Forestry Co-operatives
Vern Hughes
Aggregation: the key to viability for small producers
Functions of co-operatives in plantation forestry
Four co-operative business opportunities:
1. New forestry co-operatives
2. Existing agricultural and rural co-operatives
3. Strategic alliances with regional credit unions
4. Joint ventures involving forestry co-operativesCo-operative sector support services
Forestry co-operatives in Victoria and Tasmania
INTRODUCTION
Private forestry in Victoria is set to expand significantly in the coming two decades. Existing sources of timber will be insufficient to meet the requirements of our timber and paper industries by the year 2020. Beyond our shores, a growing international demand for timber and timber products beckons.
Some of the growth in plantation forestry forecast for Victoria will be driven by major timber processing companies. But land ownership patterns in Australia place real limitations on the scope for growth in this direction. Small private landowners, using land for mixed purposes, occupy a predominant position on Australian land which is suitable for plantation forestry. Given the right structural supports, these landowners can also drive an expansion in plantation forestry.
The key to viability for plantation forestry on Australian farms is the aggregation of management, marketing and operational functions. Individual landowners cannot undertake to grow, harvest and individually market a stand of timber and expect to be competitive in the marketplace. Only by aggregating these functions through a co-operative structure can small private landowners achieve viability.
In Australia, co-operatives are a proven mechanism for aggregating the marketing of products grown by small producers.
Forestry co-operatives formed by small landowners to manage and market timber provide these producers with a means of becoming competitive and gaining access to otherwise unattainable export markets. Several have already been formed in Victoria and Tasmania. They are a valuable structural mechanism for developing plantation forestry.
They can, at the same time, play a crucial role in land management. In many parts of Australia, the development of private forestry through co-operatives will be the best way of contributing to the lowering of water tables and salinity levels. This paper aims to stimulate interest in the co-operative option in farm forestry. It is produced by the Co-operative Opportunities Project of the Co-operative Federation of Victoria, the peak body of Victorian co-operatives comprising diverse enterprises from health care to agriculture to housing, finance and energy.
It is directed to co-operatives, rural organisations, policy makers, and others who are interested in models of industry development which enhance the role of small producers and revitalise rural communities, while using governance structures which guarantee member control and Australian ownership.
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The paper is organised as follows. The outlook for private forestry in Victoria is first examined, and the aggregation of management and marketing functions is considered as the key to viability for independent private landowners. The nature of co-operative enterprise is then defined, and its application in forestry co-operatives is explored. Four co-operative business opportunities in the field of farm forestry are described. A number of existing forestry co-operatives are noted. The paper concludes with suggestions about how individuals, communities and co-operatives might proceed in exploring these possibilities..
The Victorian Government is developing a strategy plan to increase by threefold the state's private forestry industry by the year 2020. The plan will encourage farmers and private landowners to grow and harvest trees as a 'crop'.
Victoria has approximately 6.2 million hectares of cleared agricultural land with rainfall exceeding 600 millimetres annually which is suitable for private forestry.
The state government has established a Private Forestry Task Force in its Department of Natural Resources and Environment to develop a strategy for facilitating the state's private forestry development. The state and federal governments will each allocate $5 million to assist the industry's development over the next four years. The strategy will include:
Vision and goals for the industry taking into account national targets.Identification of the environmental, social and economic benefits of private forestry development in Victoria.
Identification of new opportunities in investment/development of plantations, and the competitive advantages of Victoria.
Identification of current impediments to development and approaches to overcome these.
Development of an effective implementation plan including progress criteria/milestones.
Strategies to ensure the continuing commitment and co-operation of all government and industry stakeholders in private forestry.The crucial issue to be addressed in this strategy is how farmers and small landowners can overcome current obstacles to economically viable participation in the plantation forestry industry. These obstacles are fourfold:
1. Individual producers lack expertise in forest management.
2. Individual producers cannot offer regular and reliable supplies.
3. Individual producers lack expertise in marketing.
4. Individual producers lack bargaining power in price and contract negotiation.These obstacles can be overcome through the aggregation of management, marketing and operational functions.
