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The Appalachian Farm Cooperative:1 A Business Model Based on Cooperative Identity2

This case study was prepared by Daniel Ct, associate professor and Director of the Centre dtudes Desjardins en gestion des coopratives de services financiers HEC, and Andre-Anne Gratton, research professional.

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Any portion of this document can be made freely available for information and educational purposes but cannot be modified or re-published in any format without the expressed permission of the author and copyright holders. Any modifications must respect Canada Copyright Laws including the moral rights of the author. See http://laws.justice.gc.ca/en/C-42/38355.html Daniel Ct cole des Hautes tudes Commerciales Universit de Montral 3000 Cte-Ste-Catherine Montral QC H3T 2A7 514-340-6012 / daniel.cote@hec.ca
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La Cooprative agricole des Appalaches : Un modle daffaires bas sur lidentit cooprative This present text is based on the case study The Appalachian Farm Cooperative: Cooperation, a Strategic Choice, prepared by Daniel Ct and Francine Boulva, September 1999.

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Table of Contents
1. History and Environment 2. Portrait of the Farm Supply Sector 2.1. Animal Production 2.2. Vegetable Production 2.2.1. Crop protection products 2.2.2. The fertiliser sector 3. The Current Situation of the Appalachian Cooperative 3.1. Its Structure 3.2. Its Products and Services 3.3. The Competitive Context 4. Financial Results 4.1. Consolidated Results 4.2. Results by Activity Sector 5. The Internal Environment 5.1. Human Resources 5.2. Physical Resources 5.3. Intangible Resources 5.4. The Federated Cooperative of Quebec: A Precious Resource 6. The Cooperative Dimension 6.1. Opinion expressed by Michel Pomerleau, Chairman of the Board of Directors 6.2. Opinion expressed by Daniel Vigneault, Administrator 6.3. The Managers point of view about Commercial Practices and the Cooperative Distinction 6.4. The Weaknesses of the Appalachian Farm Cooperative

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1. History and Environment

Founded in 1983, the Appalachian Farm cooperative was born of the merger of three cooperatives. At the time of the merger, the cooperative was in financial difficulty. The general reserve was almost zero and the number of members had diminished. From 1983 to 1996, the business went through four phases. Firstly, there was a period of rationalisation (1983-1986) marked by a slight decrease in sales. From 1986 to 1992, there was a period of consolidationsales as well as market share improved. In 1992, sales peaked. A strategic review exercise enabled the business to meet its financial and operational objectives. The following period (1992-96) was characterised by strong growth, due mainly to the development of the pork sector. Sales went from $14 million to $24 million, representing a 70% increase. For the year ending October 31, 1998, the business had sales of $27 million and anticipated sales of $30 million by October 31, 1999. The Appalachian Cooperative is located in the rable Regional Municipal County.3 This county, in central Quebec (100 km from Quebec City and 200 km from Montreal), has an area of 1,291 square kilometres. The Cooperatives headquarters are located in Laurierville. Three other outlets are located in Plessiville, Lyster and Inverness. In 1996, the territory had a population of 25,593. The active population amounted to 11,580, and the unemployment rate was 9.8%, 2% less than the provincial average. Personal income per inhabitant was $13,200 in 1997, compared to $17,600 for Quebec as a whole. Occupying 30% of the territory, agriculture is the pillar of the local economy. It consists largely of dairy farming and slaughtering. Over the past few years, there has been a diversification of the farming sector, with the introduction of pig, sheep and goat farming. In 1996, there were 717 farms in the rable Regional Municipal County, 65% of which were devoted to dairy farming or slaughtering and 7% to pig farming. In 1995, the territorys 402 sugar maple operations accounted for 37% of agricultural businesses. There are also fruit farming and market garden operations. Recently, millions of dollars have been invested in cranberry growing.

