Agribusiness Library

LESSON L060075: COOPERATIVES

Objectives1. Define cooperative, and describe the history of cooperatives.2. Identify the types of cooperatives, and list the seven principles of a cooperative as well as how they were developed.3. Explain why cooperatives were formed, and give examples of cooperatives.4. Explain the cooperative ownership structure.

Terms•Centralized cooperatives•Cooperative•Federated cooperatives•International cooperatives•Local cooperatives•Margins•Mixed cooperatives

•National cooperatives•Regional cooperatives•Super local cooperatives•Vertical integration

A cooperative is a business owned and controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use.

A. Users are the owners and are called members.

B. Benefits 1. The more a member uses a co-op, the more services he

or she receives. 2. Earnings are allocated to members based upon the

amount of use.

C. Cooperatives have existed for many years. For example, people used to work together to harvest

large animals for survival. 1. One person could not accomplish this task alone. 2. People received help to achieve their objectives.

D. Babylonians are noted in their development of agriculture cooperatives by pooling their resources during farming.

E. The Chinese developed savings and loans similar to cooperatives we have today.

F. In North America, clearing land in preparation for the planting of crops and barn raisings all required cooperative efforts. 1. The first formal cooperative business is assumed to

have been developed in 1752. a. This cooperative was a mutual insurance company called

the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire.

b. It was organized by Benjamin Franklin and others, and it is still in operation today.

2. Other farm organizations, including the Farmers Alliance and the Farmers Educational and Cooperative Union of America (known as the National Farmers Union) began to promote cooperative development. Farmers not affiliated with any farm organization began to

establish cooperatives. By 1900, at least 1,223 cooperatives were active in the

United States. 3. The Grange, a farmer organization established to

improve the economic and social position of the nation’s farm population (National Grange), began to engage in cooperative marketing and purchasing.

G. The modern form of cooperatives was developed in Britain in the 19th century. 1. It was developed from a need

during industrialization. 2. It was developed by a group of 28

workers who were dissatisfied with the merchants in their community.

3. They banded together and began to sell their own goods to each other.

Types of cooperatives and principles A. Purchasing cooperatives

1. These cooperatives sell farm supplies to their members.

2. Products include production supplies: seed, fertilizer, petroleum, chemicals, and farm equipment.

3. American farmers purchase approximately 28 percent of their supply needs through cooperatives.

B. Marketing cooperatives 1. These cooperatives sell their members’ farm products

and maximize the return. 2. Operations can be diversified and complex.

3. Some marketing cooperatives perform a limited number of functions, while others vertically integrate. a. Vertical integration owns portions of the business or

production process, which often adds value to the products for a higher return.

b. For example, Hershey’s candy owns cocoa farms in South America, and they own their own transportation system. This allows the company to control

its inputs as value is added to a finished product and sold to consumers.

4. Some cooperatives even sell products in grocery stores under their own brand names: Land O’ Lakes, Ocean Spray, and Florida’s Natural.

5. Some cooperatives serve members in many ways. a. They may bargain for better prices. b. They may store and sell members’ commodities. c. They may process farm products into more consumer-

ready goods. 6. In the United States, agricultural cooperatives handle

approximately 30 percent of farmers’ total farm marketing volume.

C. Service cooperatives 1. These cooperatives provide various

services to their members. a. Pesticide applications, seed cleaning,

and artificial insemination are some services offered through cooperatives.

b. Service cooperatives also include organizations such as the Farm Credit System—a network of borrower-owned lending institutions.

c. Another example is a rural electric cooperative, which provides electricity to rural areas.

2. The first U.S. cooperative was a service co-op.

D. Principles 1. The development of principles was

developed in Great Britain. 2. In 1875, the Rochdale system was

developed in carrying out its cooperative activities. The Rochdale system developed seven principles.

a. Voluntary and open membership—A cooperative should be open to all people able to use the service and willing to become members, with no discrimination.

b. Democratic member control—Those who are members have control of the cooperative’s policies and marketing decisions.

c. Members’ economic participation—Members contribute equally to and democratically control the capital of the cooperative.

d. Autonomy and independence—It provides a self-help organization controlled by its members. If the co-op raises capital from external sources, it is based upon member control.

e. Education, training, and information—It provides education and training for members, elected representatives, managers, and employees. Members should also inform the general public about cooperatives.

f. Cooperation among cooperatives—Cooperatives should work together through local, regional, national, and international cooperatives.

g. Concern for community—Cooperatives should provide for the sustainable development of communities through policies and programs determined by members.

E. Politics in the development of cooperatives 1. In the early 1900s, the U.S. government

began to pass laws that provided a favorable environment for cooperative development.

2. A commission established in 1908 by President Roosevelt noted that the country lacked adequate credit for the agriculture sector.

