EM 8665 • Revised March 2004 $4.50

A Brief Introduction to Agricultural

SERVICE

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MARKETING

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SUPPLY

OREGON STATE UNIVERSITY EXTENSION SERVICE Contents

Why do something cooperatively? ...... 3

The nature of a ...... 4

Key people for success ...... 4

Avoiding common mistakes ...... 5

Toward making the cooperative a success...... 6

Contrasting a cooperative with other forms of business...... 6

Historical background...... 10

Common cooperative functions ...... 14

Underlying economic principles that may invite creation of cooperatives ...... 16

Prospective strengths and weaknesses of a cooperative business form...... 18

Equity and debt considerations ...... 23

Legal organization ...... 27

Cooperative management characteristics ...... 28

The nature and role of cooperative directors ...... 32

Membership responsibilities ...... 33

Cooperative influences on public policy ...... 34

Relationships and linkages between independent, federated, and centralized cooperatives ...... 35

Sources for additional information ...... 36

Acknowledgments ...... 41

Prepared by Larry Burt, Extension economist, Oregon State University. 3 A Brief Introduction to Agricultural Cooperatives L. Burt

his publication is designed The historical background of cooperative organizations as well to help you learn more cooperatives, with an emphasis as Web sites. about agricultural coopera- on the cooperative movement in tivesT or to help you think through the United States, including Why do something the process of organizing and impacts of the Capper-Volstead cooperatively? operating such a business. While Act and recent developments A compelling need might lead you the focus is on creating a new Common cooperative functions, to consider forming an , many of the ideas may including marketing, supply, and cooperative. Perhaps you need to be of interest to those thinking services expand in existing markets or about reorganizing or expanding an Underlying economic principles develop new markets beyond the existing agricultural cooperative. that invite the creation of - bargaining power or supply poten- Likewise, many of the concepts eratives—elements of market tial of your business. Or, you might apply to any type of cooperative imperfection and the potential for feel group effort is needed to secure business—agricultural as well as increasing member returns lower-cost inputs or larger nonagricultural. through collective action As you consider an agricultural cooperative, keep in mind that not Potential benefits and limitations all business concepts fit well into a of cooperatives What is a cooperative form of business. It is Equity and debt considerations, cooperative? important to explore alternative including unique equity invest- forms of business for meeting your ment aspects, sources of equity, ➢ It’s owned and financed economic goals. Perhaps a standard and equity redemption systems by its members, who or limited liability Legal organization, with empha- also are its customers. company might be better able to sis on articles of incorporation ➢ Its purpose is to provide meet your goals and serve the and bylaws services to members at business needs of potential coop- Characteristics of cooperative the lowest possible erative members. After a short management—its role, functions, discussion about why someone and tools cost—not to generate might want to act cooperatively, the highest possible The nature and role of coopera- this publication provides a very return to investors. brief overview of alternative forms tive directors as policymakers ➢ of business. and individuals It is controlled by This publication explores Membership responsibilities members, usually on a important considerations in devel- Cooperative influences on public one-person, one-vote oping an agricultural cooperative: policy basis. The nature of a cooperative, key Relationships and linkages ➢ Profits are distributed to elements for success, and between independent, federated, members based on how common mistakes to avoid and centralized cooperatives much they use the A comparison with other busi- cooperative, not on how At the end of this publication, ness types and a discussion of much they’ve invested cooperatives’ primary operating you will find sources for additional in it. procedures information—local and national 4 The nature of a cooperative

quantities of inputs. Additional services or higher quality might be Patronage more readily available with joint Use of a cooperative by its members efforts. Perhaps you simply need to increase the net income generated Equity by your business. Money directly invested in a cooperative Whatever the need, creating a Net returns or net savings (profits) producer cooperative requires a The amount remaining after a cooperative subtracts its cautious approach. If done prop- costs from its income erly, a cooperative can give Patronage dividends and ranchers a competitive edge by Key terms improving market returns or Distribution of net returns to members based on how reducing operating costs. But, if much each member uses (patronizes) the cooperative done improperly, it can lead to disappointing financial returns. a day-to-day basis by professionals necessary for cooperative growth The nature of who function under policy set by and enhanced returns to members. a cooperative the board. Net income (revenues above total In other significant ways, costs) usually is returned over time A cooperative is a special type of cooperatives are quite different. to members as patronage dividends. corporation that is owned and Differences stem from the nature of Benefits typically are tied to the controlled by those who use its the cooperative’s purpose, owner- amount of use, not the amount services. In furtherance of their ship, control, and distribution of invested. Returns to members’ mutual benefit, members finance benefits. The intent of a coopera- equity investment in the coopera- and operate the business. By tive is to provide its services to tive usually are limited in order to working together, members may be members at the lowest possible focus attention on returns based on able to meet objectives that they cost—not to generate the highest use of the cooperative’s services. could not meet as individuals. possible return to investors. Yet, Most cooperatives are controlled Hence, the financial returns to sufficient revenue must be gener- democratically on a one-member, individual operations may be ated to meet continuing capital one-vote basis. However, some greater than they would be without needs. cooperatives permit a limited cooperative effort. As originally conceived, coop- proportional vote based on the In many respects, a cooperative eratives were to be operated on a amount of use members make of is like any other partnership, nonprofit basis. The term “profit” the cooperative’s services. corporation, or limited liability was avoided. Instead, revenues business. The physical facilities, above costs were called “savings.” functions, and business practices Key people for success A portion of savings was retained may be identical. Like any other For a cooperative business to be by the cooperative, and the remain- corporation under state law, a successful, the members, as user- ing amount was returned to mem- cooperative has articles of incorpo- owners, must be active through bers as patronage dividends. ration and bylaws that govern its their patronage, and they must be Today, most cooperative leaders actions. It has an elected board of willing to make a capital invest- no longer avoid the word profit. directors and usually is managed on ment in the business and to Instead, they speak of profit as Avoiding common mistakes 5

participate in decision-making. In reality, forming a cooperative Furthermore, cooperatives They must be interested in the doesn’t eliminate the limitations cannot be expected to help mem- affairs of the cooperative, present with which businesses must con- bers sell their surplus or poor- ideas for improved performance, tend. Cooperatives are subject to quality products. Neither can a and promote the cooperative’s use the same economic forces, legal cooperative be expected to sell the by others who could benefit from it. restrictions, and interpersonal highest quality or most complete Success also requires outstanding relations as other businesses. services at rock-bottom prices. management. The board of direc- Even when a cooperative Instead, cooperatives need to tors, elected by members from restricts the volume of product provide “bang-for-the-buck” within the membership, provides delivered from its members, it supplies and services to their leadership by overseeing the cannot control their production. members. cooperative’s business affairs and Neither have cooperatives been While a cooperative is subject to establishing broad policies. Com- very successful at pooling labor the same interpersonal problems as munication with the cooperative’s resources, providing machinery, or any business, additional problems professional management and with production activities. The inability typically occur, stemming in part members is critical. Professional to control production means that from the fact that the cooperative is management must be well equipped cooperatives can’t fix prices in the owned by many of those who to supervise and manage employ- marketplace. In most cases, the patronize it. Differences in business ees, capital, and physical resources; availability of substitute products acumen and objectives may put routine business activities; planning enables customers to avoid paying members at odds. and goal setting; and implementa- artificially high prices. Also, tion of board policy. growers frequently can market The importance of the cooper- outside the cooperative and, in the ative’s employees should not be short run, still benefit from prices Be realistic overlooked. Beyond job compe- fixed by the cooperative. ➢ Don’t expect a market- tence, employees need to under- A cooperative may not be able to ing cooperative to be stand the cooperative’s purposes, obtain market power. Frequently, able to control mem- objectives, and operating proce- member-patron ability to generate bers’ production or to dures. Well-educated and trained equity capital is not sufficient to employees can improve member acquire the size and diversification raise prices for their relations; enhance the cooperative’s needed. products. image with customers, vendors, and Forming a cooperative generally ➢ A cooperative can’t regulators; and increase the general doesn’t allow producers to elimi- help members sell public’s understanding of the nate marketing functions needed to surplus or poor-quality cooperative. move products to the consumer. products. However, a cooperative may be Avoiding common able to influence market structure— ➢ Pay attention to people mistakes where and how marketing functions problems. Competing are performed. Marketing functions Sometimes people believe that objectives may limit a may be replaced by the cooperative. forming a cooperative will auto- cooperative’s ability to Hence, cooperative efforts may matically solve business problems meet its potential. improve inefficient marketing faced by individual operations. practices. 6 Toward making the cooperative a success

Directors of cooperatives business. That person can help members expressing themselves. frequently must choose between committee members seek members, Furthermore, members must building the financial strength of choose a site, develop facilities, recognize that they have a responsi- the cooperative through retained devise legal structures, acquire bility to participate in financing the patronage refunds and returning capital, finance operations, and operations of the cooperative and to savings to members, who may want enhance communications. An educate those outside the coopera- to receive a short-term benefit for emphasis on communication can tive environment—other busi- investment in their own operations. make members feel informed and nesses, government personnel, and Investing in the cooperative may involved, thus encouraging them to the general public. help it meet its full potential in the invest time and money in the longer run. cooperative as well as to patronize Contrasting a Limited objectives of some it. cooperative with members may restrict the cooper- A mindset that encourages sound other forms of ative’s volume and opportunities to business practices lays the founda- reduce per-unit costs. Additionally, tion for success by developing an business the democratic process, especially appropriate accounting system, In many respects, a cooperative is when large numbers are involved, preparing operating and capital the same as any other business may delay decision-making and improvement budgets and financial entity. It is proprietary in the sense restrict the expansion of business reports, communicating to the that it is owned by its investors and activities. membership on a regular basis, and is operated privately, as opposed to conducting long-range planning being a public institution. It seeks Toward making the efforts. to increase the economic well- cooperative a success Continuing education is vital to being of its owners. the successful operation of a A major difference lies in how Frequently, cooperatives that cooperative. A democratic, major- cooperatives distribute net income enhance members’ competitive ity-rule approach to governance (profits). Cooperatives return net edge exhibit the same key ele- requires an involved and enlight- income to their investors based on ments. In the beginning, the use of ened membership. The cooper- investor patronage (usage of professional advisors (frequently a ative’s responsiveness to member cooperative services or purchase manager) and committee structures needs depends on informed volume). Other businesses tend to for decision-making typically are important. Timeliness of decision- making is critically important. Also, keeping members informed Keys to success and involved becomes an ongoing effort. Following sound business ➢ Professional advisors practices, conducting businesslike ➢ Communicating with members meetings, and maintaining a formal board/management working ➢ A mindset that encourages sound business practices relationship also are important. ➢ An experienced advisor on Conducting businesslike meetings cooperative organization can be a ➢ Maintaining a formal board/management relationship real asset when forming such a Contrasting a cooperative with other forms of business 7

distribute returns on the basis of no limit on the size of the business. investment in the business. No legal formalities are needed to There are three basic business form a proprietorship except forms: proprietorship, partnership, perhaps obtaining local permits or and corporation. In addition, there licenses. are hybrid forms such as Limited A partnership is similar except Liability Companies (LLCs). Most, that it is operated by two or more but not all, cooperatives are legally “unrelated” persons or businesses. formed . A cooperative In many cases, people who form not legally formed as a corporation partnerships accept the role of is a partnership. general partner. They share in In , limited partner- If you use anything other than management decisions, invest in ships sometimes are formed to your own name for a business the business, and have unlimited control resources such as land. conducted in Oregon, you must liability for the partnership’s debts. Sometimes, general partners in the register the business name with the Partners pay taxes as individuals on farming operation may be limited Corporate Division of the Oregon net income generated by the partners in the landholding Secretary of State’s office. That partnership. In most cases, when company. office’s excellent Web site can help one of the general partners leaves Another variation is the limited with many aspects of organizing or dies, the partnership is dissolved. liability partnership, which can be and operating a business (http:// A variation on the partnership is formed for service businesses. This www.filinginoregon.com/). the limited partnership. In this form form of organization limits partner of business, there must be at least liability for partnership debts to the Proprietorships one general partner. The limited amount of their investment. Other and partnerships partners have no personal liability aspects of the partnership remain Proprietorships are businesses for partnership obligations. How- the same. When registering with owned and controlled by one ever, they may vote on matters the Corporate Division, the busi- entrepreneur (may include a such as general partner changes, ness name of a limited liability spouse), who provides all equity admission of new limited partners, partnership must include the capital, makes key management dissolution of the partnership, abbreviation LLP at the end of the decisions, and accepts unlimited amendments to the partnership name. liability (extending to personal agreement, sale/exchange/encum- assets) for business debts. In brance of partnership property, Corporations exchange, the entrepreneur receives incurring extraordinary debt, or A corporation is a legally created all profits (positive or negative) and change in the purpose of the being that can own assets, has the pays income taxes as an individual. partnership’s business. Their right to net income, can sign The business ceases to exist when primary interest is the return on contracts, can sue and be sued in a the owner leaves or dies. their investment. They pay taxes as court of law, and is liable for all Many businesses in the United individuals on those returns. When business debts and obligations of States are single proprietorships, registering with the Corporate the business. If an owner of the but they produce a relatively small Division, the business name of a corporation dies or sells equity in percentage of dollar sales generated limited partnership must include the business, the corporation by businesses as a whole. There is the abbreviation LP at the end of continues to exist—it is perpetual. the name. 8 Contrasting a cooperative with other forms of business

