United StatesDepartment ofAgriculture

Rural Business-CooperativeSetvice

ResearchReport 159

USDA=a

MarketingCoordination inAgriculturalCooperatives

Abstract The use of marketing agreements adds elements of marketing coordination betweenmembers and their cooperatives. Marketing agreements used in this study includedboth marketing contracts signed with members and bylaw provisions that requiredmembers to market with their cooperative. Type of product marketed and related mar-keting services had a strong influence on the level of agreements. Except for dairy,cooperatives with marketing agreements had a greater proportionate investment inassets, especially fixed assets, than other cooperatives and were more likely to uselong-term sales contracts with their customers. Dairy cooperatives had a range of bar-gaining and marketing relationships with their members that created a more complexasset investment relationship.

Marketing Coordination in Agricultural Cooperatives

Roger A. Wissman

Rural Business-Cooperative Service

Research Report 159

September 1997

Contents Highlights.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketing Agreements .............................................2

Transactions Between Members and Cooperatives ...........................3

Grain Marketing ................................................. .3

Fruit and Vegetable Marketing .......................................4

Dairy Marketing ................................................. .5

Marketing of Other Products ........................................5

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cooperative Operations ............................................... .6

Grain Cooperatives ...............................................6

Fruit and Vegetable Cooperatives ....................................6

Dairy Cooperatives ...............................................6

Other Marketing Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Summary.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Coordination Between Marketing Levels ..................................11

Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..~............13

Highlights Coordinated marketing between cooperatives and their members was influenced byfactors operating at different levels in the marketing system. Understanding marketingrelationships between members and cooperatives requires an approach that sequen-tially considers each step in the marketing process. Product characteristics with relatedmarketing services, functions performed by cooperatives, and marketing coordinationall have a role in this understanding.

This study focuses on the use of marketing agreements by cooperatives and their pro-ducer members. Marketing agreements include both marketing contracts and bylawprovisions that require members to market with their cooperative. A survey of market-ing cooperatives with total sales of $15 million or more provided the basic information.

Product characteristics and marketing services at the initial product exchange betweenmembers and their cooperatives were related to use of marketing agreements. Grainproducers provide much of the storage and services needed at harvest. Therefore,grain producers are able to market grain with considerable independence throughoutthe year. Grain cooperatives tended not to use marketing agreements unless process-ing or production coordination functions were incorporated in a cooperative’s activities.Only 6 percent of the grain cooperatives had marketing agreements.

Agricultural products leaving the farm are often bulky, perishable, and seasonal, thusincreasing the need for marketing services. Fruit, vegetables, and milk are perishableproducts, and more than 75 percent of these cooperatives had marketing agreementswith their members.

At the cooperative level, bargaining functions and marketing activities with higherresource requirements influenced member-cooperative marketing relationships. Inthree of the four classifications, cooperatives with coordinated arrangements had high-er average sales, assets, equity, and fixed assets than other cooperatives. Functionsperformed by cooperatives with marketing agreements required relatively more facili-ties and equipment. Risks associated with larger investments over longer periods wereoffset by higher levels of coordinated marketing between members and cooperatives.

Dairy cooperatives had a different pattern of asset use. Those with marketing agree-ments did not have more asset-intensive operations. Bargaining activities, an importantfunction in many dairy cooperatives, require only limited assets and help explain thedifferent asset investment pattern.

Cooperatives’ marketing contracts with their customers were also related to use ofmarketing agreements. These cooperatives tended to have more long-term contractswith the firms to which they supplied products. This was especially true of dairy coop-eratives.

Marketing Coordinationin Agricultural Cooperatives

Introduction

The U.S. agricultural production and marketingsystems provide consumers a wide variety of prod-ucts. Various channels guide products as they flowfrom farms and ranches through the marketing systemto final users. Marketing transactions vary-from auc-tion markets, where buyers and sellers interact only atthe time of sale, to vertically integrated poultry orpork enterprises, where before the production processbegins, agreements have been reached on the level andschedule of production. Between these extremes existmarketing arrangements with varying degrees of coor-dination. The general trend is toward greater coordina-tion.’

Agricultural cooperatives are active throughoutthe marketing system. Their involvement is strongestin dairy, moderate in fruits and vegetables and grain,and limited in livestock.2 As in the overall agriculturalmarketing system, cooperatives and their membershave differing marketing relationships. Bylawsdescribe members’ responsibilities, and members andcooperatives may agree on other conditions and agree-ments.

This study describes the use of marketing agree-ments by cooperatives and examines possible reasonsand characteristics associated with establishing them.This coordinating link established between membersand their cooperatives is the key element in this analy-

I Hoppe, Robert A., Robert Green, David Baker, Judith Z. Kalbacher,and Susan E. Bentley. Structural and Financial Characteristics ofU.S. Farms, 1993: 18th Annual Family Farm Report to Congress.USDA, Econ. Res. Serv., January 1996 p. 10.

