Faced with a growing demand for capital to finance value-adding assets (including brand names) marketing cooperatives have modified their institutional arrangements to attract equity capital

One of the simplest changes is to convert a traditional cooperative into a proportional investment cooperative (PIC). This arrangement aligns investment with patronage and solves the internal free-rider problem.

While converting to a PIC usually does increase the amount of equity capital invested in a cooperative, this is mostly because large patrons are compelled to invest more. Voluntary investment is still not attractive owing to the persistence of horizon, portfolio, control and influence problems

NGCs & ISCs

A more effective approach is to convert a traditional cooperative into a New Generation Cooperative (NGC). NGCs first emerged in the 1990s and have become a very popular choice for marketing cooperatives in the USA

NGCs differ from traditional cooperatives in one fundamental respect - they issue two types of shares to members:

• member shares, which confer the same ill-defined voting and benefit rights on members as those found in a traditional cooperative, and

• delivery rights which confer well-defined benefit rights (but no voting) rights on members

How does an NGC differ from a traditional cooperative?

Delivery rights are not redeemable and can be traded by members at their market price

These shares specify the quantity and quality of product that the holder must deliver to the NGC. For example, a member who wishes to sell 1000 units to the NGC each year must purchase 1000 delivery rights

If a member cannot meet her delivery commitments, she must either purchase additional product from, or sell her excess delivery rights to, other suppliers

In some countries, the laws governing cooperatives may not permit significant departures from the cooperative principles. However, the NGC model has been widely adopted, even in countries that have very inflexible cooperative laws

But what if capital requirements cannot be satisfied by farmer members? Can a cooperative take on a non-patron partner that brings equity capital, expertise and intangible assets such as export contracts and brand names?

Yes – if the law allows for external investors and the patron members agree on the type of property rights that will be extended to non-patrons

New Zealand and the US states of Wyoming and Minnesota are leading the way in relaxing laws to accommodate investor share cooperatives (ISC)s

An ISC sells membership shares to patrons and introduces a second class of non-redeemable, tradable equity shares that can be purchased by investors, including patrons and external investors

While ISCs do a better job of alleviating constraints to investment than do NGCs, there are tradeoffs in the cost of supply contracts, control and hence product prices - particularly if the cooperative holds a monopoly position