There is no minimum size for a Corporations offer numerous cooperative if it is derived from corporate form of enterprise. possibilities for creating benefit sources not associated with provid- Articles of incorporation and programs for employees, who also ing member services. bylaws must be filed with the may be shareholders. If properly Secretary of State. As with other constructed, those programs are tax Limited liability types of businesses, recording fees, deductible for the corporation. companies annual license fees, and annual They frequently include retirement Limited Liability Companies reports must be filed. If these plans, medical insurance programs, (LLCs) have become an increas- requirements are not met, the state group or key-employee insurance ingly popular business form for will dissolve the business. The coverage, and housing and meal agricultural enterprises. A primary Articles specify the purpose of the expense programs. Estate planning reason is the flexibility of an LLC corporation, the Bylaws identify is made easier by the transfer of with respect to liability protection operating rules and officers, and the shares. Important for many family and its tax treatment (income is reports include updated information corporations, the “original owners” taxed only once, as with a partner- about the corporation, such as of the corporation typically can ship). Increasingly, it is the pre- current directors, change of maintain control of the business by ferred form of business when access address, etc. Shares of stock are having bylaws that require to income, reduced formality, and given in exchange for cash and the approval of 51 percent of the protection from personal liability value of property and services corporation’s stock for filling are important. In some cases, LLCs provided by the shareholders board of director positions and are used to own land, which in turn (owners) to the corporation. Annual 67 percent for questions related to is leased to the operating business. and special meeting minutes must dissolution, merger, or sale of the In many cases, both are controlled be recorded and archived. The corporation. by the same operators. overall management of a corpora- Most cooperatives are distin- The organization of an LLC is tion is vested in a board of guished in the federal tax code as fairly straightforward. The designa- directors, which is elected by the subchapter T corporations. Other tion LLC must appear after the shareholders. categories include subchapter C name of the business. The company In general, shareholders are liable (regular corporations), subchapter must file a Certificate of Formation for corporate acts only to the limit S (small, also known as tax option, (similar to articles for a regular of their investments. A corporation corporations, which transfer all corporation) with the Secretary of has a life of its own and can be profits and losses back to share- State and pay applicable fees. As dissolved only by its shareholders or holders), and nonprofit corpora- with a corporation, annual reports creditors. The identity of sharehold- tions, which vary in terms of the and renewal fees generally are ers, managers, and directors makes tax treatment of net income and required. An Operating Agreement no difference. Income is “double losses. (similar to a partnership agreement) taxed”; the corporation pays taxes Unlike other corporations, is required in many states, but on net income, and after-tax income subchapter T corporations are usually is not filed with the state. distributed to shareholders is chartered in Oregon (and many The LLC has members rather taxable to shareholders at their other states) under statutes that than partners or shareholders. Any individual rates. However, after-tax specifically address the unique person or entity may be a member. income may be retained by the nature of a cooperative form of There is no restriction on the corporation for investment up to business. Any income the coopera- number of members—one person specified IRS limits. tive earns is taxable to the may form an LLC. Members share Contrasting a cooperative with other forms of business 9

members, the limited partnership rules apply.

Distribution of economic returns Investor liability is a key consider- ation affecting business organiza- tion. All owners (members) of a cooperative have limited liability equal to their equity investment. Losses, debts, and other claims on the business can be satisfied only up to the limit of the equity invested in the business. Creditors cannot seek additional outside funds from the owners to satisfy claims against the business. in gains and losses as specified in No members are personally Similar to subchapter S corpora- the Operating Agreement, but are liable for LLC debts. However, as tions, cooperatives under subchap- taxed like partnerships. Ownership with other protected business ter T pay no income taxes on net is based on certificates (shares), forms, there is liability for debt returns from “regular” operations. which may or may not be based on guaranteed by a member or tort Only distributions to owners are capital investment. Frequently, liability outside the LLC. Also, taxable at the owner’s individual certificates are issued for manage- members cannot avoid liability rate. Cooperatives do pay other ment expertise, technical skills, etc. related to taxes, environmental taxes, including those levied on Like a corporation, the LLC owns laws, and negligence or breach of a property, sales, employment, and all of its assets. member’s obligation to the LLC. fuel. Voting rights may be based on Single-member LLCs are taxed Economic returns to cooperative ownership, a distribution formula like individual proprietors, includ- members are emphasized over for gains and losses, or an arbitrary ing self-employment tax. If there is returns to invested capital. Return rule. There may be managing more than one member, an LLC’s to investment in many cases is set members and nonmanaging mem- net income can be taxed as it would at zero. Members usually receive bers. The distinction typically is the for a regular corporation, or it can returns based on their patronage same as that between general and be distributed to members, who (purchases or use of cooperative limited partners. Unlike the per- then are taxed as individuals (as in facilities and services). Typically, petual nature of a corporation, the a partnership or subchapter S some net returns or assessments are lifetime of an LLC may be speci- corporation). Nonmanaging retained to finance operating and fied or unlimited. Dissolution after members do not pay self-employ- capital needs of the cooperative. the withdrawal of a member can be ment taxes. Estate planning rules These retained returns are paid avoided by a provision in the LLC for partnerships apply to managing back to members at a later date on Operating Agreement. members; for nonmanaging a patronage basis. While not 10 Historical background

guaranteed, many cooperatives Members establish a desired retained returns expect to payback schedule. Depending on receive these the cooperative, the schedule may dividends at range from a few years to more a later date than 20 years. and pay For tax management purposes, income taxes net returns from regular coopera- on them in tive operations in a particular year the year can be handled in two ways. Part or received. all of those net returns can be Meanwhile, identified by the cooperative as a the coopera- dividend known as a “qualified tive pays allocation.” The cooperative must income taxes pay a minimum of 20 percent of on these that dividend to members as cash. retained The full amount of the dividend, dividends in the year they are Homes from Loss of Fire”; it whether received by the member or earned. When paid out in later continues to operate. But, the not, is treated by the member as years to members, the cooperative organizational characteristics that income received in the year the treats these dividends as tax- underlie modern cooperative dividend is earned. The 20-percent deductible expenses. The advantage businesses have mostly been cash dividend helps members pay of retaining nonqualified alloca- developed within the past income taxes owed on the full tions is that income taxes owed by 160 years. Many point to the amount of the dividend. The entire the cooperative may be offset by formation of the Rochdale Society dividend is tax deductible from the tax credits. Those tax credits are of Equitable Pioneers, Ltd. in 1844 cooperative’s earnings for that year. usable only if there are income as the first successful cooperative Any of the dividend retained in the taxes due by the cooperative. An business. It was formed by a group cooperative and paid to the member additional benefit is that members of tradespeople in England as a at a later date is completely tax may find it to their advantage to consumer (buyer’s) cooperative. deductible for the member at that defer income taxes on this type of While not explicitly stated, the time since taxes were paid by the dividend until the year it is cooperative principles observed by member on those monies in the received. the Rochdale Society were the key year the dividend was earned. In to its success. The members other words, member dividends Historical controlled the business by a one- that are qualified allocations and background member, one-vote democratic retained by the cooperative don’t process. Membership was open. The concept of human cooperation permit the member to defer taxes With respect to ownership, equity within the community is not new. on those monies until they are was provided by the patrons, and As early as 1752, Benjamin received. each person’s equity was limited as Franklin helped organize the first On the other hand, part or all of a share of total equity. Limited formal cooperative in the United net returns may be identified by the dividends were paid on members’ States—the “Philadelphia Contri- cooperative as dividends that are equity investment, and income after butionship for the Insurance of “nonqualified allocations.” all costs were covered was returned Historical background 11

to patrons as a patronage refund bargaining with typically fewer, be monopolizing or restraining based on the value of the patron’s larger buyers. The second provision trade to the extent that it “unduly purchases. All goods and services of the Act protects the public from enhances prices” of agricultural were exchanged at free market “undue price enhancement” caused products, then it may be required to prices. Other principles that by monopoly action by a group of “cease and desist from monopoliza- contributed to the Society’s success producers. tion or restraint of trade.” included a duty to educate, cash As a result of Capper-Volstead, trading only, no assumption of agricultural producers not only may Recent developments unusual risk, political and religious form associations, but those Since the 1950s, agricultural neutrality, and membership equal- associations may form agencies. In cooperatives have continued to ity between the sexes. order to reduce competition among develop with only a modest amount Following the Civil War, agri- producers, associations must be of government help—broad cultural cooperatives began to be operated for the mutual benefit of research, education, and advice. formed in the United States. Most their members, who must be While remaining separate, most were patterned after the Rochdale agricultural producers. In addition, agricultural cooperatives and system. The Grange and later an association must deal in the general organizations have groups such as CENEX (Farmers products of its members to a maintained friendly and comple- Union Central Exchange, Inc.) and greater degree than the products of mentary relationships. the National Farmers Union nonmembers. Finally, an associa- Neutrality toward political (Farmers Educational and Coopera- tion must conform to at least one of parties is widespread, but agricul- tive Union of America) fostered the the following rules: (1) no member tural cooperatives are increasingly development of many cooperatives. of an association is allowed more involved in political action to But, in the 1890s, antitrust legisla- than one vote because of the influence agricultural policy and tion began to put a damper on amount of stock or membership the economic and business environ- agricultural cooperatives. Subse- capital owned, or (2) the associa- ment. Because of an increasingly quent court rulings effectively tion does not pay dividends on global economy, many agricultural made cooperatives illegal. stock or membership capital greater cooperatives have organized their Farmers were prosecuted for than 8 percent per year. structure and business strategies collective action—especially for While Capper-Volstead provides around an international economic activities that involved pricing limited antitrust exemption, agri- dimension. agreements and terms of trade. cultural cooperatives can be Agricultural cooperatives have prosecuted under antitrust laws if increasingly looked for ways to The Capper-Volstead Act they are involved in prohibited grow. Growth has come both In response to concerns about business practices. Specifically, internally and through consolida- antitrust allegations, Congress they may not engage in “predatory” tion of smaller cooperatives. Larger passed the Capper-Volstead Act in pricing practices or conspire or size has allowed many cooperatives 1922. It contained two key provi- collude with third parties to fix to expand into value-added agricul- sions. The first permits farmers to prices, restrict members’ agricul- tural activities such as input collectively market their products tural output, coerce competitors or manufacturing and product without the threat of antitrust customers, combine with other processing. action. By acting together, agricul- firms to “substantially lessen A 1998 USDA national survey tural producers are permitted to competition,” or engage in boy- of cooperatives (see USDA’s Rural create countervailing power when cotts. If an association is found to Business-Cooperative Service Web 12 Historical background

survey. Iowa grains/oilseeds. For milk at the led the way first-handler level, as much as with highest 80 percent of sales go through net business cooperatives. Grain marketing volume of approaches 40 percent, while about almost 20 percent of fruit and vegetable $11 billion. dollar sales go through coopera- Five years tives. For , about earlier, 10 percent of sales typically move California through cooperative channels. led with just The number of agricultural over cooperatives has been declining, $8 billion. largely due to mergers and acquisi- Closer to tions intended to foster growth. Yet, home, in the interest in cooperation seems to descending order be increasing. Many agricultural of importance, businesses are looking at coopera- site at http://www.rurdev.usda.gov/ agricultural cooperatives headquar- tion both as a way to help people rbs/pub/sr576.pdf), found that tered in Oregon fall into five major socially and to help ensure the about 3,600 cooperatives across the categories: supply, marketing, economic survival of their nation served 3.4 million members. grains and oil , fruit and businesses. Five years earlier, almost 5,000 vegetable processing, and Some observers of current agricultural cooperatives served processing. In all, there were about agricultural cooperative trends refer more than 4 million members. 40 agricultural cooperatives to “value-added” or “new genera- Combined assets totaled about headquartered in Oregon in 1998, tion” cooperatives. Many coopera- $47 billion in 1998, up from just with a total membership of just tives are increasingly combining over $31 billion in the earlier under 22,000. Five years earlier, traditional cooperative structures survey. Net business volume there were more than 60 agricul- with links to limited liability (excluding sales between coopera- tural cooperatives serving more companies, partnerships, or regular tives) generated more than than 40,000 members. In the latest corporations. Rather than only $104 billion, compared to survey, net business volume for the buying supplies or producing and $76 billion 5 years earlier. Member 40 cooperatives amounted to about marketing commodities, farmer- investment in their agricultural $2.1 billion. The 60 cooperatives owned cooperatives are finding cooperatives totaled almost surveyed 5 years earlier did just ways to integrate vertically. They $20 billion, up from just over over $2.4 billion on an annual may control input availability and $14 billion. By numbers of agricul- basis. cost all the way through the pro- tural cooperatives, Minnesota For both farm marketing and duction and sale of institutional and continued to lead the way with farm supplies, agricultural coopera- consumer food products. State and about 390, down from about 425. tive dollar volume has approached federal tax incentives have encour- That state also continued to have 30 percent of the total agricultural aged these more complex business the largest total number of coopera- sector. Cooperative share of sales structures and efforts to integrate tive members, 330,000 compared in many commodity categories is vertically. In addition, these to about 365,000 in the previous significant, especially for milk and linkages can provide sources of Historical background 13

