United States

Department of

Agriculture

Rural Business–

Cooperative

Service

Cooperative

Information

Report 60

Agricultural

Cooperatives

in the 21st Century
Preface This report identifies challenges and opportunities facing farmer cooperatives in the

years ahead and offers strategies to increase their chances for success. The external

forces besetting cooperatives are examined as are their internal strengths and weaknesses. Priority issues are identified that cooperative members, leaders and advisers

need to address. No easy solutions are provided, because there are none. Hopefully,

this report will serve as a catalyst for further thought and discussion on how farmer

cooperatives can enhance income and quality of life for their members.

1987 Study

In 1987, a USDA report, "Positioning Farmer Cooperatives for the Future," was prepared in response to a directive from the Senate Agricultural Appropriations

Subcommittee. It reflected the views of cooperative leaders from across the country

who gathered in a series of focus panels to discuss the future of farmer-owned cooperatives. While many different issues and strategies were discussed, panelists concluded that cooperatives must continually adapt to the changing marketplace and needs of

farmers and that nothing inherent in the cooperative form of business prevents that

type of evolution. The report affirmed the need and and capability of cooperatives to

change for the future.

2002 Methodology

This report examines the challenges producer-owned cooperatives face at the dawn of

the 21st century. Several participants in the 1987 study revisited that report and commented on a range of topics regarding the continued relevance of its findings and new

issues that have arisen since then. Then, prominent members of the cooperative community across the country participated in six focus panels (Appendix B). A discussion

outline covering a range of conditions confronting agriculture in general and cooperatives

in particular was sent to each participant before each focus group met (Appendix C).

The focus group panelists engaged in brainstorming sessions and free-form discussion, framed by the set of "contemporary" cooperative principles formulated in the

1987 study.1 Commentary from each panel is reflected in this report. However, no comment is directly attributable to any panel member.

Goal

This report identifies challenges facing agricultural producers and their cooperatives as

they enter the 21st century and suggests a foundation for developing options and

strategies to meet those challenges.2

1 The three principles: member-owned, member-controlled, and member-benefits succinctly define the

unique aspects of the cooperative form of business and provide a framework for evaluating cooperative

actions and practices.

2 This report refers to various structures used by members to form cooperatives. Scholars have classified

these structures and given them somewhat arbitrary labels. A summary of the meaning of various teams

used to describe cooperative strutures in this report is attached as Appendix A.

i

November 2002
Contents Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Cooperative Principles and Assessment of Options . . . . . . . . . . . . . . . . . . . . . . . . . 1

Cooperative principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Inter-related principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Principles guide analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

When changes are considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Issues and Forces Shaping the External Environment of Cooperatives. . . . . . . . . . 3

Changing farm demographics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Technological innovation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Changing competitive environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Role of the consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Industrialization: Farm to retail via the supply chain . . . . . . . . . . . . . . . . . . . . . . 5

Structural change in food processing and marketing . . . . . . . . . . . . . . . . . . . . . 6

Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

The policy environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The price-income anomaly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Environmental regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Issues and Forces Shaping the Internal Environment of Cooperatives . . . . . . . . . . 9

Limited ability to accumulate equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Diverging member characteristics and needs. . . . . . . . . . . . . . . . . . . . . . . . . . 10

Board effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Management lack of cooperative focus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Growing emphasis on value-added activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Pressures on the federated model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ii
Contents Reshaping the federated system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

At the regional level. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Coordinated farm supply operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Grain marketing alliances with IOFs . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Food Processing growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

At the local level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Consolidation into super locals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Emphasis on getting the best deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Priorities for Shaping Future Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Strengthening cooperative leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Growth and consolidation among cooperatives . . . . . . . . . . . . . . . . . . . . . . . . 20

Foreign sourcing and functioning in a global market . . . . . . . . . . . . . . . . . . . . 20

Motivation and strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Legal questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Foreign memberships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Member relations issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Equity accumulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Improve member equity management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Outside equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Sell assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Structural alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

New generation cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Alliances and joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Bargaining associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

iii
Contents Limited market innovations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Public Policy and Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Making member voices heard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Trade association cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Farm policy and farmer cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

USDA and farmer cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Defining cooperatives: Where is policy heading? . . . . . . . . . . . . . . . . . . . . . . . 31

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Accept and embrace change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Be guided by competent directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Maintain a solid equity base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Emphasize education. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Seek efficient structures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Forge a strong public policy presence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Make decisions based on cooperative principles. . . . . . . . . . . . . . . . . . . . . . . 34

Appendix A. Classifying Cooperatives By Structure . . . . . . . . . . . . . . . . . . . . . . . 36

Appendix B. Forum Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Appendix C. Discussion Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

iv
Introduction Facing the Challenges of the 21st Century for the Betterment of Rural America

The role of cooperatives as a critical dimension of market structure in agriculture must

periodically be assessed to determine the future viability of the cooperative form of

business. This report captures the ideas and observations of cooperative leaders and

academic specialists who gathered in focus groups to share their perspectives on a set

of questions posed by USDA RBS-Cooperative Services.

The areas covered included the changing external and internal competitive environment, cooperative principles, structure of cooperative systems, governance and

finance. Also addressed were issues associated with educational efforts and institutional mechanisms, such as public policy and government-sponsored support programs. 

Cooperatives are user-driven businesses that have contributed greatly to the development of one of the world’s most productive and scientific-based agricultural systems.

They have played an important role in strengthening market access and competitive

returns for independent farm operators during the 20th century. They adapted their

operations to agricultural technological innovations, such as the use of fertilizers, plant

and livestock breeding, agricultural mechanization, electricity and other new sources of

energy, and to new information systems.

Cooperatives have also played an important role in rural communities, where they are

an integral part of the social fabric. They encourage democratic decision making

processes, leadership development and education. The public-private partnership

between farmers, land- grant universities and USDA programs has enhanced knowledge of the role cooperatives play as a tool for improving the economic well-being of

the farming community and helping to boost the rural quality of life.

New forces are impacting the farm economy at the dawn of the 21st century that

require the attention of cooperative business leaders. Recognizing the resiliency of

self-help efforts directed to meeting member needs, focus group members addressed

the new forces impacting farmers, rural communities and changing characteristics of

markets. These forces, and suggestions about how to adjust to them, constitute a

major part of the dialogue that focus group members engaged in during their deliberations. The compilation of thoughts and ideas contained in this report provides an

important snapshot and reflection on cooperative principles, practices and structure by

those on the firing line who are engaged in day-to-day operations.

It is the intent of this report to focus attention on issues and lessons that can be captured through the experiences of cooperative practitioners and service providers. The

aim is to identify steps for improving the practice of cooperation for the betterment of

rural America.

Randall E. Torgerson

Deputy Administrator for Cooperative Services

Rural Business-Cooperative Service

USDA Rural Development

Nov. 15, 2002 

v
Agricultural Cooperatives in the 21st Century

John R. Dunn,

Anthony C. Crooks, 

Donald A. Frederick,

Tracey L. Kennedy, 

James J. Wadsworth

Rural Business-Cooperative Service

Agricultural cooperatives are part of a dynamic environment. The nature of production agriculture changes

daily. So do agricultural markets and public policy.

Many changes occur outside the cooperative system,

which has little, if any, ability to directly influence

them. Still, cooperatives have to recognize the changes

and react to them.

Internally, cooperatives' mission, structure, and

practices not only set them apart from other forms of

business, but also influence how they respond to external changes. Many of the issues and challenges discussed here are interrelated and are not limited in their

impact to farmers or cooperatives. But cooperatives, by

virtue of their particular attributes, are often uniquely

affected. This report discusses both external and internal issues facing cooperatives in the years ahead and

panelists' perceptions of how cooperatives will be

organized and operated in the 21st century.

The panel discussions emphasized marketing

activities of cooperatives. However, this report's general recommendations and conclusions apply to all types

of farmer cooperatives: marketing, supply, or service.

These conclusions point out the central role of directors in cooperatives, the need for solid financing and

organizational flexibility, the requirement for cooperative education, and the need for cooperative leaders to

understand the application of cooperative principles.

Cooperative Principles and

Assessment Options

"No one plan of organization is to be labeled as

truly cooperative to the exclusion of others...."

Justice Louis Brandeis, Frost v. Corporation

Commissioner, 278 U.S. 515, 546 (1929).

Basic cooperative principles define cooperative

organizations, give them strength, and provide the

cause and rationale for their public support, in terms

of taxation, anti-trust considerations, public education,

and promotion.

Cooperative principles

Any business organization can be defined in

terms of three basic interests: ownership, control, and

beneficiary. Only in the cooperative are all three interests vested directly in the hands of the user. These

interests are commonly referred to as the contemporary cooperative principles. The 1987 USDA study,

"Positioning Farmer Cooperatives for the Future," listed three basic principles that define the essence of a

cooperative enterprise and establish a framework for

assessing cooperative actions:

The User-Owner Principle. The cooperative is

owned by the people who use it.

The User-Control Principle. The cooperative is

controlled by the people who use it.

The User-Benefits Principle. The benefits generated by the cooperative accrue to its users on the basis

of their use.

A cooperative is a business that is owned and

controlled by the people who use its services and

whose benefits (services received and earnings allocations) are shared by the users on the basis of use. Only

an enterprise conforming to the spirit and intent of this

definition should be labeled a cooperative.

Inter-related principles

These principles are inter-related. Tradeoffs can

occur among them. To be a true cooperative, an organi1
zation must adhere to both the letter and the spirit of

the principles. In this case, none of the three principles

can be compromised.

Each principle can be viewed as one end of a continuum or spectrum. Any movement away from the

pure application of the principles places the organization in jeopardy of compromising its cooperative identity. At the far end of the spectrums, all three principles are abandoned and the organization no longer

resembles a cooperative.

Along these spectrums lie many options with

varying degrees of adherence to cooperative principles. It is difficult to identify precisely where the lines

are crossed that move the organization from being a

cooperative to being another type of organization.

Ownership is expressed by equity investment in

the enterprise and a claim on its assets. Complete user

ownership requires a 100 percent equity investment

and exclusive claim on the assets (after debts are paid).

Ownership by non-active or retired members creates a

separation of ownership and usership. Investment of

equity capital by persons who have never patronized

the cooperative even further disrupts the ownershipusership connection.

Control is the ability to exert authority over decision-making processes. Control takes many forms. It

can be objective, such as allocating votes among members and deciding issues on the basis of the most votes.

It can also be subjective, growing out of the subtle

nuances of influence. People with strong personalities

or other traits who are deferred to by their peers can

exert influence that exceeds their voting rights.

Forces outside the cooperative can also exert control through their ability to limit its decision making.

For example, the choices available to a cooperative are

constrained by environmental regulations or tax laws.

Likewise, a bank loan can include a covenant that constricts users' control. Control can also be forfeited if the

members and directors fail to exercise proper oversight and review of hired management.

Benefits available to cooperative members

include both the right to receive services and to share

in the earnings. Sometimes, others indirectly receive

cooperative benefits, such as non-members who get a

better price for their product because a cooperative

operates in their area and line of business. But internally, cooperatives must ensure that the benefits accrue

to patrons on the basis of use and not to outsiders on

the basis of investment or some other standard that

undermines the value of the organization to its userowners.

Principles guide analysis

A non-cooperative business looking for solutions

to marketplace challenges asks basic questions: Will

the business be profitable? Will it thrive and grow? If

the answers are "yes," the rest is a matter of details.

A cooperative, too, must answer "yes" to these

questions about profitability and growth. If it cannot

survive as a business, other considerations become

moot. But cooperative principles provide an additional

framework through which options for business strategies, organizational structures, and operations must be

analyzed. Cooperatives must also ask, how will this

choice affect the members' ownership interests? What

influence will it exert on members' ability to control

their cooperative? How will it affect the distribution of

benefits flowing from the cooperative? And, most critically, if the business is to remain a cooperative, how

will these user interests be protected?

Those who suggest that a cooperative can be run

just like any other business either do not understand

or do not respect the significance of these differences.

Successful leadership within a cooperative requires all

the skills and understanding required in an investorowned firm, and more.

When changes are considered

When considering change, cooperatives leaders

must ask themselves: How does it affect the basic

interests in the cooperative? What steps, if they exist,

might be taken to counter the net effect of moving

away from being a pure cooperative? How can cooperatives guarantee that action taken won't adversely

affect user interests?

Not only must cooperative leaders be pragmatic,

but they are also responsible for evaluating the

requirements and meaning of the basic principles. Any

consideration that affects user ownership and control,

or the distribution of benefits, should be discussed and

evaluated in such terms. Members have a right to

determine the nature and direction of their cooperative

business. They must consider steps that change the

character of their cooperative with a full understanding of the implications. This "principles-impact-assessment" means that cooperative decision-making

includes considerations that non-cooperative firms can

ignore. The possible responses to the conditions faced

by cooperatives are discussed in the final section of

this report.

2
Issues and Forces Shaping the 

External Environment of Cooperatives

The 1987 report, "Positioning Farmer

Cooperatives for the Future," said that, "...to be successful in fulfilling the needs of farmers, cooperatives

must be able to provide an appropriate economic

response to marketplace situations faced by members.

This response generally involves provision of competitive goods and services, or adoption of actions that

balance or counter forces present in the business environment."

Both the domestic and international components

of this environment have changed considerably since

1987. Structural changes from the farm gate to retail

shelves are impacting the markets in which cooperatives and their members operate. Farmers and farming

are also evolving. Cooperatives can no longer take for

granted that the producers they served last year are

the same or the same kind of producers they serve

today, or will serve in the future.

The rapid pace of innovation in information technology is making the world smaller and altering forever the way business is conducted. Consolidation of

agribusinesses, food manufacturers, and food retailers

continues at an unprecedented rate, resulting in fewer,

larger buyers that effectively control terms of trade.

These businesses demand more from suppliers in specific product attributes, volume, timing, and costs. The

need to add value and differentiate products from

those of competitors is now accepted by all levels of

agribusiness. The traditional roles of commodity handlers cease to exist. Layered among these changes are

the myriad regulatory and policy issues that impose

constraints on farmers and the agricultural sector.

Changing farm demographics

Even a cursory look at the demographics of the

farm population poses the question, "Where will our

next generation of farmers come from?" The average

age of U.S. farm operators is in the mid-fifties. As

older farmers retire, fewer new, younger farmers are

taking their place. In Iowa, for example, 40 percent of

farmers are more than 55 years of age. The fastest

growing category is those 65 and older. Only 15 percent of the state's producers are under 35 years of age.

From this rapidly aging farm population, cooperatives

must identify the next generation of farmer-members

and leaders.

Another demographic issue affecting cooperatives is the increasingly bimodal nature of farming.

Fifty years ago, America's farms were predominately

operated by a traditional family farmer who relied primarily on farming for his or her income and farmed

with the assistance of family members, but little or no

hired help. Since then, farm numbers have dropped by

more than two-thirds, while production has doubled.3

Today, farms with more than $250,000 in product

sales generate 68 percent of all farm production

(USDA). These "commercial" farms only comprise

about 8 percent of the farm population. At the other

end of the spectrum, farms owned by those who are

retired or rely on other, off-farm sources of income

account for 62 percent of the farm population, but generate only 8 percent of farm production. Between these

two groups are what the USDA terms "intermediate"

farms, which more closely resemble the traditional

family farm. Only 30 percent of farms fall into this category. And they provide about 24 percent of agricultural production. These farmers consider farming their

primary occupation but frequently supplement their

income through other activities.

