Chestnut Growers, Incorporated.
Leveraging university partnerships
Overview
Chestnut Growers, Inc. is a producer-owned and operated agricultural marketing cooperative based in Jackson, Michigan with members spread across the state’s Lower Peninsula. The cooperative processes its members’ Chinese and Japanese/European hybrid chestnuts into an array of value-added products as well as selling much of the harvest fresh during the fall. Currently, about 100,000 pounds of chestnuts go to the co-op annually. CGI uses exclusive access to the only commercial chestnut peeler in the country, strong partnerships with Michigan State University, and close relationships with local marketers to position itself competitively in the marketplace.[1]
History
Chestnuts were first introduced as a commercial crop in Michigan in the 1980s.[2] These first chestnut plantings were the brainchild of a “Johnny Appleseed” figure who had witnessed the success of chestnuts in Ohio, Pennsylvania, and a few other states. He hoped to reproduce these successes in Michigan, heralding chestnuts as a low-input high-return strategy for maintaining a sustainable orchard. Unfortunately, the Chinese chestnut seedlings that he sold to landowners were extremely variable and of relatively low quality. As described by one Michigan State University professor: “The stuff that they were putting out were [trees] that…if it was a chilly spring or a hot summer or a drought, they would shut down and it took forever for them to get into production.” Several land owners lost thousands of dollars investing in these open-pollinated Chinese chestnut seedlings that failed to produce consistently.
In the mid-1990s, those interested in growing chestnuts in Michigan benefitted from the arrival of plant pathologist Dennis Fulbright at Michigan State University. He took on chestnuts as his research project, and by 1996 started investigating an appropriate grafted cultivar for the area. The result was Colossal, a variety that is a Japanese/European chestnut hybrid. With this proven cultivar developed by the University, growers could plant trees that yielded nuts even in the face of climatic stresses and start producing nuts by at least their fourth year. According to one grower, “without Michigan State and the cultivars that are growing now—if it stayed just the original seedling[s]—I wouldn’t even be in it at this point.” With more landowners buying Colossal trees which consistently yield larger, sweeter chestnuts, the industry started to move forward.
As production grew, many Michigan growers felt that they would be able to better support themselves as a group rather than as individuals. Growers met, and originally proposed a cooperative as a way for growers to collectively purchase liability insurance. The fear was that chestnuts sold by growers directly to individuals might be roasted or microwaved improperly, causing the nut to explode and potentially resulting in an injury for which the grower would be liable. As the growers formed a steering committee, their goals quickly expanded beyond insurance and moved toward collective marketing and eventually the possibility of value-added processing. It took about one and a half years from the initial steering committee meeting until formal incorporation as a cooperative in 2001. During these years, the group received legal help from an area lawyer and cooperative expert in order to develop appropriate by-laws and statues.
Operations
CGI receives chestnuts from its grower-members at a central location during the October harvest. About 80% of the chestnuts are Japanese/European hybrids while the rest are holdovers from the original Chinese chestnut plantings. Once aggregated, the nuts are sorted according to size (A, B, and C-grades) cleaned with a StorOx solution, bagged, and stored at a near-freezing temperature. Rotten or otherwise bad nuts are removed via a proprietary screening process. The co-op rents space for their receiving operations and contracts for the use of the employees at the storage facility. Frequently, all the fresh chestnuts are sold by the end of November, obviating the need for a permanent warehouse.
Grower-members get paid for their chestnuts according to a yearly “target rate”—in recent years about $2.00/lb. Large chestnuts get 120% of the target rate, while smaller nuts garner only 80%. Non-members who wish to sell to the cooperative are paid around $1.50 with no size bonus. When CGI markets the chestnuts, they can sometimes sell the largest “A-sized” nuts for about $4.00/lb; C-sized nuts sell for around $2.30. The smallest chestnuts, often from the original Chinese seedlings, are difficult to sell. CGI, however, has the huge advantage of being the sole lessee of the only commercial chestnut peeler in the country which it leases from the Midwest Nut Producers Council, a non-profit affiliated with MSU. Access to the peeler, which can peel thousands of pounds per day, allows the smaller nuts that can’t be sold fresh to be marketed as unique frozen or freeze dried products. These value-added offerings not only provide a means for marketing smaller chestnuts; they help the cooperative sell at least some product in small-harvest years.
Cooperative Structure
CGI operates with a seven-person board comprised of grower-members. Board members serve three-year terms, so that each year at least two directors are up for re-election. Additionally, two non-grower faculty members from MSU help advise the board. There is no physical co-op headquarters, so most meetings take place via teleconference with the exception of one annual in-person board meeting. CGI has no paid managers or employees, placing most of the responsibility of running the co-op on the board.
