Cooperatives in Your Community

Agricultural Cooperatives

2014 VersionReleased: October 29, 2014900 Second Street, NE Suite 205Washington, DC 20002(202) 408-8522 Phone(202) 408-5385 Fax

*Version edited by Caron Gala.

Cooperatives in Your CommunityA Curriculum for High School Students

Authors:

Sanjib Bhuyan, Ph.D. Associate ProfessorDepartment of Agricultural, Food, and Resource EconomicsSchool of Environmental and Biological Sciences, Rutgers UniversityNew Brunswick, NJ

This publication was made possible through funding provided by the Council of Food, Agricultural and Resource Economics (C-FARE) and funding provided to C-FARE by the CHS Foundation. The Council for Economic Education is a supporting partner and provided technical assistance with peer review and marketing of the lesson plans.

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Cooperatives in Your CommunityLesson #2: Agricultural Cooperatives

LESSON DESCRIPTION (Background for the Instructor)In Lesson #2, students will learn about agricultural cooperatives, which play a major role in our daily life and in the U.S. economy. This lesson is designed for a high school class in economics, agriculture, and/or business. Lesson #2 includes four activities that instructors can select from where students will: 1. watch a video about agricultural cooperatives; 2. (a) learn about cooperative business characteristics, principles, structure, and governance, (b) as well as types of agricultural cooperatives, and (c) the differences between cooperative businesses and Investor-Owned Firms; 3. learn about and research agricultural cooperatives in the United States; and 4. develop a cooperative in class.

INTRODUCTION (Background for the Instructor)As stated in Lesson #1, a cooperative is a special category of corporation or business that is owned and operated by its members (user-owners). The cooperative form of business is quite prevalent in the United States (U.S.). There are almost 30,000 cooperatives (both agricultural and non-agricultural) in the U.S.

Members become part of a cooperative by purchasing a required minimum amount of shares. If you own stocks (or shares) in an incorporated company, but do not own or use any of that company’s product, do you still get dividends (income from your stock ownership)? If company gives out dividends, yes you do. In the case of cooperatives, however, you must also use the product and/or services of the cooperative. Your return on investment from the cooperative depends on how much of the cooperative’s product or service you use. The more you use, the more benefit you derive (the user-benefit principle).

For example, if you are a member of a local fuel-supply cooperative but do not buy any fuel from the cooperative, you will not get any portion of the cooperative’s earned profit. This aspect of a cooperative business is unique compared to an Investor Owned Firm (IOF). In a cooperative, the members are the owners and the customers. Thus, the members have input in guiding the activities of their

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cooperative. Not surprisingly, cooperatives behave differently from IOFs, due to structure and rules governing conduct.

Agricultural cooperatives consist of agricultural producers (e.g., farmers, ranchers) who voluntarily agree to establish a common institution to improve their production and marketing effectiveness by pursuing a common set of goals. These goals may include: 1) getting a better price for members’ products, 2) buying farm inputs at a lower cost, and 3) accessing markets that are otherwise not available to individual farmers or ranchers.

Agricultural cooperatives are one of the institutional mechanisms by which farmers work together to perform certain marketing tasks. By forming strategic peer alliances to form the cooperative, farmers increase their marketing or purchasing options as well as their bargaining power. Through their cooperative, which pools the resources of many farmers, farmer-members may reach forward into downstream marketing stages, such as processing, to capture a larger share of consumers’ dollars; or backward, to purchase (bulk) farm input supplies, to reduce their input costs. Additionally, it is common for a farmer to be a member of more than one cooperative. For example, a cranberry farmer who also raises dairy cows may become a member of both a cranberry and a dairy cooperative.

According to the latest United States Department of Agriculture Rural Development Cooperative Statistics, there were 2,238 agricultural cooperatives (including farmer, rancher, and fishery cooperatives) in the U.S. These cooperatives achieved a net business volume of $202 billion with a net income of $6.1 billion (USDA, 2012). You may already be familiar with such brands as OceanSpray, Sun-Maid, Sunkist, and Land O’Lakes. You may be surprised to learn that these brands and their parent companies are agricultural cooperatives.

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CONCEPTSu Cooperative characteristics, governance, practices, and principlesu Types of Agricultural Cooperativesu Cooperative organizational structureu Methods of financing cooperatives

OBJECTIVESStudents will be able to:

Identify the advantages/disadvantages of cooperatives businesses• Identify and describe different types of agricultural cooperatives with an

example of each (e.g., agricultural processing cooperative: OceanSpray)• Describe various terminologies associated with the cooperative form of business• Describe different types of agricultural cooperatives• Research cooperatives in the local community • Research cooperatives in the United States via the internet/local library • Describe the basic steps necessary to form a cooperative

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CONTENT STANDARDSCouncil for Economic Education National Standards for Economics Literacy (based on CEE’s “Voluntary National Content Standards in Economics,” 2nd ed., 2010; available at http://www.councilforeconed.org/resource/voluntary-national-content-standards-in-economics/)

Content Standard 1 (Scarcity)• Lesson 2: Benchmark Grade 12-1 – Choices made by individuals, firms or

government officials are constrained by the resources to which they have access.

Content Standard 4 (Incentives)• Lesson 2: Benchmark Grade 12-1 – Acting as consumers, producers, workers,

savers, investors and citizens, people respond to incentives in order to allocate their scarce resources in ways that provide them the highest possible net benefits.

• Lesson 2: Benchmark Grade 12-2 – Decision-making in small and large firms, labor unions, educational institutions, and not-for-profit organizations which face different rules and constraints. These goals, rules, and constraints influence the benefits and costs of those who work with or for those organizations, and, therefore, their behavior.

Content Standard 6 (Specialization)• Lesson 2: Benchmark Grade 12-1 – Individuals and nations have a

comparative advantage in the production of goods or services if they can produce a product at a lower opportunity cost than other individuals or nations.

• Lesson 2: Benchmark Grade 12-3 – Transaction costs are costs that are associated with the purchase of a good or service, such as the cost of locating buyers or sellers, negotiating the terms of an exchange, and insuring that the exchange occurs on the agreed-upon terms. When transaction costs decrease, trade increases.

Content Standard 7 (Markets & Prices)• Lesson 2: Benchmark Grade 12 - 1 – Market outcomes depend on the

resources available to buyers and sellers, and on government policies.• Lesson 2: Benchmark Grade 12-2 – A shortage occurs when buyers want to

purchase more than producers want to sell at the prevailing price.• Lesson 2: Benchmark Grade 12-3 – A surplus occurs when producers want to

sell more than buyers want to purchase at the prevailing price.

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• Lesson 2: Benchmark Grade 12-4 – Shortages of a product usually result in price increases in a market economy; surpluses usually result in price decreases.

Content Standard 8 (Role of Prices)• Lesson 2: Benchmark Grade 12-1 – Demand for a product changes when there

is a change in consumers’ incomes, preferences, the prices of related products, or in the number of consumers in a market.

• Lesson 2: Benchmark Grade 12-2 – Supply of a product changes when there are changes in either the prices of the productive resources used to make the product, the technology used to make the product, the profit opportunities available to producers from selling other products, or the number of sellers in a market.

• Lesson 2: Benchmark Grade 12-3 – Changes in supply or demand cause relative prices to change; in turn, buyers and sellers adjust their purchase and sales decisions.

Content Standard 9 (Competition and Marketing Structure)• Lesson 2: Competition and Market Structure – Benchmark Grade 12-1 – The

pursuit of self-interest in competitive markets usually leads to choices and behavior that also promote the national level of well-being.

• Lesson 2: Benchmark Grade 12-2 – The level of competition in an industry is affected by the ease with which new producers can enter the industry, and by consumers’ information about the availability, price and quantity of substitute goods and services.

• Lesson 2: Benchmark Grade 12-3 – Some market structures are dominated by large firms, often competing against only a few other firms. Prices in such markets may be higher than they would be in more competitive markets.

Content Standard 10 (Institutions)• Lesson 2: Benchmark Grade 12-1 – Property rights, contract enforcement,

standards for weights and measures, and liability rules affect incentives for people to produce and exchange goods and services.

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TIME REQUIRED90 to 180 minutes, depending on activities used.

STUDENT BIBLIOGRAPHYProvide each student with the list of references given at the end of the lesson.

MATERIALS• Slides 2.01 to 2.23. Optional: Give each student a handout of slides.• One copy of Activity 2.1 to 2.4 for each student.

