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File C5-112 December 2001 What is a New Generation (NCG)?*

New Generation Cooperative (NGC) is a specific operating capacity at any one time. By relatively new type of cooperative used limiting membership to those members who Aprimarily in the -added processing purchase the right to supply the cooperative, the of agricultural commodities. First used in the NGC is able to ensure a steady supply of the upper Midwest in the early 1970s, the NGC agricultural inputs required for running opera- organizational form became popular in the early- tions at the most efficient level possible. In an to mid-1990s for producers interested in collec- NGC, the membership is generally not perma- tively adding value to their commodities. The nently closed. If the cooperative decides to NGC model has since been used for hundreds of expand , for example, it could seek new across the United States, but equity from producers outside the initial member- has not yet been used extensively in Missouri. ship.

The NGC is not a specific legal structure. Rather, 2. Delivery rights: a right and an obligation to the term New Generation Cooperative is used to deliver. Once members contribute equity toward describe how a firm operates. It primarily de- the NGC, they receive the right, and the obliga- scribes the relationship between the firm and its tion, to deliver a specific quantity of the com- members and how the firm is financed. Unlike modity each year. This means if producers have traditional cooperatives, in which start-up ex- purchased the right to deliver 5,000 bushels of penses are minimal and growth is financed corn each year, they must deliver 5,000 bush- through members’ retained earnings, permanent els—no more, no less. If they cannot deliver that equity to fund NGC start-up and growth is amount or if the does not meet the financed through the sale of delivery rights. quality standards set forth in the marketing These delivery rights represent a member’s right agreement, the cooperative may have the right to to deliver a specific amount of commodities to buy the commodity on the producers’ behalf and the cooperative. Members benefit in proportion to charge for the difference in . their use, and nearly all NGCs are democratically controlled through one member/one vote. 3. Upfront equity required from producers. Adding value to agricultural commodities can be There are six primary characteristics of NGCs: capital-intensive. Before lending to a project, and other lending institutions will 1. Defined membership. Frequently, NGCs are require producers to raise part of the project cost. referred to as closed cooperatives. However, Often, this means producers must raise 50 percent defined is a more accurate term. The number of or more of the total project cost. If the project is members in an NGC depends upon the proposed estimated to cost $1million, for example, produc- capacity of the cooperative’s operations. One of ers will need to raise $500,000 or more. Although the key features of the NGC is its ability to it may be possible to find private to control supply or access to the cooperative’s reach the required equity level, producers are operations. In other types of cooperatives, mem- often the sole source of equity. As a way to tie bers can enter and exit as they please, and coop- members’ use to the total project equity required, eratives operating without marketing the total amount to be raised is broken into with their members have no way to guarantee a smaller units. These units are tied to the amount

Deanne Hackman Director, Center Missouri Department ofAgriculture 573-522-3454 Page 2 File C5-112

of required to be delivered. A 5. Marketing agreement entered into between feasibility study will help determine the most member and cooperative. Upon economically efficient size for the processing delivery rights, members are required to sign a facility. Once you know the amount of commodi- marketing outlining the duties of both ties the plant will require each year, you should the members and the cooperative toward each then determine how to allocate this total amount other with respect to the delivery, quality, and into shares. For example, if the most efficient size quantity of producers’ commodities. These plant requires one million bushels of a contracts are usually evergreen contracts, mean- year, you should divide one million into a spe- ing they are for specified periods of time (from cific number of shares. To determine the specific one to five years). They are renewed automati- number of shares, you should set minimum and cally unless either party gives notice to the other maximum amounts of delivery rights to be within a window of time specified in the market- purchased. To determine this, you need to bal- ing agreement. The market agreement often ance two issues: how many producers do you specifies the high quality standards required of want involved in the and what is finan- members’ commodities, especially in coopera- cially viable for you and other producers to tives producing consumer-level . The commit. marketing agreement outlines the specific quality required to be delivered, how quality will be Example: Assume on the $1 million project measured, and the producer’s rights and obliga- above, producers need to raise $500,000. If one tions if the quality standard is not met. million bushels a year are required to run the plant at the most efficient level, you could divide 6. Members and their NGC share three pri- the number of bushels into a minimum delivery mary legal relationships. right purchase of 5,000 bushels and a maximum of 50,000 bushels. Thus, the cooperative could • Members must purchase a share of common have as many as 200 members or as few as 20 stock or other membership interest to enable members. them to vote in all decisions set forth in the bylaws. 4. Delivery rights are transferable and may • Members also purchase delivery rights, which fluctuate in value. The delivery right is similar to are both a right and an obligation to deliver. The a share of corporate stock because it represents a delivery rights are evidenced by legal documen- firm’s permanent equity. As with a share of tation and are usually transferable upon ap- corporate stock, the value of your delivery right proval from the . will depend on your firm’s profitability. If an • Finally, members must sign a marketing agree- NGC is successful and provides value for its ment when purchasing delivery rights and members, the delivery right may appreciate in voting stock. The marketing agreement defines value. If the NGC does not provide value to its the rights and obligations of both the member members, the value of the delivery right may and cooperative toward each other with respect decrease. Unlike stock in a public , to the delivery of commodities from the member however, the delivery right has a very limited to the cooperative. resale or trading market. To comply with anti- trust, securities, , and incorporation statutes, As a result, members must pay money to the NGC bylaws limit transfer to other producers and cooperative for both the voting stock (usually usually require the board of directors to approve any transfer. File C5-112 Page 3

very minimal) and the delivery rights (amount specified exchange, with additions or subtractions varies on project size, minimum and maximum based on quality). The cooperative also is re- purchase requirements, and the specific amount quired to return any profits to members on a pre- of commodity to be delivered by the member). specified schedule determined by the board of Members also are required to deliver the specified directors. Depending on operating cash require- quality and quantity of commodities at pre- ments, the timeline for returning profits could be specified intervals for the length of the marketing immediately. Due to securities law issues, coop- agreement (which is usually, through evergreen eratives are not actively involved in the transfer contracts, perpetual in nature). The cooperative, of delivery rights. The cooperative usually in turn, is required to pay members a pre-speci- requires approval from the board of directors fied price for the commodities delivered (usually before any transfer is complete, and sometimes a formula price based on at a an outside broker handles the actual transfer of delivery rights.

* This first appeared in , Nov./Dec. 2001 newletter of the Ag Innovation Center Jefferson, MO 65102