2 Kraenzle, Charles A. “Cooperatives’ Share of Farm Market@Hits ll-year High,” Rural Cooperatives. USDA, Rural Bus.-Coop.Ser., Jan./Feb. 1996 pp. 4-5.

sis. An understanding of when and why marketingagreements are used will help cooperatives and theirmembers in structuring their marketing relationships.

SurveyA survey of marketing cooperatives with total

sales of $15 million or more provided the primaryinformation for this study. Only those marketing coop-eratives with agricultural producers as members wereincluded. The survey covered cooperatives’ 1992 fiscalyear. Cooperatives with sales of less than $15 millionwere not surveyed, so study results do not representall cooperatives. However, the marketing cooperativesincluded in this study accounted for more than one-half of the total marketing sales of all U.S. agriculturalcooperatives.

Cooperatives were questioned about members’requirement to market with their cooperative and inwhat form commitments were obtained. The surveyalso included cooperatives’ financial information, useof contracts with firms supplied by cooperatives, andmarketing activities performed. A study of dairy coop-era tives covering the same time period, providedinformation on dairy marketing operations.3

This report focuses on cooperatives’ and members’use of marketing agreements. With marketing agree-ments, members are required to market with theircooperative, which in turn, provides marketing ser-vices. The distinction between cooperatives with orwithout marketing agreements is an important classifi-cation throughout the report. Cooperatives and mem-bers with marketing agreements agree to coordinateoperations according to the established conditions and

3 Ling, K. Charles, and Carolyn Betts Liebrand, MarketingOperations of Dairy Cooperatives, USDA, AgriculturalCooperative Service, Research Report 133,1994.

time period. For the duration of the agreement, animportant part of the operations of members and coop-eratives are joined.

Cooperatives were also classified by four productclassifications- (1) dairy, (2) fruits and vegetables, (3)grain, and (4) other products such as cotton, livestock,poultry, tobacco, rice, and sugar.

The largest number and lowest median sales werein grain cooperatives (table 1). The other three groupshad fewer cooperatives but higher average sales. Fruitand vegetable cooperatives had the lowest averagenumber of members while the “other products” groupwas the highest. The variety of products included inthis group represents a range of marketing methodsand a wide range in number of members. Livestockmarketing organizations serve large areas with manyproducers. Some livestock cooperatives had more than20,000 members, although their participation variesconsiderably from year to year. Cooperatives withfewer than 100 members were also in this classification.

Tobacco cooperatives were not included in themember tabulations. Tobacco production and market-ing involve large numbers of holders of tobacco pro-duction allotments. Tobacco cooperatives with auc-tions have many more members than othercooperative types because of the widely dispersed pro-duction allotment system.4

Marketing Agreements“Marketing agreement” as used in this report

includes different forms of commitment betweenmembers and cooperatives. A binding agreementbetween member and cooperative was required toestablish a marketing agreement. These arrangementswere adopted either by provisions in a cooperative’s

4 Hunley, Charles L. Role of Cooperatives in Tobacco Marketing,USDA, Agricultural Cooperative Service, Research Report 67,1988.

bylaws that contained a marketing requirement formembers or by a separate contract that required mem-bers to market with their cooperative. In this report,marketing agreements independent of bylaw provi-sions will be called “marketing agreement contracts.”Bylaw provisions apply when a producer becomes amember. The terms of marketing agreement contractsspecify starting dates, length of agreement, and otherterms and conditions.

These two forms of members’ consent are notmutually exclusive. Some cooperatives had both bylawprovisions requiring member marketing and market-ing agreement contracts. Including both in the sameclassification does not imply that they are identical. Amarketing agreement contract is a more flexible formthat can be changed whenever a new agreement isreached.” Bylaws are harder to change and, therefore,would be more general. For cooperatives with both,marketing agreement contracts’ provisions could sup-plement bylaw provisions. While members have lessmarketing freedom, they gain an assured market fortheir products. Cooperatives gain an assured supply ofraw products but are committed to providing services.

Forty-four percent of the surveyed cooperativeshad marketing agreements with their members. Ofthose, 32 percent used only bylaw provisions, 55 per-cent used only marketing agreement contracts, and 13percent used both.

Few marketing agreements were used by graincooperatives. Only six percent required members tomarket with their cooperative. In contrast, fruit andvegetable cooperatives had the highest proportion ofmarketing agreements, at 88 percent, followed by 76percent of dairy cooperatives (table 1).

5 See discussion of marketing agreements in Cooperative MarketingAgreements: Legal Aspects, USDA, Agricultural CooperativeService, Research Report 106.

Table i- Use of marketing agreements and cooperative characteristics by type’

Cooperative type Number ofcooperatives

Proportion withmarketing

agreementsAverage number Median

of members sales

Number Percent Number $million

Grain 306 6 1,380 2 6

Fruit and vegetable 56 88 490 56

Dairy 73 76 1,590 168

Other marketing 87 60 5,970 2 56

1 Included were cooperatives with $15 million or more in sales and individual producers as members. Marketing agreements includedcontracts and bylaw provisions that require member marketing.

