| |
- What is a New Generation Co-op?
- What types of New Generation Co-ops have been created in Alberta?
- Why are Western Canadian farmers considering New Generation Co-ops?
- When would a New Generation Co-op not be the best choice for our business venture?
- What are the steps required to organize as a New Generation Co-op?
- What are the legal and tax issues we need to be aware of?
- What sources of capital are available and how can we access them?
- How are the business decisions made once the co-op is up and running
- What other business arrangement options should we be aware of?
- Where can we find out more about New Generation Co-ops?
Introduction
.
A New Generation Co-op (NGC) is a form of business arrangement that encourages agricultural producers and processors to expand the scope of their businesses. Sometimes described as hybrids between traditional co-ops and limited companies, NGC’s may be one way to help bridge the gap between commodity-oriented primary producers and consumer-focused markets.
This web site has been set up using a two-level design. The first level (this document) features "Ten things you need to know about New Generation Co-ops." Its easy-to-read question and answer format provides basic NGC information. If you need more detail you can follow any of the numerous links to level two. This second level consists of references, research papers and links to other web sites. You can access the reference section directly using the alphabetical reference index. To return to the previous screen, click on your browser’s "Back" icon.
1. What is a New Generation Co-op?
A cooperative is a legally incorporated business arrangement that provides for the control of the business by its membership. A new generation co-op (NGC) is a type of cooperative that uses a system of delivery rights and obligations to encourage business loyalty and provide a form of vertical integration. NGC’s are particularly suitable to ventures involved in value-added agricultural processing and marketing.
Based on a model first used in California, NGC’s emerged and flourished in the mid-western US in the 1990’s. Since that time, all three Canadian Prairie Provinces have introduced new laws or modified existing legislation to allow for NGC’s. Alberta's Cooperatives Act, (effective on April 2, 2002) defines NGC’s in sections 422 to 429.
There are some key attributes of NGC’s that are consistent with all co-ops:
- NGC’s are controlled by their membership using the principle of one member, one vote
- Earnings are distributed to the members based on patronage.
- The board of directors is elected by the membership.
However, there are several characteristics of NGC’s that differentiate them from traditional co-ops:
- NGC’s may issue designated shares which carry delivery rights and obligations.
- Individuals (members and non-members) may hold higher levels of equity through the purchase of investment shares.
- Membership may be restricted to designated share holders.
- In Alberta, NGC’s are applicable only to agricultural ventures, and the word "co-op" or "co-operative" does not necessarily have to appear in the name of the venture.
In general, New Generation Co-ops are typified by restricted, project-oriented enterprises which require significant investments from their members, and a membership which strives for increased profits and return on capital through this investment.
The paper New Generation Co-ops: Alberta’s Newest Option for Agricultural Businesses, prepared by Corbett Smith Bresee LLP, an Edmonton legal firm, provides an excellent and comprehensive overview of setting up an NGC in Alberta.
(Back to Questions)
2. What types of New Generation Co-ops have been created in Alberta?
There are several different types of NGC's appearing in Alberta. Our province's first co-op based on NGC principles, the Alberta Wapiti Products Co-op (AWAPCO), is primarily a marketing co-op. AWAPCO was incorporated under previous legislation with the intention of converting to an NGC in the future. It co-ordinates the processing and marketing of elk and elk products. The co-op purchases elk from its members and arranges for processing under a contractual arrangement with a federally inspected plant. However, the co-op's key role is marketing product and promoting the industry on behalf of its members.
The second type of NGC is the processing co-op - the type of NGC that flourished in the northern US in the 1990’s. Under this concept, a group of producers and investors band together to buy or build a processing plant. Producer members purchase the right (and the obligation) to deliver product to the plant using a system of designated shares and marketing agreements. Members are paid an initial market price on delivery and a patronage premium at the end of the year. This premium may be considered as a return on the investment in designated shares.
An Alberta example of a processing co-op is Westlock Terminals. Westlock Terminals took advantage of an opportunity created by the withdrawal from a portion of the market by the large grain companies. A group of grain farmers and other local investors were willing and able to invest in a business they were comfortable with. The group raised more than one million dollars to purchase grain elevators in Westlock. They believe they have a competitive advantage in being able to handle, blend and market identity preserved (IP) varieties and grades, ultimately earning better returns for their members. (news letter story).