Co-op membership is approximately twenty-five growers. Joining the co-op entails paying a one-time $300 membership fee and purchasing at least one $25 share of stock. As the brand grows, the membership fee is expected to increase. Membership confers at least one vote in the cooperative, however additional votes are proportional to the amount of production the grower contributes. As one board member stated, “The guys that are bringing in the nuts are the ones that should be helping make the decisions.” Thus far, no grower has controlled more than 50% of the votes in a given year. A marketing agreement (see below) requires growers to contribute all of their chestnuts to the cooperative except those sold on-farm directly to individuals not for resale.
Marketing and Value-Added Products
One initial challenge that the Michigan chestnut industry has faced is consumers’ lack of familiarity with chestnuts. Though once abundant in the United States, American chestnuts had been completely decimated by blight by the 1940s. Now most of the chestnuts consumed in the US are imported, with about 4,000 metric tons entering the country annually. Consumers on the west coast are likely to consume Chinese or Japanese varieties grown in China or Korea, while their east coast counterparts buy mainly European varieties from Italy or Turkey.[3] While this presented growers the opportunity to establish a new local, differentiated, high-quality product, it also meant that they faced a rather uncertain market for these homegrown chestnuts.
Key faculty members in the MSU horticulture department helped secure grant funding to explore the market. Being a non-profit, the affiliated Midwest Nut Producers Council was a very effective vehicle for pursuing federal funds that would support the market research. The nascent cooperative decided to target chefs who tend to be early adopters of new food products. While the Michigan chestnuts were very well received, the need for peeling and roasting made them a labor-intensive ingredient for busy kitchens. This sparked the quest for developing a pre-peeled product. The Midwest Nut Producers Council procured a rural development grant to purchase the peeler from Italy, andwith the help of MSU, CGI developed packages of frozen, peeled chestnuts for easy use by chefs. While an important developmental step, selling to chefs proved to be a relatively small and unstable market due to the tendency of chefs and owners to move frequently. Additionally, even though CGI enjoyed exclusive use of the peeling machine at a very reasonable lease, the high cost of processing necessitated exploring the market for fresh, unprocessed chestnuts.
One particularly dedicated co-op member, with the help of MSU faculty and extension, spearheaded the effort to find markets for fresh chestnuts. A co-op advisor noted that sending samples to potential buyers was a key part of the strategy: “If they’re not going to buy from Italy or Turkey or whatever their past source is, you better muster up with your product.” They had particular success finding contacts at the Detroit Produce Terminal and connecting with local specialty markets. Many buyers, in fact, strongly prefer the taste of the Michigan-grown chestnuts and have found that the better handling techniques employed by CGI result in fewer rotten or moldy nuts. One MSU faculty member noted that while some members originally envisioned an emphasis on creating value-added products, “Their real niche was selling very good quality fresh chestnuts.” There is little worry at the co-op about market saturation since they generally sell every nut that they grow in a given year.
CGI has been able to maintain relatively stable relationships with its customers in the fresh chestnut market. According to one board member, maintaining a diversity of buyers allows CGI to better coordinate preferred sizes for particular buyers, helping the co-op receive a better price. Some owners of specialty food markets, in fact, exclusively buy from CGI instead of purchasing Italian imports as long as Michigan production levels are high enough. One of the benefits of being a cooperative is that although production levels for individual growers fluctuate yearly, CGI has not yet experienced a year when everyone’s production was down. “By being a group” one board member noted, “we’re able to keep our same customers” by ensuring that they will have product to sell.
Several years ago, however, the board recognized that simply “being a group” was insufficient for the successful functioning of the cooperative. It became apparent that, despite a lot of enthusiasm, several grower-members weren’t going to produce significant quantities of chestnuts. Additionally, some members with large plantings would sell their most valuable chestnuts locally, using the cooperative only as an outlet for their smaller, less marketable nuts. In order to address this issue, the cooperative decided to implement a marketing agreement that each member would have to sign in order to remain a member of the co-op. It requires each member to deliver all of their chestnuts to the cooperative except for not-for-resale direct sales occurring on the farm (e.g. a “you-pick” operation or a farm stand). Additionally, it sets quality standards and dictates specific handling requirements to ensure timely refrigeration once the chestnuts are harvested on-farm. Although fifteen members opted not to sign the marketing agreement and left the cooperative, board members view it as a vitally important step in the development of the business, better ensuring that it could sell enough high-quality chestnuts each year.