new capital for cooperative busi- The user-benefits concept—The cooperative during a particular ness growth. cooperative’s sole purpose is to period of time, usually a fiscal provide and distribute benefits to year. These retains are paid to Underlying principles users based on the amount of members over time. of cooperation their use. The third approach to generating Cooperatives are formed to do equity is to create capital retains something better than individuals Members benefit both directly from earnings. Rather than could do for themselves or through and indirectly from a cooperative. paying back earnings to mem- a noncooperative form of business. Direct benefits may include a better bers, a selected portion is paid as Perhaps the goal is to develop assurance of supply sources and equity capital stock. This stock market power in order to sell access to product markets, which usually is issued with regard to products at higher prices or enter can directly increase the net income the member’s level of patronage. new markets. Some cooperatives of their own businesses. Indirect are created to obtain and deliver benefits may include a greater Some agricultural cooperatives are inputs such as feed, , petro- influence on input and output experimenting with the sale of leum, and more economi- markets, increased business knowl- preferred-type stock, which is sold cally. Others ensure the availability edge, and participation in research primarily to nonmembers. Pre- of needed services or pool risk. and development activities. ferred stock does not confer voting Acting together, members can By limiting the payments to rights. These investors expect take advantage of economies of invested dollars, cooperatives focus dividends to be paid by the coop- size or develop bargaining power. on their primary responsibility— erative on a regular basis, and they In doing so, the cooperative providing needed products and risk no more than the loss of their attempts to fulfill member needs at services to members. Current users investment. They pay taxes on the least possible cost. However, in finance the cooperative in propor- dividends at their regular rates. order to cover all costs and meet tion to their use of its services. That Broad economic decision- capital needs, the cooperative investment usually is returned to making by a cooperative usually is necessarily charges competitive the member on a scheduled basis. guided by vote of the members. market prices. The at-cost basis Cooperatives primarily acquire Many cooperatives maintain a becomes reality when the coopera- capital in three ways. democratic approach to decision- tive returns surplus money (divi- Direct investments may be made making: each member has one vote dends) to members at the end of the by members. As an example, a regardless of the amount invested fiscal year. condition of membership may be in the cooperative or use of its The basic principles underlying an initial fee, which buys stock services. Increasingly, however, modern cooperatives include: in the cooperative. cooperatives are adopting or The user-owner concept—The Capital is also raised by retain- considering “member control” people who own and finance the ing some net income rather than voting systems, which relate to the cooperative should be its users. paying it out as patronage amount of patronage each member The user-control concept—The refunds. The resulting retained conducts with the cooperative. controllers and users of a patronage returns are propor- Most agricultural cooperatives cooperative are one and the tioned to members based on the are not completely open for mem- same. amount of business (patronage) bership. Frequently, membership is they have done with the restricted to commercial operators. 14 Common cooperative functions

The word “commercial” in this context means a good or service produced for economic gain. In What do agricultural cooperatives do? some cases, membership may be ➢ Marketing—ranging from helping members sell their prod- restricted further to accommodate perceived limits on market ucts at the first-handler level, to processing, distributing, availability. retailing, and exporting ➢ Supplying high-quality products at reasonable prices to Common cooperative members functions ➢ Providing specialized services such as drying, credit, utilities, Cooperative business organizations insurance, or trucking can be found throughout the agricultural sector. They range in size from a few growers working to improve the marketability of their transporting, distributing, merchan- Supply commodity to large dising, etc. Marketing cooperatives These types of businesses fre- concerns serving the complex are becoming more vertically quently are referred to as purchas- needs of thousands of members. integrated by increasing their ing cooperatives. They handle a Frequently, cooperatives are ownership and control of facilities wide variety of farm supplies and classified by the type of commodi- beyond the first-buyer level. In equipment. Frequently, members ties they handle or the functions some cases, they own retail outlets benefit from a supply cooperative’s they perform. Many cooperatives that sell to the ultimate consumer. ability to maintain a steady, combine functions. Many marketing cooperatives dependable supply of products at have major outlets through hotels, competitive prices—even in times Marketing restaurants, and institutions. Export of shortages. Increasingly, supply is another growing area. Leading Marketing cooperatives include cooperatives are adding general exports are nuts and nut products, bargaining and processing organi- merchandise lines to increase sales fruits and related preparations, zations. Frequently, marketing to both members and nonmembers. grains and related products, and cooperatives do some of each Many supply cooperatives have oilseeds and oilnuts. activity. Their primary role is become more vertically integrated. While some cooperatives are centered around moving member In many cases, they manufacture purely bargaining organizations products through marketing the supplies that they distribute, (associations), many go beyond channels toward the ultimate especially in the case of feed, price and terms-of-trade negotia- consumer. fertilizer, and petroleum products. tion. Most represent their members Some marketing cooperatives As an example, cooperatives play a at the first-handler level. Those that perform limited activities, but major role in providing petroleum are purely bargaining cooperatives others assume responsibility for all products to agricultural businesses. are mostly in the fruit and veg- marketing functions, e.g., receiv- Through regional organizations, etable industry and do not handle ing, grading, processing, packag- cooperatives explore for crude oil or take title to the product they ing, labeling, branding, storing, and natural gas, but are mostly represent. focused on refining and Common cooperative functions 15

manufacturing petroleum products they are small, sometimes unstable, Supportive, well-informed, and and operating wholesale and retail organizations that provide a source educated members distribution networks. However, of high-quality or natural foods, some also conduct research and test housing, burial services, or day Employee-owned cooperatives new products. care. In other cases, at least on the in the United States have experi- At the retail level, many coop- surface, some cooperatives look enced growth in both numbers and eratives provide bulk delivery and like any large retail business. They size. Much of the interest in this application services to members, as may be involved in business form of cooperation has centered well as full-service facilities that activities as varied as general on job preservation, productivity provide on-farm maintenance, merchandise, medical services, improvements, capital spreading, service stations, parts, mainte- utilities, or banking. encouragement of employees to nance, and accessories such as tires While consumer-owned coop- invest in the businesses that employ and batteries. eratives have remained popular in them, and creation of a democratic Europe, the picture in the United workplace. Very favorable tax law Service States has been mixed. Periods of changes have encouraged employee A wide variety of cooperatives widespread enthusiasm and success participation in business ownership provide services to agriculture, have been followed by disinterest by establishing pension benefit primarily credit, utilities, insurance, and failure. Consumer-owned programs that include employee and specialty services. In some cooperatives were especially stock ownership plans. Many cases, cooperatives form special popular during the Great Depres- agricultural and nonagricultural subsidiaries to perform these sion, when people were desperate cooperatives are looking at ways to services for members. Specialty to overcome unemployment, develop hybrid forms of coopera- services include trucking, storage, poverty, and the belief that tive membership that would give drying, grinding, and a host of monopolists were extracting high their employees an equity stake in other activities. profits by overpricing consumer the cooperatives that employ them. goods. Nonagricultural businesses have Nonagricultural Over time, the one type of experienced success in many A relatively small number of consumer-owned cooperative that efforts to form cooperatives. cooperative memberships are in has remained strong and growing is Through cooperatives, many traditional the . Credit unions and functions can be performed more and supply cooperatives. Most are other surviving cooperatives, efficiently, e.g., bulk purchasing, in cooperative forms of businesses especially natural food retail development of computerized owned by consumers, employees, cooperatives, typically exhibit four distribution and billing systems, nonagricultural businesses, public major characteristics: creation of a common identity, and institutions, and nonprofit A need for the cooperative as advertising. Typical cooperative organizations. expressed and acted upon by the arrangements include one-business, A wide variety of consumer- members one-vote democratic control and distribution of net income to owned cooperatives has been Competent managers and members on the basis of use. created to meet the need of goods directors and service users. In many cases Adequate capitalization to meet both operating and long-term investment needs 16 Underlying economic principles that may invite creation of cooperatives

Underlying pay less than economic principles competitive prices when that may invite there are large creation of numbers of cooperatives sellers. Much of the incentive to form a Transporta- cooperative comes from the desire tion costs may to overcome a common problem effectively deter and thereby improve well-being. In agricultural many cases, the primary goal is to producers from increase the net income generated looking outside by member businesses. Rational their local areas entrepreneurs frequently see for better cooperatives as a means to achieve commodity that goal. prices or input currently costs. An occupy. In Elements of market imbalance of some cases, contracts imperfection market power may result, as may help offset the imperfection. If all markets were perfect, there producers find themselves with Frequently, however, these impedi- would be no incentive to form a only one firm to serve their selling ments can be overcome through cooperative—or any other particu- or purchasing needs. This situation collective action. lar business type. Cooperatives invites low prices and high costs frequently are seen as a means of for producers, typically reducing Increasing member countering imperfections in the their profitability. returns through economic system. There are many A lack of good market intelli- collective action reasons for these imperfections. gence may create market imperfec- Economies of size frequently are Economies of size usually are tions. Information related to generated through cooperatives. As evident as businesses grow to commodity pricing and terms of the size of the operation increases, accommodate a higher volume of sale may be available only at some and fixed costs (such as manage- goods or services at a lower cost cost. For many firms, the cost of ment charges) are spread over a per unit. For producers, this market information may be pro- larger volume of goods and ser- situation creates an imbalance in hibitive. False cost/price signals vices, per-unit costs can be market power, as relatively large may lead to misallocation of expected to decrease. Efficiencies numbers of small producers face a resources that reduces profits. also can be generated through few large buyers of their product or These examples of market labor-saving machinery and sellers of production inputs. When imperfection are among many equipment and through the opera- input providers are relatively few in situations that may lead businesses tion of larger production and number, they usually can sell inputs to take action. A business may distribution facilities. At some at prices above cost. Likewise, if extend its activities into other point, however, per-unit costs are there are relatively few buyers of levels of the marketing system or expected to increase, as inefficien- an agricultural product, they may become larger in the level they cies associated with oversized Underlying economic principles that may invite creation of cooperatives 17

facilities begin to occur. In choos- ing a size of operations, coopera- Market imperfection tives need to consider the optimal Situations that give one buyer or seller an advantage size that will bring the greatest over another or that cause prices to vary from what they return to members. Forming a cooperative may be a would be under simple supply and demand. Examples way to integrate vertically into are when many small buyers must purchase from a higher or lower levels in the single large supplier, or when transportation difficulties marketing system. Higher returns put producers in a more remote region at a disadvantage. may be obtained by collectively Economies of size buying an existing business such as Reductions in per-unit cost that occur as a business an input supplier or processor. Sometimes, creating a new busi- grows. Economies of size can occur as a business ness yields efficiencies. Location spreads fixed costs over a larger volume of goods sold, and size of these firms should be or by efficiency enhancements such as labor-reducing based on cost efficiency. equipment. Cooperatives sometimes are Vertical integration formed to provide services in a Taking over upstream or downstream parts of the pro- quantity and quality not otherwise available. However, it is important duction and distribution process. For example, a dairy to consider why those services are cooperative that represents its members by bargaining not being offered by other entrepre- for better prices at the first-handler level could integrate neurs. Are the services really vertically by building a cheese manufacturing facility, needed, and will producing them Key terms creating a brand identity, and establishing a retail store. generate a satisfactory return to the Risk spreading investment made to obtain them? Sometimes the honest answer is no. Offsetting poor returns in one area by good returns in In other cases, good managers can another. This becomes easier as a business diversifies. find ways, through cooperative For example, if apple growers experience poor prices action, to cost-effectively obtain one year, a diversified fruit growers cooperative might goods and services that otherwise be able to offset those losses by strong returns in another would not be available. crop. On occasion, cooperatives are formed to better assure a source of Market power supplies or market outlets—even A business’s ability to influence prices in its favor. under adverse market conditions. Market power may be based on size or on the ability to After all, a cooperative’s first control demand by building customer loyalty to a brand priority is to serve its members, not name. the highest bidder. When shortages of supplies occur, noncooperative 18 Prospective strengths and weaknesses of a cooperative business form