PROCEDURE1. Perform a pre-test to assess what students already know about cooperatives. A. Lesson 1 will increase student’s familiarity with basic concepts regarding

cooperatives. B. The history of cooperatives is included in Lesson 1 materials.

2. Present the slides to the class.

3. Distribute a copy of Activity 2.1(a). Please read the following before watching the agricultural cooperative video.

As stated in Lesson 1, a cooperative (co-op) is a special category of corporation or business that is owned and operated by its members (user-owners). The cooperative form of business is quite prevalent in the United States. There are almost 30,000 cooperatives (both agricultural and non-agricultural) in the U.S. This lesson will explore what that means for businesses in the agricultural sector.

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A cooperative is a form of business that’s owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably based on use (USDA, 2012). We call the user-owners members. Agricultural cooperatives consist of agricultural producers (e.g., farmers, ranchers) who voluntarily agree to establish a common institution to improve their production and marketing effectiveness by pursuing a common set of goals. Such goals may include: 1) getting better price for their products, 2) buying farm input at a lower cost, and 3) accessing markets that are otherwise not available to individual farmers or ranchers. You may already be familiar with such brands as Blue Diamond Growers (almonds), Cabot (cheese), OceanSpray (juices), Sun-Maid (raisins), Sunkist (juices), and Land O’Lakes (dairy). You may be surprised to learn that these brands and their parent companies are agricultural cooperatives.

There are slightly over 2,200 agricultural cooperatives in the United States. Agricultural cooperatives are one of the institutional mechanisms by which farmers may work together to perform certain marketing tasks. By forming strategic alliances amongst themselves to form a cooperative, farmers may increase their marketing or purchasing options to increase their bargaining power. Through their cooperative, which pools the resources of many farmers, farmer-members may reach forward into downstream marketing stages, such as processing, to capture a larger share of consumers’ dollars; or backward, into areas such as farm input supply, reducing their input costs.

4. Distribute a copy of Activity 2.1(b). Watch the Agricultural Cooperative Video (length 4:17 minutes).

Video link: http://www.youtube.com/watch?v=xK7yn0y6SCM After viewing, students are invited to share and discuss their new knowledge

about the cooperative form of business.

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5. Distribute a copy of Activity 2.2, Agricultural Cooperative Facts and Discussion Questions.

A. What are the Rochdale Principles? Please list at least three. The Rochdale Principles are a set of rules for the organization of

cooperative businesses. In 1875, the Grange (http://www.nationalgrange.org/) published a set of rules for the organization of cooperative businesses. These rules were based on the principles that were practiced by the Rochdale Equitable Pioneers’ Society established in England (http://www.rochdalepioneersmuseum.coop/about-us/about-the-pioneers). These rules are commonly known as the “Rochdale Principles” in the cooperative arena. These principles are (1) voluntary and open membership, (2) democratic member control, (3) member economic participation, (4) autonomy and independence, (5) education, training and information, (6) cooperation among cooperatives, and (7) concern for community. (Detailed explanations of these principles are available at http://www.rochdalepioneersmuseum.coop/about-us/the-rochdale-principles.) Students get bonus points if they are able to list more than three of these principles.

B. Why is the cooperative model of 18th century still thriving in the 21st century? In 18th century England, the cooperative model provided an avenue

for consumers to obtain their consumer goods at a cheaper price than that charged by their local merchants. This model allowed the disparate consumers to combine their purchasing power. These consumer groups then obtained goods at a cheaper rate for the benefit of all members. That model of cooperation is still successful because in many parts of the world, including here in the United States, the market: (1) does not provide necessary products or services or (2) provides them at a high cost, excluding purchase by many who need such products or services.

Many agricultural and non-agricultural cooperatives were formed to address the need for access to essential services that investor-owned firms were not willing to provide. Investor-operated firms (IOFs) shied away from business investments in these products or services because of high per-capita costs, complicated or limited access to the value-added food-supply chain, or because they would not receive adequate payment for farm products.

Like IOFs, cooperatives are businesses that must succeed in the business world. Cooperative businesses fail for similar reasons to those that cause non-cooperative (IOF) businesses to fail, e.g., poor economic environment, poor management and decision making, lack of much-needed capital, etc.

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A. What are the different types of agricultural cooperatives and what are their main purposes?

The following types of cooperatives exist: (1) Marketing Cooperatives – This is the most common form of

agricultural cooperative. Marketing cooperatives assemble, grade, and ship agricultural products. They may also perform the first stage of processing. They allow members to achieve greater economies of scale in the marketing functions, improve their market access and help them to achieve better prices. Such cooperatives are common in milk, fruits and vegetables, livestock, cotton, oilseed, and grain markets. An example of such a cooperative is Land O’Lakes (http://www.landolakesinc.com/default.aspx).

(2) Purchasing or Farm Supply Cooperatives – Farm supply cooperatives handle all types of farm production inputs including fertilizer, feed, crop-protection chemicals, seeds and petroleum. Their objective is to allow members to obtain quality supplies at more favorable prices. An example of such a cooperatives is Minnesota-based CHS, Inc., formerly known as Cenex-Harvest State (http://www.chsinc.com/).

(3) Service Cooperatives – Service cooperatives allow members to more efficiently access needed services at favorable prices. Many cooperatives provide services that would otherwise be unavailable in the marketplace. Although there is demand for such services, there are not enough suppliers — a clear case of market failure. Cooperatives that provide credit, insurance, electricity, and telephone services are often also classified as service cooperatives. Many of these cooperatives operate in rural areas but they are not agricultural cooperatives. An example of such a cooperatives is Maryland’s Southern Maryland Electric Cooperative (https://www.smeco.coop/index.aspx).

(4) Processing Cooperatives – This type of cooperative allows farmers to participate in the marketing channels downstream from the farm gate. Common examples include milk processing, sugar refining, fruit and vegetable canning and freezing, flour milling, dried fruits, fruit juices and oilseed processing. The objective of processing cooperatives is to capture a larger share of the consumer’s food dollar for the farmer-member while improving market outlets for the cooperative members. An example of processing cooperative is OceanSpray(http://www.oceanspray.com/).

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B. What are some of the key differences between cooperatives and investor oriented firms?

Although there are many similarities between cooperatives and investor owned firms (IOFs), there are some key differences. In terms of ownership, outside investor stockholders own IOFs, while user-members own a cooperative. In terms of receiving benefits, IOF stockholders receive benefits (e.g., dividends) in proportion to investment while members receive benefits (e.g. patronage refund) in proportion to their use of services (or patronage). In terms of clientele, non-owner customers typically use IOF services while cooperative services are used by owner members. One of the most important differences is how the company is run or controlled. Common stockholders control an IOF (vote is proportional to ownership rights) whereas member patrons control cooperatives (typically one member=one vote).

C. What are some of the common food brands produced by agricultural cooperatives?

Many of the common food brands consumed by households in the United States are produced by agricultural cooperatives. Some of the most common and well-known brands owned by agricultural cooperatives include, Cabot, Florida’s Natural, Land O’ Lakes, OceanSpray, Sunkist, Sun-Maid, Tillamook, and Welch’s.

D. How do you become a member of a cooperative? Cooperatives are member-owned and operated. In some cooperatives,

particularly in agricultural cooperatives, it may be necessary to be an agricultural producer. For example, a sunflower seed-marketing cooperative may allow only sunflower producers to become its members. Once the membership criteria are satisfied, then you purchase the required minimum amount of shares, as per that cooperative’s rules, and become a member. Joining a cooperative could be as easy as purchasing a $25 membership share in your local credit union or purchasing a $1,000 share and delivery rights for every hog you plan to process in a farmer-owned hog processing cooperative in Nebraska.

E. What types of careers are available in the agricultural cooperative sector? Career opportunities in agricultural cooperatives include agribusiness

consulting, accounting, information technology, financial analysis, legal consulting, and government affairs. Career opportunities in cooperatives also exist in a variety of technical fields, such as chemical and mechanical engineers, animal scientists, biologists, architects, agronomists, botanists, and economists.

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6. Distribute a copy of Extension Activity: Activity 2.3, Learn About Agricultural Cooperatives in the United States.