2. Portrait of the Farm Supply Sector 2.1 Animal Production Dairy, pork and poultry farms make up the main activities of Quebecs animal production. Livestock feed includes additives (concentrates) and meal. Demand for meal has been declining over the past few years. Animal performance has improved, which has reduced the volume of input per animal unit, in pork and poultry
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MRC de lrable

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production alike. Research conducted by the companies with genetic know how influenced demand in the sector. In 1999, there was a surplus capacity in meal production relative to the volume produced. While fixed costs are low with regard to the production of concentrates, they account for 50% of total costs for mills. There are many required raw materials, and the products are readily available. The production of concentrates requires around 50 suppliers. The latters power is limited by the fact that the price of raw materials is determined by the stock exchange. The risk of vertical integration in this sector is non-existent. Businesses set themselves apart from one another by the services they offer, such as portable computers for calculating ratios and specialised feed rather than standard products. The main businesses in the sector are Canada Packers (Shurgrain brand), The Federated Cooperative of Quebec (FCQ),4 Nutribec and Purina. Canada Packers and Nutribec control a distribution network made up of franchises. Purina does business with distributors. Only the FCQ provides a grain service to its member cooperatives. The customers are pig, poultry and dairy farmers. Since pork and poultry activities are highly integrated (roughly 50%) by mills and slaughterhouses, it is estimated that around 50% of the pig and poultry feed market goes to the competition. There is no vertical integration in the dairy herd sector. There is another type of integration on the rise in Quebec, namely, producers who manufacture feed on the farm by means of their own mills. This phenomenon affects the price structure of feed manufactures, which includes the price of feed and service. Service is always required by the producer-manufacturer, which destabilises the price equilibrium. 2.1 Vegetable Production 2.2.1 Crop protection products These products include three large families: herbicides, insecticides and fungicides. The sector has a very concentrated structure. The two main distributors are the FCQ (50%) and Semico (20%). Van Waterm UAP and Carghill share the rest of the market. Due to the more controlled use of chemical products, demand is stable despite an increase in crops in Quebec. Operations require a low investment. Four or five manufacturers of chemical products dominate the industry, the leaders of which are Monsento, Dow Chemicals and Union Carbide. Among these suppliers, the trend is to award the distribution of a product to two or three distributors, who then compete with each other. This practice enables them to cover nearly 75% of the territory where the FCQ are Semco are among the distributors. Retail prices are typically determined by the manufacturers, who advertise directly to farmers.

Cooprative fdre du Qubec

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The FCQ distributes to farmers through its network of cooperative mills, while Semco employs a farmer-dealer model. Farmers are well informed about the characteristics of the products they use. Chemical product purchases can account for 15% to 20% of market gardening production costs. 2.2.2 The fertiliser sector Fertiliser manufacturing is based on potash, nitrogen and phosphorus. Quebec needs are supplied by western Canada, except for phosphorus, which comes from Florida. The main player in this sector is the Federated Cooperative of Quebec, which controls more than 50% of the market. Nutrite (Semco) is next with a 25% market share, while Carghill and William Hood each have a 10% market share. Fertilisers are core products which cannot be differentiated from one manufacturer to another. This activity requires significant investments used over a short period. For farmers, the first criterion is the assurance that they will be supplied on time. They also shop around a lot to get the best price. The main suppliers of nitrogen and phosphorus are very large businesses, such as IMC, Grace Konagro and CF Industries. The FCQ gets its phosphorus from CF Industries, a cooperative owned by a group of North American farm cooperatives, including the FCQ. The quality of the distribution network is critical in this sector. The network also serves as a mixing post for fertilisers. The FCQ can rely on nearly 50 mixing and distribution posts throughout the territory. For manufacturers, success factors are related to reliable raw material supply and advantageous prices. Reception, storage and spreading capacities, as well as technical skill, are also important factors.

3. The Current Situation of the Appalachian Cooperative 3.1 Its Structure As is the case with around 30 other cooperatives, the Appalachian Farm Cooperative is affiliated with the Federated Cooperative of Quebec. Its mission is the following: The Appalachian Farm Cooperative belongs to its members. Its mission is to be a farm supply leader in the region in which it operates. In this regard, its products and services seek to contribute to the economic success of its user-owners. In each of its activity sectors, it seeks to achieve excellence in meeting its members and the markets needs and exigencies, while attaining performance and profitability levels comparable to the best businesses in its sector. This profitability will guarantee the Cooperatives growth, the quality of life and job security of its employees, as well as the accomplishment of its social role. The 450 user-owners are shareholder members (farmers), and there are 500 auxiliary members (grocery and hardware consumers). The latter have no vote and cannot sit on

