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[MUSIC PLAYING] TODD: The next group is going to talk to us about their trip to Hawaii. No, I didn't-- didn't send them to Hawaii. [INAUDIBLE]. Hawaiian macadamia nuts. Go for it.
NICOLE: Good morning, everybody. I'm Nicole. And this is Connor, Jose, and Alice, and we're going to be talking to you about the work we did with the Hawaiian macadamia nut orchards to look into the feasibility of starting a cooperative. We worked with Brad Nelson, who is the CEO of HMNO, as we referred to it from here on. And he's been a wonderful asset for us in this project.
So I'll give you guys a little introduction and background. And I have the big picture here of Hawaii. And I think this one intentionally is a little bit more than just geographic to show us-- Todd pointed out that there's some lifestyle benefits to the location of this. It's maybe a little bit more scenic than Herkimer County, no offense to those from Herkimer County.
So HMNO, as it stands right now, does production of macadamia nuts and also does some processing and marketing. They also do sell to processors, both in the United States and internationally. HMNO actually has 40% to 50% of the market share of US macadamia nuts.
So they already are pretty successful. They farm over 5,000 acres on the big island of Hawaii. And for this project, they have in mind approximately 2,700 acres, not quite all in trees, but on the east side of the island over there.
It's a good location for this sort of project. They get usually between 100 and 200 inches of rain every year, which might not be great for sunbathing, but it's sure good for irrigating orchards and for production. And so, as we've pointed out, there's a lot of opportunity for both good farming and also for enjoying yourself in a little bit of a lifestyle benefit.
So Brad, the CEO is interested not just in doing this for profit, but for doing it for social benefit. And we will talk a little bit about the macadamia nut market here. So macadamia nuts obviously are grown on trees.
They were introduced to the Hawaiian islands in the 1800s actually as a shade tree for-- and a for hedgerows, for sugar plantations. And quickly, they've become sort of a cultural staple to the Hawaiian islands as well as being very important to their economy.
There's over 18,000 acres in the Hawaiian islands that are growing and producing macadamia nuts. And it generates about $53 million annually. So it's a very important market. The trees themselves, takes about five to eight years for them to start producing.
And then they can produce for over 100 years. So for potential new member farmers coming into this market, it's a little bit more stable. There are some challenges with it, obviously being any sort of agricultural crop. So there's a lot of maintenance, and harvesting can be a little bit of an issue, especially if you're doing it by hand.
HMNO does have harvester equipment, but it's very expensive. And as Brad the CEO said, it's often underutilized being an isolated island system. It's hard to sort of rent out equipment or share it.
So the other potential benefit of having a cooperative with more members, they could use the equipment and perhaps generate some profit, make it a little bit easier to get parts in for repair. You have to order it by the container load.
And they're definitely looking to expand their production and compete. There's been a lot of foreign competition recently. There's even some efforts for-- that China is putting in to put in a lot of macadamia nut orchards.
Hawaii used to be a pretty good producer, and now they're sort of getting a little bit out-competed on the global scale. And the co-op could potentially help address this issue by focusing on marketing as well. So there's been some efforts to keep sort of Hawaiian-produced nuts and keep that sort of, like, niche marketing, where some of the Hawaiian-produced brands have been found to actually be blending in some foreign-produced nuts.
So that's something also that the co-operative could potentially do is work on branding and marketing and keeping that production level. So I will now hand it off to Connor here to talk about the production process.
CONNOR: Thanks, Nicole. Yeah, so we were tasked with-- as HMNO tries to transition to a more co-operative structure because for the social benefits and also for the longevity and benefit of the macadamia industry in Hawaii.
So we were trying to conceptualize how a new member would join the cooperative. And we looked at the entire production process. That essentially begins when the new producer purchases orchard acres, acres from HMNO.
They purchase services from the cooperative to maintain their orchards and grow their nuts. Then they harvest those nuts and sell them to the cooperative. The cooperative will process and market those nuts to international customers, particularly under the label of growing in Hawaii.
And then earnings are refunded back to the growers. And so this was the general structural concept that we created. It would be a centralized co-operative but with five different sectors for accounting purposes.
A concern that came up when we were creating the structure was that we wanted-- in the event that one of these sectors was more profitable than the others, we wanted to ensure that the growers that were purchasing that service received the refunds from that service to make it equitable.
