Donald Senechal
Founding Principal, The Windmill Group, LLC
donald.senechal@verison.net

Larry Leistritz
Professor of Agribusiness and Applied Economics
North Dakota State University

Nancy Hodur
Research Scientist, Department of Agribusiness and Applied Economics
North Dakota State University


There has been a surge of interest in farmer-owned business ventures that seek to capture additional value from commodities past the farmgate. Some of these ventures have been very successful, some marginally successful and some have failed. Supported by funding from the Ag Marketing Resource Center at Iowa State University, we conducted in-depth interviews with farmer-owned businesses to determine the key factors that influenced the relative success or failure of these ventures. A better understanding of why some ventures succeeded while others failed provides valuable insight for the success of future farmer-owned businesses.

Research Method

To identify factors having the greatest impact on the success or failure of farmer-owned business ventures, a cross-section of seven farmer-owned commodity processing businesses formed since 1990 in North Dakota, South Dakota and Minnesota were selected. Extensive interviews were conducted with individuals who played, or continue to play, an important role in the formation and operation of the business. This included leaders in the formation of the business, key members of the management team, selected board members, lenders, local leaders and others.

The results of the study are presented below. The six focus areas of the investigation were as follows:

1. Investor attitudes and expectations,
2. Financial structure and performance,
3. Strategic planning and implementation,
4. Organizational issues,
5. Management and operations and
6. Local infrastructure and support

Investor attitudes and expectations

A common theme in the genesis of farmer-owned business ventures was the frequent connection with a commodity group or grower association. Often key leaders of the venture were active in commodity or grower associations.

Improve farm prices
Typically the motivation for the venture was to improve commodity prices rather than generate a return from the business investment. In fact, the idea of forming a farmer-owned business often arose only after efforts to attract an established processor to the area had failed. The grower-member’s preference for higher commodity prices rather than business dividends was quite marked and sometimes led to conflicts within the business. The failure of at least one venture was attributed, in part, to grower contracts that were arguably too generous.

High pay-out expectations
In cases where member investment returns were distributed through end-of-year ‘value-added’ payments, farmer-investors sometimes had unrealistic expectations of the level of returns. Thus, the board of directors and management faced demands from the farmer-investors for early and substantial pay-outs that were sometimes in conflict with the organization’s need to retain earnings to build reserves or pay down debt. Members using borrowed funds to buy their shares likely added to the pressure for substantial pay-outs. Realistic member expectations regarding the potential business profits are critical to the success of farmer-owned business.

Investment expectations
A successful equity drive is the first hurdle faced by all farmer-owned ventures. At least one individual from each business we interviewed emphasized the importance of having an “organizing board” comprised of well-respected community and business leaders as well as respected producer investors. The stature of this board was considered to be one of the most important factors in the success of the equity drive.

The recent success or failure of other farm-owned businesses also appeared to have a great deal of influence on producer attitudes and willingness to invest. Attitudes toward investment often appeared to be based more on emotion than on a project-specific feasibility analysis. Investment decisions must be made on sound business principles, not emotions.

Multiple investment objectives
Investors often have multiple objectives or motivations. In addition to personal economic benefits from increased commodity prices or investment returns, many investors are motivated by a desire to promote local economic development or by pride of ownership. These investor motivations can make site selection and other decisions difficult. Several of the organizations interviewed reported that plant siting decisions, while always difficult, can be complicated by parochial influences.

An example was a community that was the runner-up location for what turned out to be a very successful farmer-owned business. Regardless, the leaders and farmer-investors from the community were eager to establish a processing operation in their community and set out to do so. The business failed within a few years. When the desire to locate a business in a specific community supersedes sound business decisions, the likelihood of success can be seriously compromised.

Another example of multiple investment objectives was resolved when investors unhappy about the site selection were offered a refund of their investment. The refunds resolved a dispute that threatened to derail the entire project and the remaining investors and board members were able to move forward as a united group. Multiple motivations can complicate the effort to launch a new venture. But an awareness of these alternative motivations can help to mitigate future conflicts.

Shared business vision
A shared vision of the business venture’s goals and priorities by management and the board of directors is critical. It can have a profound effect on business viability. For example, management may see a need to reinvest to grow the business in order to ensure long-term viability while the board may be sensitive to members’ desire for substantial pay-outs from the net proceeds. The vision for the business is something that should be discussed very early in the process and prior to recruiting the management team. Regardless of what the shared vision looks like, it is critical that management and the board of directors have a compatible vision of the future of the business.