2 Tobacco cooperatives were not included in average number of members.

2

Agricultural producers and marketing coopera-tives have a variety of potential reasons for initiatingmarketing agreements - (1) conditions and require-ments existing at the transfer of products betweenmembers and cooperatives, (2) activities performed bycooperatives, and (3) marketing commitments extend-ing from cooperatives’ operations toward the endusers of agricultural products.

Studies of marketing operations describe the mar-keting environment within which each type of cooper-ative operates. Their experiences in establishing mar-keting agreements will be compared withcharacteristics of the market within which the coopera-tives operate.

Transactions Between Membersand Cooperatives

Producers’ marketing decisions begin with obtain-ing the services needed to move their products pasttheir farm gate and into the marketing system.Physical characteristics and production patterns ofvarious agricultural products require different servicesto enter marketing channels efficiently and in goodcondition. The seasonal nature of agricultural produc-tion also intensifies marketing concerns. At harvest,shortages of transportation, storage, or processingcapacity can be costly.

Establishing prior agreements between producersand marketing organizations specifies conditions andneeded services and offers the possibility of coordinat-ed actions to solve marketing concerns. If product char-acteristics and accompanying marketing needs affectmembers’ and cooperatives’ decisions, use of market-ing agreements will be related to products marketed.Product characteristics can create marketing concernsfor both producers and marketing organizations.

Perishability is a marketing concern for many agri-cultural products. They must move quickly to process-ing, storage, or conditioning facilities or directly toconsumers to preserve quality. Other physical charac-teristics also impose handling requirements at thetransfer from farms and ranches to marketing chan-nels. Bulk products such as sugar beets or field-har-vested cotton require nearby processing or handlingfacilities to facilitate efficient harvesting and trans-portation. Matching these needs requires coordinationbetween members and cooperatives.

Distinctive characteristics of speciality agriculturalproducts create potential markets. Special characteris-tics require a marketing channel that will maintainproduct quality and identity. Products’ identity is lost

if they enter the common marketing channel.Marketing agreements can assist in maintaining a sep-arate marketing channel.

Production and marketing efficiency can beincreased if coordination of these functions providessavings or allows new production methods. Functionsmay be integrated in a variety of organizational forms,including coordination between cooperatives and theirmembers. Assurance of product markets or productsupplies can be a concern of agricultural producersand marketing organizations. If many potential mar-keting outlets or product supply sources are available,producers or marketing organizations do not need tomake special efforts to operate. However, when prod-uct supply or demand is in question, producers ormarketing organizations may not be confident inestablishing or continuing operations without firmassurance that the required market or product supplywill be available. Table 2 lists characteristics of market-ing transactions between producers and cooperativesby agricultural product.

Marketing coordination has both benefits andcosts. Once a marketing agreement is established, bothsides have less freedom of independent action. Futureopportunities are limited in certain areas because ofbinding restrictions and forgone opportunities.Uncertainty has been reduced. Members gain confi-dence in their products reaching markets and coopera-tives have fewer concerns about obtaining raw prod-ucts. Both sides accept common goals. The growth andperformance of one party becomes an element in thesuccess of the other. For the period of the marketingagreement, the success of both sides of the agreementis to varying degrees joined.

Grain MarketingGrain cooperatives typically provide grain storage

and conditioning services in addition to a year-roundmarket for grain available for members and othergrain producers. Cash or short-term price contracts arethe usual methods of payment. Grain cooperativesoften include feed operations and other farm supplyservices as an important part of their operations. Grainflows from local cooperatives to federated coopera-tives, processors, exporters, and other domestic users.6Grain producers have significant amounts of graindrying, storage, and transportation equipment andfacilities. Producers’ on-farm storage capacity exceeds

6 Hunley, Charles L., and David E. Cummins, Marketing andTransportation of Grain by Local Cooperatives, USDA,Agricultural Cooperative Service, Research Report 115,1993.

3

off-farm storage capacity.7 Producers with storage andtransportation capabilities can market when andwhere they want and do not depend on local coopera-tives or other grain marketers for services. This inde-pendence provides grain cooperatives and other mar-keters a large number of potential sources for grain.

Grain cooperatives had the lowest level of market-ing agreements (table 1). The self-sufficiency of manygrain farmers and the availability of year-round mar-kets are important factors in explaining the low levelof marketing agreements. For grain cooperatives, grainusually was not the product covered by the agree-ments with members. Cooperatives’ integrated poultryand livestock operations used grain as a feed ingredi-ent, and the products of the integrated operations wereincluded in marketing agreements. In these coopera-tives, most sales were in grain marketing withoutmember commitments. The poultry or livestock opera-tions were operated as separate divisions with membermarketing commitments. Some cooperatives had mar-keting agreements for special-purpose grains.

