July 2, 2002

Cooperatives in Transition, Burdick Center Director Says

Part of Minnesota and North Dakota’s legacy to the rest of the country is the new generation, value-added cooperative, but the region’s cooperative movement is now focused on smaller, niche-market co-ops, according to a cooperatives expert at North Dakota State University.

Bill Nelson, director of the Quentin Burdick Center for Cooperatives at NDSU, compares the spread of new generation cooperatives from Minnesota and North Dakota to the crest of a wave created by a stone dropped in the water. "That crest is now in places like Michigan, Illinois, Iowa, and Colorado. We don’t have the big crest here anymore. We’re not seeing large cooperative start-ups. The crest, however is followed by smaller ripples. The smaller niche market cooperative seems to be the next step in the evolution of the new generation co-ops."

"For a while I think people thought they had to be really big to be significant and successful," Nelson says. "ProGold LLC was by far the biggest. When it was built it was more than five times larger than other start-up value-added co-ops of the 1990s in investment cost, and it only survived nine months until the lease arrangement with Cargill."

There may be no large cooperatives like ProGold or Dakota Grower’s Pasta starting up in the near future, but smaller, niche-market co-ops are starting to appear, Nelson says. Cooperatives for wind energy, ethanol, dairy production and a restaurant chain are among those in the region currently conducting equity and membership drives. The Cooperative Development Center at Mandan continues to work with numerous start-up cooperatives.

According to Nelson, the change in the type of value-added cooperatives formed is only part of the evolution that is occurring. The Quentin Burdick Center for Cooperatives has just signed a contract with the City of Fargo to do a feasibility study for a cooperative child care center. Nelson states that it is a different application of the cooperative form of business in this area, but one that is common elsewhere. He also believes that there is considerable potential for growth in other applications of cooperatives such as machinery sharing, housing, and retail business such as grocery stores in smaller towns. There is at least one group discussing the concept of a worker’s cooperative in North Dakota.

Although the cooperative is changing, its inherent advantages still remain. "The cooperative system permits the gathering of investment capital in small amounts from a large number of people," Nelson says, "and it has the advantage of a democratic control system. In people-oriented cooperatives it provides more opportunity for volunteer effort to reduce costs."

Other advantages, Nelson adds, include a continued willingness by state and federal lending institutions to assist in financing these ventures, and cooperative profits that are allocated to it’s members are taxed only once, at the member level, unlike corporation profits that are taxed both at the corporate level and dividends taxed at the investor level.

New generation cooperatives, like any other business venture, face all the challenges of any private business operating in a competitive market. Determining the real demand for the product or service being offered is key. One of the Quentin Burdick Center’s main functions is marketing and feasibility analysis. Need doesn’t necessarily translate into demand, which is the ability and willingness to buy. Market analysis must focus on the real market demand by buyers and the competition for those buyers in the market, not "wishful thinking" by suppliers.

Nelson has also witnessed another challenge faced by people trying to form a cooperative. "Sometimes the conception and formation of a co-op becomes a movement in and of itself," Nelson states. "The formation of a cooperative requires leaders with commitment and enthusiasm, but those attributes can come into conflict with the economic realities of the proposed business and this can lead to the formation of a business doomed to fail." He has seen situations where it is very difficult for leaders to accept the conclusion of a feasibility study that resulted in a "don’t form" recommendation.

The keys to success for a cooperative are, according to Nelson: a comprehensive analysis of the market for the product or service, a realistic cost and risk analysis, a detailed business plan, a knowledgeable, flexible steering committee and experienced management to implement the plan.

For more information, please contact the Quentin Burdick Center for Cooperatives at (701) 231-1016 or ndsu.qbcc@ndsu.nodak.edu .

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Source: Bill Nelson, (701)231-1016, bill.nelson@ndsu.nodak.edu
Editor: Tom Jirik, (701)231-6136, tjirik@ndsuext.nodak.edu
Writer: Scott Lowell (701)231-7882, slowell@ndsuext.nodak.edu