Much of the cooperative system was built to support traditional family farmers. Cooperatives now

must adapt to a more diverse membership that

requires different services, products, and structures.

Setting priorities among competing and sometimes

conflicting business objectives of their members is a

growing challenge for many farmer cooperatives.

Technological innovation

Improved technology has been key to the growth

of commercial farms. Mechanical innovations increase

capacity and lower the cost of production. One panelist noted that a farmer with a 35-foot combine can

now harvest more grain in one week than he could in

the entire harvest season during his youth. Farmers

use Global Positioning Systems to guide their machinery to maximize efficiency in the field and computergenerated digital imagery to assess strengths and

weaknesses of individual parcels of land.

Biologically based innovations hold the promise

of new products and new applications. Ethanol and

bio-diesel are emerging as supplements and replacements for petroleum-based fuels. Soy-based ink is in

commercial production. Plant-based adhesives, biopolymers and films are being developed. So are "far3

3 USDA’s report, “Food and Agricultural Policy: Taking Stock for the

New Century,” (September 2001), p. 4.
macological" products that use tobacco and other crops

with special traits making them good sources of raw

material for beneficial drugs.

Biology-based innovations are not without controversy. The harvesting and marketing of herbicidetolerant corn and soybeans, the so-called "Roundupready" varieties, are under attack for possible undiscovered adverse impacts on the health of people and

animals that eat products made from these grains. But,

over time, it is expected that the best available genetics

will be combined with the best (i.e., most profitable)

production processes to deliver products intended to

meet the needs of an increasingly discriminating market.

An important issue for producers and cooperatives is the extent to which they will be able to participate in future biotechnology growth. For example,

farmers, through cooperatives, have been active in

using traditional crops to produce ethanol. Improved

varieties of these crops have historically been developed by land-grant universities and made available to

the public at large. Now, research and development is

conducted by investor-owned firms and alliances of

seed corporations with pharmaceutical firms, formed

with the specific goal of developing genetically modified seed stock. University researchers are participating in some of these alliances and receiving a financial

stake in the venture. Discoveries are being patented

and newer seed is frequently sold to selected farmers

under strict contracts that limit the farmers' legal right

to save seed from current production for use in future

years.

Research and development is capital intensive

and financially risky. Cooperatives have limited access

to capital and are often adverse to assuming risk. This

restricts their participation in this arena. As a result,

they have less access, for example, to newer and better

seed to sell to their members. In addition, cooperatives

may find that contracts between the alliances and

farmers for use of the latest seeds also deny cooperatives access to the products farmers produce from

those seeds. This could be a serious barrier to cooperative marketing efforts in the years ahead.

Information technology, like biotechnology, offers

both opportunities and challenges to producers and

their cooperatives. Computers make possible everfaster collection, analysis, and dissemination of information among potential buyers and sellers of agricultural production and food products. This has

shortened the time period in which purchase, inventory, and pricing decisions are made. Farmers are adjusting to the new technology, including the Internet. In

2000, nearly 60 percent of farm households had access

to a computer and half of these used the Internet in

their farming business. Farmers reported making more

than $375 million in online business purchases in 2000

and sold crops and livestock valued at nearly $300 million online.4

While these numbers are large, they are but a

portion of the potential "e-commerce" market.

Cooperatives have traditionally been product-handling entities, with local supply stores and grain elevators symbolizing their presence in the local community

and the business world. Cooperatives developing

strategies for the 21st century must consider their role

in a marketplace that values nimbleness, flexibility,

and information vs. stationary structures and physical

inventory.

Changing competitive environment

Consolidation of firms at the processing, wholesale, and retail levels of the U.S. food marketing system continues unabated. Market influence and bargaining strength of even the largest cooperatives are

limited as a consequence. Food retailers flex their market muscle by imposing coordination mechanisms that

demand strict discipline and conformity from suppliers. Food processors exert greater control over distribution channels by integrating back into the production

of raw materials through a variety of ownership and

contractual arrangements. Such arrangements rob producers of decision-making authority and market choices. Indeed, poultry industry-like integration in the hog

and other industries and the pervasiveness of contract

farming are leading to what one panel participant

called the "‘chickenization' of U.S. agriculture."

Role of the consumer

The consumer drives today's market. While

exceptions exist, typical consumers want wholesome,

tasty, convenient, and safe food products at the lowest

possible price. They have the time, information, and

mobility to identify stores that meet their criteria and

patronize them on a regular basis.

The competition among various elements of the

retail food sector—grocery chains, discount merchandisers, independent stores, and convenience stores—to

satisfy consumers is leading them to impose new business practices on cooperatives and other suppliers of

food products. It is also encouraging consolidation

among food retailers to reduce costs and improve ser4

4 Id., pp. 33-34.
vice to consumers, while reducing consumer choices

and power by reducing the number of competitors in a

market.

The increasingly global market crosses national

boundaries, exposing consumers to new products and

changing expectations for familiar products. It opens

new market segments and offers opportunities for suppliers to identify and meet the specific needs of a

growing number of demographic groupings. Keeping

up with these changes requires continuous spending

on consumer research, new product development,

innovative packaging, and advertising.

Many cooperatives are only beginning to recognize the idea of a consumer-driven marketplace. Some

cooperatives—primarily engaged in marketing milk,

fruits, vegetables, and nuts—have a proven record of

understanding and accommodating consumer preferences. On the other hand, many commodity-oriented

cooperatives have seemed satisfied to limit their roles

to first-handler functions. Today, identity-preservation,

genetic modification, and other differentiation strategies threaten to virtually eliminate the commodity

business.

To gain consumer acceptance and loyalty, cooperatives must "unlock" value in their commodities

through differentiation. For example, this might

involve highlighting specific physical product attributes preferred by some consumers, such as organic, freerange, sustainable, fairly traded, humanely slaughtered, etc.

While consumers are sometimes willing to pay a

premium for specific product attributes, suppliers find

little evidence of general market acceptance of such

premiums for providing food grown or processed to

meet special standards and expectations. For example,

domestic consumers have generally neither required

nor been willing to pay extra for non-GMO products.

Many foreign consumers insist on certain tolerance

levels and segregation of non-GMO products, but not

at a premium.

Cooperatives may be able to exploit the natural

advantage of their inherently close ties to producers to

create a positive, marketable image in the minds of

consumers. Debate continues on whether a cooperative's identity is a marketable attribute. Some cooperatives, such as Blue Diamond and Florida's Natural,

emphasize their farmer-owned cooperative status in

advertising and when promoting their products. Close

ties to producers should allow cooperatives to assure

buyers of identity preservation and traceability to a

degree not possible in other businesses.

Industrialization: farm to retail

via the supply chain

As part of their response to the growth of consumer power, food processors and retailers are extending their influence over associated market channel

activities. Firms that control key elements of the distribution and marketing system are attempting to control

each level of the process, up to and including delivery

to the consumer. These firms strive to assure: a) product quality that satisfies their customers’ specific preferences; b) minimum costs subject to meeting the quality specifications; and c) that the associated risks are

managed within acceptable levels. Competition gives

way to coordination, as large consolidated firms internalize transactions through ownership or other coordination mechanisms that give them greater control of

variables affecting profitability. It also results in thinner markets where the disparity in bargaining power

among the parties becomes even more pronounced.

A common term to describe the tools used to consolidate this control is "supply chain management." In

agriculture, it begins with contract farming. The production of uniform food products requires relatively

uniform raw farm products. Drumsticks and pork

chops won't be the same from week to week unless the

chickens and hogs they come from are relatively alike.

Supply chain management is a fact of life in the broiler

industry and becoming common in the pork industry.

Early biotechnology helped develop relatively

uniform chicks that produce consumer-preferred largebreasted chickens. Most chickens today are produced

using an "industrial" model. A vertically integrated

firm breeds and hatches the chicks, transfers them to a

farmer who grows them to market size under a contract with the parent firm, and then transfers them

back for processing and marketing. Every aspect of the

"grow-out" process is controlled by the parent firm.

Feed, veterinary services, and other supplies are provided to the farmer. The result is a uniform, low-cost

poultry product that generally meets consumer

demands. Integrated firms, seeking to ensure product

quality and to reduce costs, negotiate directly with

producers for contracted product delivery according to

specific time, place, and performance standards.

Now genetics-based artificial insemination of

hogs is resulting in piglets that, if raised in a certain

manner, produce lean pork cuts that also meet consumer demands. The pork industry is developing an

integrator/contract farmer production system based

on the poultry industry model. Industrialization of

beef and grain production is anticipated in the near

future.

5
The implications of this integration for producers

involve loss of independence, shortened planning

horizons, and mounting cost/price pressures. Contract

producers accept restricted decision-making and less

autonomy for the relative security of a stable, albeit

somewhat lower at times, income stream.

Industrialization is also moving backward from

the supermarkets toward the processor. Led by WalMart, retailers are forcing food processors to streamline their production and distribution systems.

Retailers tell firms that want to be their suppliers

where, when, how, and how much product to deliver.

This top-down dominance is being facilitated by the

concentration occurring in food retailing. Food processing and distribution firms that want these large

accounts must develop internal supply management

systems that satisfy the retailers and convince their

suppliers to adjust to these systems.

Not long ago, retailers were like talent agents,

vying for the privilege of carrying the best brands. But

with their burgeoning size and market share, they are

now landlords who own the only prime real estate in

the area. They can collect slotting fees (rent for the use

of shelf space within stores). The burden of carrying

inventory is shifted to weaker links in the chain.

Retailers reduce labor costs by compelling suppliers to

stock shelves. Suppliers now bear more of the risks

and costs of the marketplace.

Cooperatives are forced to evaluate where they

stand in various supply chains from both the production and marketing standpoint. In the past, cooperatives provided a public price, making them vulnerable

to undercutting and blame for perceived low product

prices. Today, while many cooperatives still find themselves in that role, some of the larger ones emulate the

integrated-firm practices in livestock production for

which they were once supposed to be the antidote.

Structural change in food processing 

and marketing

Producers and their cooperatives are selling into

markets increasingly dominated by fewer, larger buyers. A variety of ownership and contractual arrangements intensifies concentration and creates a dramatic

disparity in market power. Even the largest agricultural cooperatives have much smaller sales and asset

bases than many of their competitors and customers.

Economists suggest that if four firms have 40 percent of a market, that market is no longer competitive.5

In food manufacturing, this four-firm concentration

ratio ranges from 49 percent to 80 percent in beef packing, pork packing, broiler processing, flour milling,

dry corn milling, wet corn milling, and soybean crushing.6

Consolidation among U.S. retail food marketers

is continuous. It is augmented by the entry of foreign

firms into the U.S. market through aggressive acquisition strategies. From 1991 to 2001, the four-firm share

of the retail food market increased from 23.3 percent to

27.8 percent, while the eight- firm share has increased

from 35.2 percent to 43.6 percent.7 Retailers are positioned to dictate product requirements, prices, and

other terms of trade to suppliers. Purchasing is centralized for logistical and pecuniary leverage as retailers

seek to purchase as many products as possible from

the fewest number of suppliers. Moreover, suppliers

must be substantial enough to carry not only a nationwide presence, but also global networks of stores.

As traditional supermarkets expand in size and

scope, volume discounters and warehouse clubs are

entering food retailing and becoming dominant market participants. In 2002, Wal-Mart is the clear leader

in national food sales (but wasn't even on the list of

largest food retailers in 1990), while Costco is fifth and

another Wal-Mart unit, Sam's Clubs, is sixth.8

The remarkable success of Wal-Mart's supply

chain model, which demands suppliers provide service, dependability, and quality assurance—and at the

lowest possible price—is pressing retailers and suppliers alike to conform to a new standard. Wal-Mart's success is driven largely by its ability to compel suppliers

to meet their demands for products while simultaneously reducing delivery costs. In return, the retailer

provides access to shelf space on a nationwide basis,

state-of-the-art information technology, and a large

data base on consumer demands and preferences.

Suppliers (including cooperatives) must conform

to buyers' procurement systems by adopting specific

information technology that both requires and facilitates better up-front planning by suppliers in inventory, transactions and billing. Although suppliers bear

more risk and cost, these types of demands are considered positive by many, because they impose a discipline that can be applied not only to other buyers but

also back to raw material suppliers as well. The ability

6

6 Id., at 17-19.

7 Supermarket News, January 18, 1993, and the website

www.supermarketnews.com as of March 28, 2002.

8 Supermarket news website, www.supermarketnews.com.

5 William Heffernan, “Consolidation in the Food and Agricultural

System,” National Farmers Union, (February 1999), p. 1.
to do business with Wal-Mart is considered a benchmark of a supplier's ability to service other large retailers. Those cooperatives that can do business with WalMart report that they are better, more efficient

suppliers to all of their customers as a result.

Cooperatives, as sellers of farm production supplies, also feel the effects of structural change within

their industry. Serving both large and small producers

remains a continuous challenge, as does their ability to

respond to demands for "one-stop shopping" and

bundling of products and services. As buyers of inputs

and ingredients, cooperatives feel the cost-price

squeeze. They, like their members, face fewer, larger

suppliers. Under increasing pressure to be more efficient, some cooperatives are exploring alternative purchasing avenues through buyers' consortiums or freemarket auctioning. However, simple solutions to their

challenges are not readily apparent.

Globalization

Cooperatives are groping to find their place in

the 21st century's global, interdependent economy.

Participation in the global economy is, in many ways,

no longer an option. Slow U.S. population and income

growth have dampened demand at home, requiring

U.S. producers to look to the 96 percent of the world's

consumers outside the United States. Attendant is the

need to address the myriad demand-factors that

world-consumers require—each in their own unique

cultural context. Other international market conditions

often mirror domestic markets. For example, U.S. producers face the same need for countervailing power in

highly concentrated food industries both domestically

and worldwide.

Producers are particularly hard hit by globalization. For decades, U.S. farmers were the most efficient

and productive producers in the world. As we look

ahead, U.S. producers may be extremely productive

given their resource base. However, foreign producers

have lower input costs. Labor costs are lower in other

parts of the world. U.S. production subsidies have driven land prices to unprecedented heights. International

production grows increasingly competitive on a price

and quality basis. As less-developed countries become

better able to meet their basic food requirements, they

will be less dependent on for U.S. surplus production

and may even become competitors in both our own

and other countries' markets.

One book on the subject of globalization was

mentioned repeatedly during the panel discussions.

Steven C. Blank's The End of Agriculture in the American

Portfolio looks at the economic realities of globalization

and concludes that we are approaching a time when

all agricultural production will cease in the U.S.9 None

of the panelists dismissed the book out-of-hand.

Although many said Blank may have overstated his

case by suggesting that all agricultural production in

the U.S. would cease, they take seriously his basic

premise that farmers (and by implication, their cooperatives) will never again make money consistently selling basic commodities such as corn, soybeans, wheat,

and cotton.

