Peanut co-op seen as viable option

Forming a “new generation” cooperative for Georgia peanut producers could be an economically viable option, especially considering current market challenges, according to a feasibility study conducted recently by the National Center for Peanut Competitiveness.

Three main factors, says the study, are driving the search by producers and researchers for peanut marketing alternatives. “First, farm income for peanut producers has declined steadily during the current farm bill (FAIR Act) period. This has been due in part to a reduction in the quota price and the additional contract price.

“Second, the future of the current peanut program is questionable. Historically, peanuts were classified as a Section 22 crop, which provided domestic producers protection from imported peanuts. The removal of this classification due to the recent GATT and NAFTA trade agreements has led to downward price pressure domestically,” states the report.

In addition, the current supply-management program likely will be changed to a marketing loan-type program in the new farm bill.

A third factor is that the first buyer market, or shellers, has become increasingly concentrated over the last decade, giving the individual producer little or no market power with a semi-perishable crop, states the study. Currently, two firms control about 73 percent of the first buyer market in Georgia, Alabama and Florida.

New generation cooperative (NGC) is a term that has been applied to about 50 cooperatives that have emerged in Minnesota and North Dakota since the early 1990s and since have spread throughout the United States.

They are called new generation cooperatives for three reasons: they represent the newest generation of cooperatives, their major focus on value-added processing rather than the past objective of commodity marketing and, rather than acting as a general clearinghouse, a NGC is restricted to accepting only a predetermined amount of commodity from its members.

A survey of Georgia peanut producers conducted this past year revealed that southwest Georgia likely would be a target area to start a new generation peanut cooperative. The proposed cooperative would add value to farmer stock peanuts by operating a shelling facility and buying points. This would allow growers to pool their production for greater market power as well as capturing profits beyond the farm gate.

The cooperative suggested in the feasibility study would be a 69,000-ton per year facility. In order to finance the cooperative, the membership would have to come up 30 percent of the start-up costs, with the remainder coming from lending institutions. The 30 percent would be raised through the sale of equity shares in the cooperative.

The study assumes that one share will entitle and obligate a member to deliver one ton of farmer stock peanuts to the cooperative for as long as that member owns the share. The final cost of the initial shares would depend on the concentration of participating farmers and the number of buying points required for the operation.

Start-up costs for a cooperative with two buying points was estimated at $34,700,000 and an up-front member investment of $151 per share. On the other end of the spectrum, start-up costs for a cooperative with five buying points would be $37,100,000, requiring a member investment of $161 per share.

Regardless of the number of shares purchased by a member, the traditional cooperative standard of one member equals one vote still would apply. “This NGC still would be a cooperative with the main goal of benefiting its members by increasing marketability of the commodity, increasing market efficiency, eliminating middle men and return profits to its patrons after expenses of the NGC have been covered,” states the study.

The projected benefit-cost ratios for the proposed cooperative ranged from 2.12 to 1.68 over a 10-year schedule. This means that a member is projected to average about a 6.8 percent to 11.2 percent return on his investment over the first 10 years. For example, a member who invested $151 per share would be projected to receive a return, over the first 10 years, of $320.77 per share.

The feasibility study states that even though research has shown that a NGC for peanuts could be economically viable, other factors need to be considered.

“First, farmers must be willing to cooperate with each other. Without cooperation, there can be no cooperative. Second, the decisions made by the management and the board of directors could make or break the venture. The cooperative must be able to attract skilled managers with a good knowledge of the industry.

“Third, predatory practices could be a concern. Even though some predatory behavior was budgeted for in the study through cold storage costs, the cooperative would be competing with two very large firms.

“Finally, the structure of payments from the cooperative to the farmer-members for farmer stock peanuts can dictate the viability of the venture. If the cooperative were required to pay the total value of one year's output to its members at harvest, cash flow could become a problem.”

Throughout the study, alternative structures and arrangements are discussed that could solve potential problems. For example, the cooperative could reduce start-up costs by purchasing existing facilities rather than creating a new structure. Several shelling facilities and buying points that either are unused or available to be purchased throughout southwest Georgia.

In addition, rather than starting a new cooperative, potential members could restructure an existing cooperative or look to an alternative marketing arrangement with an existing, smaller shelling firm. This would allow membership to gain from the marketing and administrative experience of an existing management staff and allow a smaller sheller to guarantee a consistent level of output.

Finally, to avoid some of the start-up costs as well as overcome some of the cash-flow problems of purchasing peanuts from members, a cooperative could avoid investing in buying points and instead design delivery dates throughout the year. This allows membership to innovate and form cooperatives on the side for storing peanuts.

All of these structural options should be considered when the cooperative is organized, advises the study.

Authors of the study state that further research should include a follow-up survey including hard numbers for projected share prices and returns do an accurate level of producer interest can be determined.

“Once producers are educated on the costs and potential benefits of forming a new generation cooperative, and feedback on the idea is received, the feasibility of this venture can be determined more accurately.”

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