The best way to learn more about today’s agricultural cooperatives — or any cooperative — is to visit a cooperative and meet its members, directors, and managers. That may or may not be feasible for you to do as a class. Alternatively, you may research cooperatives by going to a school or local public library and/or using the Internet. There are over two thousand agricultural cooperatives in the United States, some of which are very well known.

Students could be divided into groups, each group containing 4-5 students (or as appropriate). The questions below can be given to the students to help with their inquiry about agricultural cooperatives in the United States. Once the research has been completed, students will write a brief report based on their findings and present their research in class (10-minute presentation).

Questions: Here are a few questions to help you with your inquiry about your local

cooperative(s):

A. What primary products/services does the cooperatives provide or offer? The answer will describe the market incentives driving establishment/

development of the cooperative.

B. What led to the organization of the cooperative, and when was it established?

The answer to these questions will highlight the entrepreneurial and market failures that drove the establishment of the cooperative. Look in “Our Story” or “About Us” on the cooperative’s webpages.

C. Tell us about the members of this cooperative: Who are they? What do they produce? Where are they located?

The answer to this question will reveal a membership profile that should fit with the purpose or mission of the cooperative.

D. Review Tables 2a, 2b, and 2c. Can you find information listed in these tables that are applicable to the cooperative you are researching? Write a list of features or develop a table for the cooperative that you are researching, based on: Table 2a. Ownership, Table 2b. Benefits, or Table 2c. Control.

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Listing information and/or putting it into a table similar to Table 2 will allow students to organize their research materials in a systematic way.

E. [Extra Credit] How is the cooperative doing as a business? Have sales gone up (or down) in the past couple of years?

It may not be possible to find the annual reports of the cooperative, therefore this should be an optional question. The answer to this question will reveal the general health of the cooperative. It may also shed light on the future of the cooperative.

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7. Distribute a copy of Closure Activity: Activity 2.4, How to Form a Cooperative: A Student Cooperative Project.

Role of Instructor: The goal of this activity is to provide students with a hands-on experience of democratically forming a cooperative business. Students will demonstrate their understanding of a cooperative business. The instructor will not be a member of the in-class cooperative, but should act as a consultant. The students will make the decisions regarding cooperative formation and management.

Student Cooperative Business Experience: Explain to the students that they are going to develop a cooperative businesses to which they are all eligible for membership. Use the guiding questions below. Then give the students 10 minutes to come up with a product or service idea (e.g., auctioning of members’ exhibits, bake sale, crafts sale, corsage sale, etc.). Guiding Question 2 should be used if the students have difficulty identifying a common purpose or demand for forming a cooperative.

Guiding Questions1. What needs do you have as students that a cooperative might be able to

address? The instructor encourages students to discuss their ideas for 10 minutes.

2. What is the purpose of a student cooperative? • Students may want to pool their resources (time, money, efforts) and

want to find a way to sell their product (e.g., art, craft) or service (e.g., computer repair service) to potential customers. If students form a co-op for this purpose, it would be a marketing cooperative.

• Perhaps students would like to have more bargaining or negotiating power when purchasing their school supplies for the school year. If students form a co-op for this purpose, it would be a purchasing cooperative.

• Students who own vehicles may want to form a car pool to sell rides to fellow students at a reasonable rate. This would be an example of a service cooperative.

• Perhaps students want to add value to a raw material, such as flour, by baking it and then selling it in the form of various baked-products at an event. This could be an example of a processing cooperative.

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INITIAL MEETING OF THE COOPERATIVEOnce the product or service idea is finalized and voted on, take time to learn about governance and steps to take when establishing a cooperative by using the Cultivate Cooperatives Wiki1, searching for Governance and Mission Statement.Creating a cooperative is not just about what you do, but how you do it. To administer your first co-op meeting, identify a Secretary and follow these steps: I. Any member (thereafter the elected Chairperson) can call the meeting to

order. II. Discuss the purpose of the [STUDENT COOPERATIVE]. III. A member of the cooperative makes a ‘Motion to Organize.’ IV. Members of the cooperative elect a ‘Chairman’ and ‘Treasurer.’ Confirm

the ‘Secretary.’ V. Develop a ‘Cooperative Mission Statement.’ VI. Members of the cooperative develop membership criteria. Will eligible

members be only those in the class? At the school? In that grade-level? VII. The Chairman of the Board appoints permanent steering committees to

focus on the following areas of the cooperative: ‘Marketing,’ ‘Membership,’ and ‘By-laws.’

VIII. Establish guidelines for the collection of ‘earnest money,’ or ‘good faith’ payments that will be used to establish the co-op. Receipt of these payments is confirmed with a legal document offering a ‘share’ of the co-op. The guidelines and processes help to demonstrate the founding members’ intent and process integrity to potential members. Establish a unit price for each ‘share’ (aka ‘membership fee’).

IX. Set the minimum number of shares a student needs to buy to become a member of this proposed cooperative.

X. Elect the Board of Directors (BOD). XI. Set date, time, and place for the BOD meetings. XII. Set date, time, and place for the membership meeting. XIII. Select name and logo for the business. XIV. Discuss an educational program (e.g., to educate new and potential

members about the newly formed cooperative) to implement. XV. Plan for each committee meeting (names of some essential committees are

given earlier). XVI. Adjourn.Once this exercise is over, you should write a brief report (2 pages max.) on your experience in forming a student cooperative.1Cultivate Cooperatives Wiki: http://cultivate.coop/wiki/Category:Articles#Governance

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8. Distribute the Assessment Activity – Cooperative Quiz. Student assessment takes several forms: (i) multiple-choice questions, (ii)

constructed response items or short essays, (iii) successful completion of Activity 2.3 (extension activity), and (iv) successful completion of Activity 2.4 (closure activity).

Answer Key – Multiple-choice Questions

1. The primary purpose of a cooperative is to A. produce a profit B. increase market share C. provide tax-exempt income to members D. deliver goods and services to members at a reasonable cost

2. The characteristics that distinguishes cooperatives from other forms of businesses are

A. Stock ownership, property rights, voting rights B. User-owner,user-control,anduser-benefits C. Voting proportional to ownership, user-control, user-owner D. Agriculture, consumer, government

3. An agricultural cooperative could provide the following service: A. Public utilities (e.g., electricity) in rural areas B. Consumer credit C. Process grapes and oranges for juice D. Higher education

4. _________ is the mechanism used by cooperatives by which cooperatives _______ to their members their earnings above cost (i.e., profit). (Complete.)

A. Membership drive, collect B. Patronage refund, return C. Annual voting, distribute D. Meetings, collect

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5. Based on the functions they perform, cooperatives are divided into the following categories:

A. Marketing, farm supply, service, and processing B. Farming, processing, supply, and marketing C. Marketing, service and processing D. Marketing, farm supply, and service

6. Cooperatives are an alternative form of business. As a business, cooperatives must perform to succeed. Cooperatives may fail due to

A. Poor economic environment B. Poor economic management by cooperative leadership C. Lack of capital D. All of the above

7. Agricultural cooperatives usually extend farmers’ businesses __________ into input supply or __________ into one or more levels into marketing.

A. Forward, backward B. Forward, forward C. Backward, forward D. Backward, backward

8. Market failure occurs A. When the market does not efficiently allocate resources to achieve the

greatest possible consumer (or producer) satisfaction. B. When goods or services are not supplied by markets (or are supplied in

insufficient quantities). C. When negative externalities arise (i.e., when an individual or firm does not

bear the costs of the harm it imposes – pollution, for example). D. All of the above

9. An IOF is a form of business enterprise which is owned by ________ who receive benefits (e.g., dividends) in proportion to the _____________ they made.

A. Members, patronage B. Members, investment C. Outside stockholders, investment D. Stockholders, patronage

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10. The concept of ___________ relates to those characteristics of a market that influence the behavior and results of the agents working in that market.

A. Market structure B. Perfect competition C. Monopoly D. Cooperative

Constructed Response Items1. Why is the cooperative model appropriate for the agricultural sector and

farmers in particular? Students should be able to discuss how the cooperative model provides an

institutional framework for farmers to have economies of scale which lower the cost of doing business. Through agricultural cooperatives, farmers work together to perform certain farming-related tasks, such as marketing or purchasing inputs. Thus, by working together as a group and forming strategic alliances, farmers may be able to increase their marketing or purchasing options. Together they can: 1) get access to markets or resources that were not available to individual farmers, 2) increase their bargaining power, and 3) reach forward into processing or value-added stages to capture a greater proportion of the consumer’s dollars, or 4) reach upstream (or backward) to reduce their input costs.