businesses may move product to lower earnings from processing due member commodities can increase nonagricultural outlets that are to the smaller volume of product. revenue. willing and able to pay the highest Furthermore, diversity in input price. Continuity of market outlets supply operations may allow Prospective strengths also can be better assured by cyclical problems in one line to be and weaknesses of a focusing on the needs of members, offset by good returns in others. cooperative business not on exiting markets for higher It is important, however, not to returns elsewhere. allow risk-reduction strategies to form In an integrated cooperative hide management inefficiencies by Although a well-operated coopera- business, there is great potential for members or cooperative managers. tive can bring many benefits to its increased returns through coordina- For example, members should not members, it isn’t a cure-all for their tion of supply, production, and receive average pricing for low- economic concerns. In starting a marketing activities. Two-way quality product that could be cooperative, it is important to communication between marketing improved through better balance possible benefits with and production units can reduce management. potential limitations. In the process, costs and improve product prices. Greater market power may be you will develop a more realistic The cooperative can ensure the possible through cooperative view of how a cooperative might quantity and quality of product action. If other firms are obtaining enhance your individual business. needed to satisfy market demands unusually high profits at the In many cases, the benefits and and hence bring greater returns to expense of individual businesses, limitations of a cooperative depend members. Supply operations then collective action may transfer some on the type of business activity can be tailored to those production of that market power and associ- undertaken. In some cases, benefits needs. Typically, the development ated profits to members. Establish- are quite measurable in terms of of long-term arrangements for ing a reputable brand name, if done bottom-line results of member supply, production, and marketing successfully, may help to develop businesses. In others, benefits may linkages encourages more efficient customer loyalty and transfer some be more indirect and intangible, for investment. Furthermore, transac- market power toward the coopera- example, impacts on market prices, tion costs, such as those related to tive. Sometimes, cooperatives can improvements in quality, and better frequent contract renegotiations, develop sufficient market power to services. Benefits may become less can be minimized or even significantly alter the terms of trade measurable as time passes. In some eliminated. in favor of members. However, that cases, benefits and limitations may Risk spreading may be a real level of market power usually be unmeasurable in economic benefit associated with cooperative implies an ability to control the terms but subjectively measurable business operations. Adverse quantity and quality of member in social terms. market price or other conditions production. Forming a cooperative, may be absorbed (averaged out) by alone, does not ensure that power. Potential benefits pooling with other product lines All of these elements affect the As members work collectively to that are not adversely affected. cooperative’s ability to operate set objectives, arrange financing, Also, vertical integration can help competitive and efficient systems and establish operating procedures maintain returns by offsetting for the benefit of its members. A and methods for distribution of countercyclical price movements. cooperative form of business can benefits, their individual operations As an example, higher prices for a encourage lower per-unit costs for may enjoy increased returns. smaller crop may be offset by resources, while higher prices for Increased returns can come from a Prospective strengths and weaknesses of a cooperative business form 19

number of factors. Higher prices some cases, services are provided high quality frequently is rein- for products or lower costs for for a minimal return to the coopera- forced by basing payment on inputs are common. Frequently, tive in order to meet the objective members’ meeting standards such reductions in per-unit handling or of satisfying member needs. Well- as grades, harvest scheduling, and processing costs may be evident. managed cooperatives find other, container requirements. Efforts to Quality improvements achieved higher margin services to provide maintain high standards for product through better operating procedures an overall blend of returns that quality and reliability can pay off may be important. Or, a coopera- adequately meets the needs of when buyers consistently purchase tive may be able to develop a new members. products at above-average prices— market or brand identification. A cooperative can help its even during times of market Frequently, cooperatives have a members maintain high product surplus. positive influence on general price quality, which leads to greater With respect to supply, a coop- levels in competitive markets. returns in the marketplace. Through erative can sell inputs that provide Cooperatives may have some information and advice, coopera- the greatest yield gains, rather than flexibility in pricing. As an tives can encourage production and those that provide the largest example, a cooperative may be able marketing practices that will yield margin to the cooperative. In fact, to reduce input prices when mem- the highest net returns. For the better cooperatives have bers face a price–cost squeeze. As a example, field representatives may smaller margins on farm supplies, result, some of the economic work one-on-one with members to in part because they relay produc- benefits of the cooperative would maintain schedules and quality tion information from sources such move from the end of the year to specifications. The emphasis on as agricultural experiment stations midseason. In assessing savings returned to members, it is important to con- Potential benefits of agricultural sider both immediate cash pay- ments (returned at the end of an cooperatives operating year) and noncash returns ➢ Reduced per-unit handling or processing costs that are revolved out as cash payments in the future. Coopera- ➢ Dividends based on how much each member uses the tives frequently make substantial cooperative payments to members to return ➢ Improved service savings that were retained for short- and long-term financing. ➢ More marketing power through greater size, brand identifi- These revolving funds may repre- cation, quality control, etc. sent a substantial portion of the ➢ patronage dividends paid to mem- Assured sources of supply at a reasonable cost bers in a given year. ➢ Political influence Improved service to better meet ➢ the needs of members frequently is Education to help members improve business practices a benefit of cooperative business ➢ Support for family operations—either by improving on existing services or by providing ➢ Income generated in the local community services not otherwise available. In 20 Prospective strengths and weaknesses of a cooperative business form

need a dependable, reason- were aimed at strengthening the ably priced source of supply position of their members. supply—even during As an example, some cooperatives times of extreme short- further expanded their refining ages and rising prices. capacity in order to increase control Cooperatives, in their over their fuel sources. orientation toward member A cooperative entering the needs, can accept smaller marketplace may have a significant margins rather than diverting impact on the market’s competitive supplies to higher-margin environment. Product prices may buyers. increase, or input prices may move A good example of coopera- to lower levels. The quality of tive devotion to member needs services from businesses in general can be seen in the operations may improve. of petroleum and fertilizer Many cooperatives find that supply cooperatives during pooling products of a specified severe shortages in the 1970s. grade can open up new market To keep supplies moving to outlets. Large-scale buyers, who their members, many coop- wouldn’t work with individual eratives confined sales to members, may purchase from a member-patrons. Many cooperative. The cooperative also cooperatives purchased extra may be better able to meet the petroleum and expanded needs of overseas buyers. Both to members, who then can obtain transportation and storage foreign and domestic buyers may the greatest use-value from pur- capacities. be interested in value-added food chased inputs. In some cases, Refining and manufacturing brands processed by a cooperative. cooperatives may have field capacity was increased, and a Many popular brands are in fact representatives to help in that number of supply cooperatives owned by cooperatives. process. formed an international petroleum The political influence of To offset lower margins for farm trading and individual businesses can be input lines, many cooperatives sell to acquire oil. At the same time, enhanced by cooperative action. In other higher margin lines. As an cooperatives worked in the political many cases, cooperatives join example, many supply cooperatives arena to obtain priorities for together in state or regional asso- sell high-volume, high-margin pet petroleum products necessary to ciations to lobby for legislation and food and supplies in their retail meet food and fiber production administrative rules that will outlets. Members benefit since needs. Furthermore, supply coop- enhance member businesses. Much mostly nonmembers purchase those eratives took a leadership role in of the emphasis has been on items. The higher after-tax net helping members conserve fuel and influencing tax legislation. returns are distributed to members fertilizer. In addition to helping managers in the form of patronage dividends. After the petroleum crisis and directors, cooperative educa- Assured sources of supply may abated, cooperatives were aggres- tional efforts can have a positive be an important motivating factor sive in long-range planning to impact on member business for starting a cooperative. Members avoid future crises. Their efforts practices. Information on Prospective strengths and weaknesses of a cooperative business form 21

marketing, production practices, businesses spend money on local some unique problems relate to the and farm management can be goods and services and pay taxes. agricultural industry in general and presented conveniently by universi- In many cases, cooperative person- specifically to cooperative ties and other organizations nel and members participate in organizations. through cooperatives. In addition to community events and are involved Many of the pricing problems formal education, members can in governmental activities. for agricultural products are related receive practical business experi- Consumers benefit in many to the nature of demand for those ence through cooperative commit- ways when they patronize coopera- products. Frequently, demand is tee or board activities. All of these tive businesses. In some cases, the very price-sensitive to changes in opportunities enhance member primary benefit is access to high- volume. Overproduction frequently abilities to provide leadership in quality, reasonably priced goods triggers a dramatic drop in market their communities. and services. In others, consumers prices, resulting in a significant Cooperative operations may be gain access to a wider variety of decline in total revenue to able to help family farms stay in items than otherwise would be producers. business. Credit and supply coop- available. Cooperatives tend to be Cooperatives cannot legally eratives may help family operations on the leading edge of new product control members’ production to grow and capture economies of size and process development. Their overcome this problem. In some while remaining independent. more efficient production and cases, they may be able to control Marketing and processing coopera- marketing systems may increase the number of acres that members tives can help ensure markets and the availability of competitively have under production. In other the timing of sales under advanta- priced products and services. cases, they may be able to encour- geous circumstances. A cooper- age the formation of a marketing ative’s ability to control product Limitations order under government auspices to flow farther up the marketing In many respects, cooperatives are promote orderly (controlled) system can bring greater financial subject to the same limitations as marketing programs that might rewards to individual family farm any business. They face the same offset adverse market conditions. members. economic environment, many of However, there is little evidence the legal restrictions, and similar that market orders are an effective Broader benefits interpersonal problems. In addition, price-enhancing tool. to the community Cooperative business activities benefit more than members. The Limitations of agricultural cooperatives community and individual consum- ers also may benefit. These benefits ➢ Inability to raise prices for members’ products may be local or regional in nature. ➢ Disagreements among members Much of the additional income generated by members from ➢ Difficulties in building long-term equity when members cooperative business operations want to receive dividends immediately finds its way back to local busi- ➢ nesses as payment for goods and Slow decision-making services. Cooperative employee ➢ Unreliable member participation salaries add to that economic activity. In addition, cooperative 22 Prospective strengths and weaknesses of a cooperative business form

Early in the history of coopera- A cooperative can’t be expected types of businesses serving the tive development in this country, to eliminate market functions. agricultural community. some enthusiasts argued that Instead, it may be able to provide The limited objectives of some producers could control prices. more efficient marketing services members can be an impediment. That proved to be a myth. No that reduce the marketing margin Building long-term financial matter how large the cooperative, necessary to move goods and strength through retained patronage control of production, even among services through marketing chan- refunds may be discouraged by its members, is not possible. In nels. Cooperatives providing their some members who want some industries, cooperatives have members with the highest quality increased short-run returns for been able to influence demand for services and supplies may in fact themselves. Refusing to carry a their goods and services through increase marketing margins. Prices diversity of goods and services of better production techniques, charged by the cooperative may interest to the community at large improved handling, and superior need to be higher in order to best may limit the cooperative’s ability bargaining. But, regardless of its serve the bottom-line interests of its to reduce per-unit costs through size, a cooperative can have little members. increased volume. impact on the overall demand for Cooperatives that pool member The democratic nature of a agricultural output. Consumers labor, land, and other capital for cooperative can be a problem when simply have too many options. production activities generally have significant decisions need to be Furthermore, producers who not been successful in the United made in a timely manner. Decisions choose not to be members of the States. Frequently, these types of frequently are delayed by the cooperative can benefit from the cooperatives have been overcome necessity to give attention to cooperative’s favorable market by minimal net gains, decision- member relations in addition to impacts without paying any of the making problems, and disagree- strict business decisions. Although associated costs—the free-rider ments over distribution of net boards of directors may have the effect. returns. In limited cases, coopera- power to make these decisions, Developing a cooperative is not tives formed to share specialized they typically are discussed with necessarily a means of creating machinery and equipment have the general membership before market power. There may be been somewhat successful. decisions are finalized. With large limitations on the amount of equity The “people problems” groups, this process creates delays capital available to expand the experienced by any business are that can have a serious impact on business. Thus, reaching the size exacerbated in an organization decision-making. needed to influence market condi- characterized by user-owners. If agricultural cooperatives don’t tions and prices may not be practi- Misinformation and unrealistic have marketing or purchasing cal. Other problems that frequently expectations on the part of mem- agreements with their members, limit market power include a lack bers, directors, and management they are at the mercy of voluntary of long-run planning, management can lead a cooperative to poor participation. Members may avoid failures, and inferior visioning performance or even bankruptcy. annual meetings, be fickle in their skills. Sometimes, new coopera- Disagreements on objectives, patronage of the cooperative, and tives have a favorable influence on policies, and approaches can lead resist providing their fair share of prices, margins, and supply for a to intense competition and duplica- the capital needed to develop its few years. However, longer term tion of services and facilities full capacity for service to mem- benefits in that regard may not be between cooperatives and other bers. Thus, major expansions in the apparent. cooperative’s services may be Equity and debt considerations 23

limited, and improvements, if they accounts receivable, and cash. Agricultural Credit Bank (ACB), occur at all, may be delayed. Intermediate-term assets include has the authority of a Farm Credit machinery and equipment, while Bank to provide loanable funds of Equity and debt long-term assets include buildings all kinds to agricultural, aquatic, considerations and land. Funds may come from and public utility cooperatives. traditional debt instruments through Furthermore, ACB is authorized to Like any other business, an agricul- banks or from the nationwide Farm provide international banking tural cooperative needs funds to Credit System (FCS). services for farmer-owned coopera- maintain the short-term, intermedi- FCS, a producer-owned coopera- tives. For more information on FCS ate-term, and long-term assets tive, provides a wide range of and its U.S. government regulator, necessary for operations. Short- financial services to U.S. agricul- the Farm Credit Administration term assets include inventory, ture. One unit of the system, (FCA), visit FCA’s excellent Web site (http://www.fca.gov/FCA- HomePage.htm). Cooperatives and equity Cooperatives usually obtain and handle funds from equity sources in ➢ What is equity? a unique manner that fits their user- Equity is member funds that buy ownership in a coopera- owner nature. Members make the tive. Equity funds have two major purposes. They serve as a equity investment in the coopera- buffer when losses occur, and they finance growth. tive’s assets. Investment usually is made in proportion to the benefits ➢ How do cooperatives get equity? received in the past or those — Members make direct investments, such as through a expected in the future. By main- membership fee. taining a strong equity position, — A portion of profits may be retained rather than paid out members help assure that the as patronage refunds. cooperative can obtain credit, — Members may be assessed a per-unit fee each time they survive financial adversity, and make a long-term commitment to use the cooperative. This fee is then deducted from the providing needed goods and member’s dividends. services. In addition, a sizable ➢ How are investors paid back? equity investment may encourage — Funds can be returned after a set time period (revolving lenders to give more favorable rates fund plan). and terms for loans to a — Members can be paid back based on how much they cooperative. In many respects, the equity have invested and how much they use the cooperative investment in any business can be (base capital plan). thought of as risk capital. It serves — A percentage of each member’s equity can be paid back as a buffer during hard times when regardless of when it was invested or how much the losses may be experienced. Those member uses the cooperative (percentage-of-all-equities losses are subtracted from the plan). equity balances in the business—to the point of exhaustion. 24 Equity and debt considerations

