Skip to main content
Business LibreTexts

5.12: The “New Generation” Cooperative Phenomenon in the United States

  • Page ID
  • The so-called “new generation cooperatives” began occurring in the U.S. in the late 1990s, with producers vertically integrating into processing cooperatives such as corn-ethanol, durum wheat for pasta, sugar beets for sugar and co-products, and other commodities. These cooperatives were referred to as “new-generation” because they differed from previous types of cooperative formation. The membership was defined and linked explicitly through contractual marketing agreements with the capacity of the processing plant. For example, a 50 million gallon corn-ethanol plant might require 18 million bushels of corn. Thus, the cooperative would sell 18 million delivery rights linked with physical units such as bushels, and commit members to physically deliver 18 million bushels of corn.

    These delivery rights might require a minimum investment such as 10,000 bushels, in which case the membership would be defined as no more than 1,800 members (18 million bushels divided by 10,000 bushels). The total cost of the processing plant would be determined through a business plan and members would be required to invest up to a certain amount, which might be 70% of the total cost. If this corn-ethanol plant had a cost of $35 million, then $24.5 million would be required before the business plan would be implemented. The upfront cost per producer would be $1.36 per bushel ($24.5 million divided by 18 million bushels) or a minimum investment of $13,611 ($1.36 multiplied by 10,000 bushels). Thus, a member would be entitled to a patronage refund obtained from the processing of corn into ethanol and its co-products.

    This patronage refund would be expressed in dollars per bushel and would be the value obtained above and beyond the market price of corn received when the cooperative purchased the corn from the member. A new generation cooperative had a defined membership with defined responsibilities of each member, including a contractual delivery right and corresponding share in control through participation in governance. Data from the U.S. Department of Agriculture suggests that more than 200 business plans were written for investments in processing assets, with less than half actually conducting membership drives for investment and perhaps 75 actually building a processing plant. Sugar beet processing and corn-ethanol plants had government policies, which helped their formation and economic viability. Several others had great success, including U.S. Premium Beef and Dakota Growers Pasta, but they demutualized and were acquired by outside investors. Others, such as South Dakota Soybean Processors and a number of corn-ethanol cooperatives, converted to different forms of closely held organizations. In 2017, there are estimated to be less than 30 cooperatives who have maintained their “new generation” cooperative status.