Increasingly, commodity suppliers take advantage of opportunities to source from multiple locations

and reduce transactions costs. This is a challenge for

U.S. cooperatives, which are tied to their domestic

grower bases. Cooperatives may no longer be able to

provide a home for all member product and be the

market of last resort. Instead, cooperative marketers

must identify ways to insulate themselves from

volatile commodity markets by adding value and differentiating their products, if only by implementing

and enforcing higher quality standards and terminating their relationship with producers consistently

unable to make the grade.

Both the rules of the game and the players are

changing. China's membership in the World Trade

Organization positions it to displace U.S. agricultural

products in both domestic and export markets. The

reaction to these kinds of changes, added to the cyclic

and unstable nature of the global economy, is often

governmental intervention to protect domestic producers. Tariff and non-tariff barriers are used to protect

domestic production, but also distort trade and throw

markets out of balance. This produces a continuous

cycle of market-access issues and actions to "level the

playing field."

Panelists seemed unafraid of questioning

whether cooperatives can position themselves to help

U.S. producers compete globally under these conditions. They asked whether it is enough—as some grain

cooperative leaders have suggested—to look for ways

to increase domestic demand through livestock and

renewable energy rather than rely on export market

growth. And they wondered what unique features of

the cooperative form of business define the ability of

U.S. producers to influence policy and gain a foothold

in international markets.

7

9 Steven C. Blank, “The End of Agriculture in the American

Portfolio” (Westport, CT: Quorum Books, 1998).
The policy environment

Few deny the impact public policy has on agricultural producers and their cooperatives. Panelists

were generally critical of how policy affected their

members and cooperatives. And they were willing to

share some of the blame for not being effective enough

in educating legislators on the problems they face.

At the producer level, some panelists questioned

a "cheap food" policy, chiding lawmakers for mollifying voters by perpetuating programs that dampen

markets for producers. Others noted the results of

fighting basic economics—encouraging production

that exceeds demand and then providing subsidies,

which keep land in production.

Government programs also influence the structure and success of cooperatives. This section reviews

two policy issues discussed during the workshops. A

subsequent section examines how cooperatives can be

more effective in shaping policy in the years ahead.

The price-income anomaly

Entering the 21st century, market prices for basic

farm commodities—wheat, corn, cotton, soybeans,

rice—were at cyclical lows, the result of unrestrained

domestic production, worldwide surpluses, and

depressed demand in a weakened global economy. Yet,

net cash farm income in the U.S. reached a record high

of $59.5 billion in 2001. The value of U.S. farm real

estate rose 12 percent from 1999 to 2001, to more than

$1 trillion. The farm debt-to-asset ratio hovers between

15 and 16 percent, well below the level reached during

the period of farm financial stress in the 1980s.

This anomaly is made possible by Government

transfer payments. Of the $59.5 billion in net cash farm

income in 2001, $21.1 billion came from Government

payments to farmers. The 1996 farm bill was intended

to wean agricultural producers from the financial support of the Federal Government and to provide a

framework for a "market-oriented" production economy. But a series of natural disasters and related circumstances resulted in a less aggressive approach in

congressional efforts to shape a more rational agriculture. As a consequence, farm land prices rose to record

levels, putting U.S. producers at a disadvantage relative to those in other countries where land and other

supplies are cheaper and technology has boosted product quality.

Environmental regulation

Another growing challenge to producers and

their cooperatives in the 21st century is dealing with

the production and business restraints brought about

by environmental concerns. Producers are caught up

in a myriad of regulations that seek to constrain

actions that may harm the environment. Areas of likely

conflict include nutrient runoff, access to scarce water

supplies, and protecting open space.

Cooperatives, like farmers, must deal with

increasingly complex environmental regulations.

Runoff from food processing facilities, disposition of

chemicals, access to water, and noise and odor complaints from neighbors are some of the issues confronting cooperatives and other businesses.

Well-intended environmental rules can sometimes harshly affect cooperatives. One example is the

Environmental Protection Agency (EPA) rule to substantially reduce the sulfur in diesel fuel and gasoline.

This poses a serious threat to cooperatives that own

petroleum refineries. Management estimates that it

will cost at least $200 million to bring their facilities

into compliance with these standards. Investor-owned

petroleum firms can raise the funds to upgrade their

refineries in public capital markets. Cooperatives are

concerned that their members don't have the money to

do the same for their facilities. EPA's refusal to grant

cooperatives an exemption from the rules, or more

time to comply, places them in a difficult position. One

or more refineries may have to be sold, reducing fuel

availability and competition among sellers in rural

areas.

Another concern for cooperatives involved in

food marketing is the ever-present possibility of delivering products that are considered adulterated or

unsafe into the marketplace. This issue is amplified by

recent questions about possible long-term harm from

the use of genetically modified farm products.

Conflicts may arise between the technologies available

to farmer-members and their impact on the integrity of

the food delivery system, with cooperative marketing

managers caught in the middle.

Some environmental programs may be perceived

as beneficial by producers but impediments by cooperative managers. Agricultural-based conservation

began in earnest after the "dust-bowl" days of the

1930s. The overriding objective has been to keep topsoil in place, reducing pollution and enhancing farm

productivity. Significant strides have been made in

achieving that goal. Ninety-two cents out of every dollar spent on direct conservation payments to farmers

pays to idle land and for the management practices

that enhance the environmental benefits of retired

land.10 But this means reduced farm supply sales and

products to market for cooperatives.

8
In the years ahead, producers, cooperatives, and

Government will have to work to improve management practices on farms, in forests, and factories.

Government dollars may have to be reallocated

toward sustainable practices and a wider range of

issues, such as incentives to conserve scarce water and

energy resources on the farm and at cooperative facilities. As with all agricultural firms, farmer cooperatives

will have to find ways to meet the cost of complying

with various regulations or exit certain lines of business.

Issues and Forces Shaping the Internal

Environment of Cooperatives

Internal challenges as daunting as the external

ones confront cooperatives. The internal issues are

largely related to the external ones, particularly as they

complicate efforts to respond to outside forces. Some

internal issues are inherent in the structure of cooperatives, others result from the attitudes of the people in

cooperatives. All must be addressed for cooperatives

to remain a viable business structure in the 21st century.

This section addresses issues common among all

types of farmer cooperatives and special problems

confronting the federated farm supply and grain marketing system.

Limited ability to accumulate equity

One of the stiffest challenges facing cooperatives

in the years ahead will be accumulating sufficient capital, particularly equity, to finance improvements and

expansion of services. Cooperative principles dictate

that cooperatives are owned and controlled by the persons who use their services, and benefits flow to userowners on the basis of use, not investment. This makes

investment in a cooperative unattractive to "outsiders,"

even those who support what the cooperative is trying

to accomplish.

Equity accumulation is further complicated by

the related axiom that the burden of financing the

association should fall on current users. A cooperative

is the only form of business that is expected to systematically return equity to owners.

Another hurdle is the common practice of

encouraging membership by requiring only a minimum initial investment to acquire an ownership interest in a cooperative. Cooperatives are often expected to

provide low-cost services to members and still generate sufficient earnings to redeem old equity, return

substantial cash patronage refunds to members, and

generate all the new equity the association needs.

Another impediment is farmer reluctance to

finance new initiatives, especially unfamiliar and risky

activities, such as vertical integration and value-added

processing. Cooperative managers, particularly managers of regional cooperatives who want to enter new

ventures, believe that many farmers have the resources

to finance cooperative expansion but prefer to spend

the money on their own farm or other investment

opportunities.

Retained patronage refund financing is creating

fissures within the system. Cooperative managers

assert they need these retained earnings to sustain the

business. Producers and local members of regional

federated cooperatives want large cash patronage

refunds and question the value of non-cash patronage

refunds. They become frustrated with a cooperative

that says patronage refunds are members’ money but

fails to redeem equity as rapidly as these memberpatrons would like.

The environmental compliance problems facing

cooperative refineries discussed in the previous section

illustrate the equity accumulation problems for cooperatives. Some believe that if cooperatives that own

petroleum refineries could simply sell stock on the

open market as their investor-owned competitors do, it

would be much easier for them to meet EPA edicts

concerning reduced sulfur content in their products.

But this conflicts with operating their business on a

cooperative basis. So cooperatives must develop

strategies to attract sufficient capital without subverting their cooperative character if they wish to remain

in the petroleum refining business.

Some farmers are willing and able to finance their

cooperatives. The development of numerous "new

generation" cooperatives shows that if farmers are

offered the proper incentive, such as a chance to participate in value-added processing and to realize a gain

when they sell their investment in the cooperative,

they will provide up-front equity.

However, in several instances, the farmer-owners

of a "new generation" have determined that they

couldn't raise adequate equity from the membership to

seize important market opportunities. They voted to

convert to an investor-owned firm to gain access to

9

10 USDA’s report, “Food and Agricultural Policy: Taking Stock for

the New Century,” (September 2001), p. 10.
outside investment. The original farmer-members may

still benefit from the company. However, those benefits

will no longer be protected by user ownership and

control.

Diverging member characteristics and needs

The growing diversity among producers is

reflected in cooperative membership. Cooperatives in

the 21st century will be expected to meet the various

needs of an increasingly heterogeneous membership.

Some issues arise because of the diverging size

and motivation among producers. For example, commercial-scale producers may expect discounts on supply purchases and special services to remain cooperative patrons because such benefits are offered by other

businesses. Small producers sometimes resist what

they see as efforts by larger producer-members to control the organization.

Cooperatives have always had members of various ages. But when children were raised on the farm,

received all of their formal education in the local area,

and became farmers like their parents, the generation

gap was fairly narrow. Today, farm children are going

away to college, acquiring technical skills and experiences that match their urban counterparts, and being

offered opportunities not available to previous generations. While some older farmers scoff at technological

advances and global opportunities, younger farmers

accept them and expect their cooperatives to do the

same.

A single cooperative may have at least one member, if not a representative group of members, with the

following characteristics:

● A small-volume producer who enjoys living in

a rural area and doesn't particularly care if the farm

makes money (hobby farmer);

● A small-volume producer who wants to grow

and will seek the best deal available for needed goods

and services;

● A small-volume producer living in an area of

less economic opportunity for whom farming is a necessary supplement to limited non-farm income;

● A large-volume producer-member who runs

the farm as a business with a clear focus on profit;

● A new producer who is highly leveraged; and

● An older, long-time producer who is approaching retirement and has everything paid for.

Each of these members brings a specific set of

interests and demands to the cooperative. Leaders and

advisers must find ways to blend this increasingly

diverse base of farmers into a membership with a

cohesive business interest in their cooperative.

Board effectiveness

Effective boards of directors are critical to cooperative success. Their position as the link between members and management makes them responsible for

meeting member needs while maintaining the viability

and cooperative character of the association. Given the

complex and fast-changing circumstances facing cooperatives today, developing strong leadership at the

board level will be a continuing challenge in the 21st

century.

Cooperatives are organized as corporations

under State law and have a general governance system

based on the corporate model, but modified to reflect

the cooperative system of user representation.

Member-owners elect a board of directors to set corporate policy and oversee operations. The board selects

the chief executive officer, usually referred to as the

manager, who administers the board policies, hires

other staff, and is responsible for the day-to-day operations of the cooperative.

Participants in the focus groups raised several

issues about director effectiveness in cooperatives. One

concern was that producer-directors too often make

decisions based on internal politics rather than sound

economic principles. Decisions made to curry popularity (e.g., to keep an unprofitable facility open) may get

the directors re-elected but the decisions may be bad

for the business. Good directors, it was suggested, vote

for what makes the most business sense and let the

performance of the cooperative determine whether or

not they are re-elected.

A second concern is that some directors never

grow, in a leadership sense, beyond being a producer

member. For example, they resist equity accumulation

through retained earnings because, as a grower, they

want a high cash patronage refund each and every

year. They are viewed as too willing to mortgage the

cooperative's future for more cash today. Far-sighted

directors will ensure that money invested in their

cooperative protects and enhances their income over

the long term.11

10

11 This also reflects the board’s policy-making role where members

may have divergent interests. If members want more cash, do

directors have an obligation to respond accordindly? This may

also be a member-education issue.
Panelists were also wary about the inability of

many grower-directors to deal with contemporary

issues. Farmer-directors may be outstanding producers, but often lack the experience and training to analyze options for dealing with supply chains, technological innovations, complex business arrangements, or

globalization. They might not fully understand financial statements and might have trouble grasping complex business plans. Managers of regional marketing

cooperatives in particular question whether their

grower-directors are equipped to guide processed food

companies in today's economic environment. Some

believe grower-directors should limit their oversight to

broad policy areas while turning over full responsibility for operational decisions to management.

Concerns about board effectiveness will be

explored in more detail in the subsequent section on

the changing federated farm supply and grain marketing systems. Ways to improve board performance will

be addressed later.

Management lack of cooperative focus

Some aspects of managing a cooperative are similar to other comparable businesses. These tend to be

the physical operations. A cooperative-owned dairy

plant, feed mill, or farm supply store looks and operates much like a non-cooperative one. So do the trucks,

warehouses, and fork lifts. Both types of businesses

develop distribution channels, deal with unions, comply with government rules and regulations, etc.

But some management issues are unique to cooperatives. Managing one requires a clear understanding

of cooperative principles, structure, and operations.

Cooperative managers must be doubly qualified. They

need to be well versed in the fundamentals of cooperation as well as the specific operations of the business.

In an investor-owned firm (IOF), the chief executive officer (CEO) often has a large, if not dominant

voice, in selecting the board of directors. Strong CEOs

look for persons who share their vision for the future

of the company and respect their managerial ability in

selecting directors. When a new CEO takes over, directors who don't share his or her views are often encouraged to relinquish their seats on the board. This places

the manager in a position of strong control over both

setting and implementing company policy.

In a cooperative, the CEO usually has significantly less influence over who sits on the board. Incumbent

directors may have outlasted several managerial

changes. When a board seat opens up, the influence of

the CEO in the selection of the new director varies

greatly depending on the culture of the association.

Some cooperatives look for guidance from the manager, others deeply resent any involvement by the manager. As a result, directors often don't feel beholden to

the manager for their position and have the independence, if they choose to exercise it, to question management decisions and reject its recommendations.

Another difference is the daily relationship

between the shareholders and the directors of an IOF

and a cooperative. An IOF investor-owner may have

no relationship with the business other than as an

investor. Directors attend a quarterly board meeting,

but they may also have limited additional contact with

the firm.

In a cooperative however, user-owners and directors invest in and guide the firm specifically to obtain

services for themselves and the other members. They

often have regular contact with employees and other

producer-owners. Their livelihood depends on the

cooperative doing a good job. They know when they

think it isn't meeting their needs and frequently tell

management when they are displeased about even the

smallest imperfection in goods or services received.

Thus, cooperative managers must be able to

accept shareholders walking into their office with comments, often critical, while, in an IOF, the shareholders

may not even know where the headquarters is located.

They must also work with a board they didn't select

and that may have very different ideas from their own

as to how the association should operate.

When hiring a new CEO, a cooperative needs to

consider how that person is likely to do in the close,

personal environment that is part of working for a

cooperative. This suggests that one good source of

people with the appropriate skills for leadership in

farmer cooperatives is managers whose careers developed in the cooperative system.

