support costs of the study. A formal agreement may not be necessary, but it should be apparent that there is enough interest in the outcome of the study to warrant its completion.

Surveying the Producers

The steering committee needs to know how many potential members would support a project and if it's feasible. A random sample survey of eligible producers prior to completing a feasibility study can determine if that potential support exists. The most difficult task associated with polling producers is to draw a statistically valid sample.

Rural electric and telephone cooperatives, commodity groups, producer associations, and other organizations are sources for names and phone numbers. Building the master list of eligible producers takes time and costs money, but is a critical piece of planning. The track record of the professional polling company is equally important. Like the feasibility study consultant, the lowest-cost survey may not necessarily be the best buy.

Timing is important because producer opinion can have wide swings. Simply knowing that producers are serious about investing at the time of the study will not ensure that investment during the equity drive. This may especially be true if the equity drive is conducted 2 years after the study or was conducted during distractions such as blizzards, floods, or other natural or political events that would affect the producers of the products to be processed.

The steering committee designs the survey with the polling company. The company mails a letter to each person selected for the survey. The letter explains the exploratory effort to determine the feasibility of the proposed project and related details on the proposed cooperative. Those surveyed are told that someone will call for a phone interview. The interview will determine the extent to which producers will need to invest and patronize the cooperative if the project is to be economically feasible.

 Feasibility

The need for the Madison professional practices emanated from the experiences of the cooperative development practitioner. Frequently, consultants will be required to study the feasibility of an idea. Remaining objective while serving as an advocate for the project is always difficult. The Non Partisan League in North Dakota selected a goat as its mascot because it was the only animal that fights with its head.

The developer must help select the best consultants available, raise money to pay them, and often must police their work to ensure compliance with contractual agreements. In the past, feasibility studies were something needed to get financing. Now, feasibility studies are critical if members of the cooperative's interim board are to understand the opportunity.

The tasks of writing the scope of the study, recruiting competitive proposals, and assisting in the selection process often fall to the development professional. The lowest-cost consultant, friends of directors, or a study someone gives the cooperative are no substitute for quality work.

Successful cooperative development depends initially on a thorough study of the opportunity. A common mistake is to hire either an engineering firm or an equipment manufacturer to conduct a market feasibility study. Some large engineering firms have completely separated functions within one company and are capable of independent analysis. Others, more commonly, try to use their feasibility consulting practice as a feeder for engineering work. Some may bid low on the feasibility study (even below cost) in hopes of making it up with a design and construction contract.

Equipment manufacturers are well known for their low-cost, quick-turnaround feasibility studies. In some cases, they have completed "one size fits all" studies that say using their equipment will result in a positive venture.

I don't recommend using either engineering firms or equipment manufacturers as feasibility consultants. Although it's often necessary to understand construction and equipment costs in determining if a project is feasible, engineers and equipment manufacturers should provide data on costs, but not on market analysis. In most cases, the cooperative development practitioner enforces this discipline. While using the necessary emotions to create change, the developer must still teach cooperatives to fight with their heads and balance emotion with reason.

Business Planning

A second task of the developer is to help the interim board complete its business plan. The professional principles are never more challenging. Many new directors are unfamiliar with operating principles of cooperatives.

Because these are closed cooperatives that require equity investment much like a corporation, directors can easily lose sight of their fiduciary responsibility to other members who may invest. Steering the board away from sweetheart deals with each other or from using knowledge gained through work on the cooperative board for private gain is sometimes difficult. The interim board may often feel that it has sacrificed enough just to build this cooperative and therefore is entitled to some benefits not available to members who join later.

How the cooperative will operate regarding conflict of interests and prohibitions against directors using cooperative opportunities for personal gain can be addressed in operating policies or bylaws. If the facilitator can keep the professional business planners on task, the director decisions and a good plan of action agreed to and recorded, the bylaws and operating procedures are not difficult to develop.

It is generally a mistake to develop operating procedures and bylaws in the absence of a business plan. In some cases, interim boards may be tempted to copy another cooperative's operating documents. However, the developer will hold the interim board's "feet to the fire" to write its own business plan. It will save the cooperative time and legal fees in the long run by exercising this discipline.

In the business planning process, directors actually confront each other about their expectations of this cooperative and the allowable and expected behavior of directors. It helps to have a director who has served on another new-generation cooperative board explain how it handled these issues.

