United States

Department of

Agriculture

Rural BusinessCooperative

Setvice

Research

Report 159

USDA =a

Marketing

Coordination in

Agricultural

Cooperatives
Abstract The use of marketing agreements adds elements of marketing coordination between

members and their cooperatives. Marketing agreements used in this study included

both marketing contracts signed with members and bylaw provisions that required

members to market with their cooperative. Type of product marketed and related marketing services had a strong influence on the level of agreements. Except for dairy,

cooperatives with marketing agreements had a greater proportionate investment in

assets, especially fixed assets, than other cooperatives and were more likely to use

long-term sales contracts with their customers. Dairy cooperatives had a range of bargaining and marketing relationships with their members that created a more complex

asset investment relationship.

Marketing Coordination in Agricultural Cooperatives

Roger A. Wissman

Rural Business-Cooperative Service

Research Report 159

September 1997
Contents Highlights.. .........................................................

ii

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

.

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

.

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

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

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

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

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

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

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

.

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

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

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

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

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

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

..10

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

Observations ........................................

..~............13
Highlights Coordinated marketing between cooperatives and their members was influenced by

factors operating at different levels in the marketing system. Understanding marketing

relationships between members and cooperatives requires an approach that sequentially considers each step in the marketing process. Product characteristics with related

marketing services, functions performed by cooperatives, and marketing coordination

all have a role in this understanding.

This study focuses on the use of marketing agreements by cooperatives and their producer members. Marketing agreements include both marketing contracts and bylaw

provisions that require members to market with their cooperative. A survey of marketing cooperatives with total sales of $15 million or more provided the basic information.

Product characteristics and marketing services at the initial product exchange between

members and their cooperatives were related to use of marketing agreements. Grain

producers provide much of the storage and services needed at harvest. Therefore,

grain producers are able to market grain with considerable independence throughout

the year. Grain cooperatives tended not to use marketing agreements unless processing or production coordination functions were incorporated in a cooperative’s activities.

Only 6 percent of the grain cooperatives had marketing agreements.

Agricultural products leaving the farm are often bulky, perishable, and seasonal, thus

increasing the need for marketing services. Fruit, vegetables, and milk are perishable

products, and more than 75 percent of these cooperatives had marketing agreements

with their members.

At the cooperative level, bargaining functions and marketing activities with higher

resource requirements influenced member-cooperative marketing relationships. In

three of the four classifications, cooperatives with coordinated arrangements had higher average sales, assets, equity, and fixed assets than other cooperatives. Functions

performed by cooperatives with marketing agreements required relatively more facilities and equipment. Risks associated with larger investments over longer periods were

offset by higher levels of coordinated marketing between members and cooperatives.

Dairy cooperatives had a different pattern of asset use. Those with marketing agreements did not have more asset-intensive operations. Bargaining activities, an important

function in many dairy cooperatives, require only limited assets and help explain the

different asset investment pattern.

Cooperatives’ marketing contracts with their customers were also related to use of

marketing agreements. These cooperatives tended to have more long-term contracts

with the firms to which they supplied products. This was especially true of dairy cooperatives.
Marketing Coordination

in Agricultural Cooperatives

Introduction

The U.S. agricultural production and marketing

systems provide consumers a wide variety of products. Various channels guide products as they flow

from farms and ranches through the marketing system

to final users. Marketing transactions vary-from auction markets, where buyers and sellers interact only at

the time of sale, to vertically integrated poultry or

pork enterprises, where before the production process

begins, agreements have been reached on the level and

schedule of production. Between these extremes exist

marketing arrangements with varying degrees of coordination. The general trend is toward greater coordination.’

Agricultural cooperatives are active throughout

the marketing system. Their involvement is strongest

in dairy, moderate in fruits and vegetables and grain,

and limited in livestock.2 As in the overall agricultural

marketing system, cooperatives and their members

have differing marketing relationships. Bylaws

describe members’ responsibilities, and members and

cooperatives may agree on other conditions and agreements.

This study describes the use of marketing agreements by cooperatives and examines possible reasons

and characteristics associated with establishing them.

This coordinating link established between members

and their cooperatives is the key element in this analyI Hoppe, Robert A., Robert Green, David Baker, Judith Z. Kalbacher,

and Susan E. Bentley. Structural and Financial Characteristics of

U.S. Farms, 1993: 18th Annual Family Farm Report to Congress.

USDA, Econ. Res. Serv., January 1996 p. 10.

2 Kraenzle, Charles A. “Cooperatives’ Share of Farm Market@

Hits ll-year High,” Rural Cooperatives. USDA, Rural Bus.-Coop.

Ser., Jan./Feb. 1996 pp. 4-5.

sis. An understanding of when and why marketing

agreements are used will help cooperatives and their

members in structuring their marketing relationships.