Growing emphasis on value-added activity

A final internal issue confronting cooperatives is

the growing emphasis on value-added handling and

food processing. Many panelists view value-added

processing as the growth area for cooperatives in the

21st century. This raises serious questions about how

other business segments that historically have been

important to producer members will be treated and

the extent to which cooperatives should invest limited

resources in trying to be effective in markets dominated by powerful global food and retail firms.

Pressures on the federated model

One major theme to emerge from the focus group

discussions is that the traditional federated grain mar11
keting and farm supply system is under intense pressures. It has already begun to change in response to

those pressures and may be vastly different in the

years ahead. All cooperatives are affected by major

changes in the agricultural environment such as globalization and concentration. Yet, panel participants

focused their expressions of concern on the traditional

network of local grain elevators and farm supply

stores and their federated regional grain marketing

and supply buying cooperatives.

This focus is not surprising for at least two reasons. In 2000, nearly two out of every three U.S. farmer

cooperatives marketed grain and/or provided supplies to grain producers. More than 75 percent of the 3

million producer-memberships held in farmer cooperatives were in these associations.12 While most of these

associations are local, centralized cooperatives, many

are members of one or more regional, federated systems.

A basic cultural conflict exists between local

cooperatives and their federated regional. Some locals

will not recognize change. Federated managers believe

the realities of the business world are demanding that

they do. Panelists offered numerous explanations for,

and examples of, this conflict.

The planning horizon of a local cooperative is

often constrained by its older farmer-members, many

of whom are nearing retirement. They want their cooperative to just keep doing what it has been doing and

use any cash on hand to redeem their equity. This was

described as older members wanting to "slide by" for

another 5 to 10 years until they retire.

Younger producers are more likely to urge their

association to invest in operations that will help them

remain viable into the future. However, the older farmers control most of the board seats on many locals and

have the authority to thwart change. For example,

panelists suggested farmer-directors' limited vision is

keeping cooperatives from making the necessary

investments to become leaders in the hog processing

industry. They asserted that these elders are relegating

future hog farmers to "contract producer" status.

Many federated managers believe that locals

embrace the cooperative culture of service over profit

to such an extent that they are unwilling to take steps

necessary to maintain profitability. This leads the

locals to make unreasonable demands on their federated regionals to keep them in business. Locals expect

federateds to be the low-cost source of farm supplies,

pay a premium for product delivered for resale, and

issue a hefty patronage refund each year. Often, economic circumstances make this impossible.

Federated cooperatives could offer locals the

opportunity to be more profitable by selling them supplies for less and/or paying more for farm products

delivered for marketing. However, such activity would

impair the federateds' ability to finance operations and

pay the patronage refunds that command the loyalty

of local cooperatives. Some federated managers don't

trust their locals to use the funds wisely. Regional

cooperatives want to enhance their own economic

position rather than to further underwrite what they

perceive as losing activities at the local level.

Many locals operate at a deficit and depend on

federated association cash patronage refunds and

redemption of retained patronage refunds of earlier

years to stay in business. Rotan reports that in 2000,

more than 40 percent of the locals surveyed had losses

on their own operations and needed patronage

refunds from federated cooperatives to show a profit.13

Regional federated managers are also frustrated

by what they see as perception problems among local

producer members. Because patronage refunds are

often used to cover the losses of inefficient locals, producers seldom recognize the extent of the support they

receive from federated cooperatives.

Federated cooperatives consider this an

unhealthy situation. They question the ability of their

affiliates to survive when they are unable to pay

patronage for a period of time. Federated cooperatives

want locals to be profitable on their own, instead of

diluting regional assets to cover their inefficiencies.

Locals often encourage competition among cooperatives and fail to emphasize cooperation among

cooperatives. Federated cooperatives are forming

alliances with each other that create new, nationwide

ventures focusing on single lines of business. They see

this as a way to "take costs out of the market" while

locals see it as a way to "take competition out of the

market."

Hogeland observed that locals want, and are

accustomed to, several bids for their business. They

may belong to multiple marketing and supply federat12

12 Charles A. Kraenzle et al., “Farmer Cooperative Statistics, 2000,”

U.S. Department of Agriculture, RBS Service Report 60, p. 2

13 Beverly L. Rotan, Sales Climb, Net Income Declines in Local

Cooperatives in 2000, “Rural Cooperatives,” USDA/Rural

Development, (Nov/Dec 2001), pp. 25-26.
ed cooperatives to cherry pick the best bids available

within the system. When the system only offers one

bid, they look to IOFs for competitive bids.14

Federated cooperatives see the locals as ungrateful and somewhat disloyal when they look for the best

short-term deal instead of supporting regional coordination aimed at capturing economies of scale that

increase market power and reduce costs to the locals

over time. The friction makes it difficult for federated

cooperatives to achieve their business objectives.

Locals are seen as adverse to business alliances,

either with other cooperatives or IOFs. Federated management, on the other hand, moves easily in a world

where they compete with a firm on one front and partner with them on the next. The alignments of regionals

with firms that some local leaders consider rivals creates considerable tension among regionals, their local

affiliates, and their producer-members.

Communication is necessary to educate members

on the need for joint ventures that appear to reduce

competition and for ventures with "the enemy." An

example of this is uproar over a federated cooperative's decision to sell grain through an IOF competitor.

The cooperative’s management saw no problem with

this because the cooperative regularly does business

with the IOF. Many producer-members, however, were

upset because they perceive the IOF as "the competition." A larger investment in a member education campaign might have helped the cooperative limit the tension with its producer-members. The importance of

thoroughly explaining pending partnerships with a

competitor before the venture is approved cannot be

overemphasized.

Federated managers view local members as less

concerned with the value of their equity investment in

their federated than in keeping their local cooperative

alive. Federated cooperatives see the locals' penchant

for service over profit manifesting itself as a justification for insisting inefficient local facilities remain open

when economics demand that they be closed.

The evolution of transportation services, especially trucking and the interstate highway system, negates

the need for a grain elevator and farm supply store

every 8 to 10 miles. Grains, cotton, and even milk can

be hauled hundreds of miles or more when it is economically advantageous to do so.

Several panelists viewed local grain elevators as

dinosaurs bound for extinction. Their farmer- owners

will have to absorb the loss. They also cautioned

against farmers investing in new sub-terminal elevators to get back on railroad main lines. Marketing commodity grain, they said, is not profitable now, nor is it

likely to be in the future.

Investor-owned processors and exporters are perfectly willing to let farmers tie up their capital in basic

commodity handling facilities, with their low return

on investment. However, as the IOFs require grain,

they are also somewhat willing to share the cost

through joint ventures. The grain firms regard these

elevators as costs and not profit centers, while many

farmers still expect them to generate patronage

refunds.

Farmers must recognize the additional costs associated with keeping a conveniently located but inefficient local in business. For example, two small cotton

gins resisted merging because both sets of members

wanted a cooperative in their town. It cost their

regional cooperative an extra $20/bale to serve both

gins. When the situation was explained to the producers that they could decide either to merge or receive

$20/bale less for their cotton, the merger was quickly

approved. Farmers have every right to place a "social"

value on retaining their local facilities. But they must

understand the economic cost of that choice.

Sometimes the cost of operating what appear to

be inefficient locals may be justified. In another

instance, two local cooperatives serving producers of a

perishable crop would save $200,000 per year by merging. However, the members are in a hurricane area and

wish to minimize the risk of significant losses due to a

harvest-time storm. Closed roads could prevent deliveries by some patrons to a single location, resulting in

a substantial crop loss. As their potential loss might be

greater than the extra cost of maintaining two locals,

they decided to bear the additional cost—a form of

market insurance.

Rural sociologists add a new perspective on the

issue of closing locals. They suggest that the closure of

a local cooperative tears at the social fabric of the community, just as when a school, church, or hospital closes. The reasoning is always the same: "The community

can't support the facility." But the social damage

caused by such closures is difficult to measure.

Panelists spent little time on supply cooperative

issues. One executive of a farm supply regional pointed out that the costs of doing business through a

multi-level supply cooperative come under real scrutiny when a farmer can order chemicals, for example,

directly from the manufacturer and have them delivered for less total cost. While some farmers are willing

13

14 Julie A. Hogeland, “The Changing Federated Relationship

Between Local and Regional Cooperatives,” U.S. Department of

Agriculture, RBS Research Report 190 (August 2002), p. 5.
to pay more for technical support provided through

their cooperative, others simply use the Internet and

bypass the cooperative system.

The many pressures on the federated system are

placing managers of local cooperatives in an untenable

position. When a local isn't profitable on its own, the

survival of both the manager and the cooperative

depends on something beyond their control: the success of their regional.

Managers at all levels within the system are

rewarded for how well their unit does on a short-term

basis. Perhaps, because of system inter-dependencies,

a new approach to incentives should be developed that

rewards performance of the entire system.

Reshaping the federated system

As cooperatives adapt to the 21st century business climate, producer-owners must recognize the fundamental shifts that are occurring and initiate policies

and programs designed to succeed in the new environment. This includes adapting to globalization, technological innovation, and industrialization within agriculture.

Perhaps even more important is an underlying

current drawing the economy in a new direction.

Throughout the 20th century, the cornerstone of our

economic thinking was free and open competition.

However, as the 21st century begins, coordination is

now a driving force. Cooperatives will have to position

themselves and their producer-members to deal with

this basic shift in business operations and market

structure.

The focus groups discussed several inter-related

issues including: streamlined decision-making, coordination among cooperatives, and capital accumulation.

They concluded that the successful agricultural cooperative of the future is likely to be relatively large, centralized, and market driven. Important changes are

already occurring within the federated system of grain

marketing and farm supply associations. Regionals are

spinning off their previously competing farm supply

operations into product-line LLCs, turning grain marketing over to the multinational IOFs, and evolving

into food processing firms. At the local level, changes

include consolidation of local cooperatives, some large

enough to be considered a so-called "super-local."

Not all restructuring needs to result in substantial

increases to margins. Restructuring is also successful if

it prevents a deterioration that would have otherwise

occurred without the change.

At the regional level

The federated regional cooperative traditionally

was a single-source supplier of all the important goods

and services to local affiliates. Each federated purchased the major farm supplies in bulk for resale to its

locals, who then resold them to their farmer-members.

Regionals also maintained large facilities where stored

grain was gathered, sold, or transported for either

domestic processing by other firms or for export

through port facilities.

These cooperatives are now openly questioning

whether, as structured, they can compete with the

large multinational firms in either of their two key

functions: providing supplies to their farmer- members

or marketing their production. They have initiated

new business strategies. While it is too early to predict

their success, these changes offer opportunities not

likely to arise under the traditional mode of operation.

Coordinated farm supply operations. In recent

years, Midwestern federated farm supply cooperatives

made major changes in their delivery systems by organizing joint cooperative ventures to coordinate a single

market presence.

Agronomy. On February 3, 2000, CHS

Cooperatives, Farmland Industries,15 and Land

O'Lakes formed Agriliance LLC. This firm provides

crop nutrients, crop protection products, and seed to

cooperatives and producer-members in all 50 states,

Canada, and Mexico. The venture allows participants

to use the fertilizer manufacturing capacity of

Farmland and CF Industries more efficiently. It is

developing a branded marketing program for crop

protection products under the AgriSolutions label.

Feed. Land O'Lakes and Farmland also formed

Land O'Lakes Farmland Feed LLC to manufacture and

distribute feed. The venture has eliminated duplicate

facilities, entered growing specialty markets, and

through Land O'Lakes, purchased Purina Mills and its

branded feed marketing program.

Energy. In September 1998, CHS and Farmland

formed Country Energy LLC to deliver petroleum

14

15 This alliance (along with others) was viewed by many as way for

Farmland to alleviate the pressure it was under to provide an

array of services to its local affiliates despite the financial burden

imposed by those services. In June 2002, Farmalnd Industries was

granted bankruptcy protection under Chapter 11 to continue its

business operations. According to the petition, this filing was

spurred by “continued adverse market condition in the nitrogen

fertilizer business and recent increases in cash demands.”
products, propane, and lubricants to rural residents.

However, energy coordination appears headed toward

consolidation within CHS.

Farmland sold its interest in Country Energy to

CHS, which owns 75 percent of National Cooperative

Refinery Association (NCRA). If Farmland sells its

petroleum refinery in Coffeyville, KS, the only two

larger refineries in cooperative hands—the CHS refinery in Laurel, MT, and the NCRA facility in

McPherson, KS—will be under CHS control. The only

other refinery owned by a farmer cooperative is a relatively small unit operated by Countrymark in Mt.

Vernon, IN.

A similar coordination in farm supply operations

has occurred on the East Coast. In October 1998, Gold

Kist sold its farm supply operations to Southern States

Cooperative. In July 2000, Southern States began providing product distribution and marketing services to

a network of farm supply stores in the Northeast previously served by Agway. Agway has announced

plans to exit the agronomy, equipment leasing, seed,

and insurance businesses. It will focus on lines of business where it has a strong market position in its trade

territory (animal feed, energy product distribution) or

sees a brighter future (fresh produce, food industry

technology).16

These examples of joint ventures and restructurings reflect a growing realization among the federated

cooperatives that they can no longer afford to aggressively compete against each other for farmer loyalty

and business.

Grain marketing alliances with IOFs.

Cooperative grain marketers have created joint ventures with some of the largest grain merchandising

and food processing firms in the world that are well

positioned to participate in the global market.

In 1985, GROWMARK sold its river grain-marketing terminals to ADM for ADM stock. These elevators are operated by ADM/GROWMARK, a subsidiary

of ADM. GROWMARK locals are encouraged to deliver their grain to ADM/GROWMARK; ADM pays

GROWMARK an origination fee for grain supplied by

its members. Indiana Grain also formed a similar venture with ADM.

In May 2001, Farmland placed its domestic grain

operations into a similar grain marketing joint venture

with ADM, called ADM-Farmland, Inc. The new company leases and manages Farmland's 24 grain elevators in North America. In a related development, on

March 5, 2002, Farmland announced plans to exit the

international grain trading business by selling or liquidating its Tradigrain operations. Both agreements

place ADM in the forefront of marketing the grain

grown by farmer-members of local associations affiliated with these federated regional cooperatives.

In September 2002, Southern States Cooperative

entered into a long-term lease agreement turning control of its 13 grain facilities over to Perdue Farms,

which will operate the facilities. Southern States

emphasized the need to reduce companies in the market and provide growers with more marketing options

than Southern States could make available.17

Not all cooperative-originated grain is subject to

a marketing arrangement with an investor-owned

firm. For example, CHS markets substantial amounts

of member-produced grain. But the trend over recent

years has been toward affiliation with a global grain

marketing company.

Food processing growth. Midwestern federated

cooperatives have reduced their direct involvement in

farm supply and grain marketing and redirected their

resources to become food processing cooperatives.

Farmland Industries and CHS Cooperatives are moving toward the model created many decades ago by

Land O'Lakes (LOL). LOL members have enjoyed

returns produced by the cooperative's prominent position in the branded butter and dairy foods markets for

many years. This provided the financial strength and

positive exposure to develop a farm supply line that

supports dairy production and allows the cooperative

to diversify its business without diluting its focus. One

panelist suggested cooperatives that wish to succeed

in the 21st century may need to follow this model: pick

a product line where they can be successful on a

national/international scale; build a structure (including joint ventures) to accomplish that objective, and

convince growers to finance it (not pay half the earnings out as cash patronage refunds every year).