2. What would be your advice be regarding member responsibilities to a group of farmers in your area who want to form an agricultural cooperative?

Students should be able to discuss that as user-owners, members have critical responsibilities to ensure the smooth operation and success of their cooperative. Students should discuss the fact that member responsibility includes member commitment to their cooperative. In other words, the members must use the products and services of their cooperative, maintain control by attending and voting in the cooperative meetings and electing the BOD, make major decisions (e.g., to expand service or not), and provide financing (equity).

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GLOSSARYCooperative – AA cooperative (co-op) is a special category of corporation (business) or organization that is owned and operated by its members (also known as user-owners).

Food supply chain – A food supply chain refers to a system of people, organizations and institutions, information and resources that are involved in moving food from its place of production (e.g., farm or factory) to the place of consumption (e.g., individuals).

Investorownedfirms(IOF) – A form of business enterprise that is owned by stockholders who receive benefits (e.g., dividends) in proportion to investment they made. In terms of control and operation of the business, stockholders control and manage the firm (voting power is proportional to ownership rights).

Market failure – Term used to describe the situation where the market does not efficiently allocate resources to achieve the greatest possible consumer (or producer) satisfaction. There are a number of sources of market failure. Market failure occurs when goods or services are not supplied by markets (or are supplied in insufficient quantities). From a competitive viewpoint, market failure occurs when there is the existence of market power, or the absence of workable competition. If either the buyers or the sellers are unhappy with the deal they are getting, that can lead to market failure. Market failure also occurs when negative externalities arise (i.e., when an individual or firm does not bear the costs of the harm it imposes – pollution, for example).

Market structure – A market for any product or service consists of buyers and sellers, agents, who through their interactions, both real and potential, determine the price of a good or set of goods (or services). The concept of market structure, therefore, relates to those characteristics of a market that influence the behavior and results of the agents working in that market. Market structure is composed of: • the number of agents in the market, • their ability to set prices, • the degree of differentiation and uniqueness of products and • the ease of entry and exit into the market in question. Two of the most commonly recognized market structures are perfect competition (a system with numerous buyers and sellers, no agent having the ability to set prices, and free information about prices and offerings) and monopoly (one seller for numerous buyers, that seller having the ability to set prices, and only limited information on price and product).

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Member – Also known as a user-owner, a member is a person who meets qualifications (such as place of employment, place of residence) for membership in a co-op and purchases a required number of shares to belong.

Patronage refund – Term used to describe a return of profits to co-op members based on how much they have used a co-op’s products and services (i.e., their patronage). Like corporate boards of directors, co-op boards can distribute profits as cash refunds to members or retain a portion of the profit (called “retained earnings”) in a general reserve fund in the form of stock. They can also retain a portion of the profits in a general reserve fund called “unallocated reserves” which are similar to the “retained earnings” category in an IOF.

Patrons – Anyone who uses the product or services of a cooperative. A patron could be a member or a non-member (assuming that non-members are allowed to use the cooperative).

Rochdale Principles – The Rochdale Principles are a set of rules for the organization of cooperative businesses. In 1875, the Grange (http://www.nationalgrange.org/) published a set of rules for the organization of cooperative businesses. These rules were based on the principles that were practiced by the Rochdale Equitable Pioneers’ Society, established earlier in England. These rules are commonly known as the “Rochdale Principles” in the cooperative arena. The seven principles are: 1. Voluntary and Open Membership; 2. Democratic Member Control; 3. Member Economic Participation; 4. Autonomy and Independence; 5. Education, Training and Information; 6. Cooperation among Cooperatives; and 7. Concern for Community.

Value-added – When a product is value-added, it takes a raw commodity (e.g., milk, wheat) and changes its form to produce a product that is more valuable (e.g., cheese, loaf of bread). However, value is also added to a raw commodity when it is stored (to be made available when there is demand for it) or transported (from a place of plenty to a place of need). Thus, the value-added process provides benefits to producers as well as those who are involved in the process, such as processors or transportation and storage firms.

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STUDENT BIBLIOGRAPHYBhuyan, S. 2007. “The ‘People’ Factor in Cooperatives: The Effect of Attitudes

on Member Participation and Commitment.” Canadian Jr. of Agricultural Economics, 55:275-298.

Bhuyan, S. & F. L. Leistritz, 2001. “An Examination of Characteristics and Determinants of Success of Cooperatives in the Non-Agricultural Sectors.” Journal of Cooperation, 16:46-62.

Bond, J. K., C. A. Carter & R. J. Sexton. 2009. “A Study in Cooperative Failure: Lessons from the Rice Growers Association of California,” Journal of Cooperatives, 23: 71-86.

CCCD, 2014. Agricultural Cooperatives. California Center for Cooperative Development (CCCD), available at http://www.cccd.coop/info/types_of_coops/agricultural (accessed on September 23, 2014).

Cobia, D.W. (ed.). 1989. Cooperatives in Agriculture. Englewood Cliffs: NJ.

Cooperative Network, 2014. Understanding Cooperatives, Minnesota Edition. A joint collaboration of the United States Department of Agriculture (USDA) and the CHS Foundation. Cooperative Network, St. Paul, MN and Madison, WI. available at http://www.cooperativenetwork.coop/wm/education/youthprograms/web/USDACurriculum_MNedition/StartHere.htm (accessed on September 23, 2014).

Deller, S., A. Hoyt, B. Hueth & R. Sundaram-Stukel, 2009. Research on the Economic Impact of Cooperatives. University of Wisconsin Center for Cooperatives, University of Wisconsin- Madison.

Kohl, R.L. & J.N. Uhl (2002). Marketing of Agricultural Products, 9th ed., Upper Saddle River, NJ: Prentice-Hall, Chapter 13.

McKee, G., 2013. High School Cooperative Syllabus. North Dakota State University via extension. available at http://www.extension.org/pages/63097/high-school-cooperative-syllabus#.UkrulfzD_3h as of Sept 30, 2013.

Minnesota Department of Agriculture, 2014. Cooperatives. Minnesota Department of Agriculture, St. Paul, MN. available at http://www.mda.state.mn.us/protecting/sustainable/mfo/mfo-diversification/coops.aspx (accessed on September 23, 2014).

21

National Cooperative Business Association (NCBA). 2012. What is a Co-op? National Cooperative Business Association, Washington, D.C. available at http://www.ncba.coop/what-is-a-coop (accessed on Sept 30, 2013).

National Council of Farmer Cooperatives (NCFC), 2014. Cooperative Facts. National Council of Farmer Cooperatives, Washington, D.C. available at http://www.ncfc.org/information/cooperative-facts (accessed on September 23, 2014).

North Dakota Century Code (NDCC). 2013. “Articles of Incorporation, Chapter 10-15, Cooperative Associations.” North Dakota Legislative Branch, Bismarck, North Dakota. available at http://www.legis.nd.gov/cencode/t10c15.pdf?20131001110955 as of October 1, 2013.

United States Department of Agriculture (USDA). 2012. Co-ops 101: An Introduction to Cooperatives. Cooperative Information Report 55, Rural Development (formerly Rural Business Services), Washington, D.C.

USDA. 2012. Cooperative Statistics, 2011. Rural Development, USDA, Washington, D.C., November.

USDA, 2002. Agricultural Cooperatives in the 21st Century. Rural Business-Cooperative Service, Cooperative Information Report 60, Washington, D.C., November.

USDA, 2002. Problems and Issues Facing Farmer Cooperatives. Rural Business-Cooperative Service, Cooperative Research Report 192, Washington, D.C., September.

USDA, 2001. Cooperatives: What They Are and the Role of Members, Directors, Managers, and Employees. Rural Business-Cooperative Service, Cooperative Information Report 11, Washington, D.C., June.

USDA, 1998. Creating “Co-op Fever:” A Rural Developer’s Guide to Forming Co-ops. Rural Business-Cooperative Service, Cooperative Service Report 54, Washington, D.C., July.

USDA, 1993. What are Patronage Refunds? Rural Business Services, USDA, Washington, DC. Available at http://www.rurdev.usda.gov/rbs/pub/cir9.pdf as of Sept 30, 2013.

Zeuli, K.A. & R. Cropp, 2004. “Cooperatives: Principles and Practices in the 21st Century.” Report A1457, Cooperative Extension, University of Wisconsin-Madison.