The business planning effort includes a search for information on the size of the market, prices, processes, deciding about strategy, and estimating returns on investment. The developer and interim board often will encounter a perplexing problem. Who should you believe? Consulting firms, existing cooperatives, and competing firms, and other development consultants may offer conflicting advice. The cooperative development practitioner seldom has a captive client group.

Advice and coaching are often ignored or disregarded, even from the longest tenured and most successful cooperative development advisors. I often ask the steering committee to formally accept me as their "official" advisor and coach in this effort. I seldom agree to share my advisory role with another because multiple advisors create and destroy accountability.

Sometimes the development practitioner may be asked to serve on the steering committee as a voting member or play a role other than advisor. It may be useful to do so even if your views are in the minority. Just listening is important, but when it comes to very bad projects, I recommend just running away.

The developer must realize there is no shortage of advisors available to suggest alternative approaches or less painful commitment levels. It is up to the directors to learn the difference between bad and good advice.

It's easy to confuse the roles of the advisor or consultant with those of the cooperative's directors and employees. While advisors and consultants teach and coach, all the players must learn together. An uneven or out-of-balance learning environment often occurs when completing the business plan. Directors may become individually smart but corporately stupid.

This phenomenon is discussed in depth in Peter Senge's The Fifth Discipline. In my experience, the uneven learning occurs because of natural specialization and focus by directors. Some may want to understand the market and marketing strategy while others are more focused on process technology.

As the pressure to "get it right" develops, these individuals will learn quickly a particular segment of the business plan. The problem arises when advocacy for a business plan segment, as all-important, begins to blur the entire vision of the cooperative and the main objective goes out of focus. Team learning with systems thinking is required. Team learning on a board is much like a basketball team. Individuals have different talents, but play better as a team than just as individuals. Team learning occurs when inquiry replaces advocacy-asking rather than defending allows other directors and staff to learn and accept and eventually depend on someone else's thinking. This leads to a more effective use of talent in building the business plan.

An accounting firm can often help write the business plan. But finding qualified firms can be a challenge. The Helmeke firm worked for both the Dakota Growers Pasta Company and North Plains Premium Beef Cooperative (NPPB). Even though the accountant's expertise may not be in planning, both the cooperative and accounting firm learn together.

Selecting an accounting firm is much like picking a feasibility study consultant. Some of the same criteria apply.

Even if a CEO is hired, an accounting firm is often necessary to provide the computing ability to analyze alternatives and write the plan. In the case of NPPB, Steve Noack was both the cooperative's attorney and chief financial officer. He held both law and accounting degrees. An accounting firm was hired to provide technical backup and the computing services the cooperative could not afford to purchase.

Hiring the CEO

There is no set pattern on when to hire a manager/CEO. If the contribution drive has been completed successfully and the cooperative has several hundred thousand dollars available, it works well to hire a CEO to help complete the business plan. United Spring Wheat Processors used this strategy. Prior to completing a business plan, the cooperative hired an executive-search firm.

The cooperative eventually hired Gary Lee who had broad industry experience, especially in strategic planning. He led the planning effort, brought focus to the cooperative, and was a major presenter during the equity drive.

Dakota Growers Pasta Company hired Tim Dodd after the business plan had been completed, but before the equity drive. Dodd helped the cooperative fine-tune its plan, assisted in decisions, and answered technical questions during the equity drive. He also brought with him engineering and marketing personnel.

Hiring the CEO before completing the business plan, however, can be difficult. Numerous questions are unanswered, such as where to locate the office, where the CEO will live (if the office site hasn't been selected, so the CEO can avoid a double move), and the type of business the cooperative wants to conduct. What critical skills are needed-technical and processing, leadership and communication, or marketing and public relations?

Using an executive search firm is also expensive-about one-third of the employee's annual salary plus direct expenses. It is also difficult to find experienced candidates who will leave well-paying jobs on the bet that this new company will be successful.

NPPB hired me to serve as their interim CEO to pull together a team that could complete the business plan and the equity offering documents, and plan and execute the investment drive. At the same time, the board hired an executive search firm to find the permanent CEO. This process worked well. The new CEO was subsequently hired. However, the equity drive fell short of the necessary minimums and the permanent CEO couldn't be continued. Dakota Growers Pasta conducted its own search and found Tim Dodd while United Spring Wheat Processors used a search firm and hired Gary Lee. Both techniques work.