15

16 Agway News Release, “Agway Announces Plan to Strengthen,

Refocus the Cooperative,” March 6, 2002. Agway has, like

Farmland Industries (see note 15), filed voluntary petitions to

reorganize under Chapter 11 of the U.S. Bankruptcy Code. Agway

cited insufficiet cash flow to support the level of its debt as the

reason for its action. At the time this paper was written, Agway

had sold its insurance business and was negotiating to sell its

seed, agronomy, and equipment leasing assets to reduce its debt

load. Agway News Release, “Agway, Inc., Intends to File for

Chapter 11 Reorganization to Restructure Finances andReduce

Debt,” September 30, 2002. 

17 Southern States news release, “Southern States Announces Grain

Facilities Agreement with Perdue Farms Inc.,” Sept. 17, 2002.
Farmland Industries chose to enter the processed

meats business. Its affiliate, Farmland Foods, produces

a full line of pork products. Funds are being invested

in research and development and on advertising to

build the Farmland CaseReady Brand. Food service

agreements are in place with restaurant chains, hotels,

Kroger, and Wal-Mart Super-centers.

Farmland National Beef, owned by Farmland and

U.S. Premium Beef, is already the fourth largest beef

processor in the United States. The venture's

"CaseReady" beef is sold nationally through Wal- Mart.

This unit is also looking overseas and has captured 20

percent of the market for chilled beef in Japan.

CHS is building a foundation as a processor and

marketer of grain-based consumer products. CHS

owns a 50 percent ownership interest in Ventura

Foods, LLC, which generates $1 billion annually in

sales of margarine, salad dressings, and related products. This investment links back to CHS's soybean

crushing and refining operations in Mankato, MN.

Ventura Foods owns established brand names in

Hidden Valley salad dressings and Saffola edible oil

products.

In June 2000, CHS purchased Sparta Foods, Inc., a

major manufacturer of tortillas and related products,

opening new opportunities for its wheat, corn, and

oilseeds producing members. CHS also entered the

organic foods sector by purchasing an interest in

Rocky Mountain Milling, LLC, a small organic flour

mill in Platteville, CO.

On January 11, 2001, CHS and Cargill, Inc.,

announced a wheat milling joint venture known as

Horizon Milling, LLC. It combines five CHS mills with

16 Cargill mills into a nationwide network that will

retain the flour brand names of both companies and

explore new branded product opportunities. Cargill

manages the joint venture company.

CHS has also launched Oilseed Partners, LLC, a

joint venture with 450 North Dakota producers. It

crushes and markets crambe.18

In 1998, Gold Kist, Inc., sold its farm supply business to Southern States. Currently, Gold Kist's only

major line of business is processing and marketing

poultry products, although it also has a unit that markets pork products.

Gold Kist is now the second largest poultry

processor in the United States. It markets a complete

line of chicken products, Cornish hens, and processed

poultry products under its Gold Kist Farms brand

name. An unanswered question is whether other fullservice cooperatives will, or should, follow the example of Gold Kist and jettison all farm supply operations

in favor of a total commitment to food marketing.

At the local level

Some local associations are bolstering their grain

marketing and supply distribution business by transforming themselves into larger, centralized cooperatives. They have the strength to finance and manage

investments in facility and service upgrades. In turn,

they are becoming less dependent on the federated

system for products and services.

Consolidation into super locals. Local cooperatives need the capacity to serve tomorrow's producer.

When a commercial farmer has a large harvest of grain

to be stored and marketed, the local cooperative facility must be able to handle it or that business will go

elsewhere.

Like other elements of agri-business, local grain

marketing and farm supply cooperatives are consolidating to form centralized "super locals." They cover a

multi-county area and often accumulate sufficient capital to construct modern, high-volume grain elevators

along a railroad main line. They can also provide a

large enough market to attract favorable bids from

providers of farm supplies.

In Iowa, as with other states, the rate of concentration is accelerating. Twenty percent of all grain and

farm supply business is conducted by the largest 5

cooperatives. The largest 10 cooperatives conduct up

to 35 percent of the grain and farm supply business.

The trend to create super-locals with a centralized structure will continue. Some may approach the

size of existing regionals, but will have a single board

and management team.

Some consolidation will be voluntary to take

advantage of economies of scale, access to better

financing options, and increased market power. Some

will be involuntary, as floundering locals are merged

into stronger associations. Some locals will simply

cease to exist. Because alternative uses for a grain elevator are limited, the producer-owners of associations

may lose most or all of their equity.

Super-locals will have fewer but larger physical

facilities. They will purchase supplies for members

wherever they can be obtained at the lowest cost consistent with good delivery service. Often, they won't

take delivery of the product but will simply process

orders with the supplies being sent directly from the

manufacturer to the farm. Likewise, they will market

16

18 Crambe is a member of the mustard family, grown primarily in

North Dakota. When crushed, its seeds produce an oil suitable for

non-food, industrial uses.
member grain wherever they can get the best overall

terms. A growing portion may be sold under contracts

signed with private grain companies. These contracts

may be part of a joint venture or alliance arrangement.

The grain-marketing firm may help finance the cooperative elevator(s) in return for an assured supply of

product at a reasonable price.

The business environment surrounding superlocals that only market grain and provide farm supplies will likely limit them to modest margins.

Multinational grain companies prefer not to tie up

their capital in rural storage facilities and will continue

to support the origination role of cooperatives.

Therefore, grain-marketing contracts will provide

enough of a spread over cost for the association to

cover business expenses. But the cooperatives won't be

able to negotiate highly favorable contracts because

they face so much competition from other growers

throughout the country and around the world.

Emphasis on getting the best deal. Super-locals

are considered a mixed blessing by federated cooperatives. They eliminate redundant facilities and staff and

are generally more efficient than the locals that preceded them. They are also large enough to hire staff expertise and negotiate contracts with other firms. This

gives them a measure of independence not enjoyed by

their predecessors.

Super-locals have a full share of responsibility for

a loss of some of the social or personal relationships

associated with local cooperatives. Farmer loyalty, to

the extent it still exists, is often based on a personal

relationship with a local cooperative official, often the

manager or a director. The emergence of super-locals

diminishes those personal relationships.

The evolution of the cooperative grain marketing

and farm supply system can be expected to continue in

a rapid manner. The outcome is uncertain. There is

near-unanimous agreement that small, isolated locals

face a bleak future. And some recent mergers are considered simply a step toward an inevitable liquidation.

Beyond that, the only certainty is that farmers and

their elected leadership face difficult decisions as they

guide their cooperatives in the years ahead.

Priorities for Shaping

Future Cooperatives 

Two themes permeate strategies for cooperatives

to succeed in the 21st century. The first is that greater

investment is needed in the people who make up

cooperatives. Members, directors, managers, and

advisers must receive the training required to deal

with 21st century issues. Otherwise, they will neither

completely understand the options available nor have

the ability to analyze them and make sound business

decisions.

The second is that an emphasis must be placed

on pragmatism and profitability. Cooperatives are

businesses and in the years ahead they must focus on

solving business problems and providing value to

their members. If they don't, members will stop

patronizing them and they will just fade away.

Strengthening cooperative leadership

Little positive can happen for cooperatives unless

they have leadership able to meet the challenges of the

21st century. Skills required to lead cooperatives must

be identified and developed in directors and managers.

Directors

The board of directors is the central element of

producer control in a cooperative. Directors are elected

by the members to set policy and oversee its implementation. Most directors are cooperative members.

Today's cooperative board is likely to be composed of

older producers with a great deal of knowledge about

production agriculture but limited experience and

skills needed to deal with the external business forces

bearing on cooperatives.

As the business environment evolves, farmers

find it more difficult to manage their enlarging enterprises and keep abreast of marketplace changes. As

one educator suggested in the extreme, trying to talk

research and development, advertising, marketing,

and supply chain management with a board of producers "is like examining Shakespeare." It is simply a

foreign language to them. They just see short-term

costs.

To broaden the experiences represented on their

boards, cooperatives might pursue greater involvement of their absentee landlord members in the governance process. Off-farm owners are frequently treated

with indifference, if not contempt. Yet, they may be

17
very knowledgeable about farming and cooperatives.

Many are children of full-time farmers who were

raised on the farm but left to pursue other opportunities. They are often still active in farm management. If

they will serve on the board, they may be excellent

directors because they bring experience not otherwise

available to full-time farmers.

Outside directors. Panelists repeatedly urged the

inclusion of one or more outside directors on cooperative boards. Outside directors are typically non-members who are experts in areas vital to the association

but normally outside the experience of producers, such

as finance and marketing. Preferably, the outside directors are given a genuine role in the cooperative's leadership by making them voting directors, not just advisors. Grower control is maintained by giving them

power to remove outside directors that fail to meet

their approval. If the cooperative's State incorporation

law restricts board membership exclusively to members, non-voting advisers can provide some of the

same outside assistance.19

Panelists said that board meetings involving outside directors tend to stay on topic and run smoother

than producer-only boards. They also said outside

directors bring objectivity to a board that has problems

with conflict-of-interest issues, as occurs when the best

interests of some directors may not be the same as the

best interests of the association or the membership as a

whole.

While outside directors may offer many benefits,

the choice of who to bring in is extremely important.

To be effective, an outside director must understand

cooperative principles and practices and the special

burdens inherent in managing a cooperative. An outside director must be compatible with the farmerdirectors and understand the issues that producers

and the cooperative face in the marketplace.

Outside directors cannot be too closely aligned

with the manager. A strength of cooperatives is that

directors are chosen by the membership, not management. While management may recommend people to

fill outside director seats, producer control over the

selection and retention of outside directorships is

essential.

Producer directors must avoid being over-awed

by the outsiders. The outsiders may have a polish that

entices the farmers to just accept their word without

real challenge. If that happens, the purpose of the outside directors is subverted. They aren't adding their

knowledge to that of the producer directors, but rather

eliminating the element of control the farmer directors

were elected to exercise.

One governance system used in a limited number

of instances is the two-board structure exemplified by

the Welch's grape growers. Thirteen grower-members

serve as directors for the National Grape

Cooperative.20 This board is responsible for the operation of the cooperative, such as membership and raw

product issues.

The National Grape board controls Welch's, its

wholly owned cooperative subsidiary, by electing

Welch's board of directors. But Welch's is governed by

a separate board consisting of four National Grape

directors, two executive officers of Welch's, and four

outside professional people.

This arrangement separates direct control of decision-making for the processed foods operation from

the parochial politics and general reluctance to act that

is commonly associated with grower-dominated

boards. The decisions of the Welch's board are consistently unanimous because the outside directors have

learned to appreciate grower needs and can explain to

them why some services they may want can't be provided because of business reasons.

One specific advantage of this system is that it

frees the cooperative to make arrangements with other

firms without securing approval from the farmer

board. A panelist used this example. Suppose a marketing cooperative was participating in a joint venture

that needed an artificial substitute for a member product in a processed product. Under this system of control, it wouldn't have to deal with farmer directors

who would likely say "you can't do that." This structure allows the cooperative to base decisions on economics, with a minimum concern for politics.

This section is not intended to suggest that

farmer directors aren't doing, or can't do, a good job.

Many large and successful agricultural cooperatives

are governed entirely by farmer members. Many producers have acquired the skills necessary to be effective cooperative directors. And it is the level of competency, not one's status as a farmer or outside director,

that matters.

18

19 Some question the use of outside directors for expertise that might

be available from management or advisory consultants.

20 Welch’s was a family-controlled business for decades. In 1945,

growers who sold grapes to Welch’s formed the National Grape

Cooperative. In 1952, the Welch family sold its business to the

grower cooperative.
But when a cooperative integrates its marketing

activities forward into processing and marketing, the

impact of the external forces discussed earlier in this

report increases. As the world in which cooperatives

operate becomes more complex and corporate strategies are further removed from the farmer's natural

comfort zone of agricultural production, the learning

curve for farmer-directors becomes increasingly steeper. It's not that farmers can't fulfill this role, but that a

process of identifying, electing, and training the ones

who can is proving difficult. This is leading cooperatives, who need a board with diverse expertise and

experience, to turn outside the membership.

Director training. Another step to improved

board performance is for cooperatives and groups that

support them to place new emphasis on director training. Too many cooperative leaders and advisers look at

education as a cost, rather than an investment.

Whenever times get tight, cooperatives, their trade

associations, universities, and Government agencies

tend to cut or eliminate training budgets.

Each cooperative must assess the skill deficiencies of directors and develop programs to eliminate

weakness. Training takes resources. But the benefits far

outweigh the expenses incurred if it helps directors

avoid making poor or uninformed decisions because

they lack the ability to assess the implications of various courses of action.

Director compensation. Cooperatives should also

consider reasonable compensation for their directors.

All cooperatives should, at a minimum, reimburse

directors for any out-of-pocket costs incurred in their

official duties. As cooperatives come to expect more of

their directors, being a good director will take more

time and expertise. Paying for that time and expertise

will encourage more members to run for the board,

stimulate directors to attend board meetings, and

demonstrate that members appreciate the efforts of the

directors. Experts may refuse to serve as outside directors on a gratuitous basis and reasonable fees should

be included in a plan to add outside directors to the

board.

However, cooperatives must be cautious not to

set payments or honorariums to directors too high.

Directors who seek office because of its income potential can be expected to make decisions based on how

they can stay on the board, rather than the best interests of the membership.

Like training, director compensation should be

treated as an investment, not a cost. It will help develop a leadership team that can successfully guide the

cooperative over the hurdles of the 21st century.

Managers

A good manager knows both the business and

the special culture of the cooperative. Attracting and

retaining good managers is not an exact science. But

cooperatives might focus on two areas in improving

the performance of their management team.

Developing management from within. The manager arguably holds the most important position in a

cooperative, outside of the board of directors itself. It

is imperative that cooperative boards find and hire a

person who can effectively carry out the duties

required. Many cooperatives find that promoting internally, rather than hiring from outside the cooperative

system, is the most beneficial way of picking a new

CEO/manager. Some experts surmise that even with a

professional CEO search, a cooperative is better off

taking the second candidate who is internal rather

than the first selection if that candidate comes from an

investor-owned firm (IOF) and lacks cooperative management experience.

While there have been some successes, there have

also been some major failures of cooperatives that

brought in managers from the non-cooperative sector.

Managers from the IOF environment often try to push

cooperatives toward non-cooperative business practices and principles. It is widely felt that a successful

cooperative manager must understand and embrace

the unique principles and practices of cooperatives

and be able to operate the business within that framework.

Successful managers, like successful athletes,

have usually benefitted from natural ability and good

coaching. As employees show the ability to become

good, or better, managers, the cooperative should provide training and experience that prepares them for

increased responsibility. When they are needed, they

will be ready to succeed in their new job and help the

cooperative succeed as well.

Providing competitive compensation. Many

cooperatives struggle with establishing suitable compensation for their manager. Most observers believe

that cooperative compensation generally lags behind

that paid by comparable IOFs. This is especially true

when deferred compensation and stock options for

non-cooperative managers are considered.