And this was the best way to do that. As you can see the growers sell the nuts to the co-operative. They received the refunds another important thing to note in this slide is that HMNO, the parent company, becomes a member grower of the co-operative under this structure.
And as shown previously, the different sectors are agronomy, equipment, processing, marketing, and auxiliary, auxiliary. And the different services are categorized under each sector. And then in terms of refunds, refunds are done on patronage of each individual sector.
So to get into the core of the structure, the stock is based on shares of acres. One share is worth-- equivalent to 1 acre of orchard is $100 per share that will be paid at the time of the land purchase. And then in the event that that land is removed from production, whether through retirement or a sale or just a transition to another crop, that would be repaid within five years by the cooperative.
Members are the individuals that purchase the acres that HMNO is currently selling for this project. They will have the rights of voting and cooperative decisions, rights to earnings from the cooperative as well as the cooperative activities, which we think is kind of unique.
Because of the social structure, the co-op will be providing things like roads, maybe a clubhouse, potentially even a grower kitchen to help develop new products for macadamia nuts. And they will have use of that as well. And then the board of directors would be made up of seven directors. I looked at the six-year terms.
They will be fellow member growers that would be tasked with making business decisions, listening to the different growers and hearing their concerns as well as working with state and federal policymakers because the industry has been, I guess, someone looked over in terms of policy. So I will pass it over to Alice.
ALICE: Thank you, Connor. So to delve into the financial structure further to discuss the co-op holistically, it's really crucial to touch on the budget and how the co-op is actually going to be generating a substantial amount of its revenue. So primarily through membership and maintenance fees that members will be obligated to pay as well as a percent of farmers' profits that we're actually going to touch on later on in the presentation in addition to its expenses.
So one of the core reasons for the co-op is to really share this under-utilized equipment that's typically experienced by farmers. So a lot of the expenses are actually going to go to actually purchasing this equipment, as well as maintaining this equipment. In addition, it was really crucial to HMNO that not only are experienced farmers able to join the co-op, but people that actually have no farming backgrounds at all.
So we're going to provide a lot of this educational resources to farmers so that people can really get into the industry with no prior background. To discuss patronage refund, it's going to be a really crucial part of our co-op as well. So like Connor touched on earlier, patronage refunds are going to be proportional to the profits that every member derives from their parcel of land. But we're really going to zero into every individual sector in order to determine these patronage refunds.
So now if we go on to the following slide, we're going to really zero into the financial structure of individual members specifically. So really crucial to drill down the idea of patronage refunds because it's going to be super important. So a percent of patronage refunds are actually going to be retained by the code, which is going to be very crucial, especially from the get-go, in the initial stages, where the co-op really needs to have cash on hand in order to purchase any additional equipment or maintain any unexpected equipment.
In addition, so every parcel of land is actually going to have a home on the land so farmers can live on there if they need to. A lot of the farmers are not actually going to be from big islands of Hawaii but actually are from other islands of Hawaii that they can come down to on the weekend or even on the West Coast, from California, or even countries in Asia where they can travel to Hawaii pretty seamlessly.
So any maintenance necessary for every individual home is actually going to be the responsibility of each individual member. In addition to that, members can actually choose to lease their property. However, it really is up to the member, as they are the title holder, to take part in the co-op in addition to the rules and according to everything that we have laid out.
If the member does decide to transfer the property over, that is definitely possible. However, it's really important to note that the shares and the lands must be transferred together. You can't transfer either the membership and the stock and then transfer the land separately. They must be done together. So I'll now hand it off to Jose to talk about the capital effect.
JOSE: So I'm sure some of you may know, because you guys are also in the same boat, but starting a cooperative is not an easy task, and a lot of capital is required. So we've developed an early capital acquisition plan that will help provide startup capital for this endeavor. So just before anything starts, the first thing we did was to make sure we were meeting the goals that we set out for.
So we've laid the goals out. HMNO's goals are to develop a profitable exit strategy from the market and establish a cooperative to replace its current operations. And so the cooperative school, on the other hand, would be to maximize the amount of capital on hand for the startup of the operation as well as early ongoing operations within the cooperative.
Now, how do we get this money? Well, as previously stated, HMNO is seeking to sell approximately 2,000 acres of land out of the 5,000 acres it holds currently. And so the plan is to meet these goals in an effective way. HMNO will directly receive 50% of the profits fairly and a long-term note worth 35% of the sale profits.
