S TATE OF M ICHIGAN DEPARTMENT OF AGRICULTURE RICK SNYDER JAMIE - - PDF document

RICK SNYDER

GOVERNOR

JAMIE CLOVER ADAMS

DIRECTOR

STATE OF MICHIGAN DEPARTMENT OF AGRICULTURE AND RURAL DEVELOPMENT L

CONSTITUTION HALL P.O. BOX 30017 LANSING, MICHIGAN 48909 www.michigan.gov/mdard (800) 292-3939

TO: Michigan Bison Group DATE: 8/30/2014 FROM: Mike DiBernardo, MDARD RE: Michigan Bison – Additional Information Model based on the successful structure utilized by Michigan Turkey Producers. Under this structure, a producer-owned cooperative would be formed that would be

• wned by producers committing between 85-100% of the livestock required for the plant

to operate at its planned capacity. (For purposes of this illustration, we have assumed that there would be 100% commitment of livestock by coop members). Operationally, the producers would sell their livestock to the cooperative, who would then, under a long-term supply agreement, sell the livestock to an LLC (for this illustration the processing plant is referred to as LLC) that owns and operates the plant. The cooperative would in turn invest capital in LLC, that would be a combination of invested capital from the cooperative members as well as available grants and incentives provided for the project. The membership interests owned by the cooperative are referred to here as “Class A” ownership interests. Additional capital would be raised for the LLC from accredited investors-they could consist of business partners, suppliers, additional individual investment from coop members, or private individuals. The LLC member investments by accredited investors are referred to here as “Class B” ownership interests. This structure has a number of advantages:

• 1. It allows the producers to maintain majority ownership of the plant while still
• perating as a farmer-owned cooperative-which provides modest tax incentives

and allows access to federal and state programs exclusively available to cooperatives.

• 2. The separate LLC allows a mechanism to access private capital for the plant,

while still allowing the LLC to operate with a relatively small Board and a separate governance structure.

• 3. The split ownership arrangement also provides a mechanism to provide a more

specific balancing of financial risks and rewards for the two sets of investors.

• a. For example, it is likely that the debt utilized in the formation of the LLC will

require personal guarantees-and further likely that if the accredited investors would participate in those guarantees. This structure would allow the cooperative to provide whatever guarantees. This structure would allow the

cooperative to provide whatever guarantees are required by the project lenders.

• b. In addition, the producers will likely be subject to price adjustment provisions

if the profitability of the plant is insufficient to meet debt service, thus reducing the cash they receive for their livestock.

• c. In the preliminary design, this risk assumed by the producers would be

partially mitigated by aggregating the initial financial incentives provided by federal and state incentives into the cooperative…and counting this as equity contribution by the cooperative.

• d. Finally, further incentives could be provided to the Class B ownership

interests in the form of a preferential dividend to enhance their returns beyond those initially projected. There are numerous alternatives in this structure and a number of details to be resolved, but we believe this approach offers significant promise. Cooperatives Advantages Disadvantages User ownership and control (through board of directors) Limited return on equity Group action benefits Slow decision making Single taxation at member level Unrealistic member expectations Capital Sales Products Limited anti-trust exemption Limits on investors and business Limited Liability Company Advantages Disadvantages Flexible management structure Need for a well thought out operating agreement Liability limited to ownership interest Cannot retain earnings Continuity of existence Flow through tax treatment (no double taxation) Low maintenance costs

Potential Structure

Sell Livestock 100% Ownership Class B Class B (Optional) Owns Plant and Brands Operates Plant

Final factor to consider…

GET PROFESSIONAL ADVICE.

Cooperative Coop Members Accredited Investors Limited Liability Company

Sells Livestock to Class A