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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