Unique aspects of equity Equity balances can be managed For small, startup cooperatives, investment in a more easily in a cooperative than in the willingness of members to cooperative other types of business because the invest directly can be an important The rate of return on one’s equity board of directors can control the test of their interest in forming the investment in a cooperative may be amount of equity redeemed back to cooperative. A lack of interest in difficult to determine. Appreciation the membership and the amount of direct investment may not bode in the investment usually is not a current net earnings retained for well for the cooperative’s ability to factor, and there typically is no building equity reserves. Some maintain sufficient patronage open market for selling the invest- portion of net earnings usually is levels. However, it may simply ment. However, when comparing withheld as retained patronage reflect producers who are hard- returns with alternatives in nonco- dividends or per-unit capital pressed for cash. In this case, it is operative businesses, members retains. The unique part of this much easier to retain funds from need to include intangibles, such as concept is that customers provide net earnings. improved access to markets and the equity capital for the busi- A second technique for raising more reliable sources of supply. ness—unheard-of in an investor- equity funds is through retained How have the member’s overall owned firm. patronage refunds. Under this business returns benefited from Most equity in a cooperative is system, portions of net income cooperative membership? temporary in nature. There usually allocated to members are retained In most agricultural coopera- is an implied obligation for the by the cooperative. In essence, tives, only qualified producers are cooperative to redeem it, although members are investing new monies permitted to make an equity not on a fixed schedule. Thus, a in the cooperative based on their investment. That investment, cooperative’s board of directors is levels of patronage. For most usually represented by common free to choose the time of equity agricultural cooperatives, this stock or membership certificates, retains and redemptions so that the technique raises the largest portion provides the right to vote on financial integrity of the coopera- of equity. Its popularity stems from cooperative policies. Unlike tive will be maintained. Sometimes the easy, systematic nature of investor-owned businesses, coop- the cycle is longer than 20 years. generating equity funds from net erative member voting rights are Mandatory obligations to redeem earnings in the most recent operat- not based on the number of equity equity typically are not a part of ing period. shares or certificates owned by the cooperative operations. Retained patronage refunds are member. Although some agricul- particularly well suited for supply tural cooperatives allow for voting Cooperative equity and service cooperatives, where it weighted by member patronage, sources is difficult to determine charges per most still subscribe to the principle The initial equity funding for an purchase unit. In addition, non- of one vote per member. Some agricultural cooperative usually is member patrons may be encour- agricultural cooperatives issue obtained through direct investment aged to become members, since preferred stock to members (as well from its members. Occasionally, retained patronage refunds typi- as nonmembers). Preferred stock well-established cooperatives seek cally can be used to purchase usually provides for an expected direct investments from members membership stock or certificates— fixed rate of return on the invest- to increase equity reserves. In eliminating the need for a direct ment, but does not confer voting either case, these sources usually cash investment. However, on the rights. provide a relatively small amount down side, retained patronage of capital. Equity and debt considerations 25

refunds may make the cooperative overly dependent on earnings as a source of capital. Fluctuations in net income (including losses) create uncer- tainty in the cooperative’s ability to generate equity investment and to redeem older equity investments. Furthermore, misunderstandings may occur if members believe that patronage retains are a debt owed to them. In fact, they are equity risk capital that members invest to In addition, per-unit generate future benefits. They can capital retains have the same A somewhat controversial be lost, or repayment can be advantages as patronage retains. To technique for equity accumulation delayed, due to declines in operat- be effective, it is important for the is known as unallocated equity. ing results, unwise capital invest- board of directors to choose a This approach builds equity ments, or untimely business retain rate that generates the accounts that are not allocated to expansions. amount of equity capital needed, to individual members. These funds A third technique, often com- establish the speed with which it is come from sources such as nonop- bined with retained patronage generated, to set the rate of equity erating interest and rent income, refunds, is per-unit capital retains. redemption, to consider the com- acquisition of business assets at Member-patron investments are petitive environment of the coop- prices below their assessed value, based on usage of the coopera- erative, and to provide for adequate and net income generated from tive—not on a portion of net communication with the member- nonmember (or even member) earnings. Some marketing coopera- ship about the need for a capital services that is not required to be tives find this technique conve- retain and plans for its accumula- allocated. nient. As an example, a processing tion and redemption. A distinct advantage of unallo- cooperative might assess a $1.00 Many cooperatives downplay cated equity accounts is that risk retain for each ton delivered to the per-unit capital retains because they equity of this type may be viewed cooperative for processing. That may reduce cash returned to as more permanent by lenders and amount is deducted from payments members more dramatically. The might encourage them to provide made to the member. This method per-unit capital retain system also better rates and terms of repay- is less common than patronage suffers from the same “debt image” ment. Also, building these accounts retains. as patronage retains; members may through nonmember patronage may Cooperatives that favor per-unit believe that their equity risk be a more palatable way to accu- capital retains frequently do so investment is a debt owed to them mulate equity in the eyes of because this technique generates with interest. Furthermore, per-unit members. more stable equity investment capital retains may be seen as too The danger of this technique, (assuming a regular flow of prod- easy a source of equity since they however, relates to the potential for uct) that is independent of the are generated regardless of operat- loss of member control over the cooperative’s net income. ing performance. cooperative’s equity; it is not tied 26 Equity and debt considerations

Equity redemption plans also reinforce the idea that equity Equity redemption plans investments by members are ➢ Revolving fund plans intended to be short- to intermedi- ate-term investments. Unless These plans involve paying back equity in the order in affected by declining net income or which it was received. The length of time is based on the losses, equity usually is intended to period necessary to accumulate replacement capital and can be repaid in an orderly manner. be adjusted as needed by the board. Typical payback periods A good cooperative equity are about 10 years. redemption plan has many benefits. ➢ Base capital plan It reduces conflict among active and nonactive members regarding This type of plan combines an assessment of annual capital the speed of redemption. It also needs and member use of the cooperative’s services. Mem- may encourage member patronage. bers who are underinvested (increasing their patronage) are Members more directly see the link assessed an additional amount of equity, and members who between investment and benefits. are overinvested (decreasing their patronage) start to receive Consistent redemption of equity repayment of their overinvestment. can give the member’s equity investment greater value as collat- ➢ The percentage-of-all-equities plan eral for loans. Perhaps even more A few cooperatives use this approach. It involves paying important is the fact that consistent, back a set percentage of each member’s equity investment timely redemption forces the regardless of issue date. cooperative to implement effective financial planning. The advantages of a good directly to member equity accounts Equity redemption cooperative equity redemption plan with corresponding member systems must be balanced with a number of oversight. This dilution of member From a philosophical viewpoint, disadvantages. The financial control may encourage manage- cooperative equity redemption position of the cooperative may be ment to make decisions about the plans need to ensure that members weakened by revolving equity back cooperative’s capital investment, invest in the cooperative based on to members. In the process of thus diminishing the policy role of use. Members who have built up redeeming old equity, current the board of directors. At times, equity over the years through direct members may see their patronage unallocated equity may become a investments, patronage retains, and refunds reduced—a confrontation large percentage of total equity. per-unit capital retains will be builder. Also, cooperatives attempt- When membership-allocated equity overinvested if they decrease their ing to remain price competitive interests diminish, member loyalty use of the cooperative. Likewise, may not generate enough revenue to the cooperative may suffer. An members who increase their use to repay equity investments in a increasing percentage of nonpat- should not have their fair share of timely manner. ronage income may result in the equity investment subsidized by The basic types of equity patronage dividends not being tied those who decrease their patronage. redemption plans include revolving closely to member use of the fund plans, the base capital plan, cooperative. Legal organization 27

the percentage-of-all-equities plan, overinvestment, depending on the between member equity investment and the special situation plan. proportion of underinvested and use. It also is difficult to These types frequently are used in members who increase their equity implement if patronage and mem- combination. investment. bership roles change frequently. The revolving fund plan pays The base capital plan approach Special situations include back equity in the chronological has appeal since it focuses on the member death or retirement, order that it was received. The relationship between member member bankruptcy or termination length of time is based on the investment and use of the coopera- of agricultural business activities, period necessary to accumulate tive. Level of retained earnings is relocation of the member from the replacement capital. An average not a factor. Thus, the cooperative cooperative’s trade area, resigna- time might be 10 years, but shorter is able to directly adjust member- tion of membership, and applica- periods such as 7 years might better ship equity levels. Its main draw- tion of the member’s equity to reflect the relationship between back is that cash-poor, underin- uncollectible accounts receivable. investment and use. Payback vested members may not be able to Special situations frequently get periods may vary, depending on the respond quickly to calls for a priority for equity payback. product or service line that gener- greater equity investment. Com- ated the invested dollars. pared to simply extending the Legal organization Revolving fund plans are payback period in a revolving fund Since there is no federal incorpora- popular because they are easy to plan, tension is increased within the tion law, cooperatives are incorpo- understand and administer. The cooperative—especially when a rated under state law. Every state relationship between investment cooperative experiences high has cooperative incorporation and use is strengthened if the member turnover. Also, base statutes. In Oregon, incorporation revolving time is not too long. capital plans are relatively difficult is done under Oregon Revised Furthermore, poor operating years to administer and understand. Statute Chapter 62—Cooperatives or extraordinary demands for Used by a few cooperatives, the (ORS 62). This section of the law equity investment can be absorbed percentage-of-all-equities plan was updated significantly in 1995. simply by extending the revolving involves retiring a set percentage of Modest changes were made in period. Yet, to do so invites dissen- each member’s equity investment subsequent legislative sessions and sion from members who develop regardless of issue date. This are included in the 2001 edition, unrealistic expectations for method has the effect of rewarding which is available on the Web redemption on a fixed schedule. new members more quickly for (http://www.leg.state.or.us/ors/ A base capital plan combines an their patronage. Charging full 062.html). The law covers topics assessment of annual capital needs margins for goods and services is such as the purpose for which and relative member use of the easier because members more cooperatives may be organized, cooperative’s services. Those quickly see those margins returned. formation and amending of articles members deemed underinvested are An added plus is that the system is of incorporation, and the creation assessed an additional amount of easy to understand and administer. and substantive provisions of equity, which either must be paid or In addition, it can be adjusted bylaws. carried at interest to compensate easily to reflect changes in operat- Anyone wanting to form a those members who are overin- ing results. cooperative in Oregon should vested. Members who are overin- A major disadvantage, however, consult ORS 62 and an attorney vested start to receive a partial, if is that the system makes it more well versed in cooperative law. The not full, redemption of their difficult to establish a balance 28 Cooperative management characteristics

Under these agreements, members may be required to deliver speci- fied quantities and qualities of products to the cooperative, which has the power to act as an agent for the member in handling and marketing the products. The members provide associated capital as specified by the board of direc- basic tors and pay penalties for com- documents corporation, modities that don’t meet specifica- that are names and addresses tions. The cooperative in turn prepared by the of the president and agrees to properly account for all incorporators are the articles of secretary, primary business activ- proceeds from sales and for all incorporation and the bylaws. In ity, federal employer identification monies retained for investments. Oregon and many other states, number, and any other information Cooperatives, like other busi- these documents are approved by required under the rules of the nesses, are required to stay and filed in the Corporation Corporate Division. informed about changes in appli- Division of the Secretary of State’s The bylaws of the cooperative cable laws. State laws related to Office. are a detailed listing of its structure contracts, the Uniform Commercial Articles of incorporation are and internal operations. They Code, banking and insurance, intended to describe the organiza- specify details such as membership workers compensation, unemploy- tion and its basic structures. qualifications and the rules for ment insurance, securities, and Normally included are the cooper- suspension or termination of taxation are among those that must ative’s name, purposes, powers and membership, regular and special be monitored. In addition, numer- limitations, place of business, meetings and associated voting ous federal laws and regulations numbers and terms of the initial set rights, capital structure, rules for must be followed. of directors, membership qualifica- distribution of net savings and the tions and rights, and capital stock use of capital retains and revolving Cooperative structure. After approval for capital accounts, and rules for management amending the bylaws or dissolving incorporation in Oregon, the characteristics Corporate Division issues a certifi- the corporation. Also included in The nature of cooperative manage- cate if desired by the cooperative. the bylaws is a listing of director ment has changed over the years. It That certificate includes a verifica- and officer qualifications, duties, has evolved from a typical one- tion of the cooperative’s name as it and rules for election. The duties of person operation where the man- is registered in Oregon and con- the manager usually are identified ager did everything, including firms that the cooperative is duly in some detail. waiting on customers, keeping the incorporated in the state of Oregon. In addition to the powers and books, and maintaining the facili- Each cooperative incorporated in restrictions under articles of ties. Today, even small coopera- Oregon must report annually to the incorporation and bylaws, many tives often invest in a professional Corporate Division to verify the cooperatives that market member management team that typically is name and address of the commodities have marketing contracts with their members. well educated and proficient in Cooperative management characteristics 29