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AGGREGATION: THE KEY TO VIABILITY FOR SMALL PRODUCERS
1. Expertise in forest management
Tree growers whose land is used for mixed purposes do not possess the knowledge and expertise in forest management and good forestry practices that is held by large timber industry entities. This problem of expertise is compounded by the long time periods in the timber planting-harvesting cycle.Only by purchasing external expertise in the form of hiring appropriate management (or, in the interim, pooling internal expertise) can small producers overcome this obstacle. This cannot be done individually: it can be done through a co-operative structure which allows producers to aggregate their resources in the hiring of management expertise.
2. Regular and reliable supplies
Small landowners, even with the best management, cannot offer a regular and reliable supply of timber to buyers. Through a co-operative structure, the produce of small producers may be offered to a range of buyers through a quality, quantity, price and supply schedule. The greater the aggregation of saleable timber, the greater the prospect of regularity and reliability in supply.3. Expertise in marketing
The principal benefit of co-operative marketing is the aggregation of supply of saleable timber and the purchasing of marketing expertise in selling it. Viability requires the acquisition of a range of market destinations for a range of grades of timber. This cannot be acquired individually. It requires a co-operative structure in order to purchase, on behalf of its member producers, appropriate market development expertise.This is particularly important in gaining access to export markets.
4. Bargaining power in price and contract negotiation
The market power of small producers in relation to large buyers is weak. The only way a countervailing power can be constituted is through aggregation of supply.In Australia, the timber industry has been traditionally accustomed to acquiring the resource cheaply, primarily from native forests. This has proven to be unsustainable: limitations have been placed on the availability of the native resource, and its regeneration capacity requires a long planting-harvesting cycle. With the reduced availability of this cheap resource, alternative sources of supply will command increased market interest. Only through aggregation can small producers enhance their market power in price and contract negotiation with industry buyers.
The principal means whereby small producers have empowered themselves in this way is through co-operatives. The essence of co-operative enterprise is the pooling of economic resources to obtain benefits for members.
.WHAT IS A CO-OPERATIVE ?
A co-operative is an enterprise that is owned and controlled by its members for the purpose of providing mutual benefits. By forming a co-operative, members aim to derive benefits which they could not achieve by acting individually.
In forming a co-operative, members agree to make use of its services and contribute capital to fund the enterprise, usually by purchasing shares. Funds are contributed not for capital gain but for service or trading benefits. Members may receive dividends on capital contributed, but these are secondary to the benefits derived.
In this sense, a co-operative is a self-help organisation. It is not a charity. It is an enterprise which operates within a market economy with the aim of integrating social and economic objectives through the provision of mutual benefits. Co-operatives are a product of our market economy, often established in response to market failures or imbalances. They are not an alternative to a market economy.
Membership is voluntary, and is usually based upon a specific group of people who have a unifying interest. This may be a common residential community or locality, or a common interest as consumers, suppliers, producers, tenants or workers. Ownership and democratic control of the enterprise are vested in the membership, which may comprise individuals and/or other legal entities (co-operatives, companies or associations). Democratic control means the affairs of the co-operative are controlled by its members. Every member has one vote only, irrespective of the capital contributed or the volume of the business transacted.
Democratic control is exercised by election by the members of a board of directors charged with management of the co-operative, by approval of the rules by which the co-operative operates, and by the passing of resolutions at general meetings.
A co-operative may raise capital from its membership and from sources external to the membership, offering fair market rate returns to investors. However, control of the co-operative is exercised solely by the membership and is unrelated to the source or level of investment. As a member-owned enterprise, a co-operative differs from an investor-owned enterprise in four respects:
The prime objective of a co-operative is to provide mutual benefits to its members. An investor-owned enterprise exists to maximise the return on the capital invested in the business.