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the Board of Directors. The annual general meeting is made up of shareholder members. The Cooperative favours a flexible management style and decentralised responsibilities and authority. The Cooperative has 80 employees. Since 1983, it has had five executive directors. Gatan Roger has held this position since 1992. Five divisions are under the executive directors authority: pork and poultry, dairy and vegetable, hardware, production (mill) and feed. The management team also includes the comptroller and the manager of the petroleum sector. The Board of Directors is made up of 15 shareholder members elected at the annual general meeting, the executive director, who acts as secretary, and the comptroller. Michel Pomerleau has been the Chairman of the Board of Directors since 1991. The administrators also sit on the Cooperatives advisory committees5 and on the FCQs Pork Industry Council. 3.2 Its Products and Services The Appalachian Cooperative has six activity sectors: mills, animal production, vegetable production, hardware, grocery, and petroleum. Its product and service orientations are the following: The Appalachian Farm Cooperative shall anticipate and efficiently meet the needs of its members and customers and supply high quality products and services on the best possible terms. Through its affiliation with the Federated Cooperative of Quebec, it constantly seeks new products and services and optimal productivity. Its principles ensure the loyalty of its members and customers, thereby ensuring a significant coverage of the regional market. In 1998, the breakdown of sales by activity sector was the following:
Mills: Petroleum: Hardware: Animal products: 43.5% 16.1% 14.0% 13.1% Grocery: Vegetable products: Other: 8.2% 4.9% 0.2%

Mills: This activity sector offers the regions pork, dairy and poultry producers a full supply service and technical advice. Feed products for other production types are also offered. The dairy sector accounted for 21% of gross mill sales in 1997-98. In 1983, 50% of mill production was devoted to the dairy sector. Since 1992, there has been a decrease in volume and a drop in sales every year. Other than a decrease in the number of farmers in the region, one of the causes of this decline has been the arrival of in-house mills. For the Cooperative, this growing trend spells a heightened role for retail additive distributors rather than for feed producers. Low installation costs of in-house mills, coupled with the
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There are six such committees : cooperative education, credit and verification, poultry and pork, insurance, and management.

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fact that the products involved in manufacturing come separately are serious incentives for feed production on farms. With nearly 250 producer-members, the dairy sector is the largest in terms of number of producers. However, its growth appears to be compromised because of difficulties in ensuring renewal by way of the next generation. Indeed, quota inflation has made access to ownership very difficult. Producers are very worried by this situation. For those who are thinking about transferring their farm, the solution is to sell it to larger businesses or to find a partner. In Gatan Rogers view, the partnership solution will grow in importance. The Cooperatives members are currently looking for a program similar to that available in the pork sector for the next generation to be able to set itself up. However, start-up costs are high in this sector: one kilo/day sells for around $25,000. In 1992, the Cooperatives growth strategy focused on developing pork production as a growth driver. It adopted a policy with the main objective of ensuring pork development in the region by favouring family farms. There was to be no integration, except as a last resort; rather, there were to be partnerships with producers. The means of attaining this goal involved ensuring financing for breeding and real estate. The members, as well as the Regional Municipal County, were fully behind this approach. The results were quite positive. In 1998, out of a total production of 42,000 tons of feed, 28,000 tons were for the pork sector, 6,000 tons for the dairy sector, 2,500 tons for the poultry sector, and 5,000 tons of complete feed equivalent. This method enabled members to diversify their production, or, in the case of the younger generation, to set themselves up in business. The regions poultry sector is not very well developed. There are five producers, two of whom are members of the Cooperative. The Cooperative is working to find the means to develop this sector. This is a difficult sector for the next generation because start-up costs are very high. In 1998, meal sales for this sector accounted for 4% of gross sales. Petroleum: With 80% of the market, Sonic, the FCQS petroleum division, is the regions main operator. Its success is due largely to its customer service. Deliverers are from the region and are close to the people they serve. Despite a decline in sales due to a sharp drop in prices, this sector is undergoing growth in terms of volume (an 8.2% increase in 1998). Hardware: Four outlets offer hardware supplies, construction material, a garden centre and seasonal items. Significant investments were made in the Laurierville, Lyster and Inverness outlets. The Plessiville Renovation Centre was to be renovated in 2000. This sectors consolidated sales increased by 3% in 1998, on the heels of a 2% decrease the preceding year. In order to improve the cohesiveness of commercial practices among the four outlets, a hardware division director position was created. Animal production: This sector is made up of piglet and breeding animal brokering and a few contract pig breeders. In that the Cooperatives priority is to favour partnerships in the development of independent pork producers, contract breeders serve mainly to sell off