Survey

A survey of marketing cooperatives with total

sales of $15 million or more provided the primary

information for this study. Only those marketing cooperatives with agricultural producers as members were

included. The survey covered cooperatives’ 1992 fiscal

year. Cooperatives with sales of less than $15 million

were not surveyed, so study results do not represent

all cooperatives. However, the marketing cooperatives

included in this study accounted for more than onehalf of the total marketing sales of all U.S. agricultural

cooperatives.

Cooperatives were questioned about members’

requirement to market with their cooperative and in

what form commitments were obtained. The survey

also included cooperatives’ financial information, use

of contracts with firms supplied by cooperatives, and

marketing activities performed. A study of dairy coopera tives covering the same time period, provided

information on dairy marketing operations.3

This report focuses on cooperatives’ and members’

use of marketing agreements. With marketing agreements, members are required to market with their

cooperative, which in turn, provides marketing services. The distinction between cooperatives with or

without marketing agreements is an important classification throughout the report. Cooperatives and members with marketing agreements agree to coordinate

operations according to the established conditions and

3 Ling, K. Charles, and Carolyn Betts Liebrand, Marketing

Operations of Dairy Cooperatives, USDA, Agricultural

Cooperative Service, Research Report 133,1994.
time period. For the duration of the agreement, an

important part of the operations of members and cooperatives are joined.

Cooperatives were also classified by four product

classifications- (1) dairy, (2) fruits and vegetables, (3)

grain, and (4) other products such as cotton, livestock,

poultry, tobacco, rice, and sugar.

The largest number and lowest median sales were

in grain cooperatives (table 1). The other three groups

had fewer cooperatives but higher average sales. Fruit

and vegetable cooperatives had the lowest average

number of members while the “other products” group

was the highest. The variety of products included in

this group represents a range of marketing methods

and a wide range in number of members. Livestock

marketing organizations serve large areas with many

producers. Some livestock cooperatives had more than

20,000 members, although their participation varies

considerably from year to year. Cooperatives with

fewer than 100 members were also in this classification.

Tobacco cooperatives were not included in the

member tabulations. Tobacco production and marketing involve large numbers of holders of tobacco production allotments. Tobacco cooperatives with auctions have many more members than other

cooperative types because of the widely dispersed production allotment system.4

Marketing Agreements

“Marketing agreement” as used in this report

includes different forms of commitment between

members and cooperatives. A binding agreement

between member and cooperative was required to

establish a marketing agreement. These arrangements

were adopted either by provisions in a cooperative’s

4 Hunley, Charles L. Role of Cooperatives in Tobacco Marketing,

USDA, Agricultural Cooperative Service, Research Report 67,1988.

bylaws that contained a marketing requirement for

members or by a separate contract that required members to market with their cooperative. In this report,

marketing agreements independent of bylaw provisions will be called “marketing agreement contracts.”

Bylaw provisions apply when a producer becomes a

member. The terms of marketing agreement contracts

specify starting dates, length of agreement, and other

terms and conditions.

These two forms of members’ consent are not

mutually exclusive. Some cooperatives had both bylaw

provisions requiring member marketing and marketing agreement contracts. Including both in the same

classification does not imply that they are identical. A

marketing agreement contract is a more flexible form

that can be changed whenever a new agreement is

reached.” Bylaws are harder to change and, therefore,

would be more general. For cooperatives with both,

marketing agreement contracts’ provisions could supplement bylaw provisions. While members have less

marketing freedom, they gain an assured market for

their products. Cooperatives gain an assured supply of

raw products but are committed to providing services.

Forty-four percent of the surveyed cooperatives

had marketing agreements with their members. Of

those, 32 percent used only bylaw provisions, 55 percent used only marketing agreement contracts, and 13

percent used both.

Few marketing agreements were used by grain

cooperatives. Only six percent required members to

market with their cooperative. In contrast, fruit and

vegetable cooperatives had the highest proportion of

marketing agreements, at 88 percent, followed by 76

percent of dairy cooperatives (table 1).

5 See discussion of marketing agreements in Cooperative Marketing

Agreements: Legal Aspects, USDA, Agricultural Cooperative

Service, Research Report 106.

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

Cooperative type Number of

cooperatives

Proportion with

marketing

agreements

Average number Median

of members sales

Number Percent Number $million

Grain 306 6 1,380 2 6

Fruit and vegetable 56 88 490 56

Dairy 73 76 1,590 168

Other marketing 87 60 5,970 2 56

1 Included were cooperatives with $15 million or more in sales and individual producers as members. Marketing agreements included

contracts and bylaw provisions that require member marketing.

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

2
Agricultural producers and marketing cooperatives have a variety of potential reasons for initiating

marketing agreements - (1) conditions and requirements existing at the transfer of products between

members and cooperatives, (2) activities performed by

cooperatives, and (3) marketing commitments extending from cooperatives’ operations toward the end

users of agricultural products.

