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Understanding : Agricultural Marketing Cooperatives Information Report 45, Section 15

processing products for the consumer or Marketing cooperatives are found in industrial markets. every region of the United States Marketing cooperatives enable produc- United States ers to 1) correct failure where Department of and handle most types of are too low or buyers have left the market; . 2) provide a not available other- Rural Development wise; 3) gain market power (negotiating power) against much larger buyers; 4) Rural spread risks and costs; and 5) have and Cooperative enough volume to operate a processing Service plant efficiently or enough to meet the A marketing cooperative is a business demands of buyers. May 1998 owned by farmers to collec- Marketing cooperatives are found in Reprinted tively sell their products. It allows produc- every region of the United States and han- January 2000 ers to accomplish collectively functions dle most types of farm product. The impor- they couldn’t achieve on their own. Most tance of these cooperatives to particular agricultural producers have relatively little sectors varies. Cooperatives power or influence with large - account for 86 percent of total farm es or food companies that purchase their of all milk marketed in the United States; 41 commodities. Joining with other producers percent of the ; 40 percent of the in a cooperative can give them greater and oilseeds; and 20 percent of the power in the marketplace. In addition, farm value of all fruits and vegetables. cooperatives can give producers more Agricultural bargaining cooperatives are Ag control over their products as they make a special type of marketing cooperative. Marketing They negotiate with buyers, usually proces- Co-ops their way to consumers by allowing them to bypass one or more middlemen in the sors, on behalf of their producer-members market channel. Farmers capture more of for and other terms such as quality the returns that would otherwise go to oth- and timing of delivery. Representing large ers. volumes of products gives bargaining associations more market power and What Co-ops Do allows them to be more effective in nego- to the Agricultural marketing cooperatives per- tiations than individual producers. These consumer form many functions. They may assemble cooperatives usually do not own the farm the products of a number of producers into commodity and usually do not physically larger lots to facilitate more efficient han- handle the product. Farmers sell directly to dling and more competitive , and then processors at the price negotiated by the grade and ship these lots to market. Some cooperative. Bargaining cooperatives are marketing cooperatives perform first-stage most common in processing fruits, veg- processing such as ginning cotton or hull- etables, specialty crops, dairy, and ing nuts while others vertically integrate by beets.

1 How Co-ops Are Organized How Co-ops Operate Bargaining coopera- Marketing cooperatives may be classified Although a few cooperative according to how they are organized, and commission agents exist, most coop- tives are most common which is usually based on membership eratives have traditionally acquired and in processing fruits, affiliation, control, and often, area covered. marketed commodities in one of two ways There are three main types of organiza- — buy/sell or pooling. vegetables, specialty tional structure: centralized, federated, and Buy/Sell. This method is the way most crops, dairy, and sugar mixed. noncooperative operate. In centralized cooperatives, membership The producer is paid cash at the time of beets. is made up of individual producers. Control delivery to the cooperative. The coopera- and product volume flow from producers tive resells the product after grading, sort- directly to the cooperative. Patronage ing, packing, or performing other types of refunds flow from the cooperative back to value-enhancing activities. After the coop- the producer. These cooperatives usually erative resells the product, any profits are serve a local area or community. Their returned to producers based on the functions are often limited to the first few amount of business they have done with steps in marketing, such as assembly and the cooperative. grading. A few centralized cooperatives are One problem with buy/sell is that it larger, operate in several States, and pro- reduces the flexibility of the cooperative in vide more complex functions, such as food making marketing decisions because it . Most cooperatives are cen- does not know far enough in advance how tralized. much product will be available. Thus, it Federated cooperatives have local, cen- may be difficult to respond to buyers in the tralized cooperatives as members, which in market. turn are owned by local producers. Feder- This problem is greatly reduced by the ated cooperatives are often quite large and use of marketing agreements or forward cover wide geographic areas. Control rests cash which allow the producer to with the local cooperatives that make up with the cooperative for future the federation. delivery. The cooperative can better plan a The federation sometimes acts only as a marketing strategy knowing how much sales agent for its members. In some product will be available. These contracts cases, cooperatives provide the more can take several different forms and have complex manufacturing functions. different terms concerning pricing and Finally, a small number of cooperatives delivery. All contracts obligate the producer have structures which combine centralized to deliver an agreed amount of product to and federated features and have as mem- the cooperative. bers both individual producers and local The buy/sell method of marketing pays cooperatives. These are usually large orga- producers for their product at time of deliv- nizations structured to fit unique situations ery rather than later when marketed. Non- in their particular . cooperative firms also use this method to