Some cooperative boards have the reputation of

choosing the manager-applicant who will accept the

lowest salary and ask for the least vacation time.

Successful cooperatives will find it necessary to develop compensation packages that will attract the best

person for the job, not the cheapest one. Many cooperatives also struggle with evaluating the CEO/general

19
manager and adjusting compensation to reflect performance evaluations. These cooperatives usually lack

established performance measures and objective standards to tie manager compensation to performance.

These associations probably would benefit from the

services of a consultant who can develop an evaluation

package tailored to their specific situation.

Growth and consolidation among cooperatives

One of the rational responses of producers and

cooperatives to the external changes they face is to

consolidate. Just 200,000 farmers now do essentially

what 7 million did 50 years ago: feed and clothe our

nation and much of the rest of the world.

Cooperatives have also consolidated during

those years. In 1950, USDA reported that 10,035 farmer

marketing and farm supply cooperatives had $8.7 billion in sales.21 By 2000, the number of farmer cooperatives had fallen to 3,346 while total net business volume jumped to nearly $100 billion.22 Some of this

increase in business-volume is due to inflation. But

much resulted from increased product volume moving

through cooperative associations. Panelists supported

cooperative consolidation as a natural and necessary

reaction to the consolidation occurring in production

agriculture and among their customers and competitors.

Less enthusiasm was expressed about cooperative growth through the acquisition of non-cooperative

firms. These are outside the scope of the antitrust

immunity under the Capper-Volstead Act. Panelists

expressed concern that such moves attract the attention of, and possible challenge from, Federal and State

antitrust enforcement agencies.23

Concentration in production agriculture and

among producer associations has led some to ask

whether one of the linchpins of public policy support

for cooperatives is still valid. Is it still true that many,

relatively small, farmers are selling into a market dominated by much larger and more concentrated buyers?

The General Accounting Office (GAO) has

addressed this same question. In August, 1989, then

Senators Howard Metzenbaum and Bill Bradley asked

GAO to study whether agricultural cooperatives, and

particularly dairy cooperatives, still needed the limited

antitrust exemption provided by the Capper-Volstead

Act. Dairy cooperatives had been under almost constant scrutiny since the period from 1967 to 1971, when

170 predominantly local milk marketing associations

combined into 3 large multi-market regional cooperatives—Associated Milk Producers, Inc.; Mid-America

Dairymen; and Dairymen, Inc.—with nearly 64,000

producer members.24 GAO concluded:

...dairy farms, in general, remain relatively small

compared to the processing and distribution

firms that, in the absence of cooperatives, would

purchase milk directly from farmers. These firms

have...become more concentrated and therefore

have the potential for increased market strength.

Without cooperatives, many dairy farmers,

because of the size of their operations, would

continue to be in a relatively weak bargaining

position. Therefore, to the extent that the

increased market strength of processing and distribution firms and of dairy farmers offset each

other, the premise of the Capper-Volstead

antitrust exemption for cooperatives—that farmers cannot effectively bargain independently

because their operations are too small—

remains.25

Thus, GAO substantiated the view of producer

association leaders and advisers that consolidation

among producers and their cooperatives has been necessary for producers to protect even modest market

power in the face on growing concentration among the

buyers of agricultural commodities and processed

food and fiber products.

Foreign sourcing and functioning 

in a global market

As competition in both domestic and foreign

markets intensifies, and economic growth in developing countries creates new opportunities, cooperatives

must formulate new strategies to protect traditional

markets and to capture new ones.

20

21 USDA/RBS/Cooperative Services, “Cooperative Historical

Statistics,” Cooperative Information Report 1, Section 26 (revised

April 1998), p. 7.

22 Charles A. Kraenzle et al., “Farmer Cooperative Statistics, 2000,”

USDA/Rural Business-Cooperative Service, Service Report 60

(December 2001), p. 2.

23 See, e.g., United States v. Dairy Farmers of America, 2001-1 Trade

Cases (CCH) 73, 136 (E.D. Pa. 2000) (Department of Justice

challenges purchase of branded butter business).

24 Donald A. Frederick, “Antitrust Status of Farmer Cooperatives:

The Story of the Capper-Volstead Act,” USDA/Rural BusinessCooperative Service, Cooperative Information Report 59

(September 2002), pp. 249-252.

25 United States General Accounting Office, “Dairy Cooperative:

Role and Effects of the Capper-Volstead Antitrust Exemption,”

GAO/RCED-90-186, (September 1990), p. 3.
Because they usually are not tied to a geographically fixed resource base, IOFs are free to respond to

globalization by contracting for product from leastcost sources or by moving production or processing

operations to less-costly foreign locations.

Cooperatives have also recognized that future growth

requires them to look beyond domestic borders and

traditional production and marketing systems.

However, cooperatives' user-owner nature and ties to a

domestic production base can limit the scope of their

involvement in foreign markets.

Because an important role of cooperatives is to

ensure a "home" for member products, cooperatives

are not free to substitute lower cost imported goods or

abandon domestic operations for more profitable overseas locations. They must balance the interests of producer-members with their ability to compete in a

dynamic market. "Non-traditional" options can foster

long-term viability by enhancing the market position

of the cooperative and the marketability of members'

products. These options include tapping additional

product sources through imports, foreign members,

and overseas investment.

Motivation and strategies

Cooperatives share the same motivation as IOFs

for sourcing outside traditional channels: the need to

compete more effectively in today's rapidly changing

markets. Price strategies based on reducing costs or

non-price strategies built on adding value to products

and services are the approaches most often employed

for meeting this need. While domestic member and

non-member products may fill some of these needs,

foreign sources can offer significant cost savings or an

array of unique or seasonal products.

Strategies for enhancing competitiveness vary by

type of cooperative and by product handled. For

example, supply cooperatives accrue cost savings

directly by purchasing from the lowest cost source.

Marketing cooperatives cut costs indirectly by supplementing member-grown products with imports.

Cooperative marketers of fresh produce use imports to

spread overhead costs over broader product lines, and

cooperative processors import raw product to lower

per-unit processing costs by higher utilization of plant

capacity. When cooperatives are not able to position

themselves as a low- cost producer, non-price strategies that add value to products or services become

increasingly important. Flexibility about sourcing

options can facilitate these strategies.

For example, fresh fruit cooperatives can enhance

the marketability of member products by using

imports to extend marketing seasons. The ability to "be

in the market" on a consistent basis protects carefully

cultivated markets and market relationships. Use of

foreign product to fill seasonal marketing windows is

especially critical now that consumers expect yearround availability of some products. Stable, consistent

supplies also help maintain consumer loyalty to

branded products.

Imports can be used by a cooperative to broaden

its product line. Retailers and wholesalers increasingly

seek "one-stop" shopping—buying directly from suppliers who offer complete lines of related products.

Purchasing decisions are often based on the supplier's

ability to provide a group of products and the total

cost of a group of products, rather than the availability

and cost of each item. Some cooperatives may have to

purchase foreign items to complete a package of products that will attract and retain customers for member

product(s).

Purchases of foreign products may also be necessary as a stopgap measure to fulfill marketing commitments when disaster-related member production

shortages occur. The need for longer term or permanent supplies can arise when urban expansion and

other factors cause a cooperative's membership base to

shrink.

Cooperatives must plan strategically for the integration of foreign-sourced product and must commit

sufficient resources to managing those sources. Due to

their distance from the cooperative's traditional trade

area and differences in language, customs, and laws,

overseeing foreign providers may prove burdensome

for a cooperative.

Cooperatives must exercise caution in foreign

sourcing to manage risks associated with transnational

memberships or operations and food safety issues.

Wholly owned subsidiaries can segregate a cooperative's core member business from non-member business and shield member equity from losses suffered by

non-core activities, while allowing the cooperative to

maintain full control of that aspect of the business.

However, care is required to structure a foreign subsidiary in accordance with the tax and antitrust implications for the parent cooperative.

Imported product can also be handled through

contracts or joint ventures with other cooperatives or

IOFs. Selection of a method depends on the cooperative's access to equity and operating capital, the level

of risk it can accept, desired degree of control, and

what it has to offer to the venture.

21
Legal questions

State and Federal statutes covering permissible

cooperative structures and operations do not specifically address the issue of foreign sourcing. However,

certain elements in laws affecting cooperatives, such as

membership eligibility requirements or allowable levels of non-member business, can influence the form

and scope of foreign sourcing activities by cooperatives.

Most State cooperative incorporation statutes

limit the proportion of business a cooperative may

conduct with non-members to 50 percent. The 50-percent rule is also used to qualify cooperatives for limited antitrust protection under the Capper-Volstead Act,

for tax treatment as an exempt cooperative under

Section 521 of the Internal Revenue Code, and for borrowing from CoBank. Non-member business conducted specifically with a foreign entity is not addressed.

Therefore, the issues surrounding cooperative sourcing

from non-members are usually assumed to be similar,

regardless of whether the sources are foreign or

domestic.

Nor do Federal or State statutes involving cooperatives address the issue of foreign members. State

statutes, Capper-Volstead, and Section 521 limit cooperative membership to producers of agricultural products. Beyond that, most statutes allow cooperatives to

establish their own membership criteria. Some cooperatives limit membership to a particular State or region.

Others have admitted foreign members with no

adverse legal consequences.

Taxation of foreign members' income derived

from the sale of product in the United States is another

legal issue to consider. Generally, it is taxed at the

same rates applicable to U.S. citizens and domestic

corporations. However, if the United States is party to

a tax treaty with a country in which the member

resides, this income may be taxable at a lower rate

established by treaty between the two countries. Tax

treaties prevent international double taxation by limiting the right of each treaty partner to tax income

earned from its territory by residents of the other

country, and by requiring that the country of residence

allow a credit for taxes paid to the source country. A

cooperative with foreign members would also be

affected if it is required to withhold funds at the U.S.

rate or the lower treaty rate for tax purposes, from distributions to foreign members.

Foreign memberships

Global buyers learn to play growers in one country against those in other countries. One possible

grower response is to form international associations

to counter-balance the power of multinational buyers

and suppliers.

Integrating foreign members into an existing

cooperative may require adjustments to the governance structure. For example, direct representation of

foreign producer-members on the board of directors

might be advisable. Foreign members might comprise

a separate district and elect a director to a cooperative's board. The ease with which foreign growers are

integrated into a cooperative's membership will also

depend on careful attention to managerial or logistical

matters, as well as attention to relations with current

members.

One food-manufacturing cooperative just voted

to admit Canadian members in hopes of acquiring

cheaper raw product from across the border. The cooperative expects to lower its selling prices and compete

more effectively with other firms. Although the bylaw

amendment was adopted, cross-border purchases have

not begun. The impact of this decision on the cooperative and its grower-members remains an open question.

Member relations issues

For better or worse, many growers have the same

adversarial view toward foreign producers as they do

toward other cooperatives and non-cooperative competitors. International joint ventures may be the closest

many U.S. cooperatives can come to an alliance with

producers outside our borders at this time.

One of the biggest concerns in introducing the

subject of foreign sourcing—either on a member or

non-member basis—is the perception that the cooperative is competing with its own current members.

Marketing cooperatives must justify use of foreignsourced product to their domestic members. Buying

offshore member or non-member products for secondary (ingredient) uses may go unchallenged because

the members usually see this as an enhancement, not a

threat, to marketing their production. In contrast,

members may view any use of foreign product for primary markets as threatening. This can occur even if

the cooperative takes all of its members’ production

and the purchases are for legitimate business purposes, such as fulfilling contractual commitments following weather-related shortfalls or when member-product is not in season.

A cooperative's existing members may resist the

admission of foreign members for fear it will dilute

their returns on operations or established brand names

built with "old" member equity. The use of partitioning

22
mechanisms—such as subsidiaries or even creation of

a separate cooperative—can limit new member participation in activities to which they have not contributed

equity capital. Members may also be concerned about

preservation of a regional identity for markets in

which origin is a point of product differentiation.

Member opposition to the use of foreign products

and the admission of foreign growers can often be

traced to conflicting views between management and

members on the focus of the business and on the mission of a cooperative. Members may view the cooperative primarily as a home for their product. Managers

may be striving to maximize earnings of the business.

These goals can be totally compatible. Both parties

must learn how this can happen and take steps to

make sure it does happen.

Cooperative managers are in the best position to

recognize the strategic implications of using alternative sources to facilitate better use of processing capacity, to extend fresh product into new markets, to offer a

year-round supply, or to offer a broader product line.

The key to gaining member support for foreign sourcing alternatives is to effectively convey the rationale

for the venture and clearly communicate the benefits

that will accrue to members.

Equity Accumulation

Perhaps the most important challenge facing

cooperatives is accumulating equity capital. Without

sufficient equity, cooperatives cannot meet the external

challenges they face or continue to grow and offer services members and customers need.

The degree to which accumulating equity is a

problem is influenced by the types of services a cooperative provides. A bargaining association, which limits its activity to negotiating prices and other terms of

sale for its members, has a minimal need for capital.

The fact that producers can use bargaining to increase

their income without a substantial equity investment is

one of its advantages. The more an association

becomes involved in manufacturing and distribution

of either farm supplies or food products, the larger the

equity base it is likely to need.

As the demands for equity increase, farmers may

be more reluctant or unable to provide the necessary

funds. Cooperative leaders must either coax it from

them or turn to external sources. In the years ahead,

cooperatives will need to employ better equity management strategies and consider structural changes

that will make more equity available.

Improve member equity management

Through the years, many cooperatives have successfully used the traditional equity management program—accumulate equity through retained patronage

refunds and revolve equity by redeeming the oldest

outstanding year's paper each year at face value. As

long as redemption is kept on schedule, members

rarely question leaving their patronage refunds with

the cooperative as they have a reasonable expectation

of having them paid out in cash at a definite time. This

system may continue to work well for established

cooperatives that are comfortable with the markets

they serve and new cooperatives with modest capital

requirements.

But in the coming years, farmers may seek more

rewarding places to invest their financial assets than in

cooperative paper that pays no direct return. If a cooperative's equity redemption timetable begins to slip,

members may become reluctant to finance it. The fact

that the money is used to provide services that augment farm income isn't always enough to convince

producers to provide the funding. Cooperatives

should examine options to improve the way they manage their member equity.

Marketing cooperatives can also accumulate

equity from members through the use of per-unit capital retains. Per-unit retains, which are based on sales

rather than earnings, provide a more dependable and

predictable equity stream. They also allow for equity

accumulation (and redemption) in years when the

cooperative's earnings are minimal or it suffers a loss.

Cooperatives may want to consider paying a dividend on retained member equity. These dividends,

like interest on debt, would be deducted from margins

before patronage refunds are calculated. They are a

mild diversion from the user-benefit principle. But

dividends would compensate members for the use of

their money and reinforce their allegiance to the userownership principle. Of course, any money paid as

dividends would not be available for patronage

refunds.

Cooperatives may also consider adopting a base

capital plan. It helps bring investment in line with

patronage or, in terms of cooperative principles, balance member-ownership with member-use. A member's capital obligation is determined on the basis of

patronage over a base period, say the last 5 years.

Newer members, who usually have a small investment

in the cooperative but may make great use of its services, leave most of their earnings in the association

until they have invested their fair share. Long-time

members who have met their equity obligation receive

23
primarily cash patronage refunds. This usually tempers the resentment of older members toward those

new ones taking advantage of the facilities and services developed by the long-time patrons.