Studies of marketing operations describe the marketing environment within which each type of cooperative operates. Their experiences in establishing marketing agreements will be compared with

characteristics of the market within which the cooperatives operate.

Transactions Between Members

and Cooperatives

Producers’ marketing decisions begin with obtaining the services needed to move their products past

their farm gate and into the marketing system.

Physical characteristics and production patterns of

various agricultural products require different services

to enter marketing channels efficiently and in good

condition. The seasonal nature of agricultural production also intensifies marketing concerns. At harvest,

shortages of transportation, storage, or processing

capacity can be costly.

Establishing prior agreements between producers

and marketing organizations specifies conditions and

needed services and offers the possibility of coordinated actions to solve marketing concerns. If product characteristics and accompanying marketing needs affect

members’ and cooperatives’ decisions, use of marketing agreements will be related to products marketed.

Product characteristics can create marketing concerns

for both producers and marketing organizations.

Perishability is a marketing concern for many agricultural products. They must move quickly to processing, storage, or conditioning facilities or directly to

consumers to preserve quality. Other physical characteristics also impose handling requirements at the

transfer from farms and ranches to marketing channels. Bulk products such as sugar beets or field-harvested cotton require nearby processing or handling

facilities to facilitate efficient harvesting and transportation. Matching these needs requires coordination

between members and cooperatives.

Distinctive characteristics of speciality agricultural

products create potential markets. Special characteristics require a marketing channel that will maintain

product quality and identity. Products’ identity is lost

if they enter the common marketing channel.

Marketing agreements can assist in maintaining a separate marketing channel.

Production and marketing efficiency can be

increased if coordination of these functions provides

savings or allows new production methods. Functions

may be integrated in a variety of organizational forms,

including coordination between cooperatives and their

members. Assurance of product markets or product

supplies can be a concern of agricultural producers

and marketing organizations. If many potential marketing outlets or product supply sources are available,

producers or marketing organizations do not need to

make special efforts to operate. However, when product supply or demand is in question, producers or

marketing organizations may not be confident in

establishing or continuing operations without firm

assurance that the required market or product supply

will be available. Table 2 lists characteristics of marketing transactions between producers and cooperatives

by agricultural product.

Marketing coordination has both benefits and

costs. Once a marketing agreement is established, both

sides have less freedom of independent action. Future

opportunities are limited in certain areas because of

binding restrictions and forgone opportunities.

Uncertainty has been reduced. Members gain confidence in their products reaching markets and cooperatives have fewer concerns about obtaining raw products. Both sides accept common goals. The growth and

performance of one party becomes an element in the

success of the other. For the period of the marketing

agreement, the success of both sides of the agreement

is to varying degrees joined.

Grain Marketing

Grain cooperatives typically provide grain storage

and conditioning services in addition to a year-round

market for grain available for members and other

grain producers. Cash or short-term price contracts are

the usual methods of payment. Grain cooperatives

often include feed operations and other farm supply

services as an important part of their operations. Grain

flows from local cooperatives to federated cooperatives, processors, exporters, and other domestic users.6

Grain producers have significant amounts of grain

drying, storage, and transportation equipment and

facilities. Producers’ on-farm storage capacity exceeds

6 Hunley, Charles L., and David E. Cummins, Marketing and

Transportation of Grain by Local Cooperatives, USDA,

Agricultural Cooperative Service, Research Report 115,1993.

3
off-farm storage capacity.7 Producers with storage and

transportation capabilities can market when and

where they want and do not depend on local cooperatives or other grain marketers for services. This independence provides grain cooperatives and other marketers a large number of potential sources for grain.

Grain cooperatives had the lowest level of marketing agreements (table 1). The self-sufficiency of many

grain farmers and the availability of year-round markets are important factors in explaining the low level

of marketing agreements. For grain cooperatives, grain

usually was not the product covered by the agreements with members. Cooperatives’ integrated poultry

and livestock operations used grain as a feed ingredient, and the products of the integrated operations were

included in marketing agreements. In these cooperatives, most sales were in grain marketing without

member commitments. The poultry or livestock operations were operated as separate divisions with member

marketing commitments. Some cooperatives had marketing agreements for special-purpose grains.

7 Grain Stocks, USDA, National Agricultural Statistics Service, Jan.

1997 pp. 27-28.