The Alberta Egg Producers Co-op is a unique example of a New Generation Co-op. Organized with the help of accounting firm Meyers Norris Penney and other professional advisors, this NGC brings together more than 100 egg producers with Vanderpol’s Egg Products Inc. from Abbotsford, BC. Their Airdrie egg processing plant has been in operation since 2003. Read the media story by AAFRD, New Generation Co-op fits the bill, and the Department of Rural Economy’s Cooperative Program newsletter article, Alberta Egg Producers Cooperative Formed
(Back to Questions)
3. Why are Western Canadian farmers considering New Generation Co-ops?
According to New Generation Cooperative Development in Canada (PDF - 229 KB), Agriculture’s focus is changing away from generic commodities and towards differentiated products, a trend that is resulting in more vertical co-ordination and integration. Trade in agricultural materials is moving less through public markets and more through contracts and product transfers within companies. NGC’s are one way for producers to participate in this trend. Other contributing factors include:
- The risks around food safety standards, environmental issues and product liability concerns are increasing.
- Production at all stages of the industry is more capital intensive and international trade continues to become more important.
NGC’s were extremely successful in the north-central US (especially North Dakota and Minnesota) in the 1990’s and they are becoming better known in Western Canada. Many provincial governments have introduced legislation that provides for the formation of NGC’s.
One of the key reasons that groups might choose to organize as a New Generation Co-op is that it may be easier to gain the confidence of local community investors. Co-op legislation, by reputation and by design, restricts the degree of control held by any one individual or group of individuals. The co-op principle of democratic control by the membership may be attractive where a venture depends upon raising funds from the community.
Agricultural Co-operatives: A Start-up Guide (PDF - 386 KB) provides a list of reasons why groups of farmers and investors might consider forming a New Generation Co-op. The list includes:
- To improve bargaining power and obtain needed products or services
- To reduce costs, achieve economies of scale and increase returns
- To improve product and service quality
- To reduce risk
- To maintain or improve access to markets and to develop new market opportunities
- To access a larger share of earnings generated by the business and keep these earnings circulating in the local economy
- To draw on the community's desire for viability and its ability and willingness to invest
- To provide flexibility for future options
The Start Up Guide has a sister publication called Financing Agricultural Co-operatives (PDF - 306 KB). This publication reviews many of the issues surrounding capital requirements for cooperatives.
. |
(Back to Questions)
. |
4. When would a New Generation Co-op not be the best choice for our business venture?
New Generation Co-ops are not for everyone. When compared to traditional business arrangements, NGC’s may seem complicated and expensive to set up, manage and maintain. Ventures involving a relatively small number of participants may wish to consider other alternatives. For example, five cereal grain producers planning to enter into a marketing arrangement might be better to consider a joint venture, corporation or partnership.
In some situations investors and/or participants may disagree with co-operative philosophies, especially that of one member, one vote. This may become a concern when some people hold very large investments and others have invested smaller amounts.
(Back to Questions)
5. What are the steps required to organize as a New Generation Co-op?
Setting up a New Generation Co-op is a major undertaking. It is important that all participants have a chance to contribute and that the development process moves ahead systematically.
The five main steps in co-op development (from Agricultural Co-operatives: A Start-up Guide) are:
- Identify a common economic goal
- Determine business feasibility
- Develop a business plan
- Draft legal papers and incorporate the cooperative
- Implement the business plan and begin operations
Parlee McLaws LLP – Sample Technical Documents
Accountants, lawyers, consultants, and other professionals that handle the technical details of setting up New Generation Co-ops may benefit from the draft bylaws, articles of incorporation, and other sample material provided by Parlee McLaws LLP.
If you have not already done so, you must read and agree to the “Terms of Use” found at the top of each Parlee McLaws document, and in the table below.
These documents are in Adobe Acrobat format; click on individual file names. If you don’t have Acrobat Reader, click here for a free download.
There are many other general references on co-op development:
(Back to Questions)
6. What are the legal and tax issues we need to be aware of?
Co-operatives in Alberta are incorporated under provincial legislation. The main objective of a common business corporation is to reap a return to investors based on the amount of capital invested in the corporation by the shareholder. A co-operative stresses membership and looks at their role as a patron rather than as an investor. A New Generation Co-operative is a hybrid of these business models. In essence, a New Generation Co-operative is trying to maintain the flexibility of raising capital, which is allowed through a corporation, provide the tax advantages of a corporation, but also focus on the operations of a commonly held business through a "co-operative spirit."
Legal requirements
In Alberta, a New Generation Co-operative (NGC) means a corporation
- that is organized and operated and carries on business on a co-operative basis
- that is incorporated pursuant to Bill C2
- whose articles restrict the business of the co-operative to one or more of the following endeavors or businesses:
- The production, processing or marketing of agricultural products
- The provision of services to persons primarily engaged in an endeavor mentioned in the previous bullet
- Any prescribed business by the Minister
The New Generation Co-operative Act also spells out the requirements for redemption of membership shares, repayments of loans, transfer of membership interests, the capital structure including investment shares and designated shares. Also, the requirement for patronage returns and the ramifications for the bylaws of the co-operatives.
In Alberta, New Generation Co-ops can be created with no less than 3 members and must be incorporated with membership shares. Furthermore, the right to vote attaches to these membership shares held by the member but each member is entitled to only one vote regardless of the amount of shares held by each member.