22

23

Agricultural Cooperatives Lesson

Cooperatives in Your Community

24

Cooperative (co-op) businesses have a unique structure.

A cooperative is a user-owned and user-controlledbusiness in which benefits are equitably

derived and distributed on the basis of use.

A cooperative’s owners are also its customers and, thus, they guide the activities of their cooperative.

What is a Cooperative?

25

● Marketing and processing services

● Financial services(credit, insurance, loans)

● Production supplies ● Transportation services● Facilities● Recreational equipment

● Housing● Health care● Child care● Wholesale goods and

supplies● Electricity● Telephone services● Food/groceries

Cooperatives Provide

26

● According to the International Cooperative Alliance (www.ica.coop), cooperatives have worldwide impact:● Worldwide more than 1 billion people are

members of cooperatives.● Cooperatives provide 100 million jobs

worldwide, 20% more than multinational enterprises.

● The economic activity of the largest 300 cooperatives in the world equals the 10th-largest national economy.

● In India and China combined, more than 400 million people are part of cooperatives.

The International Cooperative Movement

27

● According to the University of Wisconsin, nearly 30,000 cooperatives operate at 73,000 places of business in the U.S.

● These cooperatives serve 100+ million people (over 35% of the population).

● Individuals commonly have memberships in more than one cooperative (multiple memberships).

Source: http://reic.uwcc.wisc.edu/default.htm

Facts about U.S. Cooperatives

28

1. Cooperatives allow members to achieve economies of scale, reducing the cost of storage, handling, marketing, and processing.

2. Cooperatives provide market access by allowing their members to meet market channel requirements for volume, quality, packaging, and processing.

3. By banding together, cooperatives allow members to offset the market power of large firms.

4. Cooperatives let members share riskthrough pooling.

Why Do Cooperatives Work?

29

Cooperatives have three characteristics or principles that distinguish them from investor-owned firms (IOFs):1. User-owner principle: The cooperative is owned and financed by

the people who use it (the members).

2. User-control principle: The cooperative is controlled by the members who use it.

3. User-benefit principle: The cooperative's sole purpose is to provide and distribute benefits to members in proportion to their use of the cooperative's services.

Members who use the cooperative receive any profits from the cooperative's operation and take the risk of losses.Source:

Characteristics of Cooperatives

30

Common cooperative practices include:● Patronage refund—distribute

earnings to members based on use● Limited return on equity capital—

members form a cooperative for service, not for a monetary return on investment

● Cooperative cooperation—joint ventures, networks, and alliances with other cooperatives

● Cooperative education—promote the cooperative way of doing business and educate members, directors, and employees

Cooperative Practices

31

Based on the Rochdale principles developed in England in 1844, some essential principles of cooperatives include:

1. Voluntary and Open Membership 2. Democratic Member Control 3. Member Economic Participation4. Autonomy and Independence5. Education, Training, and

Information 6. Cooperation among Cooperatives 7. Concern for Community

Cooperative Principles

32

A typical cooperative is composed of the following key personnel:

Members

Board of Directors

Manager

Employees

= flow of communication and information

= flow of ownership and control

Organizational Structure of Cooperatives

33

● Members –●Use cooperative products and services●Maintain control by:

● attending meetings, voting;● electing Board of Directors (BOD); and ● provide financing (equity).

● Directors –● Set policies ● Safeguard assets ●Hire managers ● Plan for future● Self-evaluate, etc.

Organizational Responsibilities

34

● Managers –●Understand the nature of cooperative

businesses and their goals● Control daily operations ●Advise the BOD ●Make personnel decisions● Set tactical goals

● Employees –●Understand the nature of cooperative

businesses and its goals●Are committed to the cooperative’s

mission

Organizational Responsibilities

35

Three Ways to Finance a Cooperative

1. Initial equity investment –● Members provide the initial equity capital through purchase of

common stock, which entitles them to membership.2. Retained profits –

● Member-users indirectly invest equity capital when the cooperative retains profit, i.e., it does not return the profit to the members.

3. Debt capital –● Creditors—banks, insurance companies—provide long-term

and/or short-term debt capital. ● CoBank, of the Farm Credit System, is a major supplier of both

types of financing. ● A large cooperative may sell bonds or issue commercial paper to

raise capital.

36

Cooperatives can be classified based on the type of core tasks or functions they perform:

1. Marketing Cooperatives

2. Purchasing or Farm Supply Cooperatives

3. Service Cooperatives

4. Processing Cooperatives

Types of Agricultural Cooperatives

37

• Marketing Cooperatives allow members to:– achieve greater economies of scale in marketing functions;– improve their market access; and– achieve better prices.

• Marketing Cooperatives:– assemble, grade, and ship agricultural products;– may perform the first stage of processing; and– can act solely as commission agent or brokers (e.g., bargaining

cooperatives).

• Marketing Cooperatives are the most typical form of agricultural cooperative. They are common in the milk, fruits and vegetables, livestock, cotton, oilseed, and grain sectors.

1. Marketing Cooperatives

38

• Purchasing or Farm Supply Cooperatives allow members to:– obtain quality supplies at favorable prices.

• Purchasing or Farm Supply Cooperatives:– handle all types of farm production inputs,

including:• fertilizer, crop protection chemicals; • seed, feed; and• petroleum.

– Some perform services such as:• custom feed grinding,• application of fertilizer, and • application of crop protection chemicals.

2. Purchasing or Farm Supply Co-ops

39

• Service Cooperatives allow members to:– efficiently access needed services at more favorable prices.

• Service Cooperatives:– provide specialized services such as:

• controlled burn management; • crop scouting, field mapping;• drainage, irrigation; • farm management, recordkeeping; and• machinery sharing.

– Some also provide credit, insurance,electricity, and telephone services.

• While many service cooperatives are not solely agricultural cooperatives, they often operate in rural areas and provide services that are otherwise unavailable in the marketplace.

3. Service Cooperatives

40

• Processing Cooperatives allow members to: – participate in marketing channels downstream from the farm gate;– capture a larger share of the consumer's food dollar; and – improve market outlets for the members of the co-op.

• Processing Cooperatives may: – process milk;– refine sugar;– can, dry, freeze, or juice fruit and vegetables;– mill flour; and– process oilseed.

• Sunkist Growers of Sherman Oaks, CA, produces fresh and processed citrus products.

4. Processing Cooperatives

41

● There are over 2,200 agricultural cooperatives, which had a net business volume of $202 billion (United States Department of Agriculture, 2012).

● Over 25% of agricultural inputs (e.g., seed, fertilizer, fuel) are provided by cooperatives.

● More than 1/4 of agricultural commodities (e.g., grain) are marketed through cooperatives.

● In some sectors, such as dairy, almost 90% of all milk is marketed through cooperatives.

● Canadian maple sugar cooperatives produce 35% of the world's maple sugar production.

Agricultural Cooperative Statistics

42

20

Lesson 2Cooperatives in the U.S.

Distribution of Cooperatives by SectorSource: http://www.uwcc.wisc.edu/pubs/CurrentResearch/state-by-state.aspx

43

Cooperatives may seek one or more of the following economic objectives:

● to improve demand in order to raise returns to members.● to pursue economies of scale resulting in more favorable net

prices for members.● to improve access to the markets for members.● to coordinate supply and quality in order to improve efficiency

and price.● to improve the competitiveness and efficiency of the

marketplace. (By setting competitive prices, cooperatives force other firms to compete and prevent them from generating excess profits at the expense of the producer.)

● to gain influence and leadership in their market channel and, in so doing, improve prices and market access.

Review of Cooperative Economic Objectives

44

Two types of factors are shaping the cooperatives of the present and the future:

● External—factors that exist beyond the control of the cooperative, such as changing consumer behavior.

● Internal—factors that arise out of the cooperative business itself and that can be managed internally, such as the financing of cooperative operations.

What is the future of cooperatives?

It all depends on how cooperatives are impacted by external and internal factors and how they evolve.

Issues and Forces Shaping Cooperatives

45

Trends in Agricultural Cooperatives in the U.S.

• Consolidation and mergers are:• Decreasing the number of ag. Cooperatives• Increasing the average size of a cooperative

•Some ag. Cooperatives have:• Expanded to provide value-added processing, leading to name-brands• Formed strategic alliances with IFO firms

46

QUESTIONS?