Outside equity

Some cooperatives are soliciting outside equity

investors. This is another step along the continuum

from member-ownership. If the outside investors also

acquire a voting interest in the association, both legal

issues and conflicts with the user-control principle

arise.

Non-voting preferred stock taps the outside equity market while raising only modest concerns over the

cooperative status of the association. It can earn a market return and be offered to both members and nonmembers. Non-voting preferred with a modest dividend has some appeal at the local level, where the

purchasers are often other local businesses who can

consider it more of a contribution than an investment.

Non-voting preferred stock must pay a solid dividend

to appeal to disinterested outsiders who have large

sums to invest and numerous parties bidding for their

attention and funds. Any dividends, of course, reduce

net margins available for patronage refunds.

In most instances, cooperatives have not allowed

outside investors to acquire a voting interest in the

association. Such voting rights would violate the terms

of most cooperative incorporation laws. Several

Federal policies that support cooperatives, such as the

limited antitrust exemption for cooperative marketing

under the Capper-Volstead Act, only apply to associations that limit voting to producer-members. And,

depending on the extent of the voting power ceded to

the outside investors, this also diminishes true member control.

Some experts suggest cooperatives are imprudently rushing to solicit outside equity investors. They

recommend other strategies to secure necessary capital. One would be to maximize debt, another to lease

facilities and equipment to better leverage existing

capital. Either alternative would be less expensive and

less divergent from the principles of user- ownership

and owner-control.

A number of sources for cooperative funding

exist, including private and government grants. For

example, USDA's Value Added Development Grants

can be used to fund new cooperative value-added ventures. Another option might be to develop a revolving

loan program that provides sums similar to those

made available to utility cooperatives through USDA's

Rural Utilities Service.

Sell assets

Another way for cooperatives to raise equity

would be to sell under-performing assets, or those that

support services that don't fit into the association’s

long range strategic plan. For example, as some large

federated cooperatives continue to place more emphasis on their value-added food marketing programs,

they could begin reducing their direct role in basic

farm supply manufacturing. If the move to become

food companies is successful, the federated cooperatives may seek infusions of cash to purchase existing

processes and brands or to develop new ones themselves. If the strategy fails, they may need infusions of

cash to regroup and start over.

Redundant and underperforming assets are most

likely to be sold. For example, cooperatives are combining their separate assets for each major farm supply

product line into new nationwide structures. These

new entities, with their expansive networks of customers and streamlined management structure, will

likely be worth more than the separate and competing

units within the various federated cooperatives would

have been and conceivably could be sold in the right

market and for the right price. Panelists identified

grain elevators as another class of assets that might be

sold, if buyers can be found.

Management initiatives in this direction might

meet surprisingly little resistance from the local cooperative owners of the federated regionals. Locals are

becoming less dependent on federateds for supplies

and outlets for member grain. Panelists suggested that

locals' reduced dependence on regionals may lead

them to decisions that could greatly change the "cooperative system" as we know it. The locals could vote

themselves a portion of the cash realized from assets

sales and still have an ownership interest in a valueadded food manufacturing cooperative. If they wanted

to generate additional cash through the sale of that

asset as well, their options might include conveying

that interest to the producers providing raw farm

products to the food manufacturing units (for a price);

converting it to a non-cooperative structure so each

could sell its ownership interest whenever it chose; or

selling the firm in a single transaction.

Persons interested in maintaining a diversified

cooperative presence in agriculture must be aware that

these options have great appeal as a way to reduce

redundant and underperforming assets to free up and

redirect existing value tied up in traditional cooperatives. They may have the burden of proof to demonstrate that farm supply manufacturing, for example, is

a preferential use of farmer-assets.

24
Structural alternatives

Some producers are looking at new ways to organize. These new structures offer alternative approaches

to meeting the challenges of the 21st century.

New generation cooperatives

Farmers starting new cooperatives sometimes use

the so-called "new generation" model. Thus far, this

model has only been used to form agricultural marketing cooperatives engaged in value-added processing.

These cooperatives may offer an alternative to overcome the problems confronting more traditional cooperative models without abandoning the principles that

distinguish a true cooperative from other forms of

business organization.

Similarities to traditional cooperatives. New generation cooperatives are similar to traditional marketing

cooperatives in several ways:

A. Only farmers can be voting members.

B. Members reach decisions on the basis of onemember, one-vote.

or

Dividends on stock may not exceed 8 percent

per year.

C. The value of products handled for members

exceeds that handled for nonmembers.

D. Earnings are allocated to patrons on the basis

of patronage.

Differences Between New Generation and Traditional

Cooperatives. New generation cooperatives also differ

from the traditional cooperative model in several

important ways:

A. Focus

1. Traditional agricultural marketing associations usually seek to maximize the volume of

product handled to secure economies of scale and

market power.

2. New generation cooperatives seek to 

identify and obtain the volume of farm production that can be processed and sold consistently

at a profit.

B. Membership

1. Traditional cooperatives usually have an

"open" membership. They seek to sign up the

largest possible number of eligible producers to

maximize the volume of product handled.

2. New generation cooperatives have a

limited or"closed membership. Once eligible pro

ducers have contracted to deliver the desired 

level of product, membership is closed.

C. Member Delivery Obligations

1. Traditional cooperatives usually either 

accept (a) whatever production the members

choose to deliver or (b) require the members to

deliver all they produce or whatever is grown on

designated land. Under any of these scenarios,

the cooperative receives an uncertain and varying

amount of product each year that it is expected to

"move" before the next crop arrives.

2. In a new generation cooperative, each 

member has the right to and is obligated to deliver a fixed quantity of product each year. This is

true whether the member produces more or less

of that product in a given year. Meeting a production shortfall or "moving" surplus production is

the responsibility of the producer-member, not

the cooperative.

D. Member Equity Investment

1. Traditional cooperatives usually require 

a minimal, uniform investment to join. This is

consistent with recruiting the largest possible

membership base and volume of production.

Equity is accumulated over time through retained

earnings and per-unit retains.

2. New generation cooperatives usually 

require a substantial up-front investment. The

individual investments are not uniform but differ

in proportion to the amount of product the member agrees to deliver to the association each year.

E. Equity Transferability

1. In a traditional cooperative, both the upfront investment and member equity accumulated through retained patronage refunds and perunit retains can only be redeemed by selling it

back to the cooperative at face value.

2. In a new generation cooperative, equity 

tied to the right to deliver product can only be

resold to other producers eligible to use the service of the cooperative. Subject to approval from

the board of directors, the transfer can take place

at whatever price the parties can agree to,

whether it is more or less than the price paid by

the seller.

If a traditional marketing cooperative is successful, the farmer-members receive two principal benefits:

25
1. A home at a fair price for their produc

tion.

2. Patronage refunds.

In a new generation cooperative, farmer-members can realize additional benefits:

3. The option of cashing out their equity 

investment when they want to reduce or cease

their dealings with the cooperative.

4. The opportunity to make a capital gain 

on their equity investment in their cooperative.

Several panelists touted new-generation cooperatives as well suited to solve many of the problems confronting traditional cooperatives. Members may have

limited loyalty to traditional cooperatives because they

don't have to make a meaningful investment to be a

member. And they can cease doing business with a

cooperative and then return again as a patron at no

cost. This isn't possible in a new generation cooperative. The members' patronage obligations are tied

directly to their level of up-front investment, which is

often substantial.

Panelists said one of the allures of new generation cooperatives is that they create a new base of

homogeneous members. Because they require a substantial up-front investment and an obligation to deliver a block of product each year, the members tend to

be younger, better educated, and larger commercial

farmers who focus on profitability and, more specifically, the value of their transferable delivery rights.

The manager of a new generation cooperative

reported that at member solicitation meetings the

older farmers sat in the back and showed no interest

while the next generation, their sons and daughters,

listened intently. Another said that at one organizational meeting a wife, who was a banker and supporting the family, literally grabbed her farmer-husband

and made him sign up.

Traditionally, cooperatives have usually been

organized to sell whatever product(s) the members

wanted to produce. Many new generation cooperatives are developed on the basis of a marketing plan

from a different perspective. The founders identify

products consumers want that can be made from what

local farmers produce and work with members to help

them grow commodities that can be processed into

products that satisfy consumer demands.

Quality control can be a sticking point with new

generation cooperatives. Left to their own devices,

farmers will continue to produce what they have

always produced and expect the cooperative to turn it

into a quality product. A new generation cooperative

manager said that the hardest thing he had to do early

on was tell many of the members that the product they

were delivering simply wasn't good enough. In an

association started from the bottom-up, he probably

would have been told to make it work or leave. But in

a top-down situation, he had time to educate them on

the need to meet quality standards and how to do it.

A manager of a multi-function cooperative questioned whether a weakness in new generation cooperatives might be their lack of product diversity. They

focus on one commodity and one product. If that market deteriorates, so will the cooperative. North

American Bison Cooperative was offered as an example. A panelist said it was doing quite well in Europe

until the Mad Cow scare drove people away from

meat. New generation supporters counter that they

can focus on what they do best and aren't forced to

balance conflicting interests.

One panelist suggested that if new generation

cooperatives become a major force in various food

product lines, they will need an effective communications program to educate consumers on their role. One

point to emphasize is that cooperatives don't increase

the grocery store price of food. They only reallocate

more of the consumer's dollar from middlemen to

farmers.

Alliances and joint ventures

For a long time, producers and smaller cooperatives that wanted to enter a business that required

assets beyond their reach would affiliate with other

cooperatives in the same position to form federated

associations. Few new federated cooperatives are

being formed today. As we enter the 21st century, the

favored strategy for combining the resources of cooperatives, with each other and with non-cooperative

firms, is the joint venture.

A joint venture is a business entity, created and

supported by other businesses, that has a limited

objective related to solving a problem facing each of its

owners. Cooperatives are, in this sense, a joint venture.

They are formed by their members to provide quality

goods and services the members need at the lowest

possible cost. The venture may be organized as an

Limited Liability Company (LLC), partnership, corporation, cooperative, unincorporated association, or

merely a contractual arrangement.

Cooperatives are part of successful joint ventures

involving a variety of products and venture partners.

A dairy cooperative formed a joint venture with the

number one marketer of mozzarella cheese. The coop26
erative supplied the milk and most of the equity capital. The cheese company provided management and

marketing. The cooperative received a modest premium for its milk and the two firms split the profits. It

became a "win-win" situation for both parties.

Another joint venture with an IOF allows a cooperative to behave as a contract (custom) producing

agent for a branded product. Agri-Mark purchased a

cheese plant from Kraft, which freed Kraft's assets for

market development. Agri-Mark sources member milk

to make Kraft brand Cracker Barrel cheese. Kraft markets the cheese and pays Agri-Mark a per-unit manufacturing fee sufficient to assure that Agri-Mark has

minimal risk and a healthy profit margin.

In January 2002, USDA approved the use of a

protein found in dairy products on beef to protect it

from E. coli, salmonella, and other harmful bacteria.

The process was developed by LF Ventures in a joint

partnership with Farmland National Beef, the nation's

fourth largest beef company, and DMV International, a

unit of Campina, a Netherlands-based dairy company.

Farmland National Beef is itself a partnership between

Farmland Industries, the nation's largest multi-functional cooperative, and U.S. Premium Beef, a young

new generation cooperative of beef cattle producers

and feeders. In this example, an important food-safety

breakthrough was developed by a research and development operation funded by a joint venture among a

European firm, a federated U.S. cooperative, and a

new generation cooperative.

Late in 2001, Golden Oval Eggs, another new

generation cooperative, announced a joint research

and development, processing, and marketing alliance

with Inovatech Egg Products, a world-wide marketer

of value-added, specialty egg products based in British

Columbia, but recently acquired by Michael Foods of

Minnetonka, MN. The two firms intend to build a new

plant in Thompson, MN, to manufacture food ingredients for food manufacturers throughout the world.

These ventures, and others like them, are not

guaranteed successes. Raising the equity from farmers

to even get off the ground can itself be a challenge. But

they illustrate that cooperatives are looking in new

directions for opportunities and adopting suitable,

innovative structures to take advantage of those

opportunities.

Sometimes a venture needs to expand its ownership base to achieve its objective. ProGold started as a

joint venture of sugar beet marketing cooperatives and

corn growers to produce sweeteners. It faltered initially, however, because the owners were too small to adequately finance and otherwise position their new venture in the marketplace. After the member cooperatives recognized their inadequacies, they invited

Cargill to participate. Cargill assumed plant management and product distribution responsibilities and

continues as a partner in the venture.

One suggested approach to the consolidation

trend among grocery chains is for food product cooperatives to form alliances with the other chains. One

such opportunity might be with the largely overlooked

grocery wholesale cooperatives. Several are substantial

businesses with annual revenues in excess of $3 billion. They are also dispersed around the country and

near major metropolitan centers.26 Some panelists suggested that a single, national food cooperative may be

the only way farmers and other smaller entities will be

able to participate in the real profits of the food industry of the future.

Joint ventures allow cooperatives to pool

resources—product, people, facilities, and financing—

with any other entity it chooses to solve a problem or

seize an opportunity, without disrupting the ongoing

cooperative business organization or operations. These

arrangements may provide a means to conduct due

diligence and to build trust among two firms considering merger.

Another advantage of growing through joint ventures is that, unlike a consolidation or acquisition, a

joint venture that doesn't meet its objectives may often

be disbanded without becoming a major disruption to

the participants. Joint ventures can be short-lived or

continue for decades. Ventures tend to continue for as

long as they meet the objectives of the participants. But

because a joint venture is less stable than an integrated

company, a cooperative should have an exit strategy

from the beginning of the relationship.

The boards of larger cooperatives tend to accept

joint venture failure (so long as it doesn't become a

habit) as a manageable risk of trying new approaches

to solve problems and seizing opportunities. Joint ven27

26 The National Cooperative Bank listing of the 100 largest

cooperatives by sales for 2000 has agricultural cooperatives in the

top four slots (Farmland Industries, CHS Cooperatives, Dairy

Farmers of America, and Land O’Lakes). Four of the next 5

associations listed are grogery wholesalers (Wakefern Foods,

TOPCO Associates, Associated Wholesale Grocers, and Unified

Western Grocers).

However, wholesale grocery cooperatives are also facing

challenges. Some of their bigger and more successful members are

being acquired by larger chains, leaving the cooperatives with the

same fixed costs but must lower sales and income streams to

support those costs. “How to Prevent Success from Ruining Your

Cooperative,” Cooperative Business Journal, (June 2002), p. 7.
tures are more risky for the manager of a local cooperative. When locals enter into joint ventures, especially

ones that the farmers don't really understand, and the

venture doesn't meet expectations, the manager is frequently fired. Farmers remember every promise of

prosperity they were told the venture would bring,

and feel betrayed by poor results.

Sometimes locals form joint ventures (feed mill,

fertilizer plant) when they really should merge. This is

often viewed as a prudent first step in a sequence of

consolidating events. It helps the two feel more comfortable with each other, provides for friendlier due

diligence, and if all goes well may lead to a merger.