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surplus piglets. In 1998-99, net sales from animal brokering accounted for 69% of consolidated net sales, leaving 31% for contract breeding. Grocery: The grocery division offers meat, bakery products, wholesale products, alcohol and video rentals. In 1998, a 6,000-square-foot grocery store was built in Laurierville. The first six months of operation displayed encouraging results, with an increase in sales of 12.3%. Vegetable production: this sector includes mineral fertilisers, seeds, crop protection, technical service and the A.E.F.P. (Agrienvironmental Fertilisation Program).6 In 1998, this sector experienced growth of 3.9%, due largely to an increase in corn and cereal crops in the region. Dairy farmers are the main producers of these products. This phenomenon is a cause for concern among administrators, who are worried that the Cooperatives market share will decrease with the arrival of in-house mills. The mineral fertiliser sector dropped off sharply in 1998 because of the abundance of fodder harvests. Mineral fertilisers are undifferentiated products; they are commodities. According to the Cooperatives management, these products need to be developed by finding a means other than price to distinguish them, in order to ensure appreciable sales volume in the future. 3.3 The Competitive Context In the pork sector, Agri-March is the main competitor with a 25% market share, while the Cooperative has a 75% share. Agri-March specialises in contract breeding. In this sector, the Cooperative has difficulty competing at the level of price. It has opted for a differentiation strategy based on the development of independent producers. The Cooperative mainly finances start-up costs of pork production operations. Its financial involvement is applied more to animal purchases than to real estate. This is to say that the members money returns to work, in a manner of speaking, for other farmers. For their part, financial institutions provide loans for around 60%-65% of the required real estate investments. Whenever farmers do not have the remaining 35%, the Cooperative provides them with financial support. The financing cost charged to the farmers by the Cooperative is 1% higher than the rate charged by the Caisse Populaire for credit margins. The Cooperative estimates that it has had a 90% success rate in farm financing. Since 1992, it has financially lost one farm. In 1999, out of 30 financed farms, three or four were experiencing problems. This approach creates a financial bond between the farmer and the Cooperative, thereby fostering member loyalty. In the pork sector, the two conditions for profitability are efficiency and competitive prices. The price difference between the highest and the lowest quality meal can reach $20. Farmers are better off buying good quality meal because it will yield a better financial performance for their pigs. The Cooperative offers feed of various qualities, but
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P.A.E.F. (programme agroenvironnemental de fertilisation)

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farmers only buy the best. The Cooperative has Winporc, a software package that evaluates the techno-economic performance of pig breeding operations. It allows for comparisons of results as a function of different feed quality and different genetic levels. The Cooperative has a 45% market share in the dairy sector. Its main competitors are Agri-March, Purina, Soucy (in Ste-Croix de Lobtinire) and small farm distributors of additives and minerals. The Cooperative is the leader in terms of product, service and software quality. With regard to vegetable production, the Cooperative controls between 40% and 50% of the market for sales of seed and minerals. The competitors are Semico, Nutrite, Nutribec and Soucy. The future of this sector lies in biotechnologies. The Federated Cooperative is the leader in this industry, with the largest distribution network in Quebec and selling the best products. Dairy farmers who grow cereals and corn for their in-house mills could well take away part of the Cooperatives market share. Matriaux Drolet is the leader in construction materials while the Cooperative is the leader in hardware items and marketing. Prices and services are guaranteed in the four outlets. It is currently working on the product mix and inventory reduction. The number of deliveries by the wholesaler will soon increase to twice a week, which will allow for inventory reduction. Pascal Houle, Director of the Hardware Division, describes the situation when he arrived: Before, we werent competitive. After reviewing the system of price setting, we saw that the margins were much too high. We reduced the margins, we lowered the prices, and we became much more aggressive. Prices are now reviewed each week. We advertise to contracters by faxing them price lists, which has turned out to be a very effective practice. Even though the Cooperative still projects an image of higher prices, it is genuinely competitive due to downward adjustments and a 1.5% dividend on purchases. However, there is a new competitor on the horizon. The Cooperatives strategy vis--vis this newcomer consists in modernising the Plessiville building and in drawing on the members feeling of belonging. In the petroleum sector, the prices are the same and the product is undifferentiated. Competitors who want to enter the market can only modify the price. However, they encounter a certain number of obstacles, such as the trust inspired by names like Sonic, Federated and Applalachian. The 1% dividend, the computers in the trucks, and the possibility of on-demand rapid delivery are non-negligible assets. Moreover, prices at the Cooperative are based on equity. Small farmers advocate equality while the big farmers want equity. If the Cooperative opted for equality, it would lose its big farmers. As such, with Sonic, it implemented a pricing policy based on the annual volume purchased by the customer. 4. Financial Results 4.1 Consolidated Results