Financial structure and performance

While the necessity of sufficiently capitalizing the business would seem to be obvious, its importance cannot be overstated. The business must be sufficiently capitalized to withstand cash flow risks during the first few years of operation. Market downturns, crop failure and production issues can all challenge a new organization. So the business plan must allow for adequate reserves. Once the firm begins to show a profit, it is important to retain a sufficient portion of the earnings to build the business’ reserves to enable it to survive future challenges. Market downturns, crop failures and production issues can challenge even a well-established business, making an appropriate business reserve critical for new start-ups. Members’ desire for pay-outs must be weighed against the needs of the business for reserve funds.

Financial reserves
The business plan must provide for sufficient operating capital to carry the organization through the start-up period. Enterprises that were not successful often cited the lack of operating capital as a significant contributing factor.

Further, plant start-ups often require some fine-tuning before reaching planned capacity. Also, markets typically take time to develop. Without sufficient working capital, a glitch in production, marketing or an industry-wide disruption could prove fatal.

If the business does not build sufficient financial reserves, its only recourse when confronted by a downturn is another equity drive to raise more money from its members. Several of the unsuccessful businesses we interviewed reported having undertaken such fund raising efforts. But the efforts met with limited success given the business’s recent history of substantial losses. On the other hand, some of the successful businesses conducted subsequent equity drives to finance expansions. These businesses' histories of making substantial payments to grower-members were credited with contributing to the success of subsequent capitalization efforts.

Lender issues
The financial partner (lender) must be sufficiently invested in the business to have an incentive to stay the course over the long term. Without that incentive, they may want out at the first sign of trouble. Two businesses were financed by a consortium of rural banks, with a USDA loan guarantee. Thus, the risk to any individual lender was relatively small. Under these circumstances, it appeared that the lenders may not have critically evaluated the project and were quick to get out when problems occurred. If the financial institution is not sufficiently vested in the business, it may withdraw if a downturn leads to the need for additional funding.

Organizational structure
Organizational structure may have an impact on some lenders’ decisions to finance cooperatives. Some characteristics of the closed cooperative model may be perceived as weaknesses of the organizational form. Because of expanded access to capital through non-farmer investors, fewer restrictions on membership delivery and commodity purchases, and simplified structures for distribution of earnings, some lenders saw the limited liability company (LLC) or corporation (subchapter C) as a preferred organizational structure. In fact, all of the enterprises examined were either a LLC or a corporation. Some were organized as LLCs, while others had started as a closed cooperative and have since converted to a LLC or corporation. One Chief Executive Officer (CEO) we interviewed cited the need for a stream-lined decision-making process as critical in the decision to convert from a closed cooperative to a corporation.

Several lenders questioning the wisdom of siting processing facilities in remote rural areas. They expressed concern that the facility’s potential for resale may be less than if it were located in or near a regional trade and service center.

Strategic planning and implementation

Early in the development of a farmer-owned enterprise, the board of directors and management need to work together to define business goals, objectives and standards. Previously the importance of a shared vision by management and the board was discussed. The strategic planning process is where the shared vision is identified and articulated. Typically, management with its industry knowledge and expertise would prepare a strategic plan and present it to the board for approval. The implications of the plan need to be understood by both groups.

Business assessment
The plan should incorporate and articulate a tight, well-defined business focus. Launching a multi-million dollar commodity processing business is challenging enough on its own. But without a well-defined vision and plan for implementing of that vision, the odds of success decline. Management and the board need to realistically assess their business’ relative strengths and weaknesses and implement plans that capitalize on the venture’s strengths. For example, one business found that it had an advantage over competitors in shipping product to points north and west of their facility. It then focused its marketing program to capitalize on this advantage.

It is important that a new business venture not try to do too much. A new business should focus on being very good at one thing rather than try to do several things. Penetrating a commodity market with thin margins, often the case with a processing business, is difficult enough on its own. Trying to penetrate multiple markets is even more difficult. One business venture attempted to process and market five different products. This posed problems for both marketing and plant operations because of the need to retool each time it began processing a different products. The venture failed within a year of beginning operations.

Business launch
The launch phase of a new business venture is critical. The strategic plan must provide for significant and appropriate investment in sales and marketing. This is relevant for all new ventures but particularly for non-commodity or differentiated product ventures.

The use of proven technology is also critical to a new enterprise. A new enterprise should use the best available technology but also stick to proven technologies. An embryonic organization should not attempt to pioneer new technologies. There are simply too many unidentifiable risks for a new venture to attempt to overcome.

If a technology problem or a production delay emerges that hinders start-up or causes a shutdown in production, starting legal action against the technology provider or builder should not be postponed. A substantial lag can occur between the time of initiating legal action and financial remedy. In one situation, the builder was given additional time to reach guaranteed plant production capacity. So, legal action was not initiated until after several attempts by the builder to reach production capacity. By the time legal action was started and financial remedy received from the builder, the business venture had ceased operations and gone out of business.

Organizational issues

Most New Generation Cooperatives (NGC) were organized prior to the mid-1990s. Organizational structure was less important at that time than it is today. There were no viable alternative legal business structures for farmers that wanted to band together to form a new business venture to add value to their commodities. So, for a time, this structure met the needs of farmer-owned business ventures. It provided limited liability and pass-through taxation. But many ventures realized that the business principles that served distribution and supply cooperatives well did not work for capital-intensive processing ventures that characterized most NGC.

In the early to mid-1990s, many states passed legislation to allow agricultural ventures, as well as other types of ventures, to organize as limited liability companies (LLCs). It retained the principles of a traditional cooperative but removed some of the restrictions that made the cooperative cumbersome for farmer-owned processing facilities. The LLC retains key characteristics of traditional cooperatives, such as limited liability and pass-through taxation, but removes restrictions on non-farmer investors and membership delivery requirements.

Legal organizational structure
An early decision for a group organizing a farmer-owned venture is the legal organizational structure to be adopted. In recent years, most farmer groups have formed as an LLC or corporation (subchapter C). These are more favorable organizational structures than a traditional cooperative. A LLC offers similar advantages as a NGC with fewer restrictions on membership and purchasing inputs (no delivery requirements).

For other groups, a corporation was most appropriate by providing better access to capital from non-producer investors or equity funds. However, a corporation’s earnings are taxed twice--once at the corporate level and again when distributed as dividends to the owners.

Although more options for organizational structure are available today, the traditional cooperative structure is still the model of choice for certain types of farmer-owned business. An example is the highly successful sugar beet cooperatives of North Dakota and Minnesota. Sugar beets and other specialized commodities that lack spot markets find the traditional NGC model preferable.

Decision making
Another consideration when deciding on a business model is the seemingly cumbersome decision-making process inherent in the traditional cooperative structure. All major decisions must be approved by the members in a one-member, one-vote process. Not only is the process cumbersome but there are issues of confidentiality. Some of the businesses we interviewed stated that some companies prefer not to do business with cooperatives because of confidentiality issues. For example, an agribusiness company might wish to discuss a joint venture project with a cooperative but prefer to have the information kept confidential until the details are worked out. However, maintaining confidentiality may not be possible with a cooperative where management and the board must obtain member approval.

Board composition and training
A critical decision when organizing a new venture is the composition and size of the board of directors. Board members with previous board experience and appropriate business or industry experience is critical. Because farmer-owners seldom have sufficient experience or expertise in the production and marketing of processed products or experience in managing an organization as large or complex as a processing venture, including outside board members (board members from industry who may not be owners) is often desirable.

It is also important to conduct training for board members. This includes not only training for new board members but on-going board training programs as well. Just like the business itself, the board must make an investment in the form of on-going board training to maintain its industry competitiveness.

Board size and the meeting schedule should be manageable. Even an experienced and well-trained board of directors can encounter problems if the board size or meeting agenda is unmanageable. Two of the organizations we interviewed had boards of directors with more than 20 members. They suggested that their boards were too large. The desire for equitable representation of the business’s farmer-investors often leads to large board size. However, this desire should not be allowed to jeopardize the board’s ability to effectively lead the company.

Professional team
When making important business decisions, access to business, legal, financial and industry expertise is critical. Early in the process, founding members should seek professional expertise. While retaining professional services can be costly for a start-up with little or no working capital, the importance of professional council cannot be over-emphasized. For some businesses, state assistance was available and pivotal in financing feasibility studies and business plans. Another business reported that their attorneys worked on a contingency basis during the early days of the organization. State and local economic development programs may be a good place to find access to, or funding for, professional services.

Management and operations

Competent professional management is essential to a business venture’s success. The right CEO and management team can mean the difference between success and failure. Management needs to be involved very early in the business project. One successful venture we interviewed hired its CEO prior to the equity drive. The CEO was then able to lead the equity drive and provide input on plant design and oversee construction. The plant was up and running on schedule.

While this example is more often the exception than the rule (the CEO often comes on board after a successful equity drive), all of the businesses we interviewed agreed the sooner the CEO is hired, the better the start-up process unfolds. Although board members are usually successful producers and community leaders, there is no substitute for good professional management.

It was also particularly helpful when the CEO had been involved in similar start-up operations.

Management recruitment
The board should plan for a significant investment in the recruitment and retention of a CEO. Recruitment strategies varied among the businesses we interviewed, with several using executive placement (a.k.a. headhunter) firms. One CEO responded to an ad in a trade magazine. Another CEO of a successful venture was recruited because he was personally acquainted with one of the founding directors. While there appears to be no patented formula for successful recruitment, the board should make an appropriate investment in time, money and networking to find, recruit and hire an industry-savvy CEO.

The CEO is the only member of the management team that the board hires. So, once the CEO is hired, the board should leave the remaining hiring decisions to the CEO. The CEO is responsible for building the management team.

As articulated previously, the board of directors and the CEO must have a shared vision of the organization including its future growth and operations. This shared vision will enable the CEO to manage and build an appropriate management team and help alleviate micro-managing by the board, which can be very detrimental to board/CEO relations. One CEO we interviewed reported that the board of directors must be committed to reinvestment and growth in order to attract top quality management.

CEO compensation
Providing adequate compensation and incentives is absolutely necessary for attracting top management professionals. While often challenging for a fledgling organization, an appropriate compensation package will ensure that the CEO has as much incentive for business success as the board and the owners. Two successful organizations we interviewed reported offering performance-based incentives described as ‘phantom stock’ to top management.

Industry knowledge
The entire management team needs to develop and maintain market and industry savvy and awareness. Market and industry awareness is often a prime selection criterion for key positions. For the venture to succeed, it must remain competitive in its industry in terms of operating efficiency and cost of operations. It is the management team’s responsibility to be aware of industry standards and recommend investments and upgrades over time to ensure that the venture remains competitive.

Operating margins and investor returns must also be competitive with industry standards, and the management and the board must be aware of the margins and returns of other industry participants.  This too will likely require ongoing reinvestment of some of the earnings to expand or upgrade facilities. In the absence of such industry awareness, the board and farmer-members may develop unrealistic expectations regarding the returns from their venture. Many farmer-owned processing activities are fundamentally commodity businesses characterized by thin margins.

Employee training
Finally, the new organization should plan and prepare for significant investments in employee training. This is particularly relevant if the facility is located in a rural area where manufacturing and processing industries are rare. New employees will likely need substantial training in areas such as safety, sanitation and quality control.

Another measure to enhance competitiveness is to maintain a lean management team.

Local infrastructure and support

Local and state support is generally available and relatively easy for farmer-owned commodity processing businesses to obtain. All of the businesses we interviewed took advantage of state and local support to varying degrees. State funds were often used to support feasibility analysis and business plan development. Local economic development organizations often provided the plant site and supporting infrastructure, such as utilities or transportation access. Organizations with a vested interest in local economic development, such as rural electric cooperatives or local economic development organizations, frequently provided assistance ranging from low-interest loans to office space.

Role of public support 
Up-front support from various sources can be critical during the initial phases of business development. Not only can state and local programs support a venture until appropriate working capital is secured, they are often the only source of funding for feasibility studies and business plan development.

While state and local assistance is an important part of the capitalization process, it was always much less than the funds contributed by investors. For example, one successful project received local site and infrastructure improvements valued in excess of $1 million and several hundred thousand dollars in state assistance for organizational costs. However, investors contributed $12 million in the initial equity drive. After the project experienced initial success, investors contributed another $26 million in a second equity drive to finance expansion. While state and local support is part of the capitalization process, investor support was the key to project success.

Site selection
Although state and local support is a small portion of overall capitalization, competition among communities offering location incentive packages should be encouraged. Some communities may be willing to make substantial infrastructure investments that could be significant to the success of the venture. For example, one successful venture formally solicited site proposals and received twenty eight.

However, when considering state and local support for siting decisions, it is important that the potential economic development benefits do not cloud the decision-making process of siting a new venture. Site selection needs to be viewed from a “business success” perspective rather than an “economic development” one. Site characteristics must be examined carefully and the benefits of various sites considered carefully. Selecting the proper site for business success can pay long-term benefits. So, first and foremost, the potential site must make sense from a business perspective. Economic development goals are secondary. Selecting a site for economic development purposes is of no value if the site cannot lead to business success.

Site selection can also become an emotionally charged issue. Business leaders and economic development professionals often appeared to be more interested in local development benefits of the business than its profit potential. Grower-members may insist that the facility is sited in their home community even though an alternate site is shown to be economically advantageous. This can make the site selection process very difficult. Regardless, site selection must be based on sound business judgment.

Once a location has been selected, on-going communications with project supporters and state and local oversight agencies is important. Regular communication can help to avoid unforeseen issues that may delay or slow construction. It may also help facilitate permitting and other procedural considerations.



* Major funding for this research was provided by the Agricultural Marketing Resource Center. Additional funding was provided by Farmers Union Marketing and Processing Association Foundation, Co-Bank and Ag Ventures Alliance.