In a co-operative each member has one vote only. In an investor-owned enterprise voting and control is related to the number of shares held.
The profits of a co-operative are either distributed to members in proportion to use of its services, or retained in the co-operative and not distributed. Profits in an investor-owned enterprise are usually distributed as a return on capital invested.
In a member-owned enterprise ownership is based in a group of people with a unifying interest and tied to long-term objectives. In an investor-owned enterprise ownership can be traded and capital is footloose.
Co-operatives may be for-profit or not-for-profit, though all must operate on a profitable basis. They may be community-based, consumer-based, employee-based, tenant-based or producer-based.
Under the Victorian Co-operatives Act 1996 there are no bounds to the activities and services which may be provided through co-operative enterprise. Co-operatives currently operate in fields as diverse as agriculture, transport, energy, water, retailing, marketing, health, housing, child care, broadcasting, culture and community services.
The diversity of the existing co-operative sector is the product of a flexible form of organisation and is held together by a common sense of tradition and commitment to democratic enterprise, rather than by a rigid set of prescriptive rules or practices.
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FUNCTIONS OF CO-OPERATIVES IN PLANTATION FORESTRY
1. Marketing
The primary function of a forestry co-operative is securing sales and negotiation of contracts. The co-operative may either purchase from the grower and then resell, or facilitate direct transactions between suppliers and buyers, deducting a levy for the services of the co-operative (either as a percentage of the royalty, or as a fixed amount per tonne). The co-operative may or may not utilise contracts between producers and the co-operative. Some co-operatives employ sole agency agreements to market timber for a given period; others rely on member loyalty without formal contracts.2. Market development
A forestry co-operative will actively explore markets for various grades and species of timber, types of timber products, and alternative forest products such as flora and fauna. It will also explore various techniques of marketing.3. Forest management
plans Market development tasks will be integrated with the preparation of forest management plans for members. Management plans will cover matters such as choice of species, mix of species, choice and method of forestry practices, harvesting and planting schedules over a medium to long term time frame. Management planning of this kind will be either directly provided by the co-operative through its staff to its members, or made available on a contractual basis via the co-operative. It may maintain, on the member's behalf, an inventory and valuation of the member's resources, or it may assist the members in these tasks.4. Arrangements with contractors
A forestry co-operative may enter legal arrangements with contractors and hired labour, assuming responsibility for legal, insurance, worker's compensation and related matters on behalf of its members.5. Timber harvesting and transport
A forestry co-operative may co-ordinate and supervise the harvesting and transport of timber to suppliers, contracting with loggers as required. It will assume responsibility for ensuring that harvesting occurs in accordance with prescribed forestry practices. It may establish and operate holding depots for timber as required.6. Financial transactions
A forestry co-operative may centralise financial transactions such as invoicing, payment and credit systems. It may acquire and utilise computer technology for this purpose.7. Pooling equipment purchases
A co-operative may purchase forestry equipment, technology, and office requirements on behalf of its members.8. Discounts on bulk purchases of supplies
Forestry supplies and services may be purchased in bulk, attracting volume discounts.9. Advice and information to members
In the early stages of development of the private forestry industry, government agencies will provide extensive management advice and marketing information. As the industry develops, this provision will be steadily withdrawn, leaving the industry to function in a more self-reliant manner. The advisory and information-providing role of forestry co-operatives will acquire greater significance as this process of government withdrawal occurs.10. A voice for members in control of their business
Members of a forestry co-operative exercise control over the policy of their enterprise, and possess a voice in its operation. Producers who deal independently with major companies or government agencies are not so enfranchised..
