United States Department of Agriculture Cooperatives in Rural Busines s– Cooperative Service Agribusiness Cooperative Information Report 5 Abstract This publication is written for audiences at the secondary and postsec - ondary levels, or for anyone interested in agricultural cooperatives. It pro - vides a description and brief history of cooperatives, and discusses their relationship with agribusiness. This material describes the different types of cooperatives as well as their structural and organizational characteristics, and explains how they are governed and fi nanced. It discusses career opportunities in the cooperative fi eld, and explores the future of coopera - tives in a constantly changing business environment. Chapters 1-9 are each followed by brief chapter review questions. Keywords: cooperatives, agribusiness, principles, practices, organization, structure, fi nance, careers. Cooperatives in Agribusiness Katherine L. Hanson Education Specialist Education and Member Relations Rural Business-Cooperative Service U.S. Department of Agriculture Cooperative Information Report 5 March 2002 This report was originally written by Irwin Rust in 1968 and published as Education Circular 33. It was later superseded by Cooperative Information Report 5 in 1978, written by Gene Ingalsbe, and has since been revised several times. USDA's Cooperative Services program is now contained in USDA's Rural Development mission area and housed in Rural Business-Cooperative Service (RBS). For a catalog of related publications, please ask for Cooperative Information Report 4 and write to USDA/RBS, 1400 Independence Ave. SW, Stop 0705, Washington, DC 20250-0705 (phone: 202-720-8381 or FAX 202-690-4083). Publications and information are also available on the Internet. The RBS Web site is: http://www.rurdev.usda.gov/rbs/index.html Contents CHAPTER 1. HOW AGRIBUSINESS AFFECTS OUR LIVES . .1 CHAPTER 2. WAYS OF DOING BUSINESS . .5 Individually Owned . .5 Partnership . .7 Corporation . .8 Investor-owned Firm . .8 Cooperative Corporation . .9 Limited Liability Company . .11 CHAPTER 3. WHAT IS A COOPERATIVE? . .12 Why Is a Cooperative Started? . .13 What Is a Cooperative's Purpose? . .13 How Is a Cooperative Different? . .14 User-owned . .14 User-controlled . .14 User-benefits . .15 Limited Return on Equity Capital . .16 Important Practices . .17 Open Membership . .17 Continuing Member Education . .17 Cooperation Among Cooperatives . .18 i Contents CHAPTER 4. HOW COOPERATIVES ARE ORGANIZED . .19 Articles of Incorporation . .19 Bylaws . .19 Marketing Agreements . .20 Membership . .21 CHAPTER 5. COOPERATIVE STRUCTURES . .22 Local Cooperative . .22 Regional Cooperative . .22 CHAPTER 6. WHO RUNS THE COOPERATIVE BUSINESS? . .25 Members . .25 Directors . .26 Manager and Staff . .27 CHAPTER 7. HOW COOPERATIVES ARE FINANCED . .29 Capital Structure . .29 Capital Needs . .29 Member Capital . .30 Facility Loans . .31 Operating Loans . .32 Commodity Loans . .32 Special Services Loans . .32 ii Contents Revolving Capital Finance . .33 Reserves . .35 CHAPTER 8. TYPES OF COOPERATIVES . .36 Marketing Cooperatives . .37 Bargaining Cooperatives . .40 Purchasing Cooperatives . .41 Related Service . .44 CHAPTER 9. FARM AND HOME SERVICE COOPERATIVES . .46 Electric and Telephone Utilities . .46 Rural Utilities Service . .47 Rural Telephone Service . .49 Farm Insurance . .50 Health . `51 Housing . .51 CHAPTER 10. COOPERATIVE CREDIT SERVICES . .54 Farm Credit System . .54 Credit Unions . .56 Organizations Serving Cooperatives . .57 i Contents CHAPTER 11. CANVASSING COOPERATIVES IN YOUR AREA . .59 CHAPTER 12. A COOPERATIVE FOR YOUR GROUP . .62 CHAPTER 13. CAREERS IN AGRIBUSINESS . .64 Variety of Careers . .65 Education Requirements . .65 CHAPTER 14. COOPERATIVES IN THE YEARS AHEAD . .67 iv CHAPTER 1 How Agribusiness Affects O ur Lives Some of the many branded food and beverage items produced by agricultural cooperatives. ou might not be familiar with the terms "cooperative" or "agribusi - ness," but chances are you benefit on a daily basis from the prod - Y ucts and services they provide. We all reap the benefits of agribusiness, from the food we eat to the clothes we wear. Whether you are a student, executive, technology expert, or farmer, you are first and foremost a consumer. America relies upon agribusiness to feed, clothe, and house her 284 million citizens. The efficient production, processing, and marketing of food and fiber is what agribusiness is all about. 