Fruit and Vegetable Marketing

The seasonal nature, product perishability, and

range of crops combine to form a complex marketing

system for fruits and vegetables (table 2). These cooperatives provide their members with a range of marketing and bargaining services. Fruit and vegetable

bargaining cooperatives used differing forms of operation. Those studied pooled their members’ products

and negotiated prices, quantities, and other contact

terms. The cooperatives made advances and final payments to growers. In other bargaining cooperatives,

they negotiated overall terms with processors/buyers,

but contracts and payments were arranged between

growers and processors/buyers. Cooperatives that did

not take title to products were not included in this survey. Therefore, a part of cooperatives’ bargaining effort

is not reflected in this study.*

Cooperatives were involved in both the fresh and

processed marketing of fruits and vegetables.

Payments from cooperatives handing fresh products

8 Iskow, Julie, and Richard Sexton, Bargining Associations in

Grower-Processor Markets for Fruits and Vegetables, USDA,

Agricultural Cooperative Service, Research Report Number 104,

1992.

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

Product Characteristics

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

-On-farm or grain elevator conditioning and storage available

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

transportation capabilities

-Specialty use products may require separate marketing channel.

Fruits and vegetables -Perishable products and seasonal harvest

-Range of products requires various services

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

-Availability of cash markets depends on product

Milk -Very perishable product

-On-farm pickup develops marketing relationship

-Changes between marketing outlets possible, but require coordination

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

Livestock- Auctions and contracts used, changing industry structure

Poultry- Integrated production

Sugarcane or beet- Relationship with processing or bargaining group needed

1 included were cooperatives with $15 million or more in total sales and individual producers as members. Marketing agreements included

contracts and bylaw provisions that require member marketing.

4
were most commonly made to growers’ accounts.9

Other fruit and vegetable cooperatives used pooling

methods. Products are commingled and producers

share in the receipts based on their participation. The

combination of seasonal production and perishable

products presents fruit and vegetable producers with a

marketing challenge. On the other side of the transaction, fruit and vegetable cooperatives are similarly

concerned about obtaining quality raw products.

Use of marketing agreements was highest among

fruit and vegetable cooperatives. Table 1 shows 88 percent of fruit and vegetable cooperatives required members to market with them. Fruit and vegetable producers lack the marketing flexibility of grain growers.

Fruits and vegetables are perishable and must be handled carefully. These cooperatives’ need for an assured

supply and members’ need for a market for their raw

products and for marketing services provided a strong

incentive for establishing marketing relationships.

Dairy Marketing

The continuing flow of dairy products requires a

marketing system capable of regularly receiving milk

from dairy farms and providing a safe and secure supply for fluid milk distribution or processing (table 2).

In milk marketing, the standard practice is regular

milk pickup at a producer’s farm by a bulk tank truck.

Haulers performing this service are often independent

contractors. Either cooperatives or individual producers may arrange for or provide the pickup service.

Regardless, dairy farmers continually need a marketing outlet for their daily production. Similarly, dairy

cooperatives need a constant milk supply to meet their

product needs. This service creates an ongoing relationship between producers and their current marketing organizations. Unless producers or cooperatives

initiate some action to change these relationships, they

continue and become long-term.

Dairy cooperatives had the second highest level of

marketing agreements, at 76 percent (table 1). The

year-round production of milk does not concentrate

marketing decisions into a limited time period.

Because of the continuing marketing relationship and

year-round production, the difference between producers with or without marketing agreements is less

distinct in dairy marketing.

9 Biggs, Gilbert W. Cooperatives Position in the Fresh Vegetable

Industry, USDA, Agricultural Cooperative Service, Research

Report 82,1989.

Marketing of Other Products

Cooperatives in this classification marketed a wide

range of products. Table 2 lists characteristics of member-cooperative transfers of selected products.

Examples of cooperative auctions with no marketing

requirements existed in tobacco and livestock marketing. Members didn’t use marketing services until selling decisions were made, then a cooperative or another marketing channel could be chosen. In contrast, all

sugarcane and sugar beet associations had marketing

requirements with members. Members needed an

available market for their production, and conversely,

cooperatives needed the growers’ commitments to bargain with sugar manufacturers or to provide an adequate supply of raw products for processing cooperatives.

The range of products included in this group and

the small number of cooperatives representing each

product requires care in making generalizations.

However, the relationship between product characteristics and marketing services and the use of marketing

agreements found in the other cooperative types also

existed. Sixty-eight percent of the cooperatives in this

group had marketing agreements with their members

(table 11, a level lower than for cooperatives marketing

fruits and vegetables and dairy products but much

higher than for grain cooperatives.

Summary

Use of marketing agreements was much lower

among grain cooperatives than other types; six percent

versus more than 60 percent for all of the other types.

The differences in use of marketing agreements

between grain cooperatives and others were strongly

associated with the marketing services required at the

initial marketing transaction between members and

cooperatives.

Grain producers have more marketing options

because they can provide or can obtain transportation,

storage, and conditioning services. The other cooperative types served producers with generally greater

needs for marketing services and, therefore, less marketing independence.