7 Grain Stocks, USDA, National Agricultural Statistics Service, Jan.1997 pp. 27-28.

Fruit and Vegetable MarketingThe seasonal nature, product perishability, and

range of crops combine to form a complex marketingsystem for fruits and vegetables (table 2). These coop-eratives provide their members with a range of mar-keting and bargaining services. Fruit and vegetablebargaining cooperatives used differing forms of opera-tion. Those studied pooled their members’ productsand negotiated prices, quantities, and other contactterms. The cooperatives made advances and final pay-ments to growers. In other bargaining cooperatives,they negotiated overall terms with processors/buyers,but contracts and payments were arranged betweengrowers and processors/buyers. Cooperatives that didnot take title to products were not included in this sur-vey. Therefore, a part of cooperatives’ bargaining effortis not reflected in this study.*

Cooperatives were involved in both the fresh andprocessed marketing of fruits and vegetables.Payments from cooperatives handing fresh products

8 Iskow, Julie, and Richard Sexton, Bargining Associations inGrower-Processor Markets for Fruits and Vegetables, USDA,Agricultural Cooperative Service, Research Report Number 104,1992.

Table 2- Characteristics of transactions between producers and marketing cooperatives, by product’

Product Characteristics

Grain -Cash market, short-term contracts available all seasons

-On-farm or grain elevator conditioning and storage available

-Alternative marketing points available depending on area and producers’ storage and

transportation capabilities

-Specialty use products may require separate marketing channel.

Fruits and vegetables -Perishable products and seasonal harvest

-Range of products requires various services

-Location, product, and resources of producer determine limited marketing alternatives.

-Availability of cash markets depends on product

Milk -Very perishable product

-On-farm pickup develops marketing relationship

-Changes between marketing outlets possible, but require coordination

Other products Cotton- Range of services needed, ginning required near production

Livestock- Auctions and contracts used, changing industry structure

Poultry- Integrated production

Sugarcane or beet- Relationship with processing or bargaining group needed

1 included were cooperatives with $15 million or more in total sales and individual producers as members. Marketing agreements includedcontracts and bylaw provisions that require member marketing.

4

were most commonly made to growers’ accounts.9Other fruit and vegetable cooperatives used poolingmethods. Products are commingled and producersshare in the receipts based on their participation. Thecombination of seasonal production and perishableproducts presents fruit and vegetable producers with amarketing challenge. On the other side of the transac-tion, fruit and vegetable cooperatives are similarlyconcerned about obtaining quality raw products.

Use of marketing agreements was highest amongfruit and vegetable cooperatives. Table 1 shows 88 per-cent of fruit and vegetable cooperatives required mem-bers to market with them. Fruit and vegetable produc-ers lack the marketing flexibility of grain growers.Fruits and vegetables are perishable and must be han-dled carefully. These cooperatives’ need for an assuredsupply and members’ need for a market for their rawproducts and for marketing services provided a strongincentive for establishing marketing relationships.

Dairy MarketingThe continuing flow of dairy products requires a

marketing system capable of regularly receiving milkfrom dairy farms and providing a safe and secure sup-ply for fluid milk distribution or processing (table 2).In milk marketing, the standard practice is regularmilk pickup at a producer’s farm by a bulk tank truck.Haulers performing this service are often independentcontractors. Either cooperatives or individual produc-ers may arrange for or provide the pickup service.Regardless, dairy farmers continually need a market-ing outlet for their daily production. Similarly, dairycooperatives need a constant milk supply to meet theirproduct needs. This service creates an ongoing rela-tionship between producers and their current market-ing organizations. Unless producers or cooperativesinitiate some action to change these relationships, theycontinue and become long-term.

Dairy cooperatives had the second highest level ofmarketing agreements, at 76 percent (table 1). Theyear-round production of milk does not concentratemarketing decisions into a limited time period.Because of the continuing marketing relationship andyear-round production, the difference between pro-ducers with or without marketing agreements is lessdistinct in dairy marketing.

9 Biggs, Gilbert W. Cooperatives Position in the Fresh VegetableIndustry, USDA, Agricultural Cooperative Service, ResearchReport 82,1989.

Marketing of Other ProductsCooperatives in this classification marketed a wide

range of products. Table 2 lists characteristics of mem-ber-cooperative transfers of selected products.Examples of cooperative auctions with no marketingrequirements existed in tobacco and livestock market-ing. Members didn’t use marketing services until sell-ing decisions were made, then a cooperative or anoth-er marketing channel could be chosen. In contrast, allsugarcane and sugar beet associations had marketingrequirements with members. Members needed anavailable market for their production, and conversely,cooperatives needed the growers’ commitments to bar-gain with sugar manufacturers or to provide an ade-quate supply of raw products for processing coopera-tives.

The range of products included in this group andthe small number of cooperatives representing eachproduct requires care in making generalizations.However, the relationship between product character-istics and marketing services and the use of marketingagreements found in the other cooperative types alsoexisted. Sixty-eight percent of the cooperatives in thisgroup had marketing agreements with their members(table 11, a level lower than for cooperatives marketingfruits and vegetables and dairy products but muchhigher than for grain cooperatives.

SummaryUse of marketing agreements was much lower

among grain cooperatives than other types; six percentversus more than 60 percent for all of the other types.The differences in use of marketing agreementsbetween grain cooperatives and others were stronglyassociated with the marketing services required at theinitial marketing transaction between members andcooperatives.

