Agricultural Cooperatives 3211 Michael Thomsen, PhD Associate Professor Department of Agricultural Economics University of Arkansas

Objectives Describe main principles that characterize cooperative organizations Explain the difference between use benefits and ownership benefits Distinguish between the roles of “Sapiro type” and “Nourse type” cooperatives Describe common organizational structures for regional cooperatives Outline advantages and disadvantages of equity redemption alternatives Explain organizational challenges inherent in the cooperative model Identify managerial roles for decision makers in cooperatives

Cooperatives in Agriculture: 49 % of farm level grain and oilseed marketings Input Supplies 44 % of fertilizers 47 % of petroleum products 32 % of crop protectants 21% of feeds

Some Coop. Brands Land O’ Lakes Bird’s Eye Blue Diamond Ocean Spray Sunkist Riceland

Main Cooperative Principles Voting by member-users on a democratic or proportional basis User control principle Equity provided by patrons User ownership principle Net income distributed to patrons as patronage refunds on a cost basis User benefits principle

What is a Cooperative? A cooperative is a user owned, user controlled organization established to provide benefits to users. These benefits are distributed on the basis of use.

How cooperatives can increase returns Use benefits Increased returns from your farm assets Allows you access to goods/services/markets Ownership benefits (returns from your investment in the cooperative)

Extend Ownership to Other Levels of the Marketing System Input Supplier Support Services Lenders Utilities First handler/Processor

Roles for cooperatives Aaron Sapiro Single commodity cooperatives Long term producer contracts Dominant market share Sound merchandising and orderly marketing

Roles for cooperatives Edwin Nourse Integral part of existing free market system (compete with investor oriented firms) Control modest share of the market Disciplinary role

Competitive Yardstick IOF Cooperative Cooperatives compete with IOF’s Presence of cooperatives discipline the market place What happens if cooperatives go out of business? lower prices for farm products higher prices for farm inputs

Capper-Volstead 1922 Enabled farmers to legally form associations for their mutual benefit Specified requirements that such associations must meet Gives cooperatives special status with respect to antitrust laws but does not mean cooperatives are exempt from such laws

Organizational Structure Independent local associations Federated associations Centralized associations Mixed associations

Cooperative Members physical flow, products or services voting, ownership, patronage refunds

Federated Regional Cooperative

Centralized Regional Cooperative

Simplified Balance Sheet

Equity Redemption Alternatives Revolving fund plan Base capital plan Special situations plan

Cooperative Challenges Increasingly segmented membership base Equity capital Member and public relations Management (broader scope for optimization)

Cooperative Problems Horizon Problem Portfolio Problem Occurs when the useful life of a coop. asset exceeds the planning horizon of members Result: under investment in term assets Portfolio Problem Depending on the coops. equity redemption policy, members are unable to adjust their own asset portfolios to match their risk preferences. Result: higher true cost of capital, coops. under funded

Cooperative Problems (cont.) Control Problem One member - one vote policy reduces the likelihood that a controlling block of the membership will find it in their interest to expend resources to monitor hired management Result: more severe agency problems Free Rider Problem Members have an incentive to let others patronize, fund, and govern coops. Result: coop. investments under funded.

New Generation Cooperatives Substantial “up front” capital investment Closed membership Stock carries delivery rights and obligations Stock is tradable (within limits)

Management Challenges Key difference: owners = customers must balance “use benefits” with returns on invested capital broader interpersonal relations skills (cannot separate communications with stock holders and customers) often manager must maintain a higher degree of visibility

The Management Team: Who is Involved?