In oversupply situations, marketing cooperatives may continue to The people receive commodities from their ➢ Professional management farmer-members and do the best they can to sell them; other busi- Directs the day-to-day affairs of the business, including nesses would not. personnel, facilities, equipment, and accounting. Managers frequently spend a ➢ Board of directors significant amount of time dealing Sets policies such as credit, pricing, purchasing, marketing, with issues related to equitable and services. Manages relations with members, professional treatment of the cooperative’s management, employees, and the public. owner-patrons. When a cooperative deals with a complex array of ➢ Member-owner-users services, commodities, and value- Patronize (use) the cooperative, elect directors, and provide added activities, the issue of input on policy issues. patronage returns can be compli- cated. Furthermore, assigning responsibility for member financ- directing the day-to-day affairs of facilities, financial resources, and ing of the cooperative through the cooperative. people to produce products and patronage retains can create Much of this emphasis on a services that meet the needs of conflict. high-quality management team is member-owners. It focuses not Cooperative managers typically based on the experiences of coop- only on day-to-day operations but find themselves in constant contact eratives that have failed due to also on formulating and executing with their owner-members. The inept management. Overextension policies, encouraging efficiency, members created the cooperative to of credit, unsound collection ensuring high-quality service, and provide needed products and practices, speculation in handling maintaining the financial strength services, and they frequently are member commodities, poor-quality of the cooperative. Management involved in critiquing the perfor- products and services, overexpan- also must take steps to keep the mance of the business they own— sion of facilities, inadequate business focused on increasing the almost every time they come into financial planning (including cooperative nature of its exist- contact with the cooperative. overly generous pooling of returns ence—member control, serving Managers find themselves in direct to members), and dominance by a first the needs of members, and a communications with their mem- single manager are but a few fair distribution of returns to user- bers on a regular basis—not just at examples. Avoiding common members. the annual meeting. management mistakes is critical for While many of the decision- A patron-owned business that a cooperative’s survival—espe- making techniques are the same as incorporates principles of demo- cially a startup business. those used in other businesses, a cratic control presents unique good cooperative manager must personal challenges to a manager. The role of management adjust measures of success. Low- Gone are the prospects of gaining Good cooperative management margin services may be provided control of the business through involves the successful combina- because they are in the best inter- superior performance, political tion of ideas, processes, materials, ests of owner-patrons. maneuvering, or outright 30 Cooperative management characteristics

ownership. Instead, a cooperative Also, with regard to people, managers focus considerable manager must be resigned to being successful cooperative managers attention on maintaining, upgrad- an employee, take action to involve must focus much time and attention ing, and replacing these assets to the majority of members in impor- on relations with members, govern- ensure maximum efficiency. In tant decisions, and yield to the ment agencies, and the general addition, safety, health, and envi- democratic control of membership. public. Two-way communication ronmental concerns are becoming between management and members increasingly important. Resource management must be encouraged. By doing so, Many agricultural cooperative the cooperative can keep its Management functions managers report that the most membership active and encourage and tools important key to their success is new members to join, share infor- Cooperative management typically dealing effectively with employ- mation on product and service focuses on the functions common ees—exhibiting superior leadership quality and financial requirements, to any type of business. Planning skills. Important factors include the and update its policies and operat- involves establishing policies and selection of personnel, training, ing procedures. Reaching out to procedures that are consistent with empowerment, and evaluation. government agencies and the the cooperative’s mission. Once Good supervisors are able to plan general public is critical to keeping plans are developed, all available for the work load, delegate author- a focus on the cooperative’s people, capital, and physical ity and related responsibility, set objectives, accomplishments, resources must be organized performance standards and review benefits, and limitations, while effectively to accomplish the plan. job performance, establish griev- building public acceptance and Through means of explanation and ance procedures, and provide understanding of its mission. teaching, the resources of the leadership. Capital resource management is cooperative then are directed to the Management should strive to a constant concern of agricultural day-to-day activities necessary to provide motivation and create a cooperative managers. This issue fulfill the plan. corresponding rewards system. goes beyond the day-to-day man- Along the way, management Each employee’s compensation and agement of cash, receivables, must ensure that different units benefits package should provide an inventories, equipment, facilities, within the organization are coordi- incentive to do everything possible and payables to include invest- nated so that the cooperative moves to benefit the cooperative and its ments in other cooperatives and smoothly and without internal patron-owners. Critical in this obtaining favorable long-run conflict toward meeting its goals. regard are the establishment of financing. It also involves creating Periodically, management must goals for employees, inspiring and systems to encourage member- check results against standards and recognizing good performance, patron investments; maintain a take remedial action where war- developing a sense of mission financial position acceptable to ranted to eliminate unwanted through teamwork and a high lenders, suppliers, and buyers; and events or improve operating degree of esprit de corps, creating ensure financial practices consis- efficiency. an environment where employees tent with sound business and These functions usually are are encouraged to be innovative, cooperative principles. accomplished by tools such as and maintaining two-way commu- Like any other business, equip- accounting systems; control nication between supervisors and ment and facilities can represent a reports; security and safety mea- other employees. significant portion of a sures; training and evaluation cooperative’s assets. Thus, good Cooperative management characteristics 31

ever-changing agricultural business environment, but it requires time and money. Furthermore, it can be used as a technique to become proactive rather than reactive in charting a path for the cooper- ative’s future. However, strategic planning requires the commitment of everyone in the organization— managers, directors, employees, and member-owners. To be effective, six elements must be present in a strategic plan: A mission statement programs; personnel incentive Security and safety measures An assessment of the current packages; communications systems refer to programs such as insurance condition and outlook for the such as membership and employee for employees and assets; monitor- future publications, periodic and annual ing employees who handle assets reports, member and employee such as cash; protecting against A statement of objectives and meetings, and reports by educa- inventory, equipment, and facility goals tional and government agencies; theft and vandalism; programs to A strategy to meet those objec- and long-run planning efforts protect the safety and welfare of tives and goals aimed at encouraging growth in employees, patrons, and the general A means of implementing the services, facilities, and capital. public; and strict adherence to strategy A proper accounting system environmental protection standards. A feedback mechanism includes financial statements such as balance sheets, profit and loss Management’s role When implemented successfully, statements, enterprise accounts, and in strategic planning the planning process greatly member equity and patronage Along with boards of directors and influences both the short-run and accounts; proforma budgeting and employees, management typically long-run character of the coopera- cash flow management systems; plays an important role in develop- tive. It provides a means of system- and both internal and external audit ing a cooperative’s strategic plan— atically identifying and examining systems to prevent errors or other its definition of mission and the issues, problems, opportunities, and leakages (e.g., employee, member, environment in which it operates, alternative courses of action. By or nonmember theft). This system the setting of objectives and creating a strategic thinking can help management evaluate strategies to reach them, and the atmosphere, more effective deci- actual versus expected results and creation of feedback systems that sions can be made, giving the facilitate planning and control. tell leadership whether these steps organization a competitive edge in Control reports frequently include have been identified and imple- the marketplace. accounts receivable and inventory mented correctly. Continuous A key element is the mission assessments, financial ratios, and planning can help cooperatives statement, which clearly states the information on operating results. position themselves in an purpose of the cooperative’s 32 The nature and role of cooperative directors

sound recommendations and Six steps to strategic planning guidance. ➢ Develop a mission statement. The role of the board as a policymaking body ➢ Assess the cooperative’s operating environment. Directors and managers play ➢ Establish objectives, with benchmarks for measuring results. unique roles in an agricultural cooperative. Directors typically ➢ Identify specific actions that will move the cooperative focus more on the longer term and toward its goals. on policy issues, e.g., board/ ➢ Combine all resources to implement the strategies. manager functions and relation- ships; member, employee, and ➢ Obtain feedback to lead to improvements. public relations; organizational concerns; and operational policies related to credit, pricing, purchas- existence by defining the direction planning process can be changed in ing, marketing, and services it will take and the boundaries the future to better improve the provided to the membership. within which planning will take position of the cooperative. Problems typically arise when place. A critical step in developing directors slip too far into the day- a mission statement is an assess- The nature and role to-day management role. Instead, ment of the current operating of cooperative directors need to represent the environment and the likely future directors general membership in developing environment. The entire coopera- goals and objectives, which man- tive business is assessed as accu- A board of directors provides agement then implements through rately and objectively as possible leadership and guides the business its control of daily operations. vis-à-vis its external environment affairs of a cooperative. It has a A major function of the board is and the strategic issues it faces. central role in strategic planning. to stay in touch with the general Then, compatible objectives are Directors typically are members of membership so that member established, along with benchmarks the cooperative and are elected at concerns can be taken into account for measuring both short-run and the annual membership meeting. during decision-making. Further- long-run results. The cooperative’s bylaws specify more, policies established by the Next, strategies are developed to director eligibility, method of board of directors must be commu- identify an exact set of actions that selection, term of office, and board nicated to the membership. Particu- will guide the cooperative within organization. larly important is communication its carefully analyzed resource Board membership brings great about the board’s decision on constraints toward its goals. responsibility. Those selected need distribution of year-end earnings to Implementation of the strategies to be able to participate in the owner-patrons. When some portion implies marshalling all available board’s role of listening and of earnings is retained as operating resources. Finally, the feedback communicating with both manage- or equity investment, the decision process measures how well the ment and member-owners. As an must be explained carefully. strategic plan was implemented and advisory body to both management Protection of the membership’s provides insights into how the and membership, the board financial assets is another members must be able to provide Membership responsibilities 33

important function of the board. between the cooperative and the meetings. Much time may be spent The membership places trust in the general community? in communicating with members, board to invest those assets wisely preparing for meetings, represent- for increased benefits to members. Directors as individuals ing the cooperative at public In addition, the board has the Electing a board member is one of functions, and communicating with responsibility to distribute those the most important functions of a legislators and regulators. benefits equitably to a typically cooperative member. Board mem- diverse membership. bers can have a direct impact on the Membership Perhaps the single most impor- success of the cooperative and in responsibilities tant task of the board is to hire the turn on the profitability of the Membership in an agricultural general manager and review his or member’s own business. Above all, cooperative brings many responsi- her performance on at least an a prospective director needs to be a bilities. As a democratically annual basis. Beyond having a strong supporter and patron of the controlled organization, member good business sense, the manager cooperative and must understand participation and voting at member- must have excellent leadership its unique role in business. Getting ship meetings is important. Equally qualities, possess attitudes and along well with people is an so is member patronage of the goals that are compatible with the important characteristic. So too is cooperative. board’s views, and understand the regular participation in cooperative unique nature of a cooperative meetings. Distinctive features business. A written job description, Since a board member makes Those who belong to a cooperative achievable business objectives, and business decisions for the coopera- business frequently are referred to clear performance criteria are tive, he or she must be able to think as owner-member-patrons. They necessary for an effective review. through business problems inde- typically are agricultural producers Regular self-evaluation needs to pendently and to communicate who own the cooperative, which is be done by the board. Much of that effectively. The prospective board in business to serve producer- review may be fairly objective. Did member needs to be aware of members, who are expected to the cooperative meet its dollar current events that might affect the patronize (buy/use) its services. goals? Were board meetings held cooperative. Leadership qualities Many cooperatives require their when planned? Was the business and an orientation toward further- members to patronize the coopera- plan implemented? Was the man- ing the needs of membership also tive in order to vote. ager evaluated on schedule? In are important. Directors must be By design, the return on member addition, more subjective evalua- receptive to new ideas that may investment is kept low to keep the tion is needed and frequently calls enhance the benefits or lessen the focus on the benefits derived from for a collective opinion from the limitations of cooperative member- membership. In turn, the focus is directors. Such questions might ship. A reputation for integrity, on increased returns to members’ include: Is there a good working honesty, and respect for the law is private business operations. For relationship between the board and critical. many members, a cooperative the manager? Were board meetings Board membership typically really is an extension of their own conducted in a harmonious man- requires a significant amount of business that serves certain pur- ner? Were the needs of members time away from the director’s own chasing or marketing needs. put above the needs of the direc- business. Directors need to be able Essentially, members form tors? Is there a good relationship to do more than just attend formal cooperatives to provide services to 34 Cooperative influences on public policy