Often overlooked in the search for a manager/CEO is the role of the board chair. The most important evaluation in CEO selection is not the qualities of the candidates, but rather the candidate's analysis of the board and particularly the chairperson. That chemistry between employer and employee must be right or the relationship won't be sustained.

The chair must have complete authority in supervising and directing the CEO. The chair must also be the single point of contact with the board. This can be extremely difficult to achieve in a new or emerging cooperative because until a CEO is hired, the directors must make administrative decisions.

The type of CEO hired is usually an accurate reflection of the board's management philosophy. It is often the first public display of that philosophy so the decision has public relations implications. It can be a confidence builder or a negative to potential investors. It demonstrates the cooperative's ability to attract high-quality talent and, therefore, the likelihood of a successful venture. In fact, the CEO's resume often becomes part of the disclosure document filed with security commissioners.

Equity Drive

The equity drive provides the focus for the business planning effort. Will other farmers/ranchers invest scarce dollars in this venture? Do we have it right? In traditional business development, business plans were written by consultants for bankers. In cooperative development, the business plan is written by the interim board and the CEO (if already employed) for the member-investors.

Lenders can help develop the business plan (especially those from the St. Paul Bank or other cooperative-lending institutions), but they are not the final target. Decisions on minimum number of shares, delivery schedules, transportation allowances (to make all members equal to the processing plant), quality standards, marketing strategies, professional management, and many other issues are of critical importance to the farmer-investor.

It is extremely difficult to have the business plan perfect by the time an equity drive starts. Markets, interest rates, and commodity prices can all fluctuate. The cooperative development practitioner is a caretaker of the truth but must also realize that from time to time, businesses must take unmitigated risks. The risk must be explained during the equity drive but not allowed to overwhelm the cause.

Ken Throlson, North American Bison Cooperative chairman, was asked by an Ohio economist how he could ask bison growers to invest in the cooperative when, during the equity drive, the anticipated return on investment was constantly changing as the planned equity level was surpassed. Throlson replied, "I learned long ago never to say whoa during a heavy pull."

Throlson's point is easily understood. After the best analysis has been done, farmers must decide-do they believe in the business plan concept and the credibility of the interim board or do they think it won't work and isn't worth the risk? Those conducting the equity drive must put that question squarely in front of the member-investors. The cooperative's board must clearly communicate the vision.

Peter Senge said, "A shared vision is not an idea. It is not even an important idea, such as freedom. Rather, it is a force in people's hearts, a force of impressive power. It may be inspired by an idea, but once it goes farther, if it is compelling enough to acquire the support of more then one person, then it is no longer an abstraction. It is palpable. People begin to see it as if it exists. Few, if any, forces in human affairs are as powerful as shared vision."

Holding, communicating, and nurturing the vision is the key task of the business planning process. It goes public in the equity drive.

Timing -- As a general rule, with lots of exceptions, equity drives work best between the months of November and March. There are two reasons for this in agricultural communities. First, farmers are generally through with harvest and are not in the fields. This allows time to attend meetings, read about new ideas, and talk to each other. Second, they have some understanding of their own financial situation.

This time period allows farmers to include the cost of cooperative equity shares in their financial planning with agriculture lenders. In most cases, separate briefings will be held by cooperative organizers with ag lenders, prior to grower meetings. As in the case of Dakota Growers Pasta Company, some agricultural lenders actively encourage their borrowers to consider such investments.

Lenders also prefer to loan the funds quickly once an investment decision has been made to start the meter running on the interest rates. This puts pressure on the cooperative organizers to move the project along quickly, because farmers and ranchers don't appreciate paying in dollars that are not immediately needed.

Collections -- The technique for collecting equity dollars may take a variety of forms. A common way at grower meetings is to ask for some minimum contribution to indicate interest in purchasing shares. The fact that it is a contribution, not an investment, must be emphasized. Interim boards are required to prepare a prospectus and comply with Federal and State security laws if selling equity shares. The contribution is usually tied to the amount of money necessary to finish the business plan, write the prospectus, pay the organizational costs and finish the financing work.

The Dakota Growers asked for and received $0.05 per share. Each share was roughly equal to one bushel of durum wheat. The bison growers asked for $50 per animal and final equity shares sold at $250 per animal. Golden Growers asked for $0.10 per bushel of corn.