2 acquire and market products, but coopera- Variations tives offer their members an assured mar- Many variations allow marketing coopera- Pooling is a way to share ket and distribute back to the members tives to meet specific goals or respond to risk, expenses, and rev- any earnings from operations. specific situations. Pooling. Cooperatives also use “Pooling” Marketing Agencies-in-Common (MACs). enue with other produc- in marketing. The of members This a strategic alliance among marketing ers. is “pooled” or marketed together (it may or cooperatives—similar to federated cooper- may not involve the physical mixing of atives—which join to market under a com- product). All marketing decisions are made mon agreement. MACs serve as marketing by a pool manager. After deducting operat- agents for their members to achieve econo- ing costs from the pool proceeds, the aver- mies of size in marketing like or comple- age net price is paid to the members. mentary products. Member cooperatives Some pools pay adjustments for quality retain operational independence in other and others for transportation. Pooling is a areas. MACs also share large costs associ- way to share risk, expenses, and revenue ated with developing names and pro- with other producers. vide a way to acquire and sell nonmember A producer will usually receive an product to expand product lines. MACs can “advance payment” upon delivering the operate in domestic or export markets. The to the product to the pool. As the product is mar- agency will usually have exclusive rights to consumer keted, the costs of operating the pool are sell members’ products in some or all mar- deducted and “progress payments” are kets. made to pool members. A final “equaliza- Export Trading Companies (ETCs). An ETC tion payment” reflects both the remaining is a marketing agency-in-common formed proceeds from the pool and any differenc- specifically for the joint exporting of prod-

es in the quality of product delivered by ucts. Cooperatives, -owned compa- Food Store individual producers. In this way, produc- nies, commodity associations, and others ers receive an average price for their com- can be part of an ETC. Under the Export Food Store modities, which is often higher than prices Trading Company Act of 1982, ETCs can they would have received using the buy/ apply for an export certificate of review Middle man sell method. (COR) which provides limited antitrust Food FoodStore Store Chain Producers also benefit from the risk immunity. While cooperatives currently have being spread among all members of the limited antitrust immunity under the Capper- pool and from the ability to use the market- Volstead Act, the COR provides a measure ing expertise of the cooperative. The coop- of protection when noncooperative firms erative is more effective in the market as a are included in the ETC. Since 1983, 45 result of having a known volume and qual- agricultural marketing cooperatives have Producer ity of product to market; and it therefore received antitrust preclearance to jointly Control can experience some degree of market export their products in 13 ETCs. power. Cooperatives have used ETCs to increase their negotiating strength (and

3 their market power) with foreign buyers, stock and delivery rights in a new or exist- MACs serve as market- improve margins by bypassing inter- ing new-generation cooperative. Over time, mediaries, facilitate foreign market develop- delivery rights may increase in value. How- ing agents for their ment by spreading the cost among ever, producers normally have the right to members to achieve members, and manage the risks associ- sell their membership and delivery rights to ated with international . other qualified producers and capture the economies of size in New-Generation Cooperatives. These are increase in value. marketing like or com- cooperatives with special and In many traditional cooperatives, mem- operational features designed to allow pro- bership is open to anyone plementary products. ducers to capture a greater share of the wanting to sell product and usually requires returns from the value-added activities. little or no up-front investment. Examples of Keeping these value-added activities local new-generation cooperatives include Dako- also aids the rural economy by generating ta Growers Pasta Company, North Ameri- jobs. can Bison Company, and American Crystal The special ownership and operation-al Sugar Company. characteristics of new-generation coopera- For more information about marketing tives are significantly different from those of cooperatives, contact: more traditionally structured marketing cooperatives. First, new-generation coop- Rural Business-Cooperative Service eratives typically sell stock that have deliv- Stop 3254 ery rights and obligations for a specific Washington, DC 20250–3254 quantity of product. These delivery rights Phone (202) 720–3350 result in the cooperative’s membership FAX (202) 690–2750, being open only to those who purchase the Attention: CDD stock. http://www.rurdev.usda.gov/ Second, producers often must make a cooperatives.html substantial, up-front investment to purchase

To see this and other USDA coop- erative publica- tions online, visit: http://www.rurdev. usda.gov/rbs/pub/ cooprpts.htm This circular is one of a continuing series that provides training information and presentations for To order hard cop- persons who may or may not be familiar with the cooperative form of business. This series provides the ies, e-mail: basic background material they need and in a form that can be readily adapted, with limited preparation time, to a lecture or other presentation. coopinfo@wdc. The U.S. Department of Agriculture (USDA) prohibits discrimination in all of its programs and activities on the basis usda.gov of race, color, national origin, age, disability, and where applicable, sex, marital status, familial status, parental or telephone: status, religion, sexual orientation, political beliefs, genetic information, reprisal, or because all or part of an indi- vidual's income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) 1-800-670-6553. Persons with disabilities who require alternative means for communication of program information (Braille, large print, audiotape, etc.) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write to USDA, Assistant Secretary for Civil Rights, Office of the Assistant Sec- retary for Civil Rights, 1400 Independence Avenue, S.W., Stop 9410, Washington, DC 20250-9410, or call toll-free at (866) 632-9992 (English) or (800) 877-8339 (TDD) or (866) 377-8642 (English Federal-relay) or (800) 845-6136 4 (Spanish Federal-relay). USDA is an equal opportunity provider and employer.