facilities, and capital it competitive vitality and helps it needs so that they can stay in tune with the needs of its help the cooperative members. Thus, members develop stay ahead of mem- a sense of ownership and responsi- bership needs for new bility for the cooperative’s success. technology and other Yet, it is clear that maintenance of themselves on a nonprofit resources. They also need loyalty to a cooperative requires the basis. Monetary gains are to be familiar with the cooper- organization not only to have returned to them in proportion to ative’s legal papers so they can competitive products, prices, and their patronage. Members must vote intelligently on changes and service, but also to exhibit honesty realize that some net returns may act responsibly in helping meet the and provide timely, accurate be retained by the cooperative to organization’s contractual information. finance its operations or increase obligations. Many cooperatives rely on their its equity base. This money is A broad role in the management members to find new members to returned to members over time as of the cooperative is important for replace those who leave farming or new retains become available. every member. In that regard, it is move away. In many cases, new the responsibility of members to members are needed to improve the Requirements stay informed about the coopera- financial strength or increase the To be successful, a cooperative’s tive. They then can elect excellent dollar volume of the cooperative. members must actively partici- people from among their own ranks Members frequently are able to pate in overseeing its organiza- to represent them in most manage- encourage their nonmember tion, sound management, and ment affairs. Members must take neighbors to patronize the coopera- operation. Members need to make the time and effort to understand tive and perhaps later become their wishes known. By doing so, and evaluate board actions, while members. When recommending their cooperative can better meet avoiding undue pressure on board others for membership in a process- their needs. members. However, directors need ing or marketing cooperative, Members need to understand members to encourage and chal- members must be especially careful the nature of their cooperative— lenge them so that needed services to recommend only producers who its purpose for existence, objec- can be provided by the cooperative. can meet standards for high quality tives, benefits and limitations, Members must patronize their and consistent volume. operating structures, finances, and cooperative enough to ensure it an long-run planning processes. adequate amount of business. The Cooperative They need to be familiar with the bond between members and their influences cooperative’s articles of incorpo- cooperative is critical to a cooper- on public policy ative’s success. This link implies ration and bylaws, the legal Both elected and appointed offi- limitations on their operations and loyalty to the cooperative and its objectives and goals. In turn, the cials regularly make policy deci- directors, and requirements for sions that affect agricultural member participation and quality cooperative influences the growth, development, and business envi- cooperatives. The more progressive control. cooperatives have developed Members must understand the ronment for the member’s personal enterprise and community. programs to influence that deci- long-range planning process for sion-making. By involving direc- targeting future services, Member involvement in the cooperative’s business affairs gives tors, managers, other employees, Relationships and linkages between independent, federated, and centralized cooperatives 35

and members, cooperatives poten- This contact may occur at coopera- geographic territory, add new tially can have a positive impact on tive functions or through one-on- services, or expand facilities. As the policy environment in which one contacts outside the coopera- markets grow and economies of they operate. tive environment. Financial support size increase, consolidation of Once a cooperative completes its for election campaigns of officials operations may eliminate overlap- long-run business plan, meeting the who identify with positions impor- ping overhead costs, redundant objectives in that plan can be tant to the cooperative also can be advertising, or unnecessary enhanced by crafting a complemen- useful. Direct contact between facilities and record keeping. tary public policy program. It is cooperative leaders and legislators Small, independent coopera- better in this regard to be proactive and their administrative staffs can tives may form joint ventures with than reactive in order not to miss be just as helpful. one another that allow them to opportunities to positively influ- Cooperative leadership may find combine resources for certain ence government decision-making. it helpful to build coalitions with business objectives while continu- Basic to a cooperative’s public trade associations and other indus- ing to exist as separate business policy program is a written set of tries that share common concerns. entities. They maintain individual policy resolutions. These resolu- In doing so, cooperative leaders business identities while jointly tions are designed to anticipate can strive for a patient, long-term benefiting from expanded ser- problems and opportunities. The approach that will build credibility vices, increased efficiency, and policies can provide guidance to with policymakers and lead them to better control of operating costs cooperative leaders as they attempt solicit advice from cooperative and margins. In many cases, joint to influence decisions by govern- members, directors, managers, and ventures eliminate some of the mental agencies and legislative other leaders. negatives of mergers. They do so bodies. by avoiding the difficulties and While some of these policy Relationships and hostilities related to closing resolutions may originate with linkages between duplicate facilities, changing poor directors, management, or other independent, practices and policies, laying off advisors, it is important for mem- excess employees, and disrupting bership to have a say over policy federated, and community identities. statements and to be able to enact centralized Federated cooperatives are changes or reject resolutions. Many cooperatives formed by individual cooperatives. agricultural cooperatives have A cooperative’s need for growth The member cooperatives main- found a resolutions committee may go beyond its internal abilities tain their identity as individual made up of elected members to be to increase volume and services. businesses while holding member- a good way to sort through ideas Strategic alliances may be neces- ship in the federated cooperative. for resolutions. sary. Strategic alliances are moti- On occasion, individuals are Through education and commu- vated by many economic reasons. allowed to be members of feder- nication efforts, members can be Motives may include capturing ated cooperatives. By creating encouraged to support favorable economies of size, gaining market such an entity, cooperatives may initiatives at the “grassroots” level. stability, or stabilizing seasonal be better able to provide services Direct contact between cooperative patterns. Or, an alliance may to their members than they could members and policymakers can be simply be a cheaper, faster, and less with their individual resources. a very effective way to influence risky way to acquire new Federated cooperatives are legislation and administrative rules. designed to do such things as 36 Sources for additional information

facilitate joint marketing efforts or become provide supplies or specialized acquainted, services. Common federated they can business activities include the develop creation of marketing-in-common trusting agencies and purchasing agencies relationships for more economical acquisition of and open supplies. paths for Centralized cooperatives have leadership. In individuals as members and the process maintain satellite facilities in of those strategic areas to serve those discussions, all positions, opinions, ability of directors, managers, and members. They frequently are and concerns need to be made clear other employees to successfully formed by consolidations of among the participants. control, finance, and operate a previously independent coopera- If any problems are identified, cooperative. In many smaller tives into a newly created coopera- there needs to be a sense that agricultural cooperatives, the tive. Motivations for such a change everyone is working objectively manager may take responsibility include situations where the names, toward solutions. The focus needs for educational and training pro- images, geographical locations, to be on the future and on joint grams—regular newsletters, product lines, or philosophical problem solving. A positive “we” employee and member meetings, or orientations of the original coop- environment needs to be estab- even one-on-one contact with eratives are not compatible. Form- lished. Strategic planning is critical members and directors. Through ing a new cooperative can create a so that potential deadlocks can be education, even nonmembers can neutral environment by eliminating avoided and issues and choices can be encouraged to seek the benefits former legal entities, names, and be negotiated. The ultimate goal of cooperative principles and operating structures. With a fresh should be to form a strong, unified, practices. start, the new cooperative can and efficient cooperative that is adopt the strengths of the old progressive in its efforts to incorpo- Selected organizations cooperatives and eliminate per- rate sound planning, negotiation, The Agricultural Cooperative ceived weaknesses. The downside, and problem solving. The new Council of Oregon (ACCO) is a however, may be higher legal cooperative will be more likely to trade association of about 25 state expenses. Furthermore, the new have the resources and strength to and regional agricultural coopera- cooperative may not be able to provide greater benefits to all of its tives that do business in Oregon. retain the favorable identities members. ACCO focuses on supporting associated with the former educational programming related to cooperatives. Sources for agricultural cooperatives and also Successful completion of additional supports lobbying efforts on legislative issues of broad interest consolidations can be difficult. A information key element for success is one-on- to its members. An annual meeting one discussions between the Continuing education and training usually centers on educational agricultural members of each are important for those associated topics of interest to agricultural cooperative and between their with an agricultural cooperative. cooperative managers, directors, boards of directors. As people Such activities can improve the and members. Sources for additional information 37

Also, ACCO strongly supports the annual Cooperative Leadership Seminar, which is conducted by the Who can help? Executive Institute for Northwest ➢ Agricultural Cooperative Council of Oregon (ACCO) Cooperatives. The seminar is designed in part to educate agricul- John H. McCulley, Executive Secretary tural cooperative directors and P.O. Box 2042, Salem, OR 97308-2042 managers in areas such as the Phone: 503-370-7019; Fax: 503-587-8063 changing business environment, E-mail: [email protected] decision-making responsibilities, ➢ The National Council of Farmer Cooperatives (NCFC) financial analysis and control, and 50 F Street NW, Suite 900, Washington, DC 20001 improved communications and working relationships in an agricul- Phone: 202-626-8700; Fax: 202-626-8722; Web site: tural cooperative environment. http://www.ncfc.org/ ACCO is a member of the National ➢ U.S. Department of Agriculture (USDA) Council of Farmer Cooperatives. Robert K. Haase, Cooperative Development Specialist A contact for ACCO is Mr. John Cooperative Services Program, Rural Business-Cooperative H. McCulley, Executive Secretary, Service, 625 SW Salmon Ave., Suite 5, Redmond, OR 97756 ACCO, P.O. Box 2042, Salem OR 97308-2042. Phone: 503-370-7019. Phone: 541-923-4358, ext. 124; E-mail: [email protected] Fax: 503-587-8063. E-mail: Web site: http://www.rurdev.usda.gov/rbs/index.html [email protected] The National Council of Farmer Cooperatives (NCFC) is a NCFC can be contacted at 50 F a cooperative development special- national association of cooperative Street NW, Suite 900, Washington, ist in each state. businesses owned and controlled DC 20001. Phone: 202-626-8700. In part, this new agency is by farmers—food and fiber market- Fax: 202-626-8722. Web site: intended to help farmers determine ing, agricultural credit, and agricul- http://www.ncfc.org/. the feasibility of a proposed tural supply cooperatives. Its A number of educational pro- agricultural cooperative venture, primary goals include the promo- grams are identified and organize potential members to tion of farmer cooperatives, liaison publications are accessible at launch the corporation, and develop with governmental agencies, and http://www.ncfc.org/resources/ and implement a business plan. It serving as a communications link For more than 80 years, the U.S. also can help new cooperatives with agricultural cooperatives Department of Agriculture (USDA) develop and complete producer about emerging issues of interest. has sought to help agricultural surveys, conduct research and An additional goal is to serve as a cooperatives develop and prosper transmit findings about problems forum to promote needed educa- through the educational efforts of and issues, evaluate and determine tional programs for cooperative units such as the Agricultural the best business structure for the directors, managers, and members; Cooperative Service. In an effort to cooperative, and obtain information legislators and regulators; and the improve its service, USDA recently on financing available through the general public. reorganized. The new Rural federal government’s guaranteed Business-Cooperative Service has loan programs. 38 Sources for additional information

For most of the past century, For further reading Cooperatives, Volume 61, USDA’s cooperative assistance has Number 8 (November 1994). Abrahamsen, Martin A., et al. been concentrated on agricultural Cooperative Principles and Campbell, Dan. Patriotic Duty: cooperatives. While agricultural Legal Foundations (U.S. Depart- Farmer-Panelists Say Co-op marketing and supply cooperatives ment of Agriculture, Agricultural Loyalty Won’t Overcome remain a primary focus of USDA’s Cooperative Service. Farmer Inferior Service. Farmer Coop- efforts, Rural Business-Cooperative Cooperatives in the United eratives, Volume 60, Number 4 Service plans to gradually expand States, Cooperative Information (July 1993). the cooperative program to include Report 1, Section 1, July 1990). Chesnick, David S. Analyzing assistance to all types of rural Fiscal Strength of Local Co-ops cooperatives. Barton, David G. What Is a Coop- Requires Looking Beyond Fiscal The Cooperative Services erative? Cooperatives in Agri- Statements. Farmer Coopera- program of Rural Business-Coop- culture (Prentice-Hall, Inc., tives, Volume 61, Number 8 erative Service not only provides 1989). (November 1994). technical assistance, but also Borst, Alan. Network Movement conducts cooperative-related Presents Challenges, Opportuni- Cobia, David W. and Thomas A. research and produces information ties for Farmer Cooperatives. Brewer. Equity and Debt. to promote public understanding of Farmer Cooperatives, Cooperatives in Agriculture cooperatives. They have an excel- Volume 61, Number 10 (January (Prentice-Hall, Inc., 1989). lent series of circulars and bulletins 1995). Cobia, David W., Gene Ingalsbe, online (http://www.rurdev.usda. Bowne, Shirlee. Officers’ Respon- and Jeffrey S. Royer. Equity gov/rbs/pub/cooprpts.htm). For a sibilities Hinge on Loyalty, Care. Redemption. Cooperatives in general overview of all of the Farmer Cooperatives, Volume Agriculture (Prentice-Hall, Inc., services of the Rural Business– 59, Number 12 (March 1993). 1989). Cooperative Service, visit their Buccola, Steven. Cooperatives. In Cropp, Robert and Gene Ingalsbe. Web site (http://www.rurdev.usda. Encyclopedia of Agricultural Structure and Scope of gov/rbs/index.html). Science, C.J. Arntzen, ed. Agricultural Cooperatives. Those interested in rural coop- (Academic Press–Harcourt, Cooperatives in Agriculture erative development in Oregon can Brace & Jovanovich, San Diego, (Prentice-Hall, Inc., 1989). obtain one-on-one assistance from 1994). Deiter, Ron E. and Roger G. the Rural Business–Cooperative Ginder. Directors and Manag- Service by contacting Mr. Robert Buccola, Steven. Summary Lecture given at the symposium on The ers. Cooperatives in Agriculture K. Haase, Cooperative Develop- (Prentice-Hall, Inc., 1989). ment Specialist, Cooperative Cooperative Experience in Agribusiness Coop- Services Program, Rural Business– Agriculture: International Duft, Ken D. eratives in the 21st Century Cooperative Service, 625 SW Comparisons (Ma’ale Salmon Ave., Suite 5, Redmond, Hachamisha, Israel, April 1992). (Agribusiness Management, OR 97756. Phone: 541-923-4358, Campbell, Dan. The Long Haul— Cooperative Extension, Wash- ext. 124. E-mail: As Distance Increases Between ington State University, Pull- [email protected] Farms So Does Need for Coop- man, June 1993). erative Alliances. Farmer Sources for additional information 39

