Understanding Cooperatives: The Structure of Cooperatives Cooperative Information Report 45, Section 3

Geographic Territory Served Cooperatives exist in nearly every Cooperatives can differ in structure, business sector and are organized in depending on the size of the area served: United States local or regional. Department of a variety of ways. Like other busi- Local cooperatives typically operate in a Agriculture nesses in our economy, they range in single State, often within one or two coun- Rural Development ties. Individuals are the members of these size from organizations with only a local cooperatives. Cooperative few member-owners to large and Regional cooperatives usually serve an Programs entire State or a number of States. They complex organizations with thou- can have operations that are nationwide or October 1994 sands of member-owners. The way a that cover major portions of the United Reprinted States. Some regional cooperatives also April 2011 cooperative is organized determines have international operations with sales how it is operated, managed, and and members in more than one country. controlled by its members, and the Governance or Control types of benefits offered. Structures Based on membership structure, coopera- tives can be classified as centralized, fed- Cooperative structure can be classified into erated, or mixed. five types as follows: geographic, gover- A local cooperative is a centralized nance, functions, financial, and other cooperative — individual producers make arrangements. Each will be defined and up the membership. A centralized regional discussed in this circular. may serve members in a large geographi- cal area, and have one central office, one board of directors, and a manager (chief executive officer) who supervises the entire operation. Business may be conducted through several branch offices. A federated cooperative is a cooperative of cooperatives. The members of a feder- ated cooperative are local cooperatives, each operated by a manager responsible to a board of directors. Each local associa- tion in a federated cooperative is a sepa- rate business entity that owns a membership share entitling it to voting rights in the affairs of the regional.

Regional Cooperative 1 The federated cooperative has its own increasing problem for farmers acting inde- Based on member- hired management and staff, and a board pendently. Few farmers produce in quanti- of directors elected by and representing ties needed to deal directly with large ship structure, the local associations. wholesalers or retailers. Marketing coop- cooperatives can be A mixed cooperative is a combination of eratives provide an increasing variety of the two — their members may be individual off-farm processing and marketing services classified as cen- producers as well as local cooperatives. for about one-fourth of all products that tralized, federated, farmers produce. Functions Performed Marketing cooperatives help farmers or mixed. Cooperatives may perform one or more of produce and process quality products to these functions for members: market specification. Cooperative market- u Marketing products; ing includes the operation of grain eleva- u Purchasing supplies; and tors, milk plants, wool pools, cotton gins, u Providing services. livestock markets, vegetable markets, and

COOPERATIVE nut- and fruit-packing plants. Some market- Marketing ing cooperatives include the coordination The need to meet consumer demands and of processing, canning, drying, blending, FARMER FARMER FARMER expand markets for products presents an concentrating, extracting, freezing, or con- Centralized sumer packaging of animal and animal products, such as dairy, fish, meat, and poultry and the same for fruit, nut, and veg- etable products, and many other products COOPERATIVE in integrated organizations. Marketing cooperatives enable farmer- members to extend control of their prod- LOCAL LOCAL COOPERATIVE COOPERATIVE ucts as long as the cooperative retains physical or legal title to a commodity han- dled through processing, distribution, and FARMER FARMER FARMER FARMER sale. Federated Some marketing cooperatives also can be called bargaining associations, which may not handle the actual product but rath- er act as the selling agent on behalf of the member.

COOPERATIVE Purchasing Farmers first turned to cooperatives as economic tools to gain advantage of qual- ity and quantity of farm production supplies LOCAL Mixed FARMER COOPERATIVE such as feed, fuel, fertilizer, and seed. These early efforts often became business- es having full-time managers and ware- FARMER FARMER houses to handle other production supplies and services such as farm chemicals, ani-

2 mal health products, fencing, building sup- tives provide a number of specialized ser- plies, construction contracting, automotive vices assisting farmers in their business The cooperative can accessories, etc. such as credit, electricity, and telephone Most purchasing cooperatives have affil- service. be most effective by iated with other cooperatives, often through serving its members' regional and interregional cooperatives. Financial These efforts reduce farmer costs and Cooperatives are incorporated as either needs. strengthen purchasing power through own- stock or nonstock organizations. The type ing large-scale facilities, such as petroleum of capital structure is specified in the arti- refineries and feed mills. cles of incorporation. One of a purchasing cooperative’s If the association is a capital stock orga- objectives is to reduce production costs for nization, members receive stock certificates members through quantity purchasing, as evidence of their ownership interest. manufacturing, and distributing, procuring More than one type of stock may be issued, quality products, and providing related ser- but usually no more than two types are nec- vices as needed. Distribution to producer essary. Most stock cooperatives issue one members is a major concern at the local share of common stock per member to level because added services are needed. show membership. Preferred stock is Another objective is to provide a depend- issued to show additional capital contribu- able supply of quality products for mem- tions. (Common stock is usually the voting bers. stock; preferred stock is generally nonvot- Many cooperatives now perform both ing.) marketing and purchasing functions, If the association is a nonstock organiza- although they started as single-function tion, it issues some kind of certificate to organizations. show capital contributions of members. Two types are usually used — a membership Service certificate as written proof of the right to Some agricultural service cooperatives pro- vote and capital certificates in a manner vide services related to the production and similar to the way stock cooperatives use marketing of farm commodities. Others preferred stock. provide general services. Related service cooperatives offer unlim- Other Structural Arrangements ited possibilities and are used in ever-wid- ening circles to solve mutual problems and Subsidiary provide specialized services that affect the A corporation organized, owned, and con- location, form, or quality of farm products trolled either totally or partially by a parent or supplies for members. Services may be cooperative. Its purpose is to assume cer- part of the operation, or they may be per- tain duties and functions of the parent formed by separate cooperatives. cooperative. Examples of services offered by farm supply co-ops include: recommending and Marketing Agency-in-Common applying fertilizer, lime, or pesticides; cot- Organized by two or more marketing coop- ton ginning; animal feed processing; and eratives to market products or provide ser- crop harvesting. General service coopera- vices for member cooperatives. It does not

3 physically handle products, and it generally records. The cooperative then pays patron- does not take title to them. Its sole respon- age refunds on the basis of the agent’s sibility is to arrange for the sale of its mem- records. bers’ products. Private Dealers Joint Venture The dealer, as a franchise, keeps records. If An association of two or more participants, the franchiser cooperative makes money persons, partnerships, corporations, or and pays patronage refunds, these go to cooperatives to carry on a specific econom- the dealer’s customers and the dealer is ic operation, enterprise, or venture. The paid a commission on sales. identities of these participants remain sepa- rate from their ownership or participation in Conclusion the venture. Cooperatives are classified as a way to easily identify the nature of the business. Holding Company The classifications do not mean that one A corporate entity with a controlling owner- type may necessarily be better or worse ship in one or more operating companies. than another. It simply means that there are The degree of ownership can vary widely, distinguishing differences among the types, as long as the holding company can exer- and shows the wide variety of cooperatives cise control through the operating compa- and the differences in their operations, ny’s board of directors. Usually the holding management, control, etc. company generates no revenues from What is important for cooperative mem- operations; income is limited to returns bers to understand about cooperative from investments in the operating compa- structure and their own organization is: nies. u What type of cooperative it is; u How it is structured; and Contract Agent u How the cooperative, whatever its clas- A county or community cooperative may sification, can be most effectively used by organize, owning nothing but contracts and its members for serving their needs and To see this and paying only the money to hire an agent to achieving objectives. n other USDA coop- handle the goods and keep patronage 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 education To order hard cop- resource 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.