PB1750-Considerations for Membership Investment in a Processing Cooperative

The “Tennessee Processing Cooperative Law”1 provides new opportunities for Tennessee farmers. These include new market opportunities for farm commodities and the opportunity for investment in a value-added processing business. The new law is intended to encourage business formations that will add value to farm commodities and agricultural resources in Tennessee.

A thorough introduction and overview of Tennessee’s processing cooperative law is available in UT Extension PB1748, “Commentary and Overview for the Tennessee Processing Cooperative Law.” Basically, the new law provides for the establishment of a new business structure specifically for businesses that will add value by processing or marketing agricultural commodities. The new business structure can be described as a hybrid between a traditional cooperative and a Limited Liability Company (LLC). A business formed under the law will follow traditional cooperative organization principles and will be exempt from state franchise and excise taxes, similar to traditional cooperatives, but will accommodate both patron and non-patron membership.

A business organized under the new law can raise start-up capital from farmers (patrons) and investors (non-patrons) with both having membership rights in the cooperative. Patron members are those who “conduct business” with the cooperative by delivering a predefined quantity of raw input commodities to the business for processing. So, a patron member of a “processing cooperative” has potential benefits from selling commodities to the business plus possible financial returns on investment in the business from the value of the processed product. Non-patron members do not have an obligation to deliver commodities for processing. Non-patron members seek to benefit from their capital investment through dividends and appreciated stock value. Non-patron membership is not restricted to non-farmers. Non-patron members may be retired farmers, venture capitalists, current farmers or any other individual interested in an investment position without the commitment of delivery or input commodity for processing.

The initial start-up costs for many large-volume agriculture processing businesses often exceed the investment capacity for even a large number of cooperating farmers. The new law provides a legal business structure that allows farmers to cooperate with each other to obtain the required quantities of agricultural commodities for a processing operation and to supplement their capital investment with capital from outside investors. The start-up costs associated with many large value-added processing businesses are often very high. Under the new law, a “processing cooperative” can raise start-up capital from both farmer and non-farmer members.

It is important for farmers who are considering membership/investment in a new processing cooperative to understand that their involvement will be from three different perspectives: member, capital investor and obligated supplier of commodities for processing. Patron membership brings with it various responsibilities and opportunities for leadership, direction and decision making in the business. Patron members are also capital investors, having invested financial capital in the business. Additionally, patron members become commodity investors because they must commit a specified amount of their annual commodity production as raw input for processing by the business.