These 35% of sales would originally be held by the cooperative so that they can use that money as leverage in their early operations. And then eventually, once they become profitable and function independently, they will be able to slowly pay back the money HMNO is due.
On the other hand, again, the cooperative will receive 85% of cash, and it will use this for operations. And then here is just a clear example of how the money will be transferred from farmers, the cooperative, and HMNO as well as how acreage would be distributed between what HMNO holds, what the cooperative would need. They would receive land for operational and administrative purposes, and then the farmer's obviously receiving land for farming endeavors.
So moving on to the next stage, here is just a structure of what kinds of land would be being sold. The restricted land would not be for sale, and this would be operational land for the cooperative as well as land for HMNO. This would account for approximately 60% of total land.
On the other hand, land available for sale would be 2,000 acres. Small farmland would be farms of 30 to 100 acres and would be owned by individual investors or household investors who are looking to kind of set up a farming, whether that be kind of a long-term goal or more of a kind of passion project. That would be up to them.
But the co-op would hope would hope to retain 10% of equity for this land. That would not mean that these farmers can sell it. That wouldn't mean they wouldn't have operations. But just because we're believing that these farmers would be able to market their own land and sell it to other individuals, we want to have something that guarantees that it would be held by the cooperative and maintained within the cooperative in the long term.
So having a general equity goal of 10% of that acreage equity is what we want to do for smaller farms. Additionally, as mentioned by Alice, we want to extend this to as many people as possible. We want to have people able to buy this land, and not everybody can do that. So we want to extend a line of credit to [INAUDIBLE] investors.
Large farmland would be owned by large-scale investors, and we assume this would be more long-term leases. So it isn't as much of a need for an equity hold. This could be instead done through contracts, guaranteeing that the land remain within the co-operative in the long term. So here's just some percentages on a possible distribution of sales. None of this is necessarily set in stone, but just a possibility of what could be done with the available land.
So moving on, here are projected revenues. Acreage sales would account for approximately 50 million if we are selling the land at $25,000 per acre. And then the equity fee would be charged to potential members of $100 again. And this would all be going to the cooperative directly.
So here you can see a revenue distribution. Approximately $25 million would end up going to HMNO as part of their exit strategy. And a little over $25 million would go to the cooperative for its start-up in early operations.
And so potential uses for this money include distributing payments and dividends for members, developing early infrastructure for operations, and growing the value of the land because, again, members could potentially sell this land, so including increasing the value would be beneficial for them directly. Creating amenities, such as the member clubhouse, or funding early operations and working capital for the firm. That's it, and if you have any questions, let us know.
[APPLAUSE]
TODD: Wow, a complicated venture. Is Brad able--
SPEAKER: Yes.
TODD: I don't know what time it is in Hawaii.
SPEAKER: Yes, he's [INAUDIBLE].
TODD: Oh, Brad. Please,
BRAD: Yes, I'm here.
TODD: Floor is yours.
BRAD: How are you doing, Todd?
TODD: I'm good, Brad. How are you?
BRAD: Good. It's snowing. I just got back to Denver from Hawaii, was met by snow. So--
TODD: I think it's going to be 90 here today, something like that. Comments for the group, Brad?
BRAD: Yeah, I think we-- it was definitely a little bit more of a complicated scenario and maybe unique. But overall, I think they grasped the concept and helped me think through a lot of the ideas.
TODD: That's great. That's great. I mean, think about this-- this is one where HMNO is interested in selling a huge chunk of their acreage to promote new farmer development and things like that while also having the right exit strategy so it doesn't compromise their own financial underpinnings.
So a lot of moving parts here about farmers, new farmers, where the money flows, patronage, patronage pools by area. So you really tackled a lot over the course of the semester.
And I think it took a lot of conversations to get on sort of the right page. It was a complicated model. Never done one like this. It's somewhat like an ag production co-op model, which is great. So thanks to Brad and thanks to the team. I just want to keep us moving forward. Great job. Great job.
[APPLAUSE]
[MUSIC PLAYING]
Part of the Grand Challenges curriculum, Cooperative Business Management (AEM3260/5260) focuses on engaged learning with community and cooperative clients.
In May of 2022, ten student project teams presented the results of their semester-long work with community partners. Professor Todd Schmit evaluates.
Project title : Macadamia nut production cooperativeCommunity Partner : Hawaiian Macadamia Nut OrchardsStudent Team : Alice Karetsky, Nicole Pelletier, Connor Ranck, Jose Valencia
