New Cooperative Development: The Case of Hudson Valley Growers Association

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New Cooperative Development The Case of Hudson
Valley Growers Association
Ag. and Food Cooperatives in Rural Development
USDA, ERS Workshop

• June 16-17, 2004 Wash., DC
• Brian M. Henehan
• bmh5_at_cornell.edu
• Senior Extension Associate Department of
  Applied Economics and Management
• Cornell University

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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

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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)

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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.

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TODAYS 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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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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
  Customers Demands
• Along the Way, Fell Into Some Common Pitfalls
• Underestimated the Costs of Becoming the
  Middleman
• Overworked and underpaid their manager

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SUMMARY contd

• 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

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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