The trend of cooperative involvement in joint

ventures is expected to continue in the 21st century. So

long as producers avoid the same pitfalls that can subvert the use of outside directors—having venture partners too closely aligned with management or being

overawed by their venture partners— joint ventures

can make it possible for producers to pursue otherwise

unreachable opportunities.

Bargaining associations

Producer associations that limit their cooperative

activity to negotiating prices and other terms of sale

are called bargaining associations. They have been

used for decades by dairy farmers and growers of

fruits and vegetables used in processing. Producermembers of these associations have chosen to limit the

extent of their joint marketing activity.

Bargaining associations have worked best where

supply can be controlled. Supplies may be limited in

different ways. If a crop can only be grown commercially in a limited geographic area, then supply is limited to what can be grown on those acres. If a product

is highly perishable, supply is limited to what can be

sold or processed quickly. Supply can be controlled by

Government regulation. Bargaining associations have

been particularly effective in commodities with agricultural marketing orders in place.

An offshoot of an industrializing agriculture is

the trend toward fully integrated processors dominating the entire production cycle for poultry and meat

products, and to a lesser (but increasing) extent, basic

commodities. Growers in these systems contract to

raise animals and crops owned by the processor. Yet

they continue to be land owners, owners of production

facilities, and provide production management of

crops and livestock under contract.

An organizational option for contract growers is

to form cooperative bargaining associations or professional associations for negotiating contract terms. This

type of association is relatively new and untested in

industrializing agriculture. However, the American

Farm Bureau Federation's American Agricultural

Marketing Association developed considerable experience with its poultry grower division in the 1960-70

time period.

More recently, the National Contract Poultry

Growers Association (NCPGA) has attempted to organize broiler growers for negotiating contracts.

Processor intimidation has been a continuing problem

in organizing such associations. This makes organizing

contract growers more difficult and achieving a critical

mass of grower membership a major challenge.

Limited market innovations

Some producer groups are experimenting with

new uses for traditional cooperative structures or

interesting derivatives.

Small farmer cooperatives. Small-volume farmers will remain an important part of the social and economic infrastructure of rural America. The push

toward greater efficiencies and scale within production

agriculture and cooperatives ignores the needs of

small farmers. It also ignores the benefits to small

farmers that cooperatives can provide.

Cooperatives will not lower small farmer perunit costs to the level of costs to larger farmers. But

cooperative buying can lower small farmer costs.

Cooperatives might not be able to provide small farms

with access to Wal-Mart or other major market players,

but may none-the-less improve their overall returns by

servicing local and regional markets.

Cooperatives may not save the small farm as an

institution, but can improve the returns achieved by

small farmers. Small farmers must explore options for

working together. Existing cooperatives must work to

develop programs to provide services to small farmers

in a manner that recognizes differential costs, but otherwise provides fair access to the power of cooperative

behavior.

Niche-market cooperatives. Some local cooperatives are seeking to serve a specialized clientele. These

cooperatives don't strive to become large because their

small customer base wants specialized products

and/or services. Others are small by nature of the

product they handle and the territory where it can be

grown. While some of these cooperatives may be very

successful, the opportunities they represent and their

overall impact are both limited.

If a cooperative decides to be small, it must be

very good. A cooperative comprised of 10 dairy

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farmer-members, for example, does quite well because

it makes award-winning cheese. Opportunities exist,

but niche marketing isn't a guaranteed path to success.

One segment of food marketing that hopes to

become more than a niche is organic foods.

Cooperatives in this area are clearly responding to the

environmental pressures on the food industry. So far,

only a small number of consumers have been willing

to pay higher prices to buy organic products.

Cooperatives need to watch how the organic market,

and other smaller markets such as various ethnic

foods, develop. Such specialties offer another opportunity to become successful in value-added processing

without necessarily having to compete with the industry giants.

Production-service cooperatives. Cooperatives

that provide production services to their members

offer a way for producers to become more productive

by lowering their costs. For example, six grain farmers

formed an LLC that works as a production services

cooperative. Each member sold all his equipment and

with the proceeds they purchased new equipment,

consolidated their land, and operate as a single farm

enterprise. They believe they can survive as producers

now that their operating costs are significantly lower.

Education

Cooperatives have a tradition of educating their

membership, leadership, and staff in both the principles of cooperation and sound business practices.

However, in recent years, national and regional programs have been de-emphasized to redirect resources

to meeting short-term profitability goals.

Educating employees and young members is an

important part of leadership development. Some cooperatives do well in this area, sending employees to the

Graduate Institute of Cooperative Leadership held

annually at the University of Missouri, Columbia, MO,

and other workshops and conducting active young

farmer/cooperator programs. Others need to do more.

Training is critically important for directors. They

must have the ability to learn and the time to be

trained in areas in which they lack experience and

expertise. Increasingly complex financial issues and

business arrangements of cooperatives require directors to have substantial knowledge and/or experience

in related business matters. Cooperatives must create

an opportunity for directors to gain knowledge in

areas in which they lack understanding.

Directors especially need to understand their role

in the cooperative. Too many directors want to become

involved in the day-to-day decision making, the realm

of the hired management. Directors need to learn more

about their responsibilities in setting policy and overseeing the manager and not to directly interfere with

the manager's handling of routine operations.

More attention is also needed to help directors

understand cooperative finance and related business

issues, so they can decipher complex financial reports,

contracts, and proposals.

Continued structural change in cooperatives also

imposes demands on directors to effectively assess

various strategic options. Directors must learn how to

evaluate restructuring proposals to determine whether

a new organizational framework is necessary and, if

so, how it should be designed and operated.

Cooperative leaders must seriously re-evaluate

whether educational institutions are in place at universities, trade associations, other support organizations,

and USDA that will provide the meaningful education

effort needed to handle the issues of the 21st century.

In addition, cooperatives must also evaluate their own

commitment to education to improve the skills their

leaders will need to realize the potential of their organization.

Public Policy and Cooperatives

Government has been, and will continue to be, a

major influence on both agricultural producers and

their cooperatives. Some governmental policies support cooperatives, while others present challenges. As

the number of farmers continues to decline, it will

become increasingly difficult to make the voices of

farmers and their cooperatives heard in the public policy process.

Cooperatives provide a vehicle for people to

organize for effective political action. They can gather

to develop priorities and strategies. They can send representatives to meet with legislators and regulators.

These persons will have more influence because they

will be speaking for many, not just themselves.

Cooperatives can also form coalitions with other

groups having similar views on issues. The larger the

voice calling for a specific action, the more likely that

the system will respond with a favorable policy outcome.

But having the tools available is only one part of

the equation creating favorable policies. The other is

the willingness and skill to use those tools effectively.

29
Making member voices heard

Panelists agreed that a key factor in the long-term

political support for farmer cooperative interests will

be the willingness of the farmer members to become

more active in the public policy process. Cooperative

lobbying organizations receive good marks for their

effectiveness, especially considering the reluctance of

farmer-members to contact legislators and become

directly involved in the legislative process affecting

cooperatives.

This reluctance has at least two sources. Farmers

are sometimes adverse to having their cooperatives

involved in any political activity. They view politics as

a "dirty" business that will taint the organization if it

becomes involved in lobbying.

Many farmers also believe they are paying good

money to support numerous commodity and general

farm organizations. Farmers rationalize that it's the job

of these associations to get the public policies needed.

While these organizations may be supportive of cooperative-specific initiatives, they generally place most

emphasis on broader farm-policy issues.

Cooperatives don't need to be involved in all

public issues facing farmers. One panelist pointed out

that cooperatives with a high-profile identity may find

it bad business to oppose certain popular policy positions, even when members' farm interests are at stake.

For example, a cooperative with a consumer products

brand name may not want that brand portrayed as

opposed to an environmental initiative, no matter how

harmful it might be to grower members. In these

instances, the cooperative may choose to take a low

profile and let general farm trade associations carry on

the battle.

Members must recognize that there are times

when their cooperatives should stay out of public policy deliberations, but other times when only cooperatives can represent their public policy interests.

Farmers must make sure their "cooperative interests"

are appropriately expressed in public policy settings.

A related issue is the historic lack of "cooperative-oriented people" in high administration positions.

While the doorway between the IOF world and public

administrative/policy positions is two-way, it is rare to

find a person who left a cooperative to accept a political appointment with a Federal agency. When cooperative leaders complain about the lack of support for and

understanding of cooperatives among policymakers,

they must accept some of the blame for not showing

an interest in placing people in positions inside the

administration's inner circles who set policy.

Political action skills should be a component of

the education of cooperative leaders. An effective

political action program requires a combination of lobbyists who can work within the complex structures of

the legislative and administrative bodies and directors,

members, and managers who will reinforce the message to their representatives that the issues being discussed really are important to them. Cooperative

members need to be trained in advocating their positions. This will translate into support for specific cooperative policy being communicated to legislators and

other Government leaders by their trade association

leaders and spokespersons.

Trade association cooperation

While cooperative trade associations have generally been effective, their overall impact is limited by a

tendency to concentrate on narrow issues that directly

affect their membership. Unless an issue is of direct

importance to their segment of the cooperative community, they hesitate to get involved. Panelists viewed

this as a barrier to enacting legislation that might benefit both the various segments and the cooperative community as a whole.

To increase their influence in the future, cooperative trade associations will need to work more closely

together. For example, one State cooperative council

executive noted that he has a friend who manages a

large urban housing cooperative. When an issue

important to his farmer cooperative members comes

up before Congress, he calls his urban friend. If housing cooperatives are neutral on the issue, his friend

will contact his delegation and urge a vote for the

farmer cooperative position. In return, on housing

cooperatives matters, the cooperative council leader

will put in a good word as long as no important interests in his State are known to object to the proposal. By

working together, the interests of both farmer and

housing cooperatives are better served.

Building alliances among cooperative associations can be just as important to political success in the

21st century as business alliances among cooperatives

will be to economic success.

Farm policy and farmer cooperatives

The future success of farmer cooperatives will be

heavily influenced by how they adapt to changes in

national farm policy. The Farm Security and Rural

Investment Act of 2002 (2002 Farm Bill) reaffirms the

Federal Government's direct involvement in farm

income protection. But the impact on individual cooperatives will vary, depending on variables such as the

30
crop(s) their members grow and the size and nature of

their producer-members. Cooperatives will have to

understand the law's provisions, foresee how it will

affect their business, and plan to respond to any

changes it stimulates.

For example, will the price protection provisions

encourage production, or will landowners decide they

can make more money under the conservation programs, idle land, and reduce production? Will the act

keep relatively smaller producers in farming or will it

continue the recent trend of smaller farmers selling out

to large, commercial farmers? Will price protection discourage farmers from building effective market presence through cooperatives? How these and other

issues play out on a national basis will not be as

important to cooperatives as what happens in the

areas they serve.

Another important aspect of the 2002 Farm Bill is

its support for farmer-owned, rural-based valueadded businesses. Cooperatives will want to investigate whether they can take advantage of these programs. They will also want to keep track of whether

existing competitors will be strengthened, or new competitors emerge, as a result of access to funds made

available through these programs.

The 2002 Farm Bill is only the first major farm

policy pronouncement of the 21st century. In time,

farm programs, like other forces affecting cooperatives, will change. Cooperatives will need to keep alert

so they know when change is being proposed, analyze

it, and be ready to shape it to their advantage.

USDA and farmer cooperatives

Farmer cooperatives have long been a major element of the farm policy and producer assistance strategy of the U.S. Department of Agriculture. USDA

administers numerous programs that support producers and their cooperative associations. All of these programs require legislative authorization and funding.

So producer and cooperative advocacy before

Congress and the Administration is crucial to the

enactment and long-term viability of these activities.

Panelists noted that the difficulties of adapting to

changes in the marketplace are creating a growing

need for governmental assistance to cooperatives.

They expressed strong support for USDA's cooperative

education, research, and technical assistance programs.

These functions are assigned to USDA under the

Cooperative Marketing Act of 1926 and are presently

carried out through USDA's Rural BusinessCooperative Service (RBS) and the Rural Development

offices in each State. In addition, RBS-funded cooperative development centers are located at several institutions of higher learning or organized as non-profit

development associations.

Cooperatives also benefit from several USDA

financial assistance programs. As noted earlier, the

2002 Farm Bill authorizes and funds RBS grants to

farmer-owned businesses engaged in processing and

otherwise adding value to farm crops. RBS also provides guarantees to banks that loan money to producers to buy stock in cooperative value-added operations. Other USDA programs make loans to

cooperatives, underwrite export market development

efforts, and purchase surplus products for distribution

to schools and welfare recipients.

Cooperatives sometimes appear to take this support for granted. Many other interests are actively

seeking the government dollars necessary to provide

these services and fund this financial assistance.

Cooperative leaders say they want USDA cooperative

services expanded and financial assistance liberalized

and increased. But that will require a commitment to

the public policy process sufficient to pass legislation

implementing these objectives.

Defining cooperatives:

Where is policy heading?

This report discusses how the tenets that distinguish a cooperative from other forms of business can

be viewed as three inter-related continua. At one end

is strict compliance with the user-ownership, user-control, and user-benefit principles. At the other end, all

three principles are compromised to the extent that the

organization is clearly not a cooperative. An issue of

growing significance is determining where along the

continua an entity crosses from a cooperative to a noncooperative.

In the years ahead, State legislatures may play an

increasing role in this area. The State of Wyoming

recently enacted a statute that authorizes a structure,

called a cooperative, that varies in many ways from

the traditional perception of an agricultural marketing

cooperative.27

● Under this law, a cooperative can have an

unlimited number of investor "non- patron" members

31

27 The Wyoming Processing Cooperative Law became effective on

July 1, 2001. Wyoming Statutes $$ 17-01-201 to 17-10-253. For an

explanation of the Wyoming Processing Cooperative Law, see

Mark J. Hanson, “A New Cooperative Structure for the 21st

Century: The Wyoming Processing Cooperative Law,” The

Cooperative Accountant, Fall 2001, pp. 3-9.
who aren't required to do business with the association, but are entitled to vote and share in its earnings

based on their level of investment. Patron members are

limited to one vote each, while non-patron members

may have unlimited votes.

● Only one of an unlimited number of directors

must be elected by producer-patron members.

Director(s) chosen by the producer patron members

are entitled to 50 percent of the voting power on the

board. But this may fall short of the level of producer

control necessary to be operating as a farmer cooperative.

● No limit is imposed on the rate of return 

investor members can realize on their investment and

up to 85 percent of each year's earnings may be distributed to investor members based on investment.

This new law challenges the traditional concepts

of cooperatives. First, it is questionable whether an

association organized to take full advantage of the

flexibility offered by this law conforms with any of the

three core cooperative principles:

● User-Ownership — Non-patron outside

investors can own most of the firm.

● User-Control — Non-patron outside investors

can control up to 85 percent of the member votes, all

but one of the board seats, and up to 50 percent of the

voting power on the board.

● User-Benefit — Up to 85 percent of the earnings can be systematically returned to outside

investors based on their investments.

Second, it is doubtful that an association organized to take full advantage of the flexibility offered

qualifies for the numerous laws enacted to support

cooperative activity, including the limited antitrust

protection of the Capper-Volstead Act, single tax treatment under Subchapter T of the Internal Revenue

Code, and the exemption from the prospectus and registration requirements of the Securