Written, September 2009

Donald M. Senechal, Principal of the Windmill Group
Dr. F. Larry Leistritz, North Dakota State University
Dr. Nancy M. Hodur, North Dakota State University

During the 1990s, several “farmer alliances” formed to create agricultural value-added businesses.  A value-added business allows farmers to participate in processing/marketing of their commodities past the farm gate.  A farmer alliance is a formalized group of farmers, often a cooperative that focuses on investigating, forming and funding value-added businesses for investment and participation by large groups of farmers.

The authors focused on investigating and evaluating several farmer alliances to identify why some succeeded and some failed.  This paper is devoted to the research methods and results of their investigation.

Research Methods

The first step was to identify alliances to be studied.  An extensive review of professional and trade literature, coupled with the researchers’ and sponsors’ personal knowledge, led to the identification of five alliances for detailed study.  These included three alliances that were actively operating in the spring of 2008 when field work began and two that had curtailed active operation.  For each organization, interviews were conducted with present or former leaders (CEOs, board members) and others with special knowledge of a group’s genesis and subsequent history.  Face-to-face interviews were conducted by a field team during the summer and early fall of 2008.  A discussion of alliance similarities and differences will be discussed according to the following categories:

• Organizational Structure
• Alliance Missions/Objective
• Revenue Stream/Funding Source
• Staffing/Management
• Operational Behavior – Identification/Vetting of Ideas
• View of the Future

Based on an examination of the characteristics of the alliances, conclusions were made regarding which characteristics were critical to their success or failure.  

Organizational Structure

All of the alliances except one were organized as cooperatives.  While the organizational structure for all of them was similar, there were some very substantial differences in how the alliances operated.  The “no expectation of patronage” that is the hallmark of some cooperatives took on very different meanings for different organizations.  One of the alliances interviewed was struggling with the fact that the organization was structured as a non-profit cooperative which in turn prevented the alliance from securing any type of revenue stream from successful ventures supported by alliance members.  The executive director commented that if they did structure a project to provide a revenue stream, they would be required to pass all revenue though to their members.

Another alliance treated this issue slightly differently.  Again this cooperative was organized as a non-profit, but it chose to structure ventures in a manner that did not include any returns to the alliance.  While it was technically possible for the alliance to generate a revenue stream from ventures in which alliance members invested, alliance organizers made a conscientious philosophical decision that no revenues should accrue to the organization.  This meant that much time was spent looking for resources to support professional staff while the organizers firmly adhered to the alliance’s mission of bringing investment opportunities to members.

Another alliance structured ventures such that it does receive a revenue stream from successful ventures.  However, the revenue does not support professional staff.  Rather it is used to provide incentives and financial rewards to key board members that invest significant time and energy in stewarding projects to fruition.  The revenue stream from successful projects also has provided the alliance with the resources to provide seed money for start-ups.  

While most alliances were organized as cooperatives, organizational differences were in the details of the patronage rules.  Through the rules of governance it is possible to structure an alliance in such a manner that there are resources available to support the organization in the form of reserves with none left for patronage.  It is also possible to structure rules with strict patronage requirements.  Which structure is appropriate will be based on an organization’s specific mission and goals.   Because of the specialized nature of the cooperative organizational structure, this issue should be carefully considered in consultation with qualified legal council.  

Alliance Mission/Objectives

All of the alliances studied had a shared goal of identifying and facilitating the development of value-added agriculture related ventures and from these, providing profitable investment opportunities for their members.  One alliance stated as an objective the desire to fill the void in entrepreneurial and technical expertise existing in many rural areas by developing “serial entrepreneurs” and offering financial support for the development of value-added enterprises.   

While alliance short-term objectives were similar, long-term goals varied markedly.  One alliance clearly had a long-term vision and specifically articulated the goal of not becoming a one project organization.  Alternately, one of the alliances that have curtailed its operations was uncertain about their long-term objectives from the onset but choose to forge ahead without a clear vision.  This organization launched several small scale ventures and briefly expanded into a larger multi-state regional organization.   After a short period of time the organization dissolved.  The individual state organizations believed they could better represent their state through their own individual organizations.   However within a couple of years they found that individually they were too small and several state organizations re-grouped and formed a regional coalition.   After launching several successful ventures the organization declared the venture’s mission accomplished.  

The long-term visions of two alliances were not clearly defined at their inception.  The alliances started as grower groups that were interested in increasing prices for local commodities with little in the way of more specific goals and objectives.  Since their inception the organizations have experienced some fairly severe ups and downs that at times have nearly collapsed the organization.  While the organizations have managed to adapt and evolve and are still operational, one individual interviewed commented that to date the organization still struggles with its identity.  (The alliance is organized in such a manner that it is not able to generate a revenue stream from successful ventures to support alliance activities.  See section on Organizational Structure.)

