New Cooperative Development: The Case of Hudson Valley Growers Association

1. 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

2. 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

3. 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)

4. 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.

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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)

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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