Publications

Assessment of Needs and Issues Related to Financing of Agricultural Co-operatives

A Report to the Co-operatives Secretariat By Farm Business Consultants - March 2005

Executive Summary

The Co-operatives Secretariat, Government of Canada, mandated Farm Business Consultants to undertake a capitalization needs assessment of agricultural co-operatives with a particular focus on debt financing. More specifically, there was a need to get information from co-operatives and lenders to identify where problems in accessing capital exist and why. Also an analysis of availability of debt financing and of capital requirements by sector, by stage of development, as well as by size, with a particular focus on small and medium size co-operatives was performed.

This study was intended to complement previous studies which indicated that the ability to raise capital is an impediment to both the development of new co-operatives and to the expansion of existing co-operatives. This study was completed by surveying both co operatives and financial institutions.

Survey of Agricultural Co-operatives

The study found that existing co-operatives have very few problems borrowing capital, and in many cases they did not need to borrow as they are able to finance their expansion through retained earnings. However, there are established co-operatives that are experiencing significant market competition resulting in reduced income which then results in problems with financing. Ontario, as a region, had the highest level of existing co-operatives experiencing financial difficulty and consequently reduced access to debt capital.

The co-ops having difficulty accessing debt financing had a host of issues such as lower profitability, higher risk of their market sector, competition, management and insufficient retained earnings. Their business structure was not found to be the cause of credit limitations.

Special analysis was completed on newly formed co-operatives to determine whether they encounter issues related to debt financing. They report that the FIMCLA program was very helpful, and in some cases essential for their start up. They also report that having access to specialists capable of guiding them through all of the issues of establishing a new co-operative is an area where additional assistance would be beneficial. They report many benefits of choosing the co-operative structure, one of which was the loan guarantee program, and another is the preference of the farmers for this type of business structure. However, where a new co-operative wishes to establish a large business, there are difficulties in raising investment capital.

Survey of Lenders

The financial institutions surveyed treat co-operatives the same way as "broadly held" corporations. A few identified issues around how co-operatives manage their business as an area where risk is sometimes increased, as some co-operative's return too much profit to members leading them to be vulnerable to market volatility. Farm Credit Canada has been financing co-operatives although this portion of their portfolio is not large compared to corporations.

The FIMCLA loan guarantee program was one of the key issues the majority of the co operatives in this sector identified as an area where a government program has been helpful. The level of awareness of the existing federal loan guarantee program (FIMCLA) was found to be very low, as several co-ops who are planning to expand were unaware of the program, and the few co-ops that were having difficulty with their financial institution were also unaware of the program. The level of support for the continuation of a loan guarantee program was very high amongst both co-operatives and financial institutions. The level of use of this program would have been much higher if the level of awareness was increased.

The study identified a need to provide more training for co-operative boards as an area where both the financial institutions and co-operatives surveyed found an opportunity for improvement. This is not because the individuals do not have suitable business skills; the issue is one of understanding board governance and the role of a Board member.

Identified needs coming out of the study

• Assist in strengthening existing co-op training. The study identified a need to provide more training for co-operative boards as an area where both the financial institutions and co-operatives surveyed found an opportunity for improvement. This is not because the individuals do not have business suitable skills; the issue is one of understanding board governance and the role of a Board member.
• Assist in the start up process; government support in the key phases of early stage development - in business planning and human resources that have co-op expertise to help develop the project.
• Help in building a financial plan and raising start up capital. There is a need to facilitate initial co-op structuring and to enable it to be properly capitalized, complying with provincial statutes and regulations.
• Investigate options to facilitate co-op access to equity from members, and to obtain outside investment through both tax measures (the co-ops mentioned the Co-op Investment Tax credit which was advocated by the sector organizations) and other non-tax measures.
• Enhance the FIMCLA loan guarantee to assist co-ops in accessing debt financing. The current eligibility requirements are considered too restrictive.