Agricultural Cooperatives 3211

1. Agricultural Cooperatives3211 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 • 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 IOF Cooperative

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 physical flow, products or services Members 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. 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

23. The Management Team: Who is Involved?