Grain producers have more marketing optionsbecause they can provide or can obtain transportation,storage, and conditioning services. The other coopera-tive types served producers with generally greaterneeds for marketing services and, therefore, less mar-keting independence.

Cooperatives handling perishable products orproducts requiring special services tended to be orga-nized with marketing agreements. Those handlingproducts with less complex transfers between mem-bers and cooperatives tended to be organized withoutmarketing commitments. Identifying the importance ofproducts’ physical characteristics and associated con-ditions with the use of marketing agreements is not

5

surprising. However, this basic relationship needs tobe considered before other more complex factors thatmay influence marketing agreements are examined.

Cooperative Operations

Marketing cooperatives perform a range of activi-ties-from limited functions of product assembly andbargaining to extensive processing and distributionoperations. Activities performed determine the relativeamounts and types of resources that need to be con-trolled. While bargaining cooperatives have little needfor physical facilities, processing cooperatives investheavily in facilities and equipment.

Investments in fixed assets designed for specializedpurposes are committed for the life of the equipment orfacility. As these investments increase, so does an orga-niza tion’s financial risks because increasing amounts ofinvestments are committed for longer periods of time.Specialized investments in fixed assets have been iden-tified in economic theory as having a role in determin-ing organizational structure.‘0 This suggests that orga-nizations with relatively greater specialized investmenttend to organize in ways that vertically extend businessoperations to decrease their overall risk.

In cooperatives, members’ equity provides a finan-cial base for operations. Members’ marketing commit-ments also are a form of member support. Agreementsand bylaws requiring member participation are exam-ples of devices that join members and cooperatives. Ifthey use marketing commitments to support more cap-ital-intensive operations, this will be shown in differ-ences in resource use between cooperatives with andwithout marketing agreements.

In figures 1 to 4, financial totals are shown bycooperative type and use of marketing agreements.The horizontal bars represent number of cooperatives,total sales, total assets, total equity, and net fixed assetsand are shown as percentages of the totals for eachcooperative type. ‘1 Cooperative groups with and with-out marketing agreements can be compared, and with-in each group, individual values can be compared.

Williamson, Oliver E. The Economics of Capitalism, New York:

Free Press 1985.

Total sales are from all sources, not only marketing. Tatal assetsand total equity are as reported in the cooperatives’ financial

statements. Net fixed assets are cost of all facilities and equipmentless depreciation.

Grain CooperativesGrain cooperatives without marketing agreements

have the bulk of cooperative numbers, sales, assets,equity, and fixed assets. Figure 1 shows the concentra-tion of number of cooperatives and all financial totalsof those cooperatives without marketing agreements.

For grain cooperatives with marketing agreements,the horizontal bars resemble stairsteps as sales are rel-atively higher than the number of cooperatives, assetsrelatively higher than sales, member equity higherthan assets, and fixed assets the highest of all. The 6percent with marketing agreements had 20 percent ofgrain cooperatives’ fixed assets.

Grain cooperatives with marketing agreements hada range of activities. These cooperatives provided grainmarketing services and also used grain in processing oras a feed ingredient. Examples of these activities includ-ed a feedlot, integrated turkey operations, and grainprocessing operations. The marketing agreements withmembers did not necessarily apply to members’ grainproduction but to their participation in supplementaryoperations. In these cases, the majority of membersusing the grain marketing services did not have market-ing agreements, but the minority participating in thesupplementary operations did have agreements. Thesupplementary operations of cooperatives with market-ing agreements required additional resources andaccounted for the differences in financial totals.

Fruit and Vegetable CooperativesIn contrast to grain cooperatives, a high proportion

of fruit and vegetable cooperatives had marketingagreements, and the bulk of sales, assets, equity, andfixed assets were held by cooperatives with marketingagreements. As in grain, cooperatives with marketingagreements had higher average sales, assets, equity, andfixed assets than those without agreements (figure 2).

Fruit and vegetable cooperatives without agree-ments provide a range of marketing functions, includ-ing fresh and processed marketing operations. Figure 2shows that the 12 percent of fruit and vegetable coop-eratives without marketing agreements had only 5 per-cent of total assets and only 4 percent of fixed assets offruit and vegetable cooperatives. The marketing func-tions they performed required substantially fewerfacilities and equipment than the functions performedby the cooperatives with marketing agreements.

Dairy CooperativesMost dairy cooperatives had marketing agree-

ments, and cooperatives with marketing agreementshad the major portion of sales, assets, equity, and fixed

assets. In figure 3, dairy cooperatives with marketingagreements show a different pattern than the graincooperatives and fruit and vegetable cooperatives.Dairy cooperatives with agreements did not havehigher average sales or assets than cooperatives with-out agreements. The 76 percent with marketing agree-ments had only 68 percent of the fixed assets.

