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Production Aggregation [Finance
Posted on February 10, 2016 @ 08:25:00 AM by Paul Meagher

Mark Shepard is the author of Restoration Agriculture (2013). He is a no-nonsense ecological farmer and a business mentor to many Permaculture startups. I listened to a recent podcast featuring him called Permaculture Demand, Starting Up & Organic Valley. This blog was inspired by some of what he had to say.

One topic that Mark Shepard discussed in this podcast is some of his positive experiences as producer number 40 (of 1,800 producers) for the Organic Valley Cooperative.

The Wikipedia page for Organic Valley provides these key details on the cooperative:

Organic Valley (OV) is an independent cooperative of organic farmers based in La Farge, Wisconsin, United States near La Crosse, Wisconsin. Founded in 1988, it is the largest organic farmer-owned cooperative in the world with over 1,800 farmer-owners across the United States, Canada, and Australia. Organic Valley markets its products in all 50 states and exports to 25 countries. In 2014, growing annual sales neared $1 billion.

Mark frequently refers to Organic Valley as a "production aggregator" meaning it aggregates production across farmers so that farmers can access larger and more diverse markets. The need for a production aggregator, according to Mark, can arise because there is a failing market for your commodity or service when you are acting alone in the marketplace. If you are at a farmers market with local grower competition and you can't sell your cucumbers or you can't get your price, then the solution may be for cucumber growers to aggregate production and sell the combined product into the same or bigger market that can absorb it at a price that is acceptable. The market feedback you get when you operate alone may be negative but when you cooperate with other producers the market feedback can be strongly positive and encourage you to grow more cucumbers.

If you combine all your cucumbers together and sell them to a grocery chain then you might be paying a fee to a broker who distributes on your behalf. What if you replace that broker with members of your coop so that any fees you pay are going back into your production cooperative? The fees might allow you to make more income or receive additional benefits (i.e., pension, dividends, internal jobs) and would help finance the evolution of the production cooperative. Note that this is a different model than Uber, AirBnB and other popular "sharing economy" business models that offers a production aggregator service and collects a brokerage fee but without many additional benefits provided. The alternative to the "sharing economy" business model may be something along the lines of Organic Valley or the very successful John Lewis Partnership in the UK. These companies may not be as "explosive" in their growth as Uber but they are showing high levels of growth and considerable growth potential.

There may be significant costs to setting up a production aggregator (e.g., legal, accounting, software, storage facilities, equipment, transportation, dedicated staff, etc...) and the production aggregator might seek investment to cover these costs. The production aggregator might offer to return investors money (plus interest) over a period of time but could also sweeten the deal with a coop membership that allows the investor to enjoy some of the benefits of the venture. Ideally, the investor's skillset would be useful to the company and an investor might end up paying themselves some of the money invested to carry out the required setup and ongoing work.

Setting up a production aggregator would entail some legal work on the company structure. Often they are setup using a legal trust as the formal business structure but some type of partnership structure might also work and be less legally complex to start out with. I do not pretend to be a lawyer or accountant so don't quote me on any of this.

I'm not necessarily endorsing the view that cooperatives are the end-all and be-all. I'm mostly interested in examining what the motivation for production aggregation might be, how the startup phase of a production aggregation service might be financed, and what types of benefits private investors might receive from their startup investment (i.e., payback with interest, membership benefits, payment for worktime invested).

Also worth considering is what types of objects can a production aggregation business model be applied to that it isn't being applied to today? Examples might be timber production, water production, carbon sequestration and other products or services that might be less tangible.

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