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Ag. and Food Cooperatives in Rural Development – USDA, ERS Workshop . New Cooperative Development: The Case of Hudson Valley Growers Association. June 16-17, 2004 Wash., DC Brian M. Henehan bmh5@cornell.edu

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new cooperative development the case of hudson valley growers association

Ag. and Food Cooperatives in Rural Development – USDA, ERS Workshop

New Cooperative Development:The Case of Hudson Valley Growers Association

June 16-17, 2004 Wash., DC

Brian M. Henehan

bmh5@cornell.edu

Senior Extension AssociateDepartment of Applied Economics and Management

Cornell University

my role at cornell
MY ROLE AT CORNELL
  • Sr. Extension Associate in Dept. of Applied Economics and Management
  • Past Experience Includes Managing a Start-up Produce Marketing Cooperative
  • Program Leader for the Cornell Cooperative Enterprise Program
  • Secretary for NE Cooperative Council
  • www.cooperatives.aem.cornell.edu
cornell cooperative enterprise program
Cornell Cooperative Enterprise Program
  • Long standing relations with Ag. Cooperatives in region and U.S.
  • Teach undergraduate course on cooperative enterprise
  • Conduct applied research
  • Deliver extension and outreach program
  • Coordinate with the NE Cooperative Council, (NECC)
northeast cooperative council
NORTHEAST COOPERATIVE COUNCIL
  • 20 Rural Cooperatives Operating in New York State and New England
  • Non-Profit Mission: “Addressing Informational and Educational Needs of Member
  • Two Annual Events:
    • Cooperative Leaders Forum
    • Future Cooperative Leaders Conf.
today s objectives
TODAY’S OBJECTIVES
  • Review the Case of Hudson Valley Growers – A Failed Cooperative
  • Identify Lessons to Be Learned
    • Common Pitfalls
    • Factors Leading to Failure
  • Discuss Issues Related to Public Policy
background on case study materials teleconfernce
BACKGROUND ON CASE STUDY MATERIALS & TELECONFERNCE
  • 1 of 3 Case Studies Created for Regional Interactive Satellite Teleconference
  • Broadcast April 2, 1997 to 34 Downlink Sites in 7 states in NE
  • Each Case Involved Structured Interviews of Members, Directors and Managers of Start-up Cooperatives recorded on videotape
forming hudson valley growers
Forming Hudson Valley Growers
  • Leadership From Area Growers
  • Facilitation by Dutchess Co. Cornell Cooperative Extension staff
  • Support from Area USDA Soil Conservation Service staff
  • Advice from Cornell Univ. Cooperative Dev. Specialist
organizational support
Organizational Support
  • County Agent Trained in Horticulture, Worked Directly with Growers
  • He Saw Marketing as a Critical Issue
  • Soil Conservation Staff Saw Maintaining Farm Economic Viability as an Issue
  • County Extension Helped Prepare Grant and Handled Funds for Pilot Project
organizing steps
Organizing Steps
  • 5 Growers Met to Discuss Marketing Challenges
  • Reviewed Potential for Forming a Cooperative to Grade, Pack, Market and Distribute Produce
  • Hesitant to Use Word “Cooperative”
    • Some Had Bad Experiences
    • Used Association as Title of Organization
public and private support
Public and Private Support
  • Some of the Group Were Already Marketing Independently to Up-Scale Restaurants
  • Recruited Support from Culinary Institute of America, CIA
  • Chefs from Famous NYC Restaurants Supported Concept
  • Local County Officials Interested as Ag. Economic Development Intitiative
mission vision
Mission & Vision
  • Primary Goals:
    • “Eliminate the Middleman”
    • Enhance Marketing Capacity
    • Penetrate More lucrative Markets
    • Create Regional Brand Name
  • Broad Range of Products: Fruits, Vegetables, Meat, Cheese, Wine, and Eggs from 6 Counties
  • Expand Beyond Direct Marketing Sales
steering committee and goverance
STEERING COMMITTEE AND GOVERANCE
  • Committee Members Selected:
    • Well Respected Growers
    • Most Were Outgrowing Individual Marketing Capacity

Governance:

    • Members Elect Board
    • Directors Hire Manager
    • Manager Executes Business Plan
cooperative formed in 1988
Cooperative Formed in 1988
  • Incorporated under New York State Cooperative Corporations Law
    • Developed Bylaws & Membership Agreement
  • Created Single Multi-product Marketing Pool:
    • Vegetables, fruit, eggs, meat and herbs
first two years
First Two Years
  • Effectively Leveraged Initial Grant Support
  • Hired Talented Manager
  • The Start-up Cooperative Venture Successfully Penetrated New Markets
  • Generated Positive Margins
  • Grew Sales Volume
  • Increased Membership
challenges arose
CHALLENGES AROSE
  • All Inclusive Approach to Handling Wide Range of Member Products Can Dilute Focus and Resources
  • Board Split on Best Marketing Strategy
    • Some Supported Expanding Sales to Larger Volume Farm Stands
    • Others Pushed for Increased Sales to NYC Restaurants
  • Higher Than Expected Farm Product Assembly and Packing Costs
  • Manager Turnover
  • Seasonal Cash Flow Problems
  • Accounts Receivable Collection
assembly issues
ASSEMBLY ISSUES
  • Fragmented, Smaller Scale Producers Scattered Across a Wide Area
  • Marketing A Broad Range of Products
  • Attempting to Serve A Diversity of Customers
  • Critical Volume Needed to Support Costs of Assembly (warehouse, grading, packing, quality control)
distribution issues
DISTRIBUTION ISSUES
  • Product Form That Shipped Well and Maintained Quality
  • Understanding Marketing Costs (order size, managing accounts, handling complaints, trucking logistics)
  • Eliminating the “Middleman” Means YOU Assume All the Risk and Costs
  • Critical Volume Needed to Support Effective Distribution
issues of member commitment
ISSUES OF MEMBER COMMITMENT
  • Some Members Had Attractive Market Alternatives
  • Mixed Commitment to Ship Through Cooperative (non-binding agreements)
  • Public Support Ran Out and Members Had to Face Economic Realities (inadequate member equity)
  • Confidence Eroded as First Manager Left
feasibility analysis
FEASIBILITY ANALYSIS
  • Avoided Spending Too Much on Feasibility Analysis
  • However, Received Private Grant through CEO residing in area for Market Research
  • Members of Growers Group Did Much of Their Own Analysis with Mixed Success
flawed assumptions
FLAWED ASSUMPTIONS
  • Assumptions Made:
  • Would Achieve Savings on Trucking and Sales Costs:
    • Eliminate transportation redundancy
    • Combine sales efforts
  • Operate on 10-15% Gross Margin
    • vs. 25-30% charges by brokers
business plan
BUSINESS PLAN
  • Submitted for Grant Proposal, But Not Updated
  • Written to Justify Grant Expenses Not Necessarily as Working Document
  • Analysis Did Not Include:
    • per unit cost break down by product
    • accurate estimates of assembly and distribution costs
    • scenarios: best, worst, and expected
more intensive analysis was needed
MORE INTENSIVE ANALYSIS WAS NEEDED
  • Areas That Could Have Received More Attention:
    • Cooperative Finance & Member Equity
    • Transportation Logistics
    • Exploration of Partners in Supply Chain
      • “Work With Middleman”
    • Staffing Needs
    • Management Compensation & Equity Position
cooperative dissolution may not be total failure
COOPERATIVE DISSOLUTION MAY NOT BE TOTAL FAILURE
  • Member Interests May Have Been Effectively Advanced for the Long Term
  • It Could Have Successfully Addressed Market Failure and Outlived Usefulness
  • Permanently Improved Terms of Trade or Product Identity Standards for the Benefit of Members (and non-members)
  • Created a More Competitive Market on Behalf of Members
policy implications
POLICY IMPLICATIONS
  • Allow “Outside” Directors on Boards
  • Support Start-up Cooperative Capitalization:
    • Producer Financing for Member Equity
    • Lower Cost Financing
    • Accommodate Management Equity Position
    • Support Costs of Feasibility Studies and Manager Position
  • Encourage Applied Research and Outreach on Rural Cooperatives
    • Unique Form of Business
  • Evaluate Impact of Current Publicly-Funded Cooperative Development Efforts
    • Determine Most Successful Strategies
summary
SUMMARY
  • Hudson Valley Growers Attempted to Address Common Marketing Issues:
    • Spreading Out Fixed Costs of Handling and Marketing Farm Products
    • Generating Adequate Volume to Serve Larger Customer’s Demands
  • Along the Way, Fell Into Some Common Pitfalls:
    • Underestimated the Costs of Becoming the “Middleman”
    • Overworked and underpaid their manager
summary cont d
SUMMARY cont’d
  • Common Pitfalls:
    • Underestimated talent needed to manage
    • Lacked Member Commitment (product, quality, equity)
  • Failure Had Minimal Negative Impact on Members
  • Lesson Learned May Contribute to Formulating Policy
related publications www coopersatives aem cornell edu
RELATED PUBLICATIONSwww.coopersatives.aem.cornell.edu
  • “Putting Cooperative to Work” – Cooperating for Sustainability Teleconference
  • Considering Cooperation: A Guide to New Cooperative Development
  • Questions Cooperative Directors Should Be Asking Management
  • What Gives Cooperatives A Bad Name
  • What Went Wrong at Agway