Network Difficulties

Termination of Georgia wood co-op provides lessons for export co-op development

By Alan Borst,
Economist
USDA Rural Development

        In every cooperative venture, there are lessons to be learned that can help in future endeavors. Yet even with the best education, sound technical assistance and low risks, some cooperatives never really take off. That was the case with a Georgia co-op organized to help forest product companies tap export markets.
        Beginning in the late 1980s, wood networks - associations of small- and medium-sized wood product firms were established across America. In April 1993, President Clinton spoke at an Oregon forest conference where he hailed the potential of such networks as economic development tools. Other speakers also promoted wood networks as a way to save both jobs and old-growth forests by adding value to what member wood product companies already produced from trees.
        Through the early 1990s, the flexible network economic development program concept was sweeping the country, driven by the precedent of economic success among networks in Northern Italy, Asia and other regions. During this period, economic development agencies at the federal, state and local government levels, along with non-profit associations, were committing funds to such network development projects, including several targeted at forest product companies.
        Most of these network ventures were organized as non-profit associations with a general mandate to improve the economic welfare of their wood product clientele through various joint activities. Some of these associations included a joint marketing component. Others did not.
        One network organized as a marketing cooperative with the relatively specific mission of facilitating member export sales was the Georgia Wood Export Marketing Co-op, or "GeorgiaCo," as it was known. Some important lessons in export marketing cooperative development can be drawn from GACO's six-year history of operations. These lessons are of particular importance for economic development specialists or cooperative organizers.

The GA-CO case

        In 1988, the industrial marketing division of the state utility, Georgia Power, proposed that small- and medium-sized wood products companies should form an export marketing cooperative to facilitate their foreign sales. Georgia Power worked with other sponsoring organizations to support GA-CO, including the Georgia Forestry Commission; a major law firm (which handled Georgia Power's accounts); the Southeast Lumber Manufacturers Association; University of Georgia Cooperative Extension Service; Georgia Department of Industry, Trade, & Tourism; and the USDA Forest Service-Region 8. Several similar cooperatives had been organized across the Southeast and throughout the United States. Georgia Power sold large amounts of electricity to wood products companies, and took an interest in expanding their customers' foreign sales base in order to "export kilowatts."
        The idea for the co-op was planted by a speaker from the Wood Products Marketing Cooperative (WPMC) of Alabama, who made a presentation at the Forest Products Global Marketing Conference in Atlanta during the fall of 1988. During this presentation, it was revealed that a large amount of funding had been secured for the WPMC. The majority of shipments were being shipped from western Alabama through the port of Savannah, Ga., into foreign markets. WPMC trucks were going right past some GA-CO member mills.
        Georgia Power's economic development specialists took note of this development, and concluded that there was no reason why Georgia mills could not tap into this export market flow. The co-op's export mix was planned to be 35 percent hardwood and 65 percent softwood, with European and Caribbean markets as primary targets. GA-CO had an initial goal of generating new annual sales of $2 million for its 13 members. A few of these members had some export experience at the time the co-op was organized.
        Sponsors did much of the up-front organizational work to establish GA-CO, easing the burden for prospective co-op members. Georgia Forestry Commission staff obtained a ruling from Georgia's attorney general which authorized the network to be incorporated as an agricultural marketing cooperative. An attorney from Georgia Power's law firm obtained an export trade certificate of review from the U.S. departments of commerce and justice, which conferred the co-op with protection from the threat of antitrust legal actions. The attorney also drew up the co-op's by-laws and did the work to incorporate it under Georgia's agricultural cooperative statute, with the consequent benefits of limited liability protection; single taxation on distributed net earnings; and further limited antitrust protection for operations.
        Sponsors and executives from the member-companies visited their congressional representatives in Washington, D.C., to secure funding for the project and to check on the export trade certificate of review program process. Several small grants, loans and donations of goods and services from sponsoring organizations were obtained, although far less than had been the case for other network projects which had been started a few years earlier in the region. Georgia Power donated the time of a manager who coordinated the co-op's organizational tasks during its first year and also offered surplus equipment to GA-CO.
        During 1989, orientation meetings were held in Savannah, Macon and Atlanta for prospective members. Staff presented the virtues of coordinating export marketing through a co-op structure. At the time, domestic prices were depressed and export markets were seen as viable outlets for Georgia wood product companies. The different demands of importers were highlighted, along with the importance of being a committed supplier. Sponsoring staff planned to present the ideas, do some of the up-front organizational work and then step back and let the members make up their own minds.
        About two dozen companies attended the Savannah meeting, of which half agreed to participate in the co-op. The company representatives discussed the need to find new markets and to strengthen their businesses before passing them on to the next generation. One sponsor described the initial feeling among members as "guarded optimism." There were no illusions that GA-CO would carry its member firms, but it was thought that the co-op could be a factor - potentially adding a little profit to its members' margins. One sponsor reported that there was a general state of apprehension among some sponsors because it was the first time many of them had worked together.
        The sponsors withdrew from GA-CO after helping with its establishment. One sponsor had its budget for economic development activities cut, and a couple of sponsors had their activities with the co-op limited due to regional disputes related to the scope of assistance and targeted beneficiaries. It became difficult for some sponsors to justify their GA-CO assistance, given their mission and regional jurisdiction. Some sponsors reported that C-YA-CO members did not fully take over the coordination functions after the sponsors withdrew from management. No one stepped forward to "stir the pot." Sponsors felt that the cooperative mechanism had been delivered, and that now it was up to members to make it self-sufficient.