These contributions, as an indicator of interest, are dedicated to specific budgets. If minimum levels of producer commitment are not achieved, the project is frequently stopped and unused contributions are returned on a pro-rata basis. This ensures that there are no unsatisfied liabilities or additional payments in case the project does not go forward. Even though contributions may indicate an interest in purchasing shares, the interim board is under no obligation to issue shares unless minimum levels are met. A proposed bean processing cooperative determined that minimum levels were not met and a pro-rata portion of the contributions was returned.

If the minimum number of shares appear to be available from producer-investors, the attorneys and accountants prepare the prospectus and the interim board issues the shares with a final due date. In many cases, the board will reserve a special class of shares for early contributors at a lower price per share than the general share offering that recognizes their initial commitment.

Normally, the contributor may only buy the number of shares relative to the contribution unless additional shares are available. The option to purchase shares above the minimum in the business plan is often offered to contributors first and then to the general public comprised of eligible investors. These decisions involve security regulations and must be made only after consulting legal advice.

Interim boards are wise to keep the dates of the contribution, expression of interest, and final equity sale close together. Although there is not enough history to build a general rule in this regard, it is commonly believed that the number of contributors who choose not to invest increases over time.

On smaller projects with a limited number of investors and much lower issuance cost, it may be better to issue the equity shares on an initial offering and skip the first step. This direct approach also works well when a cooperative is expanding and needs additional equity. In those cases, the membership can be surveyed. No contribution phase, with its related cost is needed to determine member interest or pay organizing costs.

Simplicity is important in a successful equity drive. While it is tempting to create numerous classes for various types of investors, complicated formulas make sales more difficult. It also complicates the issues if numerous alternatives are provided based on the number of shares sold.

The beef cooperative planned to build two plants if a higher number of shares were sold and one plant if sales were low. It tended to complicate the issue because it created the question of where the plants would be built and in what order.

Creating a low minimum with a strategy to just sell enough shares to get started often becomes a self-fulfilling prophecy. Expectations are lowered and excitement fritters away. The minimum number of shares sold should cover what's needed to operate a well-capitalized cooperative profitably. If that number is not achieved, North Dakota law requires the escrowed funds be returned.

A bean cooperative issued shares and sold more than half of the anticipated amount. The investment was returned and a new plan was drafted. The same strategy is being used by the NPPB. To some extent, it is like working on a highwire without a net. And if the equity drive fails, the cooperative may face dissolution. But safety net landings in tepid business plans rarely inspire courageous investment.

Equity shares in a cooperative may be exempt from both Federal and State security registration requirements, but the exemptions must be applied for well in advance of the equity drive. Competent legal help is required. The preparation of the prospectus requires communication with security commissioners and since securities are regulated both at the State and Federal level (and in Canada at the provincial level), and each State or province is different, it gets to be a lot of work.

The greatest fear of an emerging cooperative is to receive a cease and desist order from a security commission. This takes negotiations and patience while officials decide whether or not the cooperative is a legitimate business that is worthy of investment. The more States in which you intend to operate, the more complicated the legal work. Some States will be very strict on pre-selling, that is saying anything in public about the project before a prospectus is in the hand of the potential investor.

Media Management -- While farmers sell the business concept to other farmers, the media must be used to get the story and the sales events out to them.

In North Dakota, the largest circulation print media is the Rural Electric Cooperative/Rural Telephone Cooperative magazine. Advertising and editorial support in that magazine has been helpful. In addition, the North Dakota Association of Rural Electric Cooperatives helped prepare news releases and press packets and conduct press conferences. Advertising the grower meetings and encouraging producer attendance is the principal focus of the media effort. The hard sales work is conducted in the meetings themselves.

Frequently, the media become excited about equity drives as a major campaign story-with potential for winning or losing. The cooperative must attempt to manage media expectations-size of crowds, rate of investment, and likelihood of success. The meeting room should always be slightly smaller than the anticipated crowd would require. The interim board should be used as an investor catalyst at each meeting.

Those cooperatives that are able to acquire communication directors in advance of the equity drive believe they are important parts of the management teams. Experienced politicians can provide excellent media management skills. Non-producer politicians, however, are not recommended as attractions at grower meetings, because the politician, rather than the plans of the new cooperative, becomes the story.