Dairy cooperatives perform a range of marketingfunctions which have an important influence on finan-cial resource requirements. The dairy cooperativesanalyzed were also included in a study of dairy mar-keting operations and were classified by marketingfunction performed .I* The marketing operations wereclassified as follows:

1. Bargaining Cooperatives-Operate as bargain-ing associations and refrain from product process-ing/manufacturing.

2. Bargaining-Balancing Cooperatives-Bargain formilk with processors/buyers and manufacture surplusmilk supply into commodity dairy products.

3. Processing/Manufacturing Cooperatives-Process fluid milk or manufacture dairy products.

4. Diversified Cooperatives-Perform a combina-tion of the bargaining, processing/manufacturing, andsupply balancing functions.

Table 3 lists characteristics of these marketingfunction classifications. The processing/manufactur-ing group, with its high investment in plant and equip-ment (fixed assets), had the highest ratio of assets tosales. In the other three functional groups, bargaining

I2 Ling, K. Charles, and Carolyn Betts Liebrand, “VerticalIntegration Patterns of Dairy Co-ops Reflect Changing Markets,”Farmer Cooperatives, USDA, Rural Business-Cooperative Service,Sept. 1995 pp. 18-22.

was an important function. Its effectiveness dependson members’ commitment and requires limited physi-cal facilities. Therefore, cooperatives with only bar-gaining operations required less assets for facilitiesand equipment than processing cooperatives did. Thebargaining-balancing and the diversified classifica-tions have milk processing operations, but a largeshare of their milk volume is bargaining volume andnot handled through their processing facilities.

Figure 5 shows the distribution of sales volume fordairy cooperatives with and without marketing agree-ments. Bargaining and bargaining/balancing coopera-tives account for more than 40 percent of the sales vol-ume of those cooperatives with marketing agreements.Dairy cooperatives performing diversified marketingfunctions account for more than 80 percent of the salesvolume of cooperatives without marketing agree-ments. The dairy cooperatives with marketing agree-ments performed different functions than the coopera-tives without agreements. The importance of the twobargaining groups and their relatively low assetrequirements helps to explain the different financialrelationships that existed in dairy cooperatives com-pared with grain and fruit and vegetable cooperatives.

By adding facilities for processing surplus milk,cooperatives in the bargaining/balancing groupincreased their ratio of fixed assets to sales to a higherlevel than for those cooperatives engaged only in bar-gaining. Ninety-two percent of bargaining/balancingcooperatives had marketing agreements as comparedwith 69 percent of bargaining cooperatives (table 3). Inthis simple comparison, the dairy cooperatives withhighest level of marketing agreements required themost assets compared with sales.

Table 3- Characteristics of dairy COOperatiVeS’ marketing fUnCtiOnS 1

Marketingfunctions

Proportion Average Average Averagewith marketing sales per assets per number of

agreement cooperative cooperative membersFinancial

characteristics

Bargaining

Bargaining/Balancing

Processing/Manufacturing

Diversified

Percent _________ $Mittion _________

69 140 11

92 256 38

78 197 53

76 672 140

770

1,035

475

3,900

High sales to assets,very low or no fixed assetsHigh sales to assets,moderate fixed assetsHighest per memberequity investmentLarge cooperatives,range of functions

1 Included were cooperatives with $15 million or more in total sales and individual producers as members. Marketing agreements includedcontracts and bylaw provisions that require member marketing.

7

Figure I- Grain Cooperatives: Use of Marketing Agreements Based on Cooperative Number, Sales,Assets, Equity, and Fixed Assets

MarketingAgreement

NoAgreement

I+ Sales

Assets

Equity

- Fixed Assets

40 50Percent

60 70 80 90

Figure 2- Fruit and Vegetable Cooperatives: Use of Marketing Agreements Based on CooperativeNumber, Sales, Assets, Equity, and Fixed Assets

MarketingAgreement

NoAgreement

Number

Sales

Assets

Equity

Fixed Assets

I0 10 20 30 40 50

Percent60 70 80 90 1 3

8

.

Figure 3- Dairy Cooperatives: Use of Marketing Agreements Based on Cooperative Number, Sales,Assets, Equity, and Fixed Assets

MarketingAgreement

NoAgreement

Number

Sales

Assets

Equity

Fixed Assets

I0 10 20 30 40 50 60 70

Percent100

Figure 4- Other Marketing Cooperatives: Use of Marketing Agreements Based on CooperativeNumber, Sales, Assets, Equity, and Fixed Assets

MarketingAgreement

NoAgreement

e Fixed Assets

t I50 7 80 90 100

Percent

9

As mentioned earlier, the year-round production are auctions with low capital investments comparedand on-farm pickup of milk creates a continuing mar- with sales and sugar beet processing cooperatives withketing relationship between dairy cooperatives and high capital investments. The pattern shown in figuremembers that doesn’t exist in cooperatives that handle 4 is more irregular than shown in the other classifica-seasonal products. Even dairy cooperatives that did not tions. But an overall relationship of higher averagerequire a marketing commitment had a continuing sales, assets, equity, and fixed assets for cooperativesmarketing relationship that yielded an expected supply with marketing agreements nevertheless existed.of milk. More than 30 percent of the bargaining cooper- Cooperatives without marketing agreements had rela-atives operated without a formal agreement with mem- tively lower investment in fixed assets. The 31 percentbers. The current members shipping milk were a strong of cooperatives without marketing agreements hadenough base to support bargaining operations. only 12 percent of the fixed assets.