CO-OPERATIVE BUSINESS OPPORTUNITIES
1. New forestry co-operatives
New co-operatives may be formed by farmers and landowners on a regional basis, arising from existing or new networks.2. Existing agricultural and rural co-operatives
Existing co-operatives may facilitate the examination by its members of participation in the private forestry industry. This may take the form of diversification in the existing co-operative, or it may lead to the formation of subsidiary co-operatives. Existing co-operatives may assist in the financing of new farm forestry ventures where these are undertaken by its members. A variety of financing mechanisms can be employed, including loans and deferred payment systems. Assistance can also take the form of bulk purchasing of supplies, equipment, and management expertise.3. Strategic alliances with regional credit unions
Forestry co-operatives in particular regions may form strategic alliances with regional credit unions, viewing forestry co-operatives as opportunities for regional development. This may allow such credit unions to assist the establishment of forestry co-operatives by making available financial and infrastructure facilities for use by the forestry co-operative, or by making available loans for the provision of start-up capital (investment in facilities and equipment, and operating expenses).4. Joint ventures involving forestry co-operatives
Two or more forestry co-operatives may establish a joint venture or secondary co-operative to develop contracts with export markets. By consolidating their export efforts in this way, forestry co-operatives may be able to gain access to markets beyond the reach of individual growers or their individual co-operatives. Two or more forestry co-operatives may also establish joint ventures in processing, such as woodchipping plants, and shiploading facilities..
CO-OPERATIVE SECTOR SUPPORT SERVICES
The co-operative sector in Victoria comprises enterprises in diverse fields including retailing, agriculture, finance, energy, transport, water supply, health care, child care, broadcasting and community services. The sector, through the Co-operative Federation of Victoria, is examining ways of assisting co-operatives by integrating support services.
For example, in Victoria's restructured electricity industry, the co-operative sector is examining cost advantages for its enterprises and their members through the aggregation of electricity purchasing.
With the deregulation of petrol pricing, the co-operative sector is examining the direct purchasing of fuel from terminals and distribution to its member enterprises.
The sector is developing bulk purchasing advantages in business supplies, insurance products and telecommunications.
It can assist with legal and financial services.
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FORESTRY CO-OPERATIVES IN VICTORIA AND TASMANIA
There are five forestry co-operatives in Victoria and Tasmania:
1. North East Forest Growers Co-operative Ltd
This co-operative is based in the North East region of Victoria, and was the first private forestry co-operative formed in Australia. Established in 1989, it has approximately 40 members.2. North West Tree Growers Co-operative Society Ltd
This co-operative was formed in 1991 in the North West district of Tasmania. Its founders examined alternative structures for their business, including a limited liability company and informal business arrangements, and opted for a society registered under the Tasmanian Industrial Co-operative Societies Act 1928. It currently has 180 members. In 1993 it exported its first shipment of pine logs to Korea, and by 1994 its sales exceeded $2 million in domestic pine, export pine, and domestic hardwood sales.3. North East Timber Growers Co-operative Society Ltd
This co-operative was formed in 1992 in the North East part of Tasmania. It has 140 members.4. Southern Timber Growers Co-operative Society Ltd
This co-operative was formed in 1996 in the Southern district of Tasmania. It has 30 members. The three Tasmanian co-operatives together constitute a joint venture trading as TFGA Farm Wood Pty Ltd, which has recently acquired a woodchip export licence.5. Gippsland Wood Producers Co-operative Ltd
This co-operative was formed in the Gippsland district in 1995..
The Co-operative Federation of Victoria, through its Co-operative Opportunities Project, aims to encourage co-operatives and local communities to explore the possibilities of co-operative enterprise in meeting their various needs. It does not favour any particular type of co-operative enterprise. Specifically, the Federation will:
Encourage individuals, organisations and governments to consider the co-operative options in forestry.
Provide advice and assistance in the formation and operation of co-operatives.
Supply information on appropriate co-operative experience in Australia and overseas.
Draw on the experience and personnel of its member co-operatives in developing support for new ventures..ACKNOWLEDGMENT
In preparation of this paper, acknowledgment is made of use of material in Edgar Parnell Reinventing the Co-operative. Plunkett Foundation. 1995; and Co-operative Federation of Victoria. Introducing Co-operatives. 1995.
Consultant Author: Vern Hughes
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