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In its 16th Annual Report, the Appalachian Farm Cooperative posted assets of $11.6 million for 1998. This represented an increase of 35% over the preceding year, that is, the sharpest increase in its history and a 64% increase for the 1994-1998 period. Total equity amounted to $5,480,810, for an increase of 10% over 1997. It represented 47% of total assets compared to 58% the previous year. Member equity is made up of share capital, subordinate shares, and preferred shares. In 1998, it amounted to $1.67 million, for an increase of 18% over the preceding year. Sales amounted to $26.3 million in 1998. For the 1994-1998 period, this represented a 58% increase. In 1999, sales reached $29 million. This increase is due mainly to an increase in volume, in that there was a sharp drop in prices in certain sectors. The effort which had been made since 1994 to improve products and services bore fruit. Membership grew by 15% during the 1994-1998 period, reaching 945 members in 1998. The gross surplus for the exercise was $3.7 million, an increase of 12% over 1997. The mill sector was the greatest contributor to this improvement. The operating surplus dropped by 14% in 1998, amounting to $499,446. Surplus earnings for the exercise amounted to $737,498, an increase of 3.8% over the preceding year. Dividends paid amounted to $401,285 before taxes. Since 1992, slightly more than $2 million in dividends has been paid to members. 4.2 Results by Activity Sector Table 1 illustrates the growth in net sales by activity sector, from 1997 to 1998. All sectors, except petroleum, displayed increased sales. The significant decrease in petroleum prices explains the decrease in sales for this sector. Table 1 Net sales by activity sector
1998 Mill Animal production Vegetable production Hardware Grocery Petroleum TOTAL7 $11,465,545 $3,446,174 $1,285,393 $3,693,471 $2,154,040 $4,243,147 $26,287,770 1997 $10,558,277 $3,370,694 $1,237,158 $3,553,876 $1,917,327 $4,288,587 $24,925,919 Variation % 0.9 0.2 0.4 0.4 12.0 (0.1) 0.5

The results in the mill sector reflect in part the effort devoted to the development of the pork sector. The volume of transactions in this sector increased by 20.2% between 1997 and 1998.

Before elimination of internal sales

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With regard to the operating surplus, all sectors, with the exception of animal production and grocery, posted a positive surplus.

5. The Internal Environment 5.1 Human Resources The Cooperative applies the principles of cooperative management. Employees must find their work fulfilling, feel respected and participate in decision making. To meet these objectives, the executive director and the division directors must devote time to informing, consulting and meeting the personnel. Each division director and manager is responsible for their budget and for meeting performance objectives. Monthly meetings are held with the executive director in order to present the results and to explain any shortfalls. Employees who do not perform well or who have a hard time keeping pace are in danger. Gatan Roger tells them: You are a business within the business. Salaries are competitive and career path change opportunities have been created to recognise each persons talents. Roger estimates that around 10% of the employees are true learners. He notes that some employees have problems understanding what the members status is. For example, when members tell employees in the hardware division that they should do things a certain way, their advice is not always well received. The Cooperative invests 2.5% to 3% of total annual salaries in training. The main problem is high turnover in advisory personnel for farmers. They leave for financial institutions where they are offered better salaries and are under less pressure. The cooperative also has recruitment problems, particularly with regard to division directors. People who apply are often young and without sufficient experience. They find themselves in positions of responsibility, such as is the case for Marylne Martineau and Pascal Houle. Marylne Martineau Marylne Martineau is an agronomist. She has been working for the Cooperative for the past four yours as sales director for the Pork and Poultry Division. Her sales team serves 45 pork producers and five poultry producers. Ms. Martineau notes that it is necessary to improve the teams convergence and cohesiveness. For example, if the team succeeds in recruiting a customer, it is crucial that an error at the mill not induce him to change his mind. Some employees lack motivation and do not always realise that their job depends on the Cooperatives success. Ms. Martineaus biggest challenge is to finalise the pork sector. She has to find four fattening units, each with a capacity of 1,000 piglets. She knows that her division has to