Income tax considerations
New Generation Co-ops are not treated as private corporations, however, they do qualify for the small business tax rate on the first $200,000 of active business income. They also qualify for manufacturing processing reductions when available. By not being treated as a private corporation for income tax purposes, New Generation Co-ops do not have certain tax features such as refundable dividend tax on hand (RDTOH) nor the Capital Dividend Account (CDA). These accounts ensure integration of a corporate capital gain thus there maybe a distinct tax disadvantage for co-ops in certain situations. In addition, the sale of New Generation Co-operative Shares will probably not qualify for the $500,000 capital gains deduction.
Tax rates
The effective income tax rate for NGC’s in Alberta on the first $200,000 of active income is 17.74% in 2003. As in all cooperatives, a qualified patronage payment can be made and is deductible by the cooperative as long as the payment is made in the year or within 12 months after the year end of the cooperative and the payment must be made in proportion to patronage.
In order to qualify as a co-operative for taxation purposes at least 90% of its members must be comprised of individuals or other co-operative corporations, corporations or partnerships that carry on the business of farming, and at least 90% of its shares, if any, are held by those members.
There is no farming requirement for members who are individuals to meet the 90% test. For example, if one individual and nine corporations formed a NGC, eight of the nine corporations would have to be involved in farming. (eight Farm Corporations + one Individual = 90%). Or the other hand, if they were one Corporation and nine Individuals, the 90% test is met regardless if any individuals farmed.
One major difference, in the taxation of a cooperative corporation over other corporations, is the common use of the ability of the cooperative corporation to deduct from their income any patronage dividends. Patronage dividends are payments made pursuant to allocations in proportion to patronage by members. Payments can be made in several different ways such as cash, credit to a patronage account, or offset to a members’ liability to the cooperative or through the issuing of new shares. This does allow co-operatives to internally generate a major source of capital from which corporate taxes has not been paid.
The effect of allowing a New Generation Co-operative to reduce their taxation exposure yet maintain a strong capital base through their membership patronage is a very positive legal and taxation feature that must be reviewed when structuring a business venture.
RRSP investment
The principle issue is whether a share of a New Generation Co-op is a qualified investment for a RRSP? The requirement to be an eligible RRSP investment is that at the time of acquisition by the RRSP plan, the member and all related persons to that member can not hold more than 10% of the shares. Also, 90% of the co-operative property must be used in an active business. If a member owns more that 10% of the shares but less than 25 %, the maximum value of the RRSP investment is $25,000. If a member owns more than 25% of the shares, then no RRSP eligibility is allowed. Note: membership shares are not qualifying shares for RRSP investment, but new generation co-operatives investments shares can be qualifying shares for a RRSP investment.
Conclusion
The New Generation Co-op business model allows for increased flexibility in the raising of capital, can use the concept of patronage dividends, and can provide a business structure that uniquely balances the goal of financial profitability with membership objectives.
(Back to Questions)
7. What sources of capital are available and how can we access them?
Debt Capital
AVAC
- AVAC Ltd. has several programs to assist projects that meet their funding criteria.
AFSC Commercial
- AFSC Commercial is a division of Agriculture Financial Services Corporation offering a unique portfolio of innovative financing options, to help meet the capital needs of the rapidly expanding value-added and agrifood industry.
Farm Credit Canada
- FCC loans are available for on-farm diversification and for off-farm businesses that process, transport, store or distribute farm inputs or farm produce, provided that the applicant or the shareholders of the applicant (in the case of companies or co-operatives) are involved in primary agricultural production related to the business.
Advancing Canadian Agriculture and Agri-Food (ACAAF) Program
- The ACAAF program funded by Agriculture & Agri-food Canada may fund projects under three pillars:
- Pillar I: Industry-led Solutions to Emerging Issues, supports projects that test or pilot approaches and solutions.
- Pillar II: Capturing Market Opportunities by Advancing Research Results, supports projects that transfer research results into market opportunities.
- Pillar III: Sharing Information to Advance the Sector, supports projects aimed at gathering, analyzing and sharing information to contribute to future agriculture and agri-food policy directions.
.
- The Biofuels Opportunities for Producers Initiative (BOPI) program announced in July 2006 promises $10 M to support this new industry. Announced at the same time was a one-time addition of $1 M for the existing Co-operative Development Initiative (CDI).
Equity Capital
Seed capital
- Society option - At some point in the process, the group of key individuals who are driving the project need to organize around a business entity. Forming a Society is one way to accomplish this.
- By registering with Alberta Registries, the group gains an identity and a mandate to do business. This allows the group to gather seed money, apply for grants, gather donations and employ people to further examine the business idea. It can also provide some level of protection in case liability issues should arise.