Cooperatives handling perishable products or

products requiring special services tended to be organized with marketing agreements. Those handling

products with less complex transfers between members and cooperatives tended to be organized without

marketing commitments. Identifying the importance of

products’ physical characteristics and associated conditions with the use of marketing agreements is not

5
surprising. However, this basic relationship needs to

be considered before other more complex factors that

may influence marketing agreements are examined.

Cooperative Operations

Marketing cooperatives perform a range of activities-from limited functions of product assembly and

bargaining to extensive processing and distribution

operations. Activities performed determine the relative

amounts and types of resources that need to be controlled. While bargaining cooperatives have little need

for physical facilities, processing cooperatives invest

heavily in facilities and equipment.

Investments in fixed assets designed for specialized

purposes are committed for the life of the equipment or

facility. As these investments increase, so does an organiza tion’s financial risks because increasing amounts of

investments are committed for longer periods of time.

Specialized investments in fixed assets have been identified in economic theory as having a role in determining organizational structure.‘0 This suggests that organizations with relatively greater specialized investment

tend to organize in ways that vertically extend business

operations to decrease their overall risk.

In cooperatives, members’ equity provides a financial base for operations. Members’ marketing commitments also are a form of member support. Agreements

and bylaws requiring member participation are examples of devices that join members and cooperatives. If

they use marketing commitments to support more capital-intensive operations, this will be shown in differences in resource use between cooperatives with and

without marketing agreements.

In figures 1 to 4, financial totals are shown by

cooperative type and use of marketing agreements.

The horizontal bars represent number of cooperatives,

total sales, total assets, total equity, and net fixed assets

and are shown as percentages of the totals for each

cooperative type. ‘1 Cooperative groups with and without marketing agreements can be compared, and within each group, individual values can be compared.

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

Free Press 1985.

Total sales are from all sources, not only marketing. Tatal assets

and total equity are as reported in the cooperatives’ financial

statements. Net fixed assets are cost of all facilities and equipment

less depreciation.

Grain Cooperatives

Grain cooperatives without marketing agreements

have the bulk of cooperative numbers, sales, assets,

equity, and fixed assets. Figure 1 shows the concentration of number of cooperatives and all financial totals

of those cooperatives without marketing agreements.

For grain cooperatives with marketing agreements,

the horizontal bars resemble stairsteps as sales are relatively higher than the number of cooperatives, assets

relatively higher than sales, member equity higher

than assets, and fixed assets the highest of all. The 6

percent with marketing agreements had 20 percent of

grain cooperatives’ fixed assets.

Grain cooperatives with marketing agreements had

a range of activities. These cooperatives provided grain

marketing services and also used grain in processing or

as a feed ingredient. Examples of these activities included a feedlot, integrated turkey operations, and grain

processing operations. The marketing agreements with

members did not necessarily apply to members’ grain

production but to their participation in supplementary

operations. In these cases, the majority of members

using the grain marketing services did not have marketing agreements, but the minority participating in the

supplementary operations did have agreements. The

supplementary operations of cooperatives with marketing agreements required additional resources and

accounted for the differences in financial totals.

Fruit and Vegetable Cooperatives

In contrast to grain cooperatives, a high proportion

of fruit and vegetable cooperatives had marketing

agreements, and the bulk of sales, assets, equity, and

fixed assets were held by cooperatives with marketing

agreements. As in grain, cooperatives with marketing

agreements had higher average sales, assets, equity, and

fixed assets than those without agreements (figure 2).

Fruit and vegetable cooperatives without agreements provide a range of marketing functions, including fresh and processed marketing operations. Figure 2

shows that the 12 percent of fruit and vegetable cooperatives without marketing agreements had only 5 percent of total assets and only 4 percent of fixed assets of

fruit and vegetable cooperatives. The marketing functions they performed required substantially fewer

facilities and equipment than the functions performed

by the cooperatives with marketing agreements.

Dairy Cooperatives

Most dairy cooperatives had marketing agreements, and cooperatives with marketing agreements

had the major portion of sales, assets, equity, and fixed
assets. In figure 3, dairy cooperatives with marketing

agreements show a different pattern than the grain

cooperatives and fruit and vegetable cooperatives.

Dairy cooperatives with agreements did not have

higher average sales or assets than cooperatives without agreements. The 76 percent with marketing agreements had only 68 percent of the fixed assets.

Dairy cooperatives perform a range of marketing

functions which have an important influence on financial resource requirements. The dairy cooperatives

analyzed were also included in a study of dairy marketing operations and were classified by marketing

function performed.I* The marketing operations were

classified as follows:

1. Bargaining Cooperatives-Operate as bargaining associations and refrain from product processing/manufacturing.

2. Bargaining-Balancing Cooperatives-Bargain for

milk with processors/buyers and manufacture surplus

milk supply into commodity dairy products.