A good example of the importance of clear goals and objectives relates to the type of ventures that the alliances pursue.   One alliance clearly articulated it was not a local economic development group but rather was a “business development group” and has been involved in projects nationwide and internationally.  In contrast another alliance’s stated objective was local capital development, ownership and control.  

Finally, each of the alliances examined shared the objective of creating free-standing business entities not affiliated with the alliance.  Board members from the alliances often served on the board of directors of the new entities but generally that was the extent of the relationship between the alliance and a new entity.

Revenue Stream/Funding Source

Each of the alliances interviewed required an initial membership fee for individuals to participate in investment opportunities.  One alliance had a one-time only membership fee, while the other alliances maintained annual dues.  Apart from that similarity, funding sources varied substantially.  

The alliance with one-time membership fees did not want to be a dues organization that would end up spending most of its time trying to collect annual dues.  However, for the first few years those one-time membership fees were the primary source of revenue.  As time went on, fees for services for organizing and facilitating investor meetings became the primary revenue stream for the alliance.    In a more recent project the alliance accepted founders stock as their compensation for services which has subsequently provided the alliance with a reliable and strong revenue stream.  It is noteworthy that all fees for services were deferred until such time as the venture became profitable.

Funding and maintaining alliance activities was problematic for the other alliances examined.  The collection of annual dues required substantial resources and collecting renewals was often problematic.   Funding from farm related organizations and grants from USDA and state entities provided a key revenue stream; however, this required the staff or members to devote a great deal of time and resources to grant writing.

In addition to insuring a revenue stream back to the alliance, one alliance also provides compensation for board members that make substantial contributions to development efforts.   Alliance board members that are instrumental in development efforts receive a portion of the revenues for services that accrue to the alliance.    

Staffing/Management

Staffing was quite variable among groups.  One operating alliance has an executive director and a staff of three.  An alliance that has curtailed operations had at least one full-time staff person for several years.  Other alliances never had paid staff members.  While one alliance has done very well in securing a revenue stream, the alliance was purposely organized so it can operate on a limited budget.  In each organization, the board of directors was ultimately responsible for major decisions.

Identification/Vetting of Ideas

The identification of opportunities for successful business ventures was strongly influenced by the alliance goals and objectives.   One alliance’s specifically stated goal was to not be an economic development group, rather a business development group that does not limit opportunities to the local area. In fact, two of their projects are in Brazil and Alabama.  Because this alliance has a history of successful ventures and has an established a track record, many ideas and opportunities come to them.  

The other alliances examined seemed somewhat more parochial in terms of potential investment opportunities.  One alliance started as a grower group that was focused on achieving  a small increase in the local price of commodities.  This group would consider projects outside the local area, local projects were preferred.   Currently this alliance supports a local tourism website that has a marked local economic and small business development flavor.  The other alliance examined focused on vertical applications for locally produced commodities but did acquire facilities out of state.  A business was launched by purchasing a processing facility in an adjacent state with subsequent expansions in three states.   While none of the alliances indicated they had a prescribed methodology in place to identify potential investment opportunities, it is not uncommon for projects and proposals to come to the alliance.  This was especially true for the alliance with an established track record.

Once an opportunity was identified, one alliance reported that board members take the lead in exploring ideas.  A committee (e.g., the ethanol committee) is formed that is responsible for researching and vetting the investment opportunity.   When the alliance agrees to take on a project by vote of the board of directors, a board member is assigned as liaison.  

The other alliances were less specific about responsibilities and procedures for vetting investment opportunities.  The board of directors of each of the alliances appeared to have the investment vetting and decision  making authority, although it seemed that one or two board members played significant leadership roles while paid staff people did much of the day-to-day work and investigation.   Major projects undertaken by each alliance were financed through fund drives and organized as independent entities.   

Recently, one alliance reported that the board is hearing more presentations from projects looking for start-up funding than investment opportunities ready for fund drives.      

Future

Members of the alliances that have survived clearly feel that there will continue to be investment opportunities for their members albeit perhaps not in the same vein as traditional value added agriculture enterprises.  One alliance is investigating a program where investors could band together in order to raise sufficient funds to invest in larger opportunities.  For example, ten individuals may invest $10,000 each to raise $100,000 to invest in projects with higher minimum investment requirements.  Another alliance is looking for opportunities throughout the United States and internationally.  One individual suggested that there may be substantial opportunities in South America.  

More recently a unique enterprise has provided one alliance with a significant revenue stream.  In partnership with a consulting group, the alliance applied for and received New Market Tax Credits from the U.S. Treasury.  Fees from placing the tax credits with appropriate projects have provided the alliance with a substantial revenue stream.  

