Agricultural Cooperatives

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Michael Thomsen, PhDAssociate Professor

Department of Agricultural EconomicsUniversity of Arkansas

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Objectives1. Describe main principles that characterize

cooperative organizations2. Explain the difference between use

benefits and ownership benefits3. Distinguish between the roles of “Sapiro

type” and “Nourse type” cooperatives4. Describe common organizational

structures for regional cooperatives5. Outline advantages and disadvantages of

equity redemption alternatives6. Explain organizational challenges inherent

in the cooperative model7. Identify managerial roles for decision

makers in cooperatives

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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

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Some Coop. Brands

• Land O’ Lakes• Bird’s Eye• Blue Diamond• Ocean Spray• Sunkist• Riceland

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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

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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.

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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

First handler/Processor

Support ServicesLenders

Utilities

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Roles for cooperatives

• Aaron Sapiro– Single commodity

cooperatives– Long term producer

contracts– Dominant market share– Sound merchandising

and orderly marketing

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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

• 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

Cooperative IOF

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

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Organizational Structure• Independent local

associations• Federated associations• Centralized associations• Mixed associations

Members

Cooperative

voting, ownership, patronage refunds

physical flow, products or services

Federated Regional Cooperative

Centralized Regional Cooperative

Simplified Balance Sheet

XYZ Farmer's Grain CompanyAssets LiabilitiesCurrent Assets 5,520 Current Liabilities 4,020 Buildings and Equipment 7,700 Long Term Liabilities 1,700 Less accum depreciation (3,600) Equities in other Coops 2,400 Members Equity

Common Stock 2 Allocated credits 6,198 Unallocated Reserve 100

Total Assets 12,020 Total Liabilities and Equity 12,020

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

Revolving Fund Plan (Figures are Millions of Dollars)

Year Net Income Balance SheetCash Allocated Equity Allocated Credits 1994 Loss 2000 Loss Redemptions

1990 10 2 8 8 -11991 5 1 4 12 -11992 12 2.4 9.6 21.6 -11993 15 3 12 33.6 -11994 -4 0 -4 29.61995 5 1 4 33.6 -1 71996 6 1.2 4.8 31.4 -1 31997 14 2.8 11.2 39.6 -1 8.61998 13 2.6 10.4 41.4 -1 111999 12 2.4 9.6 40 -1 02000 -5 0 -5 35 32001 7 1.4 5.6 37.6 3.82002 9 1.8 7.2 41 10.2

Current Year Allocation of Earnings

Base Capital PlanEquity/bu= 0.20$

Year Bushels Allocated Earnings Equity Cash Total Equity Equity per Bushel1990 100,000 8,000 6,400 1,600 6,400 0.06 1991 100,000 9,000 7,200 1,800 13,600 0.14 1992 100,000 7,000 5,600 1,400 19,200 0.19 1993 100,000 10,000 800 9,200 20,000 0.20 1994 100,000 6,500 - 6,500 20,000 0.20 1995 125,000 4,750 - 4,750 20,000 0.16 1996 125,000 5,000 4,000 1,000 24,000 0.19 1997 125,000 2,500 1,000 1,500 25,000 0.20 1998 125,000 7,000 - 7,000 25,000 0.20 1999 75,000 8,000 - 8,000 25,000 0.33 2000 75,000 10,000 (2,500) 12,500 22,500 0.30 2001 75,000 9,000 (2,500) 11,500 20,000 0.27 2002 75,000 9,000 (2,500) 11,500 17,500 0.23 2003 75,000 9,000 (2,500) 11,500 15,000 0.20 2004 75,000 9,000 - 9,000 15,000 0.20

Paid to Coop. Member

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Cooperative Challenges• Increasingly segmented

membership base• Equity capital• Member and public relations• Management (broader scope

for optimization)

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Management ChallengesKey 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

Group Responsibility Authority Accountability

Members All responsibilityfor managing thecoop.

All not delegated inthe articles andbylaws to directors

Themselves

Board ofDirectors

All not reservedfor members inarticles andbylaws

All not delegated tohired management

Membership

GeneralManager(CEO)

All not reservedfor the board inarticles andbylaws

All authority notdelegated tosubordinates

Board of directors

The Management Team: Who is Involved?

Management Function Manager (CEO) Board of Directors

Operational planning Major responsibility Little or noinvolvement

Strategic planning Heavy involvement Major responsibility

Organizing Total responsibility No involvement

Directing Major responsibility Only with regard tomanager

Staffing Total responsibility Little or noinvolvement

Controlling Responsibility forhired employees andcoop. operations

Responsibility foroverall goals andstrategic objectives

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