47

ACTIVITIES

Activity 2.1(a) Agricultural Cooperative VideoPlease read the following before watching the Agricultural Cooperative Video.

As stated in Lesson 1, a cooperative (co-op) is a special category of corporation or business that is owned and operated by its members (also known as user-owners). The cooperative form of business is quite prevalent in the United States. There are almost 30,000 cooperatives (both agricultural and non-agricultural) in the U.S. This lesson will explore what that means for businesses in the agricultural sector.

A cooperative is a form of business that’s owned and democratically controlled by the people who use its services. The benefits of a cooperative are derived and distributed equitably, based on use (USDA, 2012). Agricultural cooperatives consist of agricultural producers (e.g., farmers, ranchers) who voluntarily agree to establish a common institution to improve their production and marketing effectiveness by pursuing a common set of goals. Such goals may include: 1) getting a better price for their products, 2) buying farm input at a lower cost, and 3) accessing markets that are otherwise not available to individual farmers or ranchers. You may already be familiar with such brands as OceanSpray, Sun-Maid, Sunkist, and Land O’Lakes. You may be surprised to learn that these brands and their parent companies are agricultural cooperatives. Similarly, your local credit union is a non-agricultural cooperative.

There are slightly over 2,200 agricultural cooperatives in the United States. Agricultural cooperatives are one of the institutional mechanisms by which farmers may work together to perform certain marketing tasks. By forming strategic alliances amongst themselves to form a cooperative, farmers may increase their marketing or purchasing options to increase their bargaining power. Through their cooperative, which pools the resources of many farmers, farmer-members may reach forward into downstream marketing stages, such as processing, to capture more share of consumers’ dollars, or backward into business prerequisites upstream, such as farm input supply, to reduce their input costs.

48

Activity 2.1(b) Agricultural Cooperative Video (length 4:17 minutes).

Video link: http://www.youtube.com/watch?v=xK7yn0y6SCM

After viewing, students are invited to share and discuss their new knowledge about the cooperative form of business.

49

Activity 2.2, Agricultural Cooperative Facts and Discussion QuestionsAny cooperative is a form of business owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use (USDA, 2012). We call the user-owners members.

If you live on a farm, your fertilizer and fuel are likely purchased from a cooperative store, such as CHS. CHS Inc. (http://www.chsinc.com/) is the nation’s leading agricultural cooperative, owned by farmers, ranchers and farm-related co-ops across the United States. If you like to drink Florida’s Natural orange juice, Ocean Spray cranberry juice, or spread Land O’ Lakes butter or Welch’s grape jelly on your toast, you are consuming food produced by agricultural cooperatives owned by farmers known as farmer-members. People are typically surprised to discover that many of the brand-name food items that we consume every day come from agricultural cooperatives. Some common food products that are produced by agricultural cooperatives include Blue Diamond Growers, Cabot, Sun-Maid, Sunkist, and Tillamook.

Cooperative HistoryThe origin of formal cooperative organization can be traced to the Rochdale Equitable Pioneers’ Society, an urban, consumer cooperative organized in England in 1844 (USDA, 2012). It sold consumer goods such as food and clothing to cooperative members who were unhappy with the merchants in Rochdale, a community in Manchester, England. The establishment of a coherent set of thoughts for the cooperative form of organization was first proposed in the 19th century by Robert Owen and William King in England, and Charles Fourier in France.

The Grange (http://www.nationalgrange.org/), founded in 1867, was the major thrust behind agricultural and rural cooperatives in America (USDA, 2012). In 1875, the Grange published a set of rules for the organization of cooperative businesses. These rules were based on the principles that were practiced by the Rochdale Equitable Pioneers’ Society. The rules are commonly known as the “Rochdale Principles”1.

1See Cobia, 1989 for more on these and other cooperative principles.

50

For more information about the principles, please view the online Rochdale Museum2. The seven principles are: 1. Voluntary and Open Membership; 2. Democratic Member Control; 3. Member Economic Participation; 4. Autonomy and Independence; 5. Education, Training and Information; 6. Cooperation among Cooperatives; and 7. Concern for Community.

How Do You Become a Member of a Cooperative? Cooperatives are member-owned. Cooperatives members must fit the membership profile of the cooperative of interest. Let’s say you interested in joining an agricultural cooperative that markets blueberries and cranberries – the cooperative may require that only blueberry and cranberry farmers can join the cooperative. Once the membership criteria are satisfied, then you purchase the required minimum amount of shares, as per that cooperative’s rules, and become a member. Joining a cooperative could be as easy as purchasing a $25 membership share in your local credit union or purchasing a $1,000 share and delivery rights for every hog you plan to process in a farmer-owned hog processing cooperative in Nebraska. Typically each member has one vote, regardless of the amount of shares purchased or money invested in the cooperative.

Cooperative Structure, Practices, and ValuesEach cooperative is governed by an elected board of directors (BOD) and a majority of the members of the BOD are elected from the members of the cooperatives while the rest may come from financial institutions which are lenders to the concerned cooperative. The directors set policy and hires personnel to manage and run the day-to-day operations of the cooperative. Cooperatives are incorporated under state law by filing articles of incorporation which allow them the right to do business, e.g., cooperatives in North Dakota are incorporated under and governed by rules under North Dakota’s Century Code (NDCC, 2013).

2Rochdale Pioneers Museum: http://www.rochdalepioneersmuseum.coop/about-us/the-rochdale-principles

51

Some common cooperative practices include: 1. Patronage refund – cooperatives distribute earnings to members based on use,

not based on how many shares of a cooperative a member owns;2. Limited return on equity capital – members form a coop for service, not for a

monetary return on investment;3. Cooperative cooperation – cooperatives are encouraged to conduct joint

ventures, networks, and alliances with other cooperatives, and 4. Cooperative education – cooperatives promote the cooperative way of doing

business and educate members, directors, and employees.

While in many ways cooperatives resemble other businesses, they are also different from non-cooperative or investor-owned firms (IOFs). Like their IOF compatriots, cooperatives have similar physical facilities, perform similar functions and need to follow sound business practices to succeed.

But in many ways, cooperatives are distinctly different from IOFs and such differences are found in the cooperative’s purpose, its ownership and control, and distribution of benefits. For example, unlike IOFs, a cooperative member benefits proportionally to their purchase the goods or use of services of the cooperative. The amount of earnings and services that cooperative members receive from their cooperative is based on the amount of business they do with the cooperative.

Cooperatives are quite common in the United States. According to the latest U.S. Department of Agriculture’s Rural Development Cooperative Statistics3, there are 2,238 agricultural cooperatives in the U.S. These cooperatives achieved a net business volume of $202 billion with a net income of $6.1 billion (USDA, 2012). However, cooperative businesses are found in all countries, from developed countries in North America, Europe, and Asia to developing countries in Asia, South America, and Africa. Although economic pressure has led to the consolidation and mergers of many cooperatives, particularly in developed countries, the widespread use of the cooperative model shows its adaptability and diversity in the ever-changing world.

There are many career opportunities available at agricultural cooperatives. Being employed at a cooperative does not mean that you need to have a farm background. Employees at cooperatives have expertise in: agribusiness consulting, accounting, information technology, financial analysis, legal consulting, and government affairs. Cooperatives also make use of technical fields, such as chemical and mechanical engineers, animal scientists, biologists, architects, agronomists, botanists, and economists.3Rural Development Cooperative Statistics: http://www.rurdev.usda.gov/BCP_Coop_DirectoryAndData.html.

52

Tabl

e 1:

Typ

es o

f Agr

icul

tura

l Coo

pera

tives

Type

of

Agr

icul

tura

l C

oope

rati

veD

escr

iptio

n of

the

Coo

pera

tive

Ent

erpr

ise

Mar

ketin

g C

oope

rativ

es

• Mar

ketin

g co

oper

ativ

es a

re in

volv

ed in

the

mar

ketin

g of

the

raw

agr

icul

tura

l pro

duct

s with

lim

ited

valu

e-ad

ded

serv

ices

, suc

h as

cle

anin

g an

d gr

adin

g. T

his i

s the

mos

t com

mon

form

of c

oope

rativ

e.• T

heir

prin

cipa

l obj

ectiv

e is

to se

cure

the

grea

test

pos

sibl

e re

turn

for p

rodu

cts o

f the

ir fa

rmer

-ow

ners

. Som

e of

th

ese

co-o

ps a

ct so

lely

as c

omm

issi

on a

gent

s or b

roke

rs (e

.g. b

arga

inin

g co

oper

ativ

es).

