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

2. 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

3. 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

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

5. 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

6. 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.

7. 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)

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

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

10. 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

11. 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

12. 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

13. Organizational Structure
Independent local associations
Federated associations
Centralized associations
Mixed associations

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

15. Federated Regional Cooperative

16. Centralized Regional Cooperative

17. Simplified Balance Sheet

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

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

22. 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

23. 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.

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

25. 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

26. The Management Team: Who is Involved?