1 Agribusiness is just what the name implies…agriculture in business. When you buy chicken, beef, pork, vegetables, fruit, juice, eggs, milk, or similar products at your supermarket, you depend on agribusiness. In addition to supplying us with these basic necessities, agribusiness also provides jobs and income for nearly one-fifth of America's workforce. In one way or another, we all depend upon agribusiness to fulfill our needs. Because of this interdependence, agribusiness is our business. Cooperatives provide many services and products. Did you drink any Florida's Natural orange juice or Ocean Spray cranberry juice today? You might have spread Land O' Lakes butter or Welch's grape jelly on your toast. Maybe you ate some Sun-Maid raisins or a Sunkist orange as a snack, or packed Tillamook or Cabot cheese or Snyder's potato chips in your lunch. Your dinner tonight might include Farmland ham and Birdseye vegetables. These well-known foods and beverages all have one thing in common: they are all produced by farmer cooperatives. You might be surprised to discover how many of the brand-name items that you use or consume every day come from cooperatives. What makes these products unique is that the farmers who produced them are also the owners of the company that helped to bring them to your table. A cooperative is simply a type of business that is owned and controlled by the people who use its services. But cooperatives don't simply provide food and drinks for our tables. Many cooperatives provide goods or services such as utilities, savings and loan services, insurance, and farm supplies to rural and urban resi - dents. You might recognize some of these cooperatives by name, such as CoBank, Central Electric Power Cooperative, CHS Cooperatives, or Southern States. They are just a few of the nearly 48,000 cooperatives in the United States that generate more than $120 billion in annual economic activity for about 100 million members. Cooperatives have a significant impact on the employment situations of rural Americans as well. Although the number of farmer cooperatives has declined in recent years to about 3,346, they still accounted for 254,658 full-time, part-time, and seasonal employees in 2000. The decline in the overall number of cooperatives reflects the ongoing trend of mergers, consolidations, and acquisitions. However, there are more members (3.09 2 million) of farm cooperatives in the United States than there are farmers (more than 2 million), because many farmers belong to more than one cooperative. So even though the number of cooperatives has decreased, farmers still depend on them. Twenty-seven percent of total farm market - ings in 1999 was attributed to cooperatives. Consider that almost 11 million people in rural areas relied on rural elec - tric cooperatives for their power in 2000, while 569 rural credit unions helped their 3.8 million members save more than $18 billion. Likewise, 1.4 million subscriber/members received their telephone service from 220 rural telephone cooperatives. Thousands of isolated homes access the Internet in this age of technology, thanks in large part to the service pro - vided by these utility cooperatives. These numbers sound staggering, but the contribution of cooperative business to rural America is immense, and cannot be measured by statis - tics or dollars alone. Farmers are not the only ones who reap the rewards Agribusiness and membership in cooperatives is a way of life that is often passed from one generation to the next in rural families. Photo courtesy Farmland 3 of cooperative businesses. Cooperative housing helps people access bet - ter living conditions while connecting them with a support network of others with similar needs and interests. Both rural and urban residents belong to group medical, hospital, or health associations. Many use coop - erative child-care services, read Associated Press news articles, and belong to a state affiliate of the American Automobile Association or local credit union. These people are receiving the economic benefits of the cooperative, in proportion to their use of it. Cooperatives help bring peo - ple together to acquire goods or services not otherwise available to indi - viduals. By joining a cooperative and taking advantage of economies of scale and combined buying power, members realize greater savings and greater return on their investments. Moreover, members control the direction and growth of their business, with a vested interest in each business decision made by that cooperative. The cooperative form of business is useful to people regardless of where they live or how they earn their living. As these examples illustrate, the life of every American is touched at some time or another by cooperative enterprise. For these reasons, it is important for each of us to better understand what cooperatives are, how they operate, and how they relate to agribusiness. Chapter 1 Review 1. Name three cooperatives that produce brand name consumer goods. 2. How many farmer-owned cooperatives are there in the United States? How many