• Mar

ketin

g co

oper

ativ

es ar

e com

mon

in m

ilk, f

ruits

and

vege

tabl

es, l

ives

tock

, cot

ton

and

oils

eed,

and

grai

n m

arke

ts.

• Exa

mpl

es: B

lue

Dia

mon

d G

row

ers i

s a C

alifo

rnia

n m

arke

ting

coop

erat

ive

that

spec

ializ

es in

alm

onds

Purc

hasi

ng o

r Fa

rm S

uppl

y C

oope

rativ

es

• Pur

chas

ing

or fa

rm su

pply

coo

pera

tives

allo

w fa

rmer

s to

obta

in e

cono

mie

s of s

cale

in p

urch

asin

g in

puts

. • T

hey

are

com

mon

in fe

rtiliz

ers,

chem

ical

s, an

d fe

eds a

s wel

l as i

n su

ch sp

ecia

lized

serv

ices

as a

rtific

ial

inse

min

atio

n, c

usto

m a

pplic

atio

n of

che

mic

als f

or p

reci

sion

farm

ing,

and

farm

man

agem

ent.

• Exa

mpl

es: A

n ex

ampl

e of

such

a c

oope

rativ

es is

Min

neso

ta-b

ased

CH

S, In

c., f

orm

erly

kno

wn

as C

enex

-Har

vest

St

ate

(http

://w

ww.

chsi

nc.c

om).

Serv

ice

Coo

pera

tives

• Ser

vice

coo

pera

tives

allo

w m

embe

rs to

mor

e ef

ficie

ntly

acc

ess n

eede

d se

rvic

es a

t mor

e fa

vora

ble

pric

es.

• Man

y pr

ovid

e se

rvic

es th

at w

ould

oth

erw

ise

be u

nava

ilabl

e in

the

mar

ket p

lace

. • S

ervi

ces p

rovi

ded

by th

is ty

pe o

f coo

pera

tives

incl

ude

cred

it, b

anki

ng, i

nsur

ance

, tel

epho

ne, e

lect

ricity

, irr

igat

ion

and

drai

nage

, hea

lth c

are,

chi

ld c

are,

gro

cery

stor

es, e

tc. I

n re

cent

yea

rs, m

any

mar

ketin

g co

oper

ativ

es

have

add

ed su

ch se

rvic

es a

s far

m m

anag

emen

t adv

ice,

cus

tom

che

mic

al a

pplic

atio

n, a

nd m

arke

ting

assi

stan

ce to

di

vers

ify a

reve

nue

base

and

satis

fy m

embe

r dem

ands

.• E

xam

ples

: CH

S In

c. sp

ecia

lizes

in se

vera

l typ

es o

f pro

duct

s and

serv

ices

, whi

ch in

clud

e cr

op in

puts

, fee

d,

and

farm

ene

rgy

supp

lies a

s wel

l as c

onsu

lting

serv

ices

. CoB

ank,

a m

embe

r of t

he F

arm

Cre

dit S

yste

m, i

s a

coop

erat

ive

bank

. CoB

ank

is o

wne

d by

farm

cre

dit a

ssoc

iatio

ns, a

gric

ultu

ral b

usin

esse

s, an

d ru

ral u

tiliti

es.

Proc

essi

ng

coop

erat

ives

• Pro

cess

ing

coop

erat

ives

allo

w fa

rmer

s to

parti

cipa

te in

mar

ketin

g ch

anne

ls d

owns

tream

from

the

farm

gat

e.

• The

obj

ectiv

e of

pro

cess

ing

coop

erat

ives

is to

cap

ture

a la

rger

shar

e of

the

cons

umer

’s fo

od d

olla

r and

at t

he

sam

e tim

e im

prov

e m

arke

t out

lets

for t

he c

oope

rativ

e m

embe

rs.

• Pro

cess

ing

coop

erat

ives

may

pro

cess

milk

; refi

ne su

gar;

can,

dry

, fre

eze,

or j

uice

frui

t and

veg

etab

les;

mill

flou

r; an

d pr

oces

s oils

eed.

• Exa

mpl

e: S

unki

st G

row

ers o

f She

rman

Oak

s, C

A p

rodu

ces f

resh

and

pro

cess

ed c

itrus

pro

duct

s.

53

Tabl

e 2a

: Com

pari

son

of C

oope

rativ

e an

d N

on-c

oope

rativ

e B

usin

esse

s (O

wne

rshi

p)

Feat

ures

co

mpa

red

Indi

vidu

alPa

rtne

rshi

pL

imite

d L

iabi

lity

Com

pany

Cor

pora

tion

Inve

stor

-Ori

ente

dC

oope

rativ

esO

WN

ER

SHIP

Who

ow

ns th

e bu

sine

ss?

Indi

vidu

al

prop

rieto

rG

ener

al a

nd li

mite

d pa

rtner

s

Usu

ally

two

or m

ore

indi

vidu

als

Stoc

khol

ders

Use

r-Mem

bers

How

is th

e bu

sine

ss fi

nanc

ed?

Ow

ner i

nves

tmen

t an

d re

tain

ed

profi

ts fr

om

oper

atio

ns

Partn

ers’

inve

stm

ents

an

d re

tain

ed p

rofit

s fro

m

oper

atio

ns

Sam

e as

pa

rtner

ship

Sale

of s

tock

and

re

tain

ed p

rofit

s

Sale

of s

tock

or

shar

es to

mem

bers

an

d re

tain

ed p

rofit

s

Lega

l lia

bilit

y of

an

indi

vidu

al

owne

rU

nlim

ited

Gen

eral

par

t = u

nlim

ited

Lim

ited

part

= lim

ited

Lim

ited

Lim

ited

Lim

ited

54

Tabl

e 2b

: Com

pari

son

of C

oope

rativ

e an

d N

on-c

oope

rativ

e B

usin

esse

s (Benefits)

Feat

ures

co

mpa

red

Indi

vidu

alPa

rtne

rshi

pL

imite

d L

iabi

lity

Com

pany

Cor

pora

tion

Inve

stor

-Ori

ente

dC

oope

rativ

es

BE

NE

FIT

S

Who

rece

ives

pr

ofits

?O

wne

r

Partn

ers i

n pr

opor

tion

to

inve

stm

ent

agre

emen

ts

Sam

e as

pa

rtner

ship

Stoc

khol

ders

in

prop

ortio

n to

in

vest

men

t (st

ock)

Mem

bers

in p

ropo

rtion

to th

eir

use

of se

rvic

es (p

atro

nage

)

Who

use

s the

se

rvic

es?

Non

-ow

ner

cust

omer

sG

ener

ally

non

-ow

ner c

usto

mer

sSa

me

as

partn

ersh

ipG

ener

ally

non

-ow

ner c

usto

mer

sM

ainl

y th

e ow

ner p

atro

ns

Who

ben

efits

fro

m e

quity

ap

prec

iatio

n?

Prop

rieto

r, re

aliz

ed u

pon

sale

of b

usin

ess.

Ret

urns

on

equ

ity

unlim

ited.

Partn

er, r

ealiz

ed o

n sa

le o

f bus

ines

s. R

etur

ns o

n eq

uity

un

limite

d.

Partn

ers,

upon

di

ssol

utio

n of

LL

C o

r sal

e of

LL

C. R

etur

ns

on e

quity

un

limite

d.

Inve

stor

s, up

on sa

le

of st

ock.

Ret

urns

on

equi

ty u

nlim

ited.

Equi

ty d

oes n

ot a

ppre

ciat

e (th

ere

are

exce

ptio

ns).

Ret

urn

on e

quity

typi

cally

cap

ped

at

8%.

Who

pay

s inc

ome

taxe

s?