The media must be treated fairly and honestly. There is no room for misrepresentation by cooperative organizers. As a general rule, farmers appreciate an understatement more than an overstatement. Common sense and honest treatment of all media questions are required. In most cases of cooperative development, there already is a David versus Goliath story unfolding. Allow the media to tell the story and provide valid information to help them explain it to their readers, viewers, and listeners.

Launching the Cooperative

This task is rarely the job of the cooperative developer. As the cooperative emerges from its incubation period, hires management, and begins operating, the developer may feel lost and abandoned. Successful cooperatives are formed to solve problems and seize economic opportunities, not to promote the professional developer.

The cooperative now hires the general manager and no longer needs the developer. In some cases, the developer may help recruit CEO or manager candidates or may be available for wrap-up consultation to finish contracts with business planners, consultants, and the like. A typical concluding act by the developer is to deliver boxes of records (minutes, financial statement, feasibility studies, and business planning material) to the cooperative's new office. It's a nice feeling.

Timing and Budgets

Every task takes longer and costs more than you think it should! The equity drive controls other schedules and is often awkward to plan effectively. Many existing cooperatives have annual meetings in either June or December. From past experience, the months of January, February, or March work best for equity drives. There are certainly conflicts among commodity groups within those months (cattle producers may be calving and sheep producers may be lambing) and winter months can be a severe challenge. But, other times of the year appear to have worse conflicts (spring planting, haying, or harvesting).

If the equity drive is to begin as soon as possible in January, for instance, the offering circular must be prepared and at the printer by the end of December. In turn, that means the business plan must be completed by late October. But the business planning process can't start until the producers can spend days together. So, the only time left to plan the business may occur in split sessions such as late June through the middle of July and then again after harvest in October.

Working backwards, that means that the feasibility study must be completed in May or June. Studies take 90 to 120 days to complete, so you will need to start by March or April. A hypothetical schedule and budget are provided in table 3.

If the CEO can be hired to help prepare the business plan, there will be extra costs related to salary and expenses (easily $10,000 per month times 6 months). An in-house engineer can save hundreds of thousands of dollars in final construction cost. A marketing director can earn revenue much faster if hired during the design stage of the cooperative. However, if these choices are made and paid during the development stage, costs can escalate. Costs are also based on time spent. Some tasks, such as developing marketing alliances, can involve unpredictable and hard-to-control travel and staff costs.

Another important factor in scheduling and budgeting is the geographic area to be served. The larger the area and more complex the offering, the greater the time and budget considerations.

The Dakota Pasta Growers Cooperative started as a discussion on Aug. 9, 1990. Ground breaking at Carrington occurred on July 9, 1992. The 2-year process took place mostly in North Dakota and probably cost less than $500,000. Northern Plains Premium Beef (NPPB) started as a serious discussion in April 1993. It completed the first (and unsuccessful) equity drive by June 1, 1997. The 4-year process chewed up more than $1.3 million in development funds. NPPB sold equity shares in six States and two Canadian provinces and was forced to reschedule 12 of 17 organizational meetings because of blizzards.

If new technology is proposed, additional costs will be incurred. NPPB proposed using New Zealand-based technology, bore the cost of hiring both New Zealand and American-based engineering firms, and paid travel costs to New Zealand to observe additional plants.

Alliances are difficult to negotiate and conclude in time to include the detail in the offering circular. Publication deadlines for the offering circular put pressure on a relationship-building function. Attorneys are not always available to prepare documents for both sides and corporations and partnerships often have difficulty scheduling meetings that a majority of directors can attend.

Alliances can be important, however, and must always be considered. Golden Growers raised more than $50 million in equity from corn growers, in part because of the involvement of American Crystal Sugar in the Pro-Gold limited liability company.

Both cooperatives had overlapping production territories and knew each other well. NPPB and Dakota Growers Pasta Cooperative could not identify an alliance partner before their equity drives. One was successful and the other was not. A qualified CEO and/or experienced marketing director can sometimes generate investor confidence similar to an alliance partner.

Finally, it appears that marketing and processing alliances can be extremely beneficial to the new cooperative. But without the commitment of the cooperative to go it alone without a partner, alliances are nearly impossible to achieve. No existing company wants to have its name used as a lever to gain investment in another potential competitor. Once your equity is in the bank and the product is committed, alliances come easier.


* Based on material presented in Creating 'Coop Fever', A Rural Developer's Guide to Forming Cooperatives, USDA Rural Business Cooperative Service, Report 54.