3. Processing/Manufacturing CooperativesProcess fluid milk or manufacture dairy products.

4. Diversified Cooperatives-Perform a combination of the bargaining, processing/manufacturing, and

supply balancing functions.

Table 3 lists characteristics of these marketing

function classifications. The processing/manufacturing group, with its high investment in plant and equipment (fixed assets), had the highest ratio of assets to

sales. In the other three functional groups, bargaining

I2 Ling, K. Charles, and Carolyn Betts Liebrand, “Vertical

Integration Patterns of Dairy Co-ops Reflect Changing Markets,”

Farmer Cooperatives, USDA, Rural Business-Cooperative Service,

Sept. 1995 pp. 18-22.

was an important function. Its effectiveness depends

on members’ commitment and requires limited physical facilities. Therefore, cooperatives with only bargaining operations required less assets for facilities

and equipment than processing cooperatives did. The

bargaining-balancing and the diversified classifications have milk processing operations, but a large

share of their milk volume is bargaining volume and

not handled through their processing facilities.

Figure 5 shows the distribution of sales volume for

dairy cooperatives with and without marketing agreements. Bargaining and bargaining/balancing cooperatives account for more than 40 percent of the sales volume of those cooperatives with marketing agreements.

Dairy cooperatives performing diversified marketing

functions account for more than 80 percent of the sales

volume of cooperatives without marketing agreements. The dairy cooperatives with marketing agreements performed different functions than the cooperatives without agreements. The importance of the two

bargaining groups and their relatively low asset

requirements helps to explain the different financial

relationships that existed in dairy cooperatives compared with grain and fruit and vegetable cooperatives.

By adding facilities for processing surplus milk,

cooperatives in the bargaining/balancing group

increased their ratio of fixed assets to sales to a higher

level than for those cooperatives engaged only in bargaining. Ninety-two percent of bargaining/balancing

cooperatives had marketing agreements as compared

with 69 percent of bargaining cooperatives (table 3). In

this simple comparison, the dairy cooperatives with

highest level of marketing agreements required the

most assets compared with sales.

Table 3- Characteristics of dairy COOperatiVeS’ marketing fUnCtiOnS 1

Marketing

functions

Proportion Average Average Average

with marketing sales per assets per number of

agreement cooperative cooperative members

Financial

characteristics

Bargaining

Bargaining/Balancing

Processing/Manufacturing

Diversified

Percent _________ $Mittion _________

69 140 11

92 256 38

78 197 53

76 672 140

770

1,035

475

3,900

High sales to assets,

very low or no fixed assets

High sales to assets,

moderate fixed assets

Highest per member

equity investment

Large cooperatives,

range of functions

1 Included were cooperatives with $15 million or more in total sales and individual producers as members. Marketing agreements included

contracts and bylaw provisions that require member marketing.

7
Figure I- Grain Cooperatives: Use of Marketing Agreements Based on Cooperative Number, Sales,

Assets, Equity, and Fixed Assets

Marketing

Agreement

No

Agreement

I+ Sales

Assets

Equity

- Fixed Assets

40 50

Percent

60 70 80 90

Figure 2- Fruit and Vegetable Cooperatives: Use of Marketing Agreements Based on Cooperative

Number, Sales, Assets, Equity, and Fixed Assets

Marketing

Agreement

No

Agreement

Number

Sales

Assets

Equity

Fixed Assets

I

0 10 20 30 40 50

Percent

60 70 80 90 1 3

8
.

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

Assets, Equity, and Fixed Assets

Marketing

Agreement

No

Agreement

Number

Sales

Assets

Equity

Fixed Assets

I

0 10 20 30 40 50 60 70

Percent

100

Figure 4- Other Marketing Cooperatives: Use of Marketing Agreements Based on Cooperative

Number, Sales, Assets, Equity, and Fixed Assets

Marketing

Agreement

No

Agreement

e Fixed Assets

t I

50 7 80 90 100

Percent

9
As mentioned earlier, the year-round production are auctions with low capital investments compared

and on-farm pickup of milk creates a continuing mar- with sales and sugar beet processing cooperatives with

keting relationship between dairy cooperatives and high capital investments. The pattern shown in figure

members that doesn’t exist in cooperatives that handle 4 is more irregular than shown in the other classificaseasonal products. Even dairy cooperatives that did not tions. But an overall relationship of higher average

require a marketing commitment had a continuing sales, assets, equity, and fixed assets for cooperatives

marketing relationship that yielded an expected supply with marketing agreements nevertheless existed.

of milk. More than 30 percent of the bargaining cooper- Cooperatives without marketing agreements had relaatives operated without a formal agreement with mem- tively lower investment in fixed assets. The 31 percent

bers. The current members shipping milk were a strong of cooperatives without marketing agreements had

enough base to support bargaining operations. only 12 percent of the fixed assets.

