Business Models and Producer-Owned Ventures: Choices, Challenges, and Changes

Journal of Agricultural and Applied Economics, Aug 2007 by Kenkel, Phil, Park, John

Producer-owned business models are rapidly evolving. Producer-owned, value-added ventures face a number of organizational challenges, including capital acquisition, security exchange registration, antitrust exemption, borrowing eligibility, and operational flexibility. This paper examines the success of evolving producer-owned business models in addressing these challenges. The need for uniform criteria to distinguish producer-owned business from other business forms throughout the complex structure of policies and laws affecting value-added ventures is highlighted.

Key Words: cooperative, value-added organizational form

JEL Classifications: Q13, Q14, Q18

Recent activity in the biofuel industry has attracted the interest of agricultural producers as a means of adding value to their crops. New biofuel ventures have been formed as both investor-owned and producer-owned firms. In 1990, three major players dominated fuel ethanol production, with ADM (Archer Daniels Midland) holding 60% of the market. The entire industry was then composed of about 20 firms. Today, that number has grown to 71, with the top three firms producing about 31% of the nation's ethanol. Of the remaining 68 firms, 44 are organized as farmer-owned cooperatives or locally owned limited liability companies (LLCs) (Crooks and Dunn). Farmer-owned plants currently account for 39% of the total U.S. ethanol capacity (Renewable Fuels Association).

Biofuel projects are just one example of a larger universe of producer-owned, value-added ventures with complex and intense processing activities. A recent study estimated that more than 80,000 producers have invested in processing facilities organized both as new generation cooperatives (NGCs) and limited liability partnerships (Merrett et al.). Although fewer than a dozen of these farmerowned, value-added ventures existed in the early 1980s, today there are more than 165 that are operational, and at least another 100 are in some phase of development (National Corn Growers Association).

Despite this growth, the overall competitiveness of farmer-owned business forms for value-added ventures is less clear. Only 4 of the 33 ethanol plants currently under construction are farmer owned. These farmerowned plants account for only 11% of new ethanol capacity. A number of value-added cooperatives, such as Diamond Walnut Growers, Ocean Spray Cooperative, U.S. Premium Beef, Dakota Growers, and Birds Eye, have converted to investor-owned business structures. This has led some experts to conclude that current cooperative structures cannot facilitate large-scale, complex, capitalintensive ventures (Hazen).

This paper examines the challenges facing farmer-owned, value-added businesses and the evolution of farmer-owned business models to meet these challenges. The impact of legal issues, taxation, and information technology on producer-owned, value-added business models is also analyzed.

Background

The cooperative corporation is a common form of business in the agricultural sector (Adams et al.). Agricultural producers have used the cooperative business model to ensure themselves market outlets and sources of input supplies and to vertically integrate and gain economic power. The principles and properties of the cooperative business model have been defined in a variety of ways dating back to the Rochdale Pioneers in the mid- 19th century (Zeuli and Cropp). Over time, the cooperative model has been refined through both practice and legislation. Today, the most basic cooperative business can be defined by three major principles: user-ownership, user-control, and user-benefit (U.S. Department of Agriculture 2002).

The two decades of the 1920s and 1930s are sometimes referred to as the golden age of cooperative development. The U.S. Department of Agriculture recorded over 12,000 agricultural cooperatives operating during the 1930s (Mather et al.). The activities of these firms centered on providing farm inputs and marketing bulk commodities (Kenkel).

These traditional cooperatives used an open membership system, allowing a producer to join at any time by making a small initial investment. The cooperatives built equity primarily through retained patronage (retaining profits) and per unit retains (volume-based assessments). This cooperative equity lacked a secondary market and was redeemed at book value (face value), regardless of the value of the cooperative. Thus, traditional cooperative equity has been described as nonappreciable, nontransferable, and nonredeemable (Chaddad and Cook 2004).

Neoinstitutional economists (Cook; Royer) have identified a number of challenges with the traditional cooperative structure. Resulting from vaguely defined property rights, these structural issues lead to various problems that are inherent in the traditional corporate model. Dealing with free riders and equity sourcing are just two examples of the issues that have hampered the growth of the traditional cooperative model as it strives to serve the demands of intense, value-added processing (Sykuta and Cook). These issues demonstrate that the traditional cooperative structure provides insufficient incentive for members to provide the start-up funds for capital intensive projects (Cook; Cook and Iliopoulos).