3. This led to the passage of the Federal Farm Loan Act in 1916, which led to the creation of the Farm Credit System.

4. The Capper-Volstead Act of 1922 was crucial for agricultural marketing cooperatives. The Capper-Volstead Act allowed farmers to join together in

cooperative marketing associations. It was needed because many anti-trust laws were breaking up

larger corporations (e.g., Standard Oil) during this time. The Sherman Antitrust Act allows for the formation of

agricultural cooperatives. 5. Cooperatives were largely encouraged during the 1920s and

1930s because of an economic downturn from World War I. Presidents Harding, Coolidge, and Hoover were in favor of

cooperatives. This led to legislation called the Agricultural Marketing Act of

1929, which established a fund for cooperative loans.

6. During the 1930s, the USDA recorded more than 12,000 agricultural cooperatives.

7. Since this time, the number of agricultural cooperatives has been declining. However, the business revenue continues

to increase. In 1997, the USDA reported 3,791 farmer

cooperatives generating more than $106 billion. 8. The number of farmer cooperatives has decreased

through various activities including dissolution, mergers or consolidations, and acquisitions because cooperatives—like other businesses—adjust to a changing economic environment.

Cooperatives A. Cooperatives are the result of a reaction to the

inability to purchase or sell products in a competitive market.

B. Cooperatives are usually developed from smaller groups—producers or suppliers—to compete with larger corporations. 1. For example, Florida’s Natural Orange Juice is a

cooperative. This cooperative was formed by producers of oranges in Florida. The cooperative provides the producers with a facility to process

their oranges into juice through cooperative- owned processing facilities.

This brand-name product is sold in grocery stores across America.

2. Land O’ Lakes is another cooperative that markets producers’ products under its own brand name. The cooperative takes raw milk and further processes

products from the milk into butter, cheese, yogurt, and more.

3. Local cooperatives for electricity exist. Nearly all rural areas operate in a

cooperative fashion, usually taking a local area name.

4. Other examples of agricultural cooperatives a. Sun-Maid®—raisins b. Sunkist®—citrus c. Ocean Spray®—fruit and citrus d. Farmland®—processed meat

5. Not all cooperatives are strictly agriculture related a. ALL Credit Unions—banking b. ACE®—hardware c. Best Western®—hotels d. Associated Press—journalism.

C. Cooperative types and areas of operations 1. Local cooperatives operate in a single county in the

United States. An example is a local

farmers’ market. 2. Super local cooperatives

operate in two or more counties, often with several branch facilities. An example is an electric cooperative.

3. Regional cooperatives serve an area comprising numerous counties, an entire state, or a number of states. An example will vary according to what is needed in the area. In

Illinois, Farmer Service (FS) is a cooperative that supplies seed, fertilizer, and feed to farmers.

It is operated by the Illinois Farm Bureau. 4. National cooperatives serve a major portion or most of the

United States. Examples include Sun-Maid raisins, ACE, and Florida’s Natural.

5. International cooperatives operate in more than one country, with headquarters in the United States or another country. Examples include Ocean Spray, Best Western, and Associated

Press.

D. Cooperatives are formed: 1. From a need 2. To aid members in a service

or in the marketing or purchasing of materials

Cooperative ownership and governance structure A. A cooperative is a state-chartered business,

organized and operating as a corporation under applicable state laws.

B. Cooperative attributes are: 1. Control—Management is controlled by a board of

directors elected by the members. All or most of the directors must be members of the cooperative. Thus, the leaders are regular users of the firm’s products or

services. 2. Capital—Equity comes from the members rather than

from outside investors.

3. Earnings—Earnings (or losses) on business conducted on a cooperative basis are often called margins, which are the profits or losses of a business. Margins are allocated to the members on the basis of the use

they made of the cooperative during the year. 4. Taxes—Earnings from businesses with members are

taxed once, as income of the corporation when earned or as income of the members when allocated to them.

5. Life—Members can routinely join or resign without disrupting ongoing operations.

C. Governance system 1. Centralized cooperatives— Individuals and business

entities can be members. Virtually all local and super local cooperatives are centralized. Regional, national, and international cooperatives may also be

centralized. a. These have one central office. b. Centralized cooperatives have one board of directors

elected by the members. c. They have a manager (chief executive officer) who

supervises all operations. d. Business may be conducted through numerous branch

stores or offices staffed by employees responsible to the central management team.

2. Federated cooperatives have other cooperatives as their members. a. Each member of a federated cooperative is a separate

cooperative that owns a membership share entitling it to voting rights in the affairs of the federated cooperative.

b. Local cooperatives commonly form federated co-ops to perform activities too complex and expensive for them to do individually, such as: (1) Manufacturing production supplies (2) Tapping major financial markets (3) Marketing on a national or worldwide scale

c. Each member of a federated cooperative typically has its own board of directors, manager, employees, and facilities to serve its members.

d. Each federated cooperative has its own hired management and staff and a board of directors elected by and representing its member cooperatives.

3. Mixed cooperatives have individuals and other cooperatives as members. All are given voting rights

representative of their own membership.

REVIEW•What is a cooperative? Why and when were cooperatives developed?•What are the types of cooperatives? What are the seven cooperative principles, and how were they developed?•Why were cooperatives formed? What are some examples of cooperatives?•What governs the cooperative?