Diversified dairy cooperatives had the largest

average number of members. As these numbers

increase, cooperatives become less dependent on any

individual producer. Formal commitments may

become less important from the cooperatives’ view.

The importance of dairy bargaining and the continuing

marketing relationship with members accounted for

the different financial patterns of dairy cooperatives

compared to other types of cooperatives.

Summary

Overall, cooperatives with marketing agreements

tended to have operations requiring relatively more

assets, especially fixed assets, than cooperatives without

marketing agreements. Within grain, fruit and vegetable,

and “other products,” organizations with marketing

agreements averaged higher sales, total assets, equity

and especially fixed assets than other cooperatives.

Dairy cooperatives were different and more complex.

Other Marketing Cooperatives

The range of products handled and functions performed by other marketing cooperative makes this

classification more diverse than the others. Included

Grain cooperatives with marketing agreements

usually added a supplementary operation, and the

marketing agreements usually applied only to members involved in the supplementary operation. These

Figure S- Percent of Dairy Cooperatives’ Sales by Marketing Function

and Use of Marketing Agreements

100

90

80

70

60

50

40

30

20

IO

0

Bargaining

Bargaining/Balancing

Processing

Diversified

No Agreements Marketing Agreements

10
added operations using greater investments were

directly linked to marketing agreements. Fruit and

vegetable cooperatives with and without marketing

agreements were not involved in substantially different functions, but those cooperatives with agreements

were involved in more asset-intensive operations. With

cooperatives marketing other products, marketing

agreements were usually associated with cooperatives

involved in product processing.

Dairy cooperatives as a group have joint objectives

of product bargaining and use of processing/manufacturing activities to increase members’ returns.

Bargaining operations introduced a different financial

trend, and dairy cooperatives with marketing agreements did not require greater facilities. The difference

in marketing functions performed by dairy cooperatives helped explain their different pattern of resource

use. Characteristics of the ongoing patronage relationship of dairy cooperatives were also important. In

dairy, year-round marketing, on-farm milk pickup,

and large memberships bring different factors into the

member-cooperative relationship.

Coordination Between Marketing Levels

Cooperatives reported on the proportions of sales

sold by long-term contracts, short-term contracts, open

market sales, and other methods. Long-term contracts

are a year or more in length, short-term contracts are

less than a year, and open market sales are made at

prices and terms available at the time of sale. Other

methods included direct sales to consumers and sales

through agents.

Considering all cooperative types, cooperatives

with marketing agreements made, on average, 19 percent of their marketing sales with long-term contracts

(table 4). Those without member arrangements averaged only 2 percent of sales with long-term contracts.

Among those with marketing agreements, dairy cooperatives had the highest level of long-term contracts,

an average of 29 percent of sales. Grain cooperatives

had the lowest level of long-term contracts.

In the earlier discussion of member-to-cooperative

transfers, physical characteristics of the agricultural

product being marketed were related to use of marketing agreements. At the next marketing level of cooperative to customer, the physical form of many products

changes. Processing changes raw products into a form

less perishable and easier to transport. For these products, cooperative-customer exchanges have more freedom in designating time and place of delivery.

However, perishable products, such as fluid milk and

fresh fruits and vegetables, continue to require special

services throughout the marketing system. For dairy

cooperatives, the majority of total sales is in raw whole

milk.” Cooperatives handling these products continue

to face the same marketing concerns as existed at the

member-cooperative exchange.

I3 Ling, K. Charles, and Carolyn Betts Liebrand, Marketing

Operations of Dairy Cooperatives, p. 6.

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

status1

Marketing Long-term Short-term Open market Other

Cooperative type agreements contracts contracts sales methods

Percent of marketing sales *

Grain Required 0 53 39 8

Not required 2 43 55 0

Fruit and vegetable Required 14 13 69 4

Not required 0 8 92 0

Dairy Required 29 32 38 1

Not required 1 53 41 5

Other marketing Required 18 2 7 51 4

Not required 5 13 75 7

Total Required 19 2 8 50 3

Not required 2 40 57 1

1 Included were cooperatives with $15 million or more in total sales and individual producers as members. Marketing agreements included

contracts and bylaw provisions that require member marketing.

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

11
Dairy cooperatives with member agreements had

the highest proportion of sales made with long-term

contracts. For bargaining cooperatives that may not

physically handle the producers’ product, the transfer

from cooperative to milk processor/buyer represents

the members’ production direct from the farm.

Concerns related to product perishability and a continuing milk supply still apply.

Figure 6 shows the use of various sales methods by

dairy cooperatives with marketing agreements by functions performed. Those without marketing agreements

are not included because of the limited number of

cooperatives and almost no use of long-term contracts.