The marketing benefit of the co-op extends beyond maintaining key customers year after year; it also provides an outlet for growers’ low-grade product. While smaller chestnuts don’t necessarily have an inferior taste, they fetch a much lower price on the fresh market. The cooperative’s research with MSU has helped them develop a series of value-added products for the smaller chestnuts. In addition to the frozen peeled chestnuts, the CGI website offers chestnut flower targeted at gluten-free consumers or those seeking a new take on old recipes. Freeze-dried slices are also available through the online store and were developed a few years ago using a series of grants from the Michigan Department of Agriculture. They have been marketed to chefs as way to circumvent the labor necessary for peeling and cooking the chestnuts; the slices rehydrate in about fifteen minutes and are shelf stable for two years.[4] The cooperative has also sold chestnut chips to area microbreweries for use in their specialty beers—a product idea spearheaded by MSU plant pathologist Dennis Fulbright.[5] Overall, the value-added products mainly help market chestnuts that wouldn’t sell in the fresh market. As one grower-member summed up in a 2008 article in The Chestnut Grower, “Right now our goal is still to sell as many quality freshchestnuts of good size to the marketplace as possible…We play with the residue—small stuffthat doesn’t appeal to the consumer—to make additionalmarkets.”[6]
Challenges and Opportunities
CGI enjoys the considerable benefit of being closely affiliated with Michigan State University. In addition to having two MSU faculty that advise the cooperative’s board, CGI has benefitted from technical assistance in developing its organizational structure. MSU has also been the main driver in developing the frozen, peeled and sliced value-added products that the co-op sells. According to a board member, “The partnership that we’ve developed [with MSU] has been so important to move it along. It would’ve been hard to build the cooperative to the extent that it is right at this moment…without Michigan State.” Perhaps the best example of this symbiosis is the chestnut peeler which resides at an MSU research station. Although the university gets to use it for research purposes, the main benefit goes to CGI. One co-op advisor noted that if CGI had to take over all the costs of the peeler, they would struggle significantly. Without this important partnership with MSU, the cooperative would have to function significantly differently.
Another important partnership is with the MSU-affiliated Midwest Nut Producers Council. As CGI’s non-profit counterpart—most members of CGI are also members of MNPC—it can seek out grants for which the cooperative would have been ineligible. One early challenge, however, was appropriately defining the lines between MNPC and CGI. In the opinion of one MSU faculty member, CGI was trying to undertake projects (i.e. expensive product and market research) that should have been the domain of MNPC. He has warned that by spending money on these projects, it reduces the amount available to pay growers, increasing the likelihood that they might leave the cooperative. The cooperative, he claims, should focus on what they can currently sell and on paying growers competitive prices. There is a subtle but persistent tension between university enthusiasm for new products that may help growers retain higher value in the future, and the need to pay growers good prices right now to ensure that the cooperative endures.
A related challenge is conveying the cooperative’s value to its members. For example, when some non-members boasted getting paid $4/lb for their chestnuts, it caused angst among co-op members who wondered why they were not getting paid the same rate. Highlighting the particular services that the co-op provides its members is important in trying to prevent disgruntlement according to one of CGI’s advisors: “If they do not hand their stuff off to the cooperative, they do not have marketing expertise, they don’t have delivery expertise, they don’t have bagging expertise, they don’t have storing expertise, they don’t have sizing expertise, they don’t have cleaning expertise.” Additionally, growers who are not located in places where there is a market for fresh chestnuts may find themselves with nobody to sell to. Fortunately, while CGI has benefitted from expert help in starting the co-op, it has a core of key growers who have been the champions of the organization. These growers have helped communicate the services the cooperative provides when other growers have become frustrated with co-op decisions or the prices they are receiving.
Managing the many grants that have flowed into the cooperative has been another key challenge for CGI. Although they have been a huge boon, especially with developing new products, grants have sometimes come with unanticipated strings attached. One grant the co-op received was a $100,000 product development grant from the Michigan Department of Agriculture to help with developing the freeze-dried slices. What was unclear at first was that the grant was a reimbursement grant, meaning that the co-op would have to find a way to front the money and get paid back later. After initially being denied by their bank due to their small size, the co-op finally procured a loan from one of the state’s big farm banking services with five growers co-signing for the loan. In the end, managing the grant “cost” the co-op approximately $15,000 after interest and fees were calculated. This upset several members who thought the money should have been spent elsewhere. Several growers also ended up feeling that they were not adequately compensated for the product that they contributed that year as part of testing the slicing and freeze-drying technology. Despite the discontent that the handling of the grant caused some members, it was an important learning experience for the cooperative in better understanding the costs of using grant money. Speaking more generally about the challenges of handling the cooperative’s finances, one board member stated that “The most important thing that I’ve learned from this is the development of a good treasurer.” Even with appropriate expertise, however, managing grant funding can lead to hidden obstacles and tensions.