Diversified dairy cooperatives had the largestaverage number of members. As these numbersincrease, cooperatives become less dependent on anyindividual producer. Formal commitments maybecome less important from the cooperatives’ view.The importance of dairy bargaining and the continuingmarketing relationship with members accounted forthe different financial patterns of dairy cooperativescompared to other types of cooperatives.

SummaryOverall, cooperatives with marketing agreements

tended to have operations requiring relatively moreassets, especially fixed assets, than cooperatives withoutmarketing agreements. Within grain, fruit and vegetable,and “other products,” organizations with marketingagreements averaged higher sales, total assets, equityand especially fixed assets than other cooperatives.Dairy cooperatives were different and more complex.

Other Marketing CooperativesThe range of products handled and functions per-

formed by other marketing cooperative makes thisclassification more diverse than the others. Included

Grain cooperatives with marketing agreementsusually added a supplementary operation, and themarketing agreements usually applied only to mem-bers involved in the supplementary operation. These

Figure S- Percent of Dairy Cooperatives’ Sales by Marketing Functionand Use of Marketing Agreements

100

90

80

70

60

50

40

30

20

IO

0

Bargaining

Bargaining/Balancing

Processing

Diversified

No Agreements Marketing Agreements

10

added operations using greater investments weredirectly linked to marketing agreements. Fruit andvegetable cooperatives with and without marketingagreements were not involved in substantially differ-ent functions, but those cooperatives with agreementswere involved in more asset-intensive operations. Withcooperatives marketing other products, marketingagreements were usually associated with cooperativesinvolved in product processing.

Dairy cooperatives as a group have joint objectivesof product bargaining and use of processing/manufac-turing activities to increase members’ returns.Bargaining operations introduced a different financialtrend, and dairy cooperatives with marketing agree-ments did not require greater facilities. The differencein marketing functions performed by dairy coopera-tives helped explain their different pattern of resourceuse. Characteristics of the ongoing patronage relation-ship of dairy cooperatives were also important. Indairy, year-round marketing, on-farm milk pickup,and large memberships bring different factors into themember-cooperative relationship.

Coordination Between Marketing Levels

Cooperatives reported on the proportions of salessold by long-term contracts, short-term contracts, openmarket sales, and other methods. Long-term contractsare a year or more in length, short-term contracts areless than a year, and open market sales are made at

prices and terms available at the time of sale. Othermethods included direct sales to consumers and salesthrough agents.

Considering all cooperative types, cooperativeswith marketing agreements made, on average, 19 per-cent of their marketing sales with long-term contracts(table 4). Those without member arrangements aver-aged only 2 percent of sales with long-term contracts.Among those with marketing agreements, dairy coop-eratives had the highest level of long-term contracts,an average of 29 percent of sales. Grain cooperativeshad the lowest level of long-term contracts.

In the earlier discussion of member-to-cooperativetransfers, physical characteristics of the agriculturalproduct being marketed were related to use of market-ing agreements. At the next marketing level of cooper-ative to customer, the physical form of many productschanges. Processing changes raw products into a formless perishable and easier to transport. For these prod-ucts, cooperative-customer exchanges have more free-dom in designating time and place of delivery.However, perishable products, such as fluid milk andfresh fruits and vegetables, continue to require specialservices throughout the marketing system. For dairycooperatives, the majority of total sales is in raw wholemilk.” Cooperatives handling these products continueto face the same marketing concerns as existed at themember-cooperative exchange.

I3 Ling, K. Charles, and Carolyn Betts Liebrand, MarketingOperations of Dairy Cooperatives, p. 6.

Table 4- PrOpOrtiOn of COOperatiVeS’ Sales from different arrangements, by type and marketing agreementstatus1

Marketing Long-term Short-term Open market OtherCooperative type agreements contracts contracts sales methods

Percent of marketing sales *

Grain Required 0 53 39 8

Not required 2 43 55 0

Fruit and vegetable Required 14 13 69 4

Not required 0 8 92 0

Dairy Required 29 32 38 1

Not required 1 53 41 5

Other marketing Required 18 2 7 51 4

Not required 5 13 75 7

Total Required 19 2 8 50 3

Not required 2 40 57 1

1 Included were cooperatives with $15 million or more in total sales and individual producers as members. Marketing agreements includedcontracts and bylaw provisions that require member marketing.

* Percent of marketing sales is calculated as an unweighted average of percentage distributions.

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Dairy cooperatives with member agreements hadthe highest proportion of sales made with long-termcontracts. For bargaining cooperatives that may notphysically handle the producers’ product, the transferfrom cooperative to milk processor/buyer representsthe members’ production direct from the farm.Concerns related to product perishability and a contin-uing milk supply still apply.