Lack of economic need

        There was consensus among stakeholders that the primary reason for the termination of GA-CO was the lack of economic need among members for the alternative foreign markets to which the co-op provided access.
        During the initial planning phases of the co-op in the late 1980s, domestic prices were relatively weak, and export markets were viewed as potentially important alternative sales outlets. However, domestic markets for members' wood products had been at record highs throughout the 1990s, while targeted foreign markets had been in recession and complicated by technical trade barriers and unfavorable macroeconomic factors, such as a strong dollar making U.S. exports more expensive. Members did not conduct much export business and sold very limited volumes through their co-op because domestic sales were both simpler and more profitable. Smaller mill operators, such as GA-CO members, did not have the working capital to tie up in large export shipments, which might be refused by the importer or subject to some technical problem in transit, or at the border. Because of their individual fears of such losses, the co-op idea had some initial appeal as a way to reduce this risk through collective action.
        European customers wanted high-grade, special orders of wood products in metric sizes. European builders wanted the most valued wood from logs, and had little demand for the lower valued wood, leaving the mills with a lot of firewood and otherwise non-saleable byproducts. European carpenters tended to custom-build the wood components of their houses, and did not think in terms of standardized sizes, as did American builders. During the first two years of GA-CO's operations, domestic prices for member wood products increased by 20 percent while Caribbean sales were flat and European sales declined. By the time GA-CO dissolved in spring 1997, domestic prices had increased about 40 percent relative to their level at the time of the co-op's establishment while export markets remained depressed
        One of the sponsoring staff said his experience with  GA-CO, in light of this lack of economic need, reminded him of well-meaning boy scouts who eagerly help a senior citizen across the street, only to find that the person did not want to cross the street. While GA-CO members earned record profits in domestic markets, some Caribbean accounts previously serviced by a few co-op members were taken over by huge mills that under-priced them. European markets were more difficult to serve, and were declining because of macroeconomic factors and technical trade barriers. GA-CO's total export sales between 1991 and 1996 were slightly over $1 million, and annual sales never exceeded $300,000. In 1994, as European markets weakened and members declined to sell through the co-op, the Savannah sales operations were consolidated in Valdosta, Ga.

Weak cooperative culture

        Several sponsors and member executives commented that there was an absence of a "cooperative culture" among Georgia wood product firms. One respondent noted that, although cooperative wood export ventures had been tried before in the region, there was not the history or culture of cooperation among mills that existed among farmers in the Upper Midwest, where he had spent some time. Another sponsor believed that there was a stronger cooperative ideology among the forest product firms in the Pacific Northwest, where most forests are on public lands and where there is more ease with government presence.
        In Georgia, by contrast, most mills use wood from privately owned forest stands and there is less government involvement in the forest products industry. One respondent asserted that wood product companies in the Georgia area were conservative, independent, and distrustful of competitors, even with regard to information already publicly available. Another sponsor reported that there were early doubts about whether the prospective co-op member executives could work together.

Limited effort limits potential losses 

        There had been several previous attempts at export cooperation for wood products in the Southeast. One failed because of technical trade barriers related to the pine nematode, unfavorable exchange rate shifts and loss of its markets to competing suppliers. Two other ventures were dissolved early on in GA-CO's six-year life.
        GA-CO chose not to try to ally with other wood co-ops because of differences in missions and geographic and functional orientation. However, it did invite mills from the Carolinas to join as members. A few mills from South Carolina did become GA-CO members.
        The lesson learned from the experience of some of the other wood export networks known to sponsoring staff was heeded, as such high up-front fixed costs had been incurred by networks which had failed before a single log was exported. One co-op member was already an experienced exporter, and enjoyed good working relations with some of the other members when GA-CO was formed. Despite some early misgivings among some of the stakeholders, co-op members agreed to operate through the experienced member's export marketing staff rather than risk incurring high fixed costs by establishing their own office and staff before GA-CO was proven. The experienced mill member had a sufficiently powerful and positive place within its industry to function as the co-op's sales agent.
        The experienced mill member insulated co-op members from the financial risks of export transactions by paying member firms within 10 days - 30 days at most - while waiting 60 days or longer to receive payment from importers. There was some initial concern among some of the members and sponsoring staff, who worried that such a dominant member could subvert the co-op towards its own purposes. Upon reflection, respondents were impressed with the experienced mill members service and confirmed that none of their fears were realized. These members knew of other failed wood co-ops that had lost the up-front costs of expensive building leases and contracted management employees.
        One sponsor commented that the decision to administer through the experienced member seemed to work out well and did minimize potential losses. However, the sponsor wondered whether or not it also limited potential gains which could have been achieved through a more ambitious effort with independent cooperative management.