Ow

ner a

t in

divi

dual

rate

s (s

ingl

e ta

xatio

n)

Partn

ers a

t in

divi

dual

rate

s

LLC

as a

co

rpor

atio

n pa

ys c

orpo

rate

ra

te

Cor

pora

tion

pays

at

cor

pora

te ra

te;

stoc

khol

ders

pay

at

indi

vidu

al ra

te

on d

ivid

ends

an

d ca

pita

l gai

ns

(dou

ble

taxa

tion)

Co-

op p

ays n

o co

rpor

ate

tax

on q

ualifi

ed p

atro

nage

refu

nd

allo

catio

ns, b

ut d

oes p

ay

corp

orat

e ta

x on

una

lloca

ted

net p

rofit

s, ne

t pro

fits f

rom

no

n-m

embe

r bus

ines

s, an

d eq

uity

div

iden

ds. M

embe

rs p

ay

indi

vidu

al in

com

e ta

x on

cas

h an

d de

ferr

ed p

atro

nage

refu

nds

and

divi

dend

s.

55

Tabl

e 2c

: Com

pari

son

of C

oope

rativ

e an

d N

on-c

oope

rativ

e B

usin

esse

s (C

ontr

ol)

Feat

ures

com

pare

dIn

divi

dual

Part

ners

hip

Lim

ited

Li-

abili

ty C

om-

pany

Cor

pora

tion

Inve

stor

-Ori

ent-

edC

oope

rativ

es

CO

NTR

OL

Who

vot

es?

Non

e ne

cess

ary

The

partn

ers

Sam

e as

par

t-ne

rshi

pC

omm

on st

ock-

hold

ers

Mem

ber-p

atro

ns

How

is v

otin

g do

ne?

Non

e ne

cess

ary

Usu

ally

by

part-

ners

’ sha

re in

ca

pita

l

By

shar

es o

f com

-m

on st

ock

Usu

ally

one

-mem

ber =

one

-vo

te

Who

det

erm

ines

pol

i-ci

es?

The

indi

vidu

alTh

e pa

rtner

sC

omm

on

stoc

k-ho

lder

s and

di

rect

ors

The

mem

ber-p

atro

ns a

nd

dire

ctor

s

56

Questions for Discussion: Please review materials presented prior to the start of Activity 2.2 and with Activity 2.2 (a).

A. What are the Rochdale Principles? Please list at least three.

B. Why is the cooperative model of 18th century still thriving in the 21st century?

C. What are the different types of agricultural cooperatives and what are their main purposes?

D. What are some of the key differences between cooperatives and investor oriented firms?

E. What are some of the common food brands produced by agricultural cooperatives?

F. How do you become a member of a cooperative?

G. What types of careers are available in the agricultural cooperative sector?

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Extension Activity: Activity 2.3, Learn About Agricultural Cooperatives in the United States

The best way to learn more about today’s agricultural cooperatives — or any cooperative — is to visit one and meet with the members, directors, and manager(s). That may or may not be feasible for you to do as a class. Alternatively, you may research cooperatives by going to a school or local public library and/or using the Internet. There are several agricultural cooperatives in the United States, some of which are very well-known.

Students could be divided into groups, each group containing 4-5 students (or as appropriate). The questions below can be given to the students to help with their inquiry about agricultural cooperatives in the United States. Once the research has been completed, students will write a brief report based on their findings and present their research in class (10 minutes presentation time).

Questions:

A. What primary products/services does the cooperatives provide or offer?

B. What led to the organization of the cooperative, and when was it established?

C. Tell us about the members of this cooperative: Who are they? What do they produce? Where are they located?

D. Review Tables 2a, 2b, and 2c. Can you find information listed in these tables that is applicable to the cooperative you are researching? Write a list of features or develop a table for the cooperative that you are researching based on: Table 2a. Ownership, Table 2b. Benefits, or Table 2c. Control.

E. [Extra Credit] How is the cooperative doing as a business? Have sales gone up (or down) in the past couple of years?

58

Closure Activity: Activity 2.4, How to Form a Cooperative: A Student Cooperative Project

The goal of this activity is to provide you with a hands-on experience of democratically forming a cooperative business. By now we know the many reasons that farmers form cooperatives.

Guiding Questions

1. What needs do you have as students that a cooperative might be able to address?

2. What is the purpose of a student cooperative?

59

Initial Meeting of the Cooperative

The instructor will give you a few minutes to come up with a product or service idea. Once the product or service idea is finalized and voted on, take time to learn about governance and steps to take when establishing a cooperative by using the Cultivate Cooperatives Wiki4, searching for Governance and Mission Statement.Creating a cooperative is not just about what you do, but how you do it. To administer your first co-op meeting, identify a Secretary and follow these steps: I. Any member (thereafter the elected Chairperson) can call the meeting to order. II. Discuss the purpose of the [STUDENT COOPERATIVE]. III. A member of the cooperative makes a ‘Motion to Organize.’ IV. Members of the cooperative elect a ‘Chairman’ and ‘Treasurer.’ Confirm

the ‘Secretary,’ V. Develop a ‘Cooperative Mission Statement.’ VI. Members of the cooperative develop membership criteria. Will eligible

members be only those in the class? At the school? In that grade-level? VII. The Chairman of the Board appoints permanent steering committees to

focus on the following areas of the cooperative: ‘Marketing,’ ‘Membership,’ and ‘By-laws.’

VIII. Establish guidelines for the collection of ‘earnest money,’ or ‘good faith’ payments that will be used to establish the co-op. Receipt of these payments is confirmed with a legal document offering a ‘share’ of the co-op. The guidelines and processes help to demonstrate the founding members’ intent and process integrity to potential members. Establish a unit price for each ‘share’ (aka ‘membership fee’).

IX. Set the minimum number of shares a student needs to buy to become a member of this proposed cooperative.

X. Elect the Board of Directors (BOD). XI. Set date, time, and place for the BOD meetings. XII. Set date, time, and place for the membership meeting. XIII. Select name and logo for the business. XIV. Discuss an educational program (e.g., to educate new and potential

members about the newly formed cooperative) to implement. XV. Plan for each committee meeting (names of some essential committees are

given earlier). XVI. Adjourn.Once this exercise is over, you should write a brief report (2 pages max) on your experience in forming a student cooperative.4Cultivate Cooperatives Wiki: http://cultivate.coop/wiki/Category:Articles#Governance

60

COOPERATIVE QUIZ (MULTIPLE-CHOICE)

Name: _________________________________________

1. The primary purpose of a cooperative is to A. produce a profit B. increase market share C. provide tax-exempt income to members D. deliver goods and services to members at a reasonable cost

2. The characteristics that distinguishes cooperatives from other forms of businesses are

A. Stock ownership, property rights, voting rights B. User-owner, user-control, and user-benefits C. Voting proportional to ownership, user-control, user-owner D. Agriculture, consumer, government

3. An agricultural cooperative could provide the following service: A. Public utilities (e.g., electricity) in rural areas B. Consumer credit C. Process grapes and oranges for juice D. Higher education

4. _________ is the mechanism used by cooperatives by which cooperatives ______ to their members their earnings above cost (i.e., profit). (Complete.)

A. Membership drive, collect B. Patronage refund, return C. Annual voting, distribute D. Meetings, collect

61

5. Based on the functions they perform, cooperatives are divided into the following categories:

A. Marketing, farm supply, service, and processing B. Farming, processing, supply, and marketing C. Marketing, service and processing D. Marketing, farm supply, and service

6. Cooperatives are an alternative form of business. As a business, cooperatives must perform to succeed. Cooperatives may fail due to

A. Poor economic environment B. Poor economic management by cooperative leadership C. Lack of capital D. All of the above

7. Agricultural cooperatives usually extend farmers’ businesses __________ into input supply or __________ into one or more levels into marketing.

A. Forward, backward B. Forward, forward C. Backward, forward D. Backward, backward

8. Market failure occurs A. When the market does not efficiently allocate resources to achieve the

greatest possible consumer (or producer) satisfaction. B. When goods or services are not supplied by markets (or are supplied in

insufficient quantities). C. When negative externalities arise (i.e., when an individual or firm does not

bear the costs of the harm it imposes – pollution, for example). D. All of the above

62

9. An IOF is a form of business enterprise which is owned by ________ who receive benefits (e.g., dividends) in proportion to the ____________ they made.

A. Members, patronage B. Members, investment C. Outside stockholders, investment D. Stockholders, patronage

10. The concept of ___________ relates to those characteristics of a market that influence the behavior and results of the agents working in that market.

A. Market structure B. Perfect competition C. Monopoly D. Cooperative

Constructed Response Items1. Why is the cooperative model appropriate for the agricultural sector and

farmers in particular?

2. What would be your advice regarding member responsibilities to a group of farmers in your area who want to form an agricultural cooperative?