Figure 6 shows the use of various sales methods bydairy cooperatives with marketing agreements by func-tions performed. Those without marketing agreementsare not included because of the limited number ofcooperatives and almost no use of long-term contracts.Long- and short-term contracts accounted for 90 per-cent of bargaining cooperatives’ average sales. Thesecooperatives lack processing facilities and rely on con-tracts and minimal amounts of open market sales. Inthe bargaining/balancing classification, processingfacilities allow these cooperatives to process excessfluid milk supplies into dry milk powder and otherproducts. While raw whole milk is the principal prod-uct, processed products are also important. Processingclassification includes cheese manufacturing, fluid milkprocessing, and manufacturing dry milk powder. Infigure 6, the proportion of products sold under short-

term and long-term contracts drops sharply from bar-gaining to balancing and then to processing. This dropis explained by the shift in sales from raw whole milkto processed products from bargaining cooperatives tothose involved in processing and manufacturing. Thecombination classification includes large dairy coopera-tives performing a range of marketing functions,including processing and bargaining. Both processedand raw products are sold. The sales breakdown is sim-ilar to the bargaining/balancing cooperatives that alsosell processed and raw products. In dairy cooperatives,the handling of perishable products contributes to thehigh level of contracting between cooperatives andtheir customers, as compared with the other types ofmarketing cooperatives.

Coordination at one marketing level creates adefined flow of products moving to the next marketinglevel. Further coordination at the next step would con-tinue the smooth movement of products toward thefinal consumer. For the surveyed cooperatives, market-ing agreements at the member-cooperative level wererelated to greater use of long-term contracts at thecooperative-customer level. Cooperatives without mar-keting agreements with their members were less likelyto have long-term contracts with their customers.

Figure 6 Sales Conditions of Dairy Cooperatives with Marketing Agreementsby Marketing Functions

100

90

80

70

60

50

40

30

20

10

0

Other Method

Open Market

Short-term Contract

Long-term Contract

Combination Processing Bargaining Bargaining/Balancing

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Observations

This analysis used a survey over a range of cooper-ative types to identify factors associated with market-ing agreements. The factors identified do not directlyexplain the decisions that members and cooperativesmade jointly for coordinated marketing. However, thefactors do give an understanding of the marketing set-ting in which cooperatives and members operate andindicate when their decisions will lead to coordination.

Marketing systems can differ from product toproduct. Factors such as products’ physical character-istics influence the need for marketing services and theoverall complexity of transactions between membersand cooperatives. This complexity is reflected in high-er costs. Negotiations, areas of uncertainty, and marketrequirements increase costs. Focusing on the “cost” ofexchanges between members and cooperatives or atany other point in the marketing channel identifiespoints where changes are most likely to occur.Complex transactions (i.e., high-cost) should beviewed as points in the marketing chain where newideas will be tried. Those participants in the marketingsystem who are driven to achieve lower costs willdecide when and where changes will occur.

Increased coordination is an important marketingsystem change. This analysis used marketing commit-ments between members and cooperatives as a mea-sure of coordinated marketing. Considering a widerrange of relationships between members and coopera-tives would be useful in future examinations. Thecooperative-type organization is a flexible form.Simple organizations with open memberships andhighly structured organizations with limited member-ships are used. This study‘s survey approach does notcapture all the conditions and details included in indi-vidual marketing agreements. A case study approachcould be used to examine the decisions that led to jointmarketing agreements.

Marketing coordination has been discussed asinteractions between members and cooperatives, withno particular allowance made for the organizationalform. Cooperatives are controlled by their members.How can members negotiate with themselves? Themarketing coordination decision presented in thisstudy centers on a member’s tradeoff between market-ing independence against reduced marketing uncer-tainty. The basic decision does not depend on the orga-nizational form providing the coordination. Thedecision as to what form of coordination is the mostappropriate is regarded as separate from the decision

to coordinate production operations more closely withmarketing functions. Coordination arrangementsextend from individual producers expanding into mar-keting functions through their individual efforts toprograms of marketing organizations integrating intoproduction functions.

Producers facing a common problem may findcooperatives are an appropriate organizational form.The member-controlled nature may offer members dif-ferent paths in which to participate in overall deci-sions, but this participation does not change the agree-ment between the production entity and the marketingentity. The exchange of marketing independence forless overall market risk remains the basic decision inwhatever form marketing coordination takes. A mar-keting agreement allows both sides to proceed withgreater certainty. A new relationship develops betweenmembers and cooperative. Both may plan within anew framework by coordinating their operations. Bothgive up flexibility in their own operations, but produc-ers gain a more assured market and the cooperativesgain a dependable source of product supply. Growthand success will, to varying degrees, be shared.

Both members and cooperatives enjoy the greatestfreedom of operation without any form of marketingcoordination. Entering into a marketing agreementreduces operating freedom but also reduces risk forthe conditions included in the agreement. Membersand cooperatives face each other across a marketingtransaction and the conditions that concern both willform the basis for a new marketing arrangement.

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