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be profitable, otherwise her job is in jeopardy. The relationship of trust that she creates with producers is her greatest source of motivation. Pascal Houle Pascal Houle has been working for the Cooperative for a year as the Director of the Hardware Division. He has a BA in business administration and is currently studying to obtain a CMA. He accumulated ten years worth of experience as a manager in sporting goods stores before joining the ranks at Appalachian. He manages four hardware stores and supervises 30 employees. His mandate is to rectify the situation in the hardware sector. Houle is performance oriented. In his view, a managers main objective is to present good results to the Board of Directors. At the level of human resources, he observes a lack of motivation on the part of the employees. He notes, however, that in the case of the expansion of the Plessiville outlet, the employees are well motivated. Like Marylne Martineau, he is conscious of the fact that only good performance will guarantee his place as division manager. Gatan Roger, Marylne Martineau and Pascal Houle describe what they view as the Cooperatives distinctive competencies: Know how, particularly in the animal and vegetable production sectors, where it is possible to have access to a network of research farms; Access to decision makers. As such, the Board of Directors decided to expand the grocery sector, and to remain active in the sector in order to fulfil its social mission; The members ability to demand changes, to indicate what they would like to see improved; Surplus sharing (uninterrupted since 1992). In the pork sector, the dividend is set at 3.2% of producers annual purchases, which vary between $50,000 and $700,000 a year; Quality of service, quality of advice; Honesty and transparency; Sales representatives take the time to explain things and are able frequently to visit producers. Contract producers are very well informed; The importance of the FCQ as a help network: advice, services, financial support, training (50 courses); Expertise which is equal to if not better than that offered by the competition; Computerisation: all orders are done via EDI. Cooperatives have access to the FCQs inventories via the computer network, which is not the case at Sodisco, the FCQs main competitor.

5.2 Physical Resources The mill constitutes the core of the business. In the past few years, considerable production equipment has been replaced and more than $1.5 million has been invested.

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Gatan Roger maintains that he has one of the best mills in the region and that productivity is high. The mill performs very well and has an excellent cost per ton. The mill is at the cutting edge of technology and is as well equipped as those of the competition. Vegetable production includes three buildings: the mineral fertiliser centre, the seed warehouse, and the warehouse for phytoprotection products. The latter represents an advantage. Competitors who do not have one wind up sooner or later by paying the price because of accidents (spills, for example) harmful to the environment. In this context, time is on the side of the Cooperative. In environmental terms, the Cooperative projects a good image, and wants to be a good corporate citizen. The Cooperative distributes petroleum via two contract operators who have their own truck. The service quality is on the rise and the number of customers is growing. 5.3 Intangible Resources In Gatan Rogers view, information is without doubt the most important intangible resource. The Cooperative ranks first in terms of information about herds and feed. The Cooperative network spends more money on R&D than any other in Quebec. The network is often copied, particularly the dairy sector, because it has a clear lead over the others. Image also plays an important role. Gatan Roger and Michel Pomerleau have considerable credibility among members and people in the business, which is also to the advantage of the cooperative movements image. Moreover, the FCQ has the largest distribution network in Quebec. It is the first business solicited to distribute a given product. Its regional sales representatives do an excellent job. 5.4 The Federated Cooperative of Quebec: A Precious Resource The FCQ played a key role in the Cooperatives merger. Without its financial support, the Appalachian Farm Cooperative would not have survived. For the Cooperatives directors, it is important to work with the FCQ in the same way as it is hoped that members work with the Cooperative. Once a year, the FCQ produces a financial analysis of all activity sectors. The Cooperative can thus compare its results to the average of other cooperatives results, both for a given sector and for consolidated results. These analyses also present the cooperatives which achieved the best performances.

