1. Business Structures, Markets, and Risk Management
Lesson 4: Cooperatives
Sarah McKay, Graduate Student, Department of Agricultural and Applied Economics, Virginia Tech
Kristin Carr, Agriculture Teacher, Riverheads High School, Augusta County Public Schools
Marie Rothwell, Virginia Cooperative Extension Agent, 4-H Youth Development, Augusta County
Shannon Wiley, Graduate Student, Agricultural, Leadership, and Community Education, Virginia Tech
Hannah Scherer, Assistant Professor and Extension Specialist, Agricultural, Leadership, and Community Education, Virginia Tech

2. Overview of Today Recap from last lesson All about cooperatives
Cooperative simulation activity
Class discussion
Recap
Questions

3. recap

4. What is risk? Risk: chance or probability of loss
In business: the chance that the business’s actual return will be different than expected
What are some key factors that make agribusiness risky?
• Prices
• Weather
• Disease
• Consumer preferences/taste
• Economy
• World trade (imports and exports)

5. How do we manage risk? Insurance Pesticides/herbicides Irrigation
Price Risk Management
Result of volatility − how prices vary from the average or mean price over time due to factors that affect risk, such as weather, disease and consumer preferences.

6. Price Risk Management in Agribusiness
Forward contracts
Futures contract
Private agreement on a price for a future delivery
Publicly traded
Examples: corn, live cattle, oil
Examples: seed, feed, hay
Standardized quantity, quality, time, and place
Individualized
Organized futures exchange

7. How do we enter a futures contract?
Chicago Mercantile Exchange
LONG: buyer, accepts and purchases in future
SHORT: seller, delivers and accepts payment in future
Historical prices

8. All about cooperatives

9. What is a cooperative? Business owned collectively
Not owners, but members
Owned jointly by all its members who share profits equally
Profits = dividends
Examples:
Farmer-owned cooperative
Utility cooperative
Financial cooperative

10. Benefits of Cooperatives
Obtain services not available to smaller businesses
Quality supplies at the right time
Market access
Economies of size
Bargaining power

11. Cooperative Functions
Marketing cooperative − maximize return received for crops and goods, value adding
Purchasing cooperative − used to gain access to affordable and quality supplies
Service cooperative − access to affordable and quality services

12. People: 4 Key Elements Members − patronage and capital investment
Adopt and amend articles of incorporation and by-laws
Elect/remove directors
Decide on future of cooperative/evaluate performance
Board of directors & officers
Users of services and represent other members
Set objectives for cooperative
Hire manager, determine salary
Business strategies
Manager
Sets operating budget with help of board
Employees

13. Role of Officers President Vice president Secretary Treasurer
Presides at meetings and watches over affairs
Main communication link between management and directors and members
Vice president
Performs duties of president in case of absence
Secretary
Records all meetings and keeps bylaws and records
Treasurer
Oversees bookkeeping and accounts

14. Show Me the Money $$$
Cooperatives pass earnings to users on patronage basis = no outside investors
Provide equity through:
Direct investment
Retained margins
Per-unit capital retains

15. Patronage/Dividends Returned at end of fiscal year
Revenue − cost = profit
Profit divided among members based on how much business member did
Example: if profit is $20,000 and my business is 2%, I earn $400

16. Case Study: Organic Valley Milk Co-op
You own a herd of 20 dairy cows who are averaging 20,000 lbs. per year per cow.
You decide to join Organic Valley Co-op and pay the membership fee of $2,000 per percent of supply.
You become 1 of 25 members, and your milk supply is 2% of their total marketed milk.
Organic Valley agrees to pay you $14/cwt of milk; it costs you $11 per cwt to produce.
Organic Valley sells pasteurized and packaged milk to Kroger for $45/cwt.
After the cost of processing, packaging, and taking into account transportation and waste, Organic Valley has a profit of $3 million.
The board of directors decides to retain 10% of the profits to put back into the cooperative, and the rest goes to its members.
How much do you get in dividends?

17. Cooperative Simulation

18. As a class, form a cooperative.
Each of you is a beef cattle producer with a different situation (calculate your situation first).
As a class, form a cooperative.
Who will be on the board of directors?
Choose a president, VP, secretary, and treasurer
How much equity will each of you contribute as members?
Will it be a fixed price? Will it be a price per percentage owned?
Will the cooperative buy cattle from all members for a fixed price and then resell the cattle, or will you retain a portion of the selling price?

19. Round 1:
Because of the size of your cooperative, you are able to make a deal with a major feed company. They have offered you two deals; the cooperative can choose one:
If you all choose to feed the same formulation, your variable costs will drop by $20 per head.
If you all choose to go with this company for feeding needs, you will receive a free supplement that will increase your market weight by 1%.
Since you have such a large number of cattle, you can choose two routes to market:
One processor is willing to pay $1,510 per head.
The other processor will buy all the cooperative’s cattle at $125/cwt.
Based on your decisions, calculate the profit of the cooperative. How much will the co-op retain for next year? How much will be paid out in dividends?
How much did you make as an individual producer? Was this a better call than selling as one producer?

20. Round 2:
Because of the size of your cooperative, you are able to make a deal with a major feed company. They have offered you two deals; the cooperative can choose one:
If you all choose to feed the same formulation, your variable costs will drop by $20 per head.
If you all choose to go with this company for feeding needs, you will receive a free supplement that will increase your market weight by 1%.
An opportunity has come up where the cooperative can purchase a slaughterhouse for $500,000. Running the slaughterhouse will cost $100,000 a harvest, but you have a grocery store willing to pay $1.55/lb. on average if they can get the beef from the cooperative directly.
Do you all decide to buy the slaughterhouse and process your own meat?
Or, do you sell to a processor willing to purchase your cattle at $123/cwt?
Based on your decisions, calculate the profit of the cooperative. How much will the co-op retain for next year? How much will be paid out in dividends?
How much did you make as an individual producer? Was this a better call than selling as one producer?

21. Round 3:
A few members have noticed that the organic prices for beef are substantially higher.
This is because processors are willing to pay $175/cwt and retailers are willing to pay $2.25/lb., depending on if you bought the slaughterhouse in Round 2.
However, your feed costs will double to feed organic.
Because of the strict regulations with organic and the limited supply of organic grains, the whole cooperative must switch to organic or not at all.
Does the cooperative decide to go organic?
Based on your decisions, calculate the profit of the cooperative. How much will the co-op retain for next year? How much will be paid out in dividends?
How much did you make as an individual producer? Was this a better call than selling as one producer?

22. Class Discussion

23. Questions?