Unit 1.

1. Unit 1. The Cooperative Form of Business

2. What is a Cooperative? • A special type of business (usually corporate) owned and controlled by its member patrons. This is in contrast to ordinary corporations that are investor-owned firms (IOFs).

3. Basic Philosophy of Cooperatives • Through joint effort and collective action (cooperation) on the part of individuals with mutual interests, these individuals will be better off.

4. Requirements for Being a Member Owner of an Ag Co-op • Be an agricultural producer or other co-op • Provide equity capital (equity => from owners) • Be a customer (active)

5. Member Responsibilities/Obligations • Patronize Co-op • Provide Equity Capital • Keep Informed • Accept Risks of Being a Member

6. PATRON = CUSTOMER = User of the business (buyer of inputs or seller of products) NOTE: Co-op patrons not always ‘members’.

7. PATRONAGE $ amount or $ volume of business done with a cooperative

8. Co-op Versus Coop • Co-op = abbreviation for cooperative • Coop = place for chickens

9. Business Firm Interest Groups • Users (customers) • Owners (investors) • Controllers (decision makers) • Employees

10. Concerns and/or Characteristics of Corporations • Survival/Perpetual Life • Customer Needs (purpose) • Efficiency • Profitability • Limited Liability • Interest Groups/Stakeholders

11. Dual Objectives of Co-ops = Serving Dual Interests of Owners as: • Investors (return on investment) • Patrons (services and return on use)

13. Types of Co-ops • Based on Function Performed • Marketing • Supply • Service

14. Types of Co-ops • Based on Area Served • Local – local community to multiple counties • Regional – multiple states • National • International

15. Types of Co-ops • Based on Organizational Features • Interregional • - mbrs = other regionals • Federated • Farmers = mbrs of locals • Locals = mbrs of regionals • Centralized • Farmers = mbrs of regional • Local businesses run by regional

16. Steps in Starting a Co-op • Deter. Preliminary Mbr. Interest • Further Research/Analysis • Producer survey • Feasibility study (mkt, cost, …) • Organization • Reconfirm mbr interest • Get mbrs to commit/agree • Legal documents • Staffing (directors, mgmt) • Acquire facilities and financing

17. Recommendations in Starting a Co-op • Use Specialists • Attorneys • University staff • USDA staff • Financial Experts • Consider Alternatives to Starting a Co-op • Easier to Later Expand than Contract • Be Conservative in Projections • Require Producer Commitment • Make sure good management is available and that members are willing to pay for it.

18. Co-op Justification? • Economic NEED • Economic NEED • Economic NEED

19. Economic NEED? • Better Price (level or risk) by – • Increasing competition (or offsetting mkt power) • Developing own product (or capturing other-level profits) • Taking advantage of economies of size • More Dependable Market (for outputs or inputs) • Better Services

20. The ROCHDALE Society • A co-op retail store (i.e. consumer co-op) that sold food, clothing, and other household items to its patrons. The co-op was founded in 1844 in Rochdale, Lancaster, England by 28 craftsmen known as the Rochdale pioneers. This co-op has been recognized as the first such business organization which has served as a prototype for other co-ops.

21. Why Study Co-op Principles? • To understand unique or fundamental aspects of co-ops. • To guide the operation of a co-op. • To understand the basis for many co-op laws.

22. Cooperative Principles • User Ownership • User Control • User Benefits

23. User Ownership = • Users own (at least partially) the co-op • Users provide equity capital (invest $) • (Creditors provide debt capital)

24. User Control = • The ability to influence co-op decisions • May or may not mean active involvement in the decision making process; instead, it implies the opportunity to do so if desired • Users normally exert their influence thru an elected group of representatives known as the board of directors

25. Forms of USER Control • One Member, One Vote • Voting in Proportion to Patronage

26. Other Observations on ‘Control’ • User Control ≠ investor control although both are ‘democratic’ forms of control • Form of investor control is one share of stock, one vote • Co-op member voting in proportion to patronage is: • Illegal for co-ops with headquarters in Iowa • Used more often by regional co-ops than by local co-ops

27. The user benefit principle is related to the operation at cost practice.

28. Operation at Cost => • Cooperative earnings (savings, surplus, profits) are to be returned to the member PATRONS.

29. Operation at cost ≠ Nonprofit

30. The Return or Distribution of Earnings to: • Customers in proportion to the amount of patronage done with the business (i.e. return on USE) = PATRONAGE REFUNDS 2. Investors in proportion to the amount of money invested in stock in the business (i.e. return on INVESTMENT) = DIVIDENDS

31. Limits on Co-op Earnings Distribution • Patronage refunds • No limit • Usually ≥ 20% cash (for tax reasons) • Dividends • - ≤ 8%

32. Patronage Refund Example • CO-OP Sales: $200,000 Expenses: $180,000 Earnings: $ 20,000 • MEMBER A Purchases: $ 8,000 % of total for co-op 4% (8,000/200,000 = 4%) Patronage Refund: $ 800 (4% x 20,000 = 800)

33. Patronage Refund • Total: $800 • Cash (> or = 20%) $160 • Noncash $640 The noncash patronage refund is also called a retained or deferred patronage refund.

34. Why Co-ops May Have Earnings • Overcharges or underpayments because costs are unknown initially. • Co-ops charge going market prices which are above costs: • To avoid price wars • To avoid passing savings on to nonmembers

35. Evaluation of Co-ops as a Marketing Alternative: • Level of prices initially paid (or charged) • Patronage refund • Level • % cash • When noncash will be paid • Price and quality of services • Dependability as a market outlet (or input supplier) • Economic effects without the co-op (competitive yardstick) • Value of owning your own business