Dunn, John R., et al. Positioning Frederick, Donald A. Are Your Agricultural Cooperative Farmer Cooperatives for the Articles of Incorporation Current Service. Cooperative Informa- Future—A Report to Congress and Correct? Farmer tion Report 38, May 1989). (U.S. Department of Agriculture, Cooperatives, Volume 61, Ginder, Roger G. and Ron E. Agricultural Cooperative Number 5 (September 1994). Deiter. Managerial Skills, Service, October 1987). Frederick, Donald A. Cooperative Functions and Participants. Farm Credit Administration. 1995 Involvement in Public Policy Cooperatives in Agriculture Annual Report on the Financial (U.S. Department of Agriculture, (Prentice-Hall, Inc., 1989). Condition and Performance of Agricultural Cooperative Goff, James L. and Gene Ingalsbe. the Farm Credit System (June Service, Cooperative Informa- Is a Co-op in Your Future? 1996). tion Report 42, May 1993). (U.S. Department of Agriculture, Franklin, Don. Director Directives. Frederick, Donald A. Keeping Agricultural Cooperative Farmer Cooperatives, Volume Cooperative Membership Rolls Service. Cooperative Informa- 61, Number 3 (June 1994). Current (U.S. Department of tion Report 10, April 1987). Frederick, Donald A. Are Your Agriculture, Agricultural Coop- Hoyt, Ann. Cooperatives in Other Bylaws Current and Correct? erative Service, Cooperative Industries. Cooperatives in Financial Planning Provisions. Services Division. Cooperative Agriculture (Prentice-Hall, Inc., Farmer Cooperatives, Vol- Information Report 37, October 1989). 1991). ume 61, Number 12 (March Ingalsbe, Gene. Cooperatives in 1995). Frederick, Donald A. Sample Legal Agribusiness (U.S. Department Frederick, Donald A. Are Your Documents for Cooperatives of Agriculture, Agricultural Bylaws Current and Correct? (U.S. Department of Agriculture, Cooperative Service. Coopera- Members’ Capital. Farmer Agricultural Cooperative tive Information Report 5, Cooperatives, Volume 61, Service. Cooperative Informa- September 1993). tion Report 40, May 1990). Number 11 (February 1995). Ingalsbe, Gene. Cooperative Facts Frederick, Donald A. Are Your Frederick, Donald A. and Gene (U.S. Department of Agriculture, Bylaws Current and Correct? Ingalsbe. What Are Patronage Agricultural Cooperative Directors and Officers. Farmer Refunds? (U.S. Department of Service. Cooperative Informa- Cooperatives, Volume 61, Agriculture, Agricultural Coop- tion Report 2, July 1990). erative Service. Cooperative Number 9 (December 1994). Ingalsbe, Gene and James L. Goff. Information Report 9, May Frederick, Donald A. Are Your How To Start a Cooperative 1990). Bylaws Current and Correct? (U.S. Department of Agriculture, Membership Meetings. Farmer Frederick, Donald A. Tax Treat- Agricultural Cooperative Cooperatives, Volume 61, ment of Cooperatives Service. Cooperative Informa- Number 8 (November 1994). (U.S. Department of Agriculture, tion Report 7, 1990). Agricultural Cooperative Frederick, Donald A. Are Your Ingalsbe, Gene and Frank Groves. Service. Cooperative Informa- Bylaws Current and Correct? Historical Development. Coop- tion Report 23, January 1990). Background Membership eratives in Agriculture (Prentice- Provision. Farmer Cooperatives, Frederick, Donald A. Managing Hall, Inc., 1989). Volume 61, Number 6 (October Cooperative Antitrust Risk 1994). (U.S. Department of Agriculture, 40 Sources for additional information

Kirkman, C.H., Jr. Cooperative Liebrand, Carolyn Betts and Development Administration, Member Responsibilities and Thomas Gray. What Do Mem- Cooperative Services. Coopera- Control (U.S. Department of bers Think?: Mail Surveys Help tive Information Report 45, Agriculture, Agricultural Coop- Distinguish Vocal Few from Section 1, July 1994). erative Service. Farmer Silent Majority. Farmer Namken, Jerry C. Planning for Cooperatives in the United Cooperatives, Volume 60, Success—Avoid “Business States, Cooperative Information Number 10 (January 1994). Suicide” with a Strategic Plan Report 1, Section 7, January Martin, George. Should Volume be For the Future. Farmer Coop- 1990). a Serious Factor in How Coop- eratives, Volume 61, Number 9 Kirkman, C.H., Jr. Measuring Co- eratives Treat Their Farmer (December 1994). op Directors (U.S. Department Customers? Farmer Coopera- Pacific Sea Grant Advisory Pro- of Agriculture, Agricultural tives, Volume 57, Number 4 gram. Fisheries Cooperative Cooperative Service. Coopera- (July 1990). Symposium Proceedings tive Information Report 15, Mather, J. Warren, Gene Ingalsbe, (University of Washington, January 1988). and David Volkin. Cooperative Seattle, February 1975). Kirkman, C.H., Jr. Guidelines Management (U.S. Department Parsons, Carol. Making Dust— Co-op Employees Need of Agriculture, Agricultural New Alliances Explore the (U.S. Department of Agriculture, Cooperative Service. Farmer Frontiers of Cooperation. Agricultural Cooperative Cooperatives in the United Farmer Cooperatives, Volume Service. Cooperative Informa- States Cooperative Information 62, Number 3 (June 1995). tion Report 18, August 1986). Report 1, Section 8, July 1990). Rapp, Galen. State USDA/RECD Kirkman, C.H., Jr. Cooperative Mather, J. Warren and Homer J. Offices Gear Up to Offer Education and Training Preston. Cooperative Benefits Cooperative Development (U.S. Department of Agriculture, and Limitations (U.S. Depart- Service. Farmer Cooperatives, Agricultural Cooperative ment of Agriculture, Agricultural Volume 62, Number 5 (August Service. Farmer Cooperatives in Cooperative Service. Farmer 1995). the United States, Cooperative Cooperatives in the United Rapp, Galen. Survival of the Information Report 1, Section States Cooperative Information Smallest: With Sound Planning, 10, March 1983). Report 1, Section 3, May 1990). Small Cooperatives Can Thrive. Kraenzle, Charles A. Co-ops Meyer, Tammy M. Understanding Farmer Cooperatives, Volume Increase Share of 1991 Farm Cooperatives: Cooperative 61, Number 5 (August 1994). Marketings and Production Business Principles (U.S. Rapp, Galen. Sample Policies for Supplies. Farmer Cooperatives, Department of Agriculture, Cooperatives (U.S. Department Volume 60, Number 2 (May Rural Development Administra- of Agriculture, Agricultural 1993). tion, Cooperative Services. Cooperative Service. Coopera- Cooperative Information Report Krueckeberg, Harry F., Joan tive Information Report 39, May 45, Section 2, August 1994). Fulton, and Jodi Raim. Gauging 1990). Customer Reaction to a Coop- Meyer, Tammy M. Understanding Rathbone, Robert C. Cooperative erative Marketing Agreement. Cooperatives: The American Financing and Taxation Farmer Cooperatives, Volume System of Business (U.S. Depart- (U.S. Department of Agriculture, 62, Number 4 (July 1995). ment of Agriculture, Rural Agricultural Cooperative Sources for additional information 41

Service, Farmer Cooperatives in U.S. Department of Agriculture, Volkin, David. Understanding the U.S. Cooperative Informa- Agricultural Cooperative Capper-Volstead (U.S. Depart- tion Report 1, Section 9, Sep- Service. Members Make Co-ops ment of Agriculture, Agricultural tember 1991). Work. Cooperative Information Cooperative Service. Coopera- Richardson, Ralph M., et al. Report 12 (February 1993). tive Information Report 35, Farmer Cooperative Statistics, U.S. Department of Agriculture, September 1989). 1991 (U.S. Department of Agricultural Cooperative Wadsworth, James J. The Rocky Agriculture, Agricultural Coop- Service. What Co-op Directors Road to Merger. Farmer Coop- erative Service. ACS Service Do. Cooperative Information eratives, Volume 62, Number 9 Report 33, November 1992). Report 14 (October 1992). (December 1995). Royer, Jeffrey S. Taxation. Coop- U.S. Department of Agriculture, Wadsworth, James J. Blueprint for eratives in Agriculture (Prentice- Agricultural Cooperative Success: Action-Oriented Hall, Inc., 1989). Service. Organizing and Con- Strategic Plans Can Give Co-ops Royer, Jeffrey S. and Gene ducting Cooperatives’ Annual Competitive Edge. Farmer Ingalsbe. Equity Redemption Meetings. Cooperative Informa- Cooperatives, Volume 60, Guide (U.S. Department of tion Report 21 (June 1992). Number 6 (September 1993). Agriculture, Agricultural Coop- U.S. Department of Agriculture, Wissman, Roger. The Role of erative Service. Cooperative Agricultural Cooperative Federated Cooperatives in Information Report 31, May Service. Organizations Serving Equity Redemption. Farmer 1987). Cooperatives. Farmer Coopera- Cooperatives, Volume 62, Schrader, Lee F. Economic Justifi- tives in the United States. Number 1 (April 1995). cation. Cooperatives in Agricul- Cooperative Information Wissman, Roger A. Working with ture (Prentice-Hall, Inc., 1989). Report 1, Section 5 (July 1990). Financial Statements—Guide for Smith, Frederick J. Organizing and Vilstrup, Richard H., David W. Cooperative Members Operating a Fishery Coopera- Cobia, and Robert Cropp. (U.S. Department of Agriculture, tive—Part 1, SG 19 (Extension Adjustments by Existing Coop- Agricultural Cooperative Marine Advisory Program, eratives. Cooperatives in Service. Cooperative Informa- Oregon State University, Agriculture (Prentice-Hall, Inc., tion Report 43, November Corvallis). 1989). 1991). U.S. Department of Agriculture, Vilstrup, Richard H. and Frank W. Agricultural Cooperative Groves. Communications. Acknowledgments Service. Co-op Journey Started Cooperatives in Agriculture Special thanks to a number of Early for Dreyer, Honored (Prentice-Hall, Inc., 1989). Extension clientele and AREc 372 Cooperator. Farmer Coopera- Vogelsang, Donald L., et al. Agricultural Cooperatives students tives, Volume 60, Number 1 Cooperative Organization and who provided helpful comments (June 1993). Structure (U.S. Department of and ideas for revising this publica- U.S. Department of Agriculture, Agriculture, Agricultural Coop- tion. Agricultural Cooperative erative Service. Farmer Coop- Service. What the Co-op Man- eratives in the United States. ager Does. Cooperative Infor- Cooperative Information Report mation Report 16 (April 1993). 1, Section 6, September 1988). © 2004 Oregon State University

The Oregon State University Extension Service educates Oregonians by delivering research-based, objective information to help them solve problems, develop leadership, and manage resources wisely. Extension’s agriculture program provides education, training, and technical assistance to people with agriculturally related needs and interests. Major program emphases include food and fiber production, farm business management, marketing and processing of agricultural products, resource use and conservation, and environmental preservation and improvement.

This publication was produced and distributed in furtherance of the Acts of Congress of May 8 and June 30, 1914. Extension work is a cooperative program of Oregon State University, the U.S. Department of Agriculture, and Oregon counties. Oregon State University Extension Service offers educational programs, activities, and materials—without regard to race, color, religion, sex, sexual orientation, national origin, age, marital status, disability, and disabled veteran or Vietnam-era veteran status—as required by Title VI of the Civil Rights Act of 1964, Title IX of the Education Amendments of 1972, and Section 504 of the Rehabilitation Act of 1973. Oregon State University Extension Service is an Equal Opportunity Employer.

Published March 1997. Revised March 2004.