Document Type

Value-Added Agriculture

Publication Date

11-2004

Abstract

It has not been that long ago when the options for organizing a business were fairly straightforward. The list began with sole proprietorships and partnerships and then included cooperatives and corporations. This simplified list has become a bit more complex in recent years, and now includes limited liability companies and multiple subclassifications of corporations, partnerships and cooperatives. To complicate matters even more, the precise descriptions of any of these business organizations are often state-specific. That is, the definition and organizational details of a limited liability company or a cooperative in one state are not necessarily the same as in other states.

Accelerated developments in value-added agriculture enterprises in Tennessee in recent years have contributed to an increased interest in the organization of cooperative agriculture ventures. Recent interest in new-generation cooperatives has caused even more confusion in various business structures authorized under state and federal statutes. Specifically, recent research and development of biofuel manufacturing operations has increased the consideration of new business structures for more modern business practices. These developments have presented a significant division between traditional and modern cooperative concepts.

Structural changes from the traditional farm gate to retail shelves are impacting the markets in which cooperatives and farmer members operate. The rapid pace of advances in information technology is making the world smaller and changing traditional business communication and transactions.

Consolidation of agribusinesses, food manufacturers and food retailers is resulting in fewer, larger buyers for commodities. Simultaneously, farmers are gaining more control of niche-market opportunities. The need and opportunity to add value and differentiate products is becoming much more commonplace in most levels of agribusiness. The traditional roles of commodity producers and commodity handlers are much different than in the past. Similarly, much of the organizational system for cooperative business formation was created in response to, and in support of, the traditional family farm. Consolidation of agribusiness firms at the marketing, processing, wholesale and retail levels has resulted in drastic overall changes in the traditional agriculture and food marketing system. Vertical integration due to economies of scale has allowed food processors to have more control over distribution channels and profit margins. However, the opportunities afforded by integration often have come with the challenge of raising sufficient capital, particularly equity, to finance initial investment, improvements and expansions.

In the past, farmers have been able to develop cooperative ventures to do together what individually would have been difficult or impossible. This has been the primary motive of farmers organizing cooperatives to process commodities into value-added products. However, the start-up investment requirements for value-added processing cooperatives are significantly larger than the start-up costs for traditional non-processing farmer cooperatives. Another impediment to cooperative formation is potential farmer reluctance to finance new initiatives, especially unfamiliar and risky activities, such as vertical integration and value-added processing.

This document attempts to summarize and clarify the Tennessee Processing Cooperative Law, which was introduced in 2004 as Senate Bill 1161 and House Bill 1675. However, to accomplish this, a comparison with other business structures is needed. And, in order to effectively make such comparison, it is important to establish benchmark descriptions of all the business formation options.

Publication Number

PB1748-750-11/04 R12-4010-18-002-05 05-0066

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