- One example of this approach is the water cooperative in the County of Warner and Forty Mile. The group formed a society to do the feasibility study on the water pipeline. The membership fee allowed the Society to raise the initial capital needed and also obligated the members to purchase the remaining fee once the pipeline was "a go". The members bought memberships that were converted to cooperative shares. The final share cost was approximately $25,000.00 for 1 unit (1 Unit delivers 2.5 gpm).
Shares
- The selling of shares is the most common way to raise equity.
- One of the questions asked relates to how NGC's compare to other business structures when raising capital. Corporations are the most common followed by partnerships, both general and limited. When dealing with property income trusts are new to the business structures landscape.
- The Alberta Securities Commission (ASC) governs the sale of shares. When an NGC offers its shares to raise the needed capital, it must comply with the rules and regulations of the ASC. This is a specialized area of practice.
- For more information, check this fact sheet on securities rules in Alberta.
General Finance
The general rules of finance apply to co-operatives in much the same way as they apply to any other type of business. Like all businesses, agricultural co-operatives must maintain sufficient levels of equity capital to ensure the financial viability of their operations. However, in a co-operative, equity capital also provides the basis for member ownership and control. This feature makes some of the financial characteristics of co-operatives different from other forms of business.
The following considerations factor into the financial decisions and policies of co-operatives:
- Control over the co-operative’s future and direction must rest with the membership, and not with outside interests. Therefore, the bulk of a co-operative’s equity capital should be obtained from members.
- Members, as the owners of the business, have a obligation to contribute capital to the co-operative in proportion to the benefits they expect to receive from its operation.
- Equity ownership should be held by the current membership of the co-operative, namely those who have recently used the services provided by the business.
These considerations influence the ways in which co-operatives finance their operations and handle equity in the business. For more information, refer to Financing Agricultural Cooperatives (PDF - 306 KB) from the British Columbia and Alberta Departments of Agriculture.
(Back to Questions)
8. How are the business decisions made once the co-op is up and running?
New Generation Co-ops are governed by boards of directors who are elected by the membership on a democratic basis. The board hires the management team, which manages the operations of the co-op.
- Governance in Agri-Ventures (page 6)
- Governance Defined (page 6)
- Management, Staff and Committee Roles (page 7)
- Operating Issues for a Board and Management (page 8)
- Guidelines for Governance with a Board of Directors (page 8)
- Building Your Board of Directors (page 9)
- Seeking and Sourcing Management (page 10)
Source: Alberta New Gen Co-ops: Governance and Management: Developing a Management Resource, Toma & Bouma Management Consultants, March 2003, pp 6-13 (PDF - 169 KB)
(Back to Questions)
9. What other business arrangement options should we be aware of?
The use of New Generation Co-ops (NGC) in Canada could possibly be enhanced if combined with another traditional business structure such as a:
- Corporation
- Cooperative Partnership
- Cooperative Investment in a Corporation
- Cooperative Limited Partnership
- Cooperative Joint Venture
- Cooperative Corporation
The factsheet Business Structure Options (PDF - 95 KB) for New Generation Co-ops outlines the pros and cons of each of these options as well as how they could be used in a New Generation Co-op arrangement.
For more information on business arrangements, check the following Alberta Agriculture publications:
Alternatives in Business Arrangements.
Agriculture and Agri-Business Structures (paid publication - Canadian Farm Business Management Council)
(Back to Questions)
10. Where can we find out more about New Generation Co-ops?
Prompted by the success of the new generation co-op movement in the North Central US, governments, universities and other organizations have developed substantial Internet databases and other information sources. Here in Canada, the University of Saskatchewan’s Centre for the Study of Cooperatives was one of the first and remains a key resource. Its list of world-wide co-op information sites is excellent. Manitoba (case studies), BC, and Ontario have also made significant contributions.
The United States Department of Agriculture (USDA) has been a long-time champion of co-ops through its Cooperative Extension Service. Most of the USDA’s efforts in this area are in conjunction with the Land Grant Universities. Notable resources include the Wisconsin Center for Cooperatives and the Quentin Burdick Center For Cooperatives in North Dakota.
Other Alberta sources of information about co-ops include the U of A’s Cooperative Program in Agricultural Marketing and Business, the Alberta Community and Cooperative Association (ACCA) and Service Alberta (includes the text of the new Cooperatives Act).
Perhaps the ultimate source of information on new generation co-ops is the Internet itself. Information websites, databases, case studies and other resources are continually being created and being updated. Try using an Internet search engine (such as Google) to find information specific to your needs.
You may also wish to contact a member of Alberta Agriculture, Food and Rural Development’s Innovative Business Arrangements Team (PDF - 171 KB):
Merle Good
Olds
403-556-4237
merle.good@gov.ab.ca
(Back to Questions) |
|