6. The Cooperative Dimension 6.1 Opinion expressed by Michel Pomerleau, Chairman of the Board of Directors

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Michel Pomerleau is a pork producer. He acquired his knowledge of the cooperative movement from his father. After having worked in the private sector for seven years, the cooperative movement offered him the opportunity of becoming his own master. In order to grasp all the aspects of his role as Chairman of the Board, he took courses provided by the FCQ, which enabled him to meet his counterparts in other cooperatives. At the Appalachian Farm Cooperative, the members have established a relationship of trust with the executive director and the Board of Directors. The network, with the FCQ at its head, also constitutes a force, from which it is important to know how to benefit. In Pomerleaus view, more work will have to be done with the FCQs resources, something which will enable more rapid development of breeding in terms of genetics. One of the great advantages of the Cooperative is that of having enabled the rapid development of the pork sector in the region, something which has been well liked by the members. The Cooperative did a good job with respect to training producers. They appreciate the openness and transparency. For the cooperative movement, it is the farmer who is important. Producers feel better supported in the movement than in the private sector, where, for example, farms in financial difficulty are quickly repossessed. The Cooperative Difference Each member is a pillar of the business. Member loyalty needs to be sought after, and their critical spirit and participation at meetings need to be developed. Pomerleau estimates that around 30% of members use we when talking about the Cooperative. Sector meetings are held every fall. In addition to hearing about the results of their respective sector, members express their needs, present projects, and propose solutions. When asked how members know that the directions taken by the Cooperative are in their interest, Pomerleau replies that the payment of dividends is one example. In his view, good decisions generate good results. As such, the decision to install a tank at the mill resulted in increased productivity and better quality meal. Pomerleau believes that the Cooperative offers better prices. For example, in the petroleum sector, Suprieur sold its propane for 7 more before the arrival of Sonic. In an effort to keep its customers, Suprieur tried lowering its prices, but it was too late. Sonic had already captured the market. As such, had the Cooperative not entered the market, prices would still be higher. In the meal sector, the members have to trust the Cooperative because they have no way of verifying whether the meals energy level is higher than the competitions. There is also a relationship of trust in the pork sector, especially with the Cooperatives young farmer-partners. The Cooperatives objective is to make the producers happy by increasing their performance. It wants to meet the needs of the members adequately before recruiting other members. The producers have faith in what the Cooperative gives them, and the Cooperative thinks as a function of them.

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Issues and Challenges for Cooperation The businesses have to perform well and the producers have to be the beneficiaries; Be at the cutting edge in terms of products, practices and marketing; Make the concerns of the members known and see to defending their interests; Farm transfers and the challenge of the next generation; Cooperative education of the young and the employees; Keep the employees well informed about the meaning of cooperation. They have to become aware of the fact that their job depends on the profitability of the business; Develop partnerships in the dairy sector; The Board of Directors has to be open with the employees.

Michel Pomerleau would like the business to continue to invest and to perform well, but only in the areas with which it is familiar: We have to play our role and let the producers play theirs. 6.2 Opinion expressed by Daniel Vigneault, Administrator Daniel Vigneault is a young dairy farmer. He has a college diploma in farm management from the ITA in Ste. Hyacinthe. In 1993, when he was 24 years old, he became an associate on his uncles farm. Today, Vigneaults farm produces 51 kilos a day, whereas the daily Quebec average is 28 kilos a day. The Cooperative supplies them with additives, minerals and veal feed. When asked what is needed for a farm to be efficient, Vigneault replies: good management, good advisors (cooperative, dairy advisor) and confidence in ones associates. The human dimension is also an important factor in business success. Why be a Member of the Cooperative? Daniel Vigneault has around $40,000 worth of shares in four cooperatives: Agropur, Citadelle, the Caisse populaire and the Appalachian Farm Cooperative. Three generations of his family have been members of cooperatives. His grandfather started one up and his uncle taught him about cooperation. When asked about the quality of his relationship with the cooperative, the two words that spring to lips are trust and transparency. Understanding how the business works and the fact that it belongs to you are two additional reasons for belonging to the cooperative movement. Vigneault went through the exercise of comparing prices with the competition. He notes that certain products sold at the Cooperative are more expensive or the same price, but given the dividend, it is more advantageous to buy from the cooperative. Moreover, the quality of the products offered is more of a sure thing than is the case in the private sector, and the service is better. And since prices are the same for all products, he knows that he will not find out that his neighbour paid a lower price than he did because all members are treated in the same way. If Vigneault accepted a position as an administrator of the Cooperative, it was to gain a better understanding of how it works and also to confirm what he had been told, namely,

