The demands for investment capital are growing faster than members can support, says Rabobank in a review of rural co-operative businesses

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Growing global market opportunities and the need to strengthen supply chains are creating a thirst for capital among agricultural cooperatives as they seek to invest in their future, according to a recently-released research report.

In the report Agricultural cooperatives – quenching the thirst for capital, agribusiness banking specialist Rabobank says sourcing capital is on the agenda for almost every large agricultural cooperative, and is rapidly moving up the list of priorities for many.

Report author, Rabobank research director Hayley Moynihan says the traditional source of investment capital for cooperatives – their member base and modest debt facilities – may now no longer be enough to allow coops to fully participate in an increasingly dynamic global and local food and agribusiness market.

“For agricultural cooperatives seeking to capture value from the favourable global market environment, maintaining the status quo is not a strategy. Confronting the issue of sourcing capital will be required, alongside tackling increased market complexity,” she says.

Need for change

With the food and agribusiness supply chain becoming increasingly complex and global, and with rising demand for food and agricultural production, the need for further expansion of productive capacity is clear, the report says.

“With this, the cooperatives’ operating environment is also becoming more complex and the basis for competition is changing,” says Ms Moynihan.

“Cooperatives are under pressure to participate in these changes. Playing a greater role may be necessary to secure the future survival of the particular cooperative or to provide members with flexibility and additional resources as competition to secure their production off take intensifies.”

This increasingly complex operating environment is also creating the need for dedicated or more closely-aligned supply chains to evolve, to reduce or better manage risk for all parties, the report says.

“Cooperatives have the potential to be at the forefront of this supply chain evolution,” Ms Moynihan says.

“With the special relationship a cooperative has with its members, a degree of integration already exists. However, to fully capture the opportunities available in the current environment, cooperatives will require further investment and therefore capital.”

Sources of investment capital

Ms Moynihan says agricultural cooperatives usually accrue capital from members over a long period of time, based on setting aside contributions from members transacting with the cooperative, through retained earnings or the capital comes from modest debt facilities.

“Obtaining capital from these sources alone will limit many cooperatives’ ability to pursue the current opportunities and is unlikely to provide sufficient or timely funding at the current rate of change,” she says.

“This is leaving cooperatives now in many cases facing a quandary of how to access sufficient capital to tap into the opportunities before them without compromising the cooperative business model.”

Cooperatives are increasingly turning to external capital options, such as third party investors (including pension funds, hedge funds, retail investors and end users seeking supply) and financial instruments (including capital notes, bonds, shares and units).

External capital is alluring for cooperatives due to its accessibility and availability, the report says, but brings with it challenges for the cooperative model.

“For large agricultural cooperatives, accessing external capital in the same way that a publicly listed or private company would is not straightforward,” Ms Moynihan says.

“Strategic and financial investors typically want the capability to influence and control strategy and enjoy the benefits of ownership and full recourse in return for their riskbearing capital. For cooperatives though, retention of ownership and control strikes at the very core of cooperative enterprises and is usually non-negotiable."

“So the challenge is to accommodate the needs and additional demands this type of capital can bring within the cooperative model and strategy.”

In seeking to address this challenge, the Rabobank report cautions, cooperatives need to ensure they have a clear vision for the business, are highly relevant to their members and that they have strong member engagement.

“Even then,” Ms Moynihan says, “tradeoffs will exist and any potential solution will require compromise and at least some degree of risk appetite from all parties.”