Lack of member consensus

        Members had different visions on how GA-CO could best serve their interests, and disagreed on the amount of capital they were willing to contribute to fund cooperative operations. Some sponsors viewed GA-CO with guarded optimism as a tool that could help members become more globally competitive. One member executive believed that a cooperative structure for export could work well for wood products because many importers wanted to deal with one, large supplier that could fill individual orders. A cooperative could consolidate such orders from its suppliers while also serving as a liaison between member-suppliers and importers. In his experience with exporting, he found that foreign buyers generally prefer the security of dealing with large suppliers with recognizable trademarks. These importers are concerned with quality assurance through certification of some kind, while domestic buyers are looking for adequate quality at the best price and are willing to determine quality through personal inspection.
        A co-op structure, he concluded, could best help small mills collectively meet the demands of foreign buyers. A co-op could function as a stable supplier with multiple member sources and could also provide the standardized quality assurance wanted by foreign buyers.
        Another stakeholder described the Georgia wood products industry as conservative and risk-averse followers of secure market trends. One sponsor reported that many smaller mills were focused on the next quarter's returns, and they were not committed to supplying export markets when greater returns were available in domestic markets. One mill executive said his interest in exporting was to reduce supply and raise prices in his domestic markets.
        There was pressure to make the first export sale in order to prove the viability of the export marketing co-op structure. In December 1990, the first sale to the Caribbean Island of Curacao was transacted and highlighted with a media release. Eight of 13 members made at least some sales through the co-op, while the vast majority of business came from a core of two or three.
        Some members viewed the co-op as having been formed to compete on large accounts, yet large inquiries from importers never came through. They perceived a mismatch between the smaller import inquiries that GA-CO forwarded to members, and the larger inquiries in which members were interested. One member reported wishing that GA-CO could have worked proactively on market development and dealing with export sale complications rather than only being an order taker. The initial mission of GA-CO was to increase member export sales at the margin. Existing individual member export accounts were not turned over as co-op accounts. Some members expected GA-CO's value to come from its ability to handle large accounts which few or none of the individual members could meet on their own. GA-CO was designed so importers had a right to choose the individual member-supplier they wanted to fill their orders.
        The size of the working capital account limited the volume of export business the co-op could conduct. For any given market period, the volume of export accounts receivable the experienced member mill could manage was tied to working capital from member contributions. Members voted to allow GA-CO officers to take out a loan to increase the working capital. One of the sponsors further increased the working capital pool by matching member contributions. At one point, members discussed the idea of boosting their financial commitment to GA-CO through even more contributions to the working capital pool. Members were unable to achieve consensus on this point.
        There was simply no consensus among members on what kinds of export marketing services should be offered, and how much capital should be invested to support those services. When it became clear that members were not going to use their co-op, the decision had to be made whether to shelve the co-op or liquidate it. Putting the co-op into inactive status, but maintaining its structure, would cost some money to keep up the bank account and continue issuing reports. The decision was made to dissolve the enterprise.
        Another challenge that complicated coordination was GA-CO's attempts to concurrently serve the export needs of two different kinds of members - softwood and hardwood lumber mills. Softwood mills are a lower margin, higher volume business that works through larger operators. The profitable shipping range of hardwood logs is narrower than for softwood, probably around 100 miles. After softwood trees are harvested, they are replanted and farmed, while hardwoods are naturally replenished. Huge, multi-national corporations have a presence in the softwood industry, while there are only small hardwood mills.
        Some larger corporations have been attracted by the highest margins in hardwoods and have tried to establish a presence, but have failed.  GA-CO sales ended up being well over 90 percent softwood products.  During the 1991-96 period in which the co-op operated, hardwood export market prices were at a 10- to 15- year low.

Causes for failure

        The potential to serve foreign markets was provided through the co-op structure, with staff passively monitoring importer inquiries, but not engaging in any market-building activities.  There was consensus among mill executives interviewed that the sponsors did an excellent job of getting the cooperative venture organized, but the business cycle in the wood products industry worked against the GA-CO effort.
        The consensus among member-executives and sponsors was that the co-op ended for three reasons.  First, there was a lack of a driving economic need for mill members to enter export markets.  Second, there was not a "cooperative culture" among mill members to ease that coordination.  Third, there was no agreement among members about how the cooperative should operate and be funded.
        Mill members were free to individually pursue more profitable, secure and easy transactions in domestic markets, and that is what they did.  However the decision to operate through the facilities and staff of the experienced GA-CO member limited the size of the other members' investments and risks.
        However, several respondents interviewed after GA-CO was dissolved commented that members seemed not to be soured on the cooperative process. One member believed that in a future situation where domestic markets were weak and export markets were relatively strong, the export co-op structure might yet work for them.

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