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that its the members who are in the drivers seat. His relationship with the Cooperative goes beyond his expectations. He realises that the members can have an influence on the orientations and can participate in its development. He also notes that the producers who belong to the Cooperative are those whose growth is better and who are more stable. The following anecdote demonstrates the influence members have on the businesss orientations. Daniel Vigneault noted that the Cooperative sold plastic to wrap hay bales at $130 a box, compared to $75 at Purina. He raised the point at the annual general meeting. After a review of the situation, the price of plastic was lowered below that of Purina: This shows that the members are listened to when they talk, but there are still too few who speak up. We have to develop the feeling of belonging because the majority of members use they instead of we when talking about the Cooperative. The main impact for the members is the creation of a process of solidarity. Links are formed among them and are strengthened day after day. The relationship is not the same with non-membersthere is no exchange of information among them. For its part, the Cooperative has to earn the loyalty of its members on a daily basis. For members, that means mentioning what they see elsewhere (e.g., lower prices), and criticising what is not working so that the Cooperative can improve itself. The information transmitted by members has great value. This is a significant competitive advantage. The choices made by the administrators are always in the interest of the members. For example, the decision to install a hydraulic system for mineral fertiliser spreaders was not unanimously accepted75% of the members were in favour, and the remainder were not. It was decided to offer spreaders to members with and without this apparatus, even though this would make managing things more complicated. It reflected the will of the members and drew out the democratic aspect of cooperation. The Cooperatives Challenges Remain at the cutting edge in its sector, especially with regard to technology; Instil cooperative values in the young; Be able quickly to meet peoples needs because they are in a greater hurry than before: If you dont have the product, they will find it somewhere else. Get people to be more open. For those who do not believe in the cooperative movement, it is important to find a way to teach them something other than what they believe in.

6.3 The Managers point of view about Commercial Practices and the Cooperative Distinction For Marylne Martineau, an important dimension of the Cooperative is the fact that it belongs to the members. Moreover, it provides them more possibilities for getting ahead, and the network offers a good job pool.

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In her view, the challenges for the Cooperative are: 1. Finalise the pork sector, i.e., find four fattening units, each with a capacity of 1,000 places; 2. Ensure that members financed by the Cooperative become independent and that new members are recruited; 3. Develop inter-cooperation; and 4. Take its place in the territory. Pascal Houle notes that cooperative management practices are very different. In his view, in the private sector, one can always get certain privileges by passing a few dollars under the table. Too often, these businesses have the sole objective of making money and care little about service. This kind of practice is inadmissible in the cooperative movement. It always provides good service. The real cooperator is someone who expresses what he or she is unsatisfied about. Cooperative practices engender a strong feeling of belonging. Houle says that he deals with his business as if he were in the private sector. He likes the advantages he gets from the network. In his eyes, the challenges for the Cooperative lie in continuing its growth and in increasing its profitability. The cooperative movement needs to get bigger and to be strengthened, because the more we buy the better the prices are. For his part, Gatan Roger tells a story that made him think about the meaning of cooperation. The Cooperative was carrying the Fdcor line of paint (supplied by the FCQ), and an employee told him that it would be more profitable to sell Sico paint. So, he came before the Board of Directors with a plan to get a Sico franchise. An administrator asked him: Why do you want to change suppliers? As a member, that tells me that if Im not satisfied with a product offered by the cooperative, I only have to go to another supplier. Thats not a very good example to set for our members. Roger withdrew his request. The lesson he took from this episode was that when there is a problem with the FCQ, it has to be discussed in order to improve the product or the service. It is precisely this kind of behaviour that the Cooperative expects of its members. 6.4 The Weaknesses of the Appalachian Farm Cooperative All agree that there are few weaknesses or disadvantages to the Cooperative. The slowness of the decision-making process is the main weakness noted. For example, to expand the hardware store, all decisions about this matter had to be approved by the Board of Directors, which meets once a moth. This procedure slowed things considerably. In a private business, the owner is present, which speeds up decision making. However, this procedural weakness can be an advantage in that decisions have had the chance to ripen to the benefit of equity for all members.

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