Long- and short-term contracts accounted for 90 percent of bargaining cooperatives’ average sales. These

cooperatives lack processing facilities and rely on contracts and minimal amounts of open market sales. In

the bargaining/balancing classification, processing

facilities allow these cooperatives to process excess

fluid milk supplies into dry milk powder and other

products. While raw whole milk is the principal product, processed products are also important. Processing

classification includes cheese manufacturing, fluid milk

processing, and manufacturing dry milk powder. In

figure 6, the proportion of products sold under shortterm and long-term contracts drops sharply from bargaining to balancing and then to processing. This drop

is explained by the shift in sales from raw whole milk

to processed products from bargaining cooperatives to

those involved in processing and manufacturing. The

combination classification includes large dairy cooperatives performing a range of marketing functions,

including processing and bargaining. Both processed

and raw products are sold. The sales breakdown is similar to the bargaining/balancing cooperatives that also

sell processed and raw products. In dairy cooperatives,

the handling of perishable products contributes to the

high level of contracting between cooperatives and

their customers, as compared with the other types of

marketing cooperatives.

Coordination at one marketing level creates a

defined flow of products moving to the next marketing

level. Further coordination at the next step would continue the smooth movement of products toward the

final consumer. For the surveyed cooperatives, marketing agreements at the member-cooperative level were

related to greater use of long-term contracts at the

cooperative-customer level. Cooperatives without marketing agreements with their members were less likely

to have long-term contracts with their customers.

Figure 6 Sales Conditions of Dairy Cooperatives with Marketing Agreements

by Marketing Functions

100

90

80

70

60

50

40

30

20

10

0

Other Method

Open Market

Short-term Contract

Long-term Contract

Combination Processing Bargaining Bargaining/Balancing

12
Observations

This analysis used a survey over a range of cooperative types to identify factors associated with marketing agreements. The factors identified do not directly

explain the decisions that members and cooperatives

made jointly for coordinated marketing. However, the

factors do give an understanding of the marketing setting in which cooperatives and members operate and

indicate when their decisions will lead to coordination.

Marketing systems can differ from product to

product. Factors such as products’ physical characteristics influence the need for marketing services and the

overall complexity of transactions between members

and cooperatives. This complexity is reflected in higher costs. Negotiations, areas of uncertainty, and market

requirements increase costs. Focusing on the “cost” of

exchanges between members and cooperatives or at

any other point in the marketing channel identifies

points where changes are most likely to occur.

Complex transactions (i.e., high-cost) should be

viewed as points in the marketing chain where new

ideas will be tried. Those participants in the marketing

system who are driven to achieve lower costs will

decide when and where changes will occur.

Increased coordination is an important marketing

system change. This analysis used marketing commitments between members and cooperatives as a measure of coordinated marketing. Considering a wider

range of relationships between members and cooperatives would be useful in future examinations. The

cooperative-type organization is a flexible form.

Simple organizations with open memberships and

highly structured organizations with limited memberships are used. This study‘s survey approach does not

capture all the conditions and details included in individual marketing agreements. A case study approach

could be used to examine the decisions that led to joint

marketing agreements.

Marketing coordination has been discussed as

interactions between members and cooperatives, with

no particular allowance made for the organizational

form. Cooperatives are controlled by their members.

How can members negotiate with themselves? The

marketing coordination decision presented in this

study centers on a member’s tradeoff between marketing independence against reduced marketing uncertainty. The basic decision does not depend on the organizational form providing the coordination. The

decision as to what form of coordination is the most

appropriate is regarded as separate from the decision

to coordinate production operations more closely with

marketing functions. Coordination arrangements

extend from individual producers expanding into marketing functions through their individual efforts to

programs of marketing organizations integrating into

production functions.

Producers facing a common problem may find

cooperatives are an appropriate organizational form.

The member-controlled nature may offer members different paths in which to participate in overall decisions, but this participation does not change the agreement between the production entity and the marketing

entity. The exchange of marketing independence for

less overall market risk remains the basic decision in

whatever form marketing coordination takes. A marketing agreement allows both sides to proceed with

greater certainty. A new relationship develops between

members and cooperative. Both may plan within a

new framework by coordinating their operations. Both

give up flexibility in their own operations, but producers gain a more assured market and the cooperatives

gain a dependable source of product supply. Growth

and success will, to varying degrees, be shared.

Both members and cooperatives enjoy the greatest

freedom of operation without any form of marketing

coordination. Entering into a marketing agreement

reduces operating freedom but also reduces risk for

the conditions included in the agreement. Members

and cooperatives face each other across a marketing

transaction and the conditions that concern both will

form the basis for a new marketing arrangement.

13
U.S. Department of Agriculture

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Washington, D.C. 202583257

Rural Business-Cooperative Service (FIBS) provides research, management, and

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The cooperative segment of RBS (1) helps farmers and other rural residents develop

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