Cooperative Capital

Daniel Fireside
July 25, 2017
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Have you ever thought about how food companies are financed? We think about it a lot at Equal Exchange, and we’ve created a capital structure that reflects our cooperative values, and even allows participation from our regular customers and supporters.

Equal Exchange is unusual in lots of ways. You might know that we always pay above-market prices to farmers, buy directly from small-farmer co-operatives around the world, facilitate pre-harvest financing, and provide a ton of other benefits to farmers in the form of direct aid as well as training.

We are also a democratically run worker co-operative – one of the largest in the United States. Once a worker has passed a probationary period, they are elected into the co-operative, buy an ownership share that gives them an equal right to run or elect the Board of Directors, change the bylaws or governing structure, and to be a part of profit-sharing or loss-sharing. One rule that we’ve all agreed on is that we can never sell the company for profit, so we’ll never go the way of so many other “ethical” food and beverage companies that have been absorbed into the machinery of global capitalism.

We’re also creating new spaces for consumers to join us in our work of changing the global food system to one that puts the people and planet before profit through the Equal Exchange Action Forum

One other area that distinguishes Equal Exchange is much less well-known – our capital structure. It may not be that noticeable to someone drinking our coffee, but it’s one of the things that sets the company apart and helps us to keep working for a more just and sustainable global food system.

Our business model requires us to have access to much larger amounts of cheap financing than most other coffee companies of our size. While other companies try to keep inventory low by buying from brokers and middlemen when it suits them, we realized that this puts our farmer partners at a huge disadvantage. We decided early on that we would buy our entire year’s purchase from them as soon as they were ready to sell. This means the farmers don’t have to worry about storage or financing inventory, but it means that we do. And that means a lot of money tied up in unsold good in our warehouses.

The traditional companies get financing from investors who want to make a quick and large profit, or from faceless banks that impose onerous conditions. Often the founders are under intense pressure to sell the company to a global conglomerate so that early investors and some of the founders make a killing and everyone else reports to a new corporate boss, and the social mission becomes just another public relations point. We’ve seen this process repeat itself countless times and realized early on that going this route would ultimately undermine all our other work.

Our financing depends on three legs: investment, loans, and savings or retained earnings. 

Investments:

When we need to scale up, we’ve sold a special kind of stock to people who closely share our values. It can’t be traded on any stock exchange and doesn’t change in value. Investors have to hold onto it for at least five years (the same time it takes a coffee seedling to become a fully productive coffee tree!), and they don’t get any voting rights or seats on our board. They only get their money back by selling the stock back to the company. We offer an annual dividend that can range between nothing and 8 percent. The average is around 5 percent, but might be less or even nothing in any given year. We’ve raised over $16 million through sales of this kind of stock, which includes over $1.5 million from deferred profit-sharing by the workers. We’re not looking for new investments right now, but we know that we can count on our supporters when we need to. 

Loans:

Sometimes we need loans, which can be a more flexible form of financing. Just as we think about the impact we have when we buy our products, we think carefully about the impact we have when we pay interest on our loans. We don’t want our interest payments going to finance the conventional banking industry. Although it’s a bit more trouble, we spread out our borrowing among non-profit lenders, like the Cooperative Fund of New England, the National Cooperative Bank, RSF Social Finance, and the Calvert Foundation. We do our commercial borrowing with Eastern Bank, which is a New England mutual. We also borrow directly from several dozen individuals and institutions. This way our interest payments are recycled back through the cooperative economy. 

Savings:

Our annual profits are divided between taxes, charity, dividends, and patronage (profit sharing) to our members. We also set aside a portion to reinvest in the business and keep it healthy for future generations. We currently have over $6 million in retained earnings, which represents funds that everyone who has ever worked here has agreed to leave in the company to keep it strong and growing.

How you can be a part of our financing:

We recently partnered with the Calvert Foundation to create a special Equal Exchange Community Investment Note. For as little as $20, you can invest with the Calvert Foundation in a special fund that they loan to Equal Exchange at a preferential rate. You’ll earn interest on your funds and can get them back when the Note comes due. Because we don’t want to take on more debt than we need, at this time, we’re asking people to make deposits of only $20 to $100. If you have more funds that you’d like to invest, you can take out another Calvert Foundation note and put it to use toward one of their other lending categories. 

Investing in the Equal Exchange Note through the Calvert Foundation is also one of three ways to qualify for membership in Equal Exchange’s Action Forum