Perhaps the most significant factor to influence the future of alliances is experience.  These organizations and the individuals that make up the organization have experience.  They can bring a measure of expertise to enterprise development that comes only from having been involved in other business development projects.  

On the other hand, one alliance that has curtailed operations felt that there is less interest in farmer-owned businesses today than in recent years.   In their view, with commodity markets much improved since the mid 1990s, producer’s incentives to find a way to maintain profitability have declined markedly.  One individual commented that the low-hanging fruit has already been picked.  Another individual commented that there are limited numbers of potential investors and that those potential investors have limited resources, suggesting that the available capital pool from local investors was tapped out or at least nearing capacity.  That is, after one or two investments, potential investors may not have the capacity to participate in future offerings or simply lose interest.  Very high capital cost associated with new technologies may also be an impediment to the cooperative and limited liability company models.  Raising large amount of money from many small investors is problematic.  

Several of the individuals interviewed suggested that the amount of effort needed to launch a producer-owned enterprise with hundreds of investors is an inefficient model.  In the future, farmer investor groups with a smaller number of investors but more investment per investor will be the norm.  One individual went so far as to say that the landscape has changed so much that the cooperative model, including LLCs, has at least in the near term peaked.  Higher commodity prices, price volatility and the cumbersome nature of dealing with large numbers of investors have made the cooperative/LLC model less attractive.
 
Implications

In general the alliances sought to help develop the expertise and capacity to facilitate the development of value-added ventures and bring investment opportunities to their members.  While all alliances had a similar mission, not all had a clear view of their mission over the long term.  It seems obvious that a set of well defined goals and objectives is critical to the long term success and viability of these alliances.  Further, it seems that the ability to adapt and evolve is critical.  For example, the alliances examined, at least initially, were not interested in any formal relationship between the alliance and the new venture.  However both of the organizations that are still operational have moved away from their original position and are securing some sort of revenue stream from the ventures it supports.  In at least one instance, the alliance has taken an ownership stake.   

The need for a reliable revenue stream was apparent.  The lack of a reliable revenue stream was cited as a problem and several individuals stated the importance of structuring projects so there is a revenue stream coming back to the alliance.  This has afforded one group the ability to award start-up money to further expand its ability to facilitate the development of value added investment opportunities.  In this instance, if the business venture is successful, it agrees to repay the alliance three times the start-up funding.  If the venture is not successful, the start-up venture has no obligation.  While one individual interviewed commented that fees or some other sort of equity requirement were not feasible and would simply be another financial obligation for a new venture, the alliance that has built in the potential for a revenue stream from a new project has never had a deal fail because of the equity requirement.  

All but two of the alliances examined have always had professional management.  The others have never had paid staff.  When there are no paid staff members the organizations can operate on a limited budget.  Further, the fact that board members do the work of identifying, researching and vetting potential investment opportunities and reap the rewards of successful ventures is key to the alliance’s success.  Alternately, paid staff can focus specifically and exclusively on the mission of the alliance while board members usually have other full time obligations.  

Suggesting that one model is better than the other would not be appropriate.  Rather, an organization’s goals and objectives would dictate which structure is most appropriate.  It is worth noting that a reliable revenue source is even more critical to an organization that maintains paid staff.  Without a reliable revenue stream the staff, or at least the executive director, spends much of their time working to secure resources to maintain their position and cover operating expenses rather than identifying, developing and vetting investment opportunities.   

The importance of people was cited on several occasions.  The best idea is of little value without dedicated and committed individuals working to bring the idea to fruition.  While this is true, the time and dedication required to identify, develop and vet business opportunities is not insignificant, especially in instances where there is no professional staff.  Considering that alliance boards of directors are made up of individuals that do something else on a full-time basis, burn out can easily become a factor.  Considering the level of personal commitment required, compensation for key board members responsible for fostering a project along seems wholly appropriate.  

Conclusions

Clearly, the state of the farm economy has changed dramatically since the early 1990s when farmer alliances began forming and the creation of farmer-owned value added enterprises was at its peak.  These changes prompt questions about the future of farmer-owned ventures, as well as the alliances that were formed to launch them.  Our research identified farmer-owned businesses that have been extremely successful, as well as others that were less successful.  Likewise, each of the alliances studied had launched at least one successful venture, although some alliances had since suspended operation.  The alliance that appeared to have achieved the greatest success had developed mechanisms to obtain a revenue stream from successful ventures and to use some of these revenues to reward individuals who had made outstanding contributions.  Thus, leaders in venture development had an incentive to remain involved over time and the alliance has a resource base to sustain new development activities.  Even as a sound business plan is a prerequisite for success of an individual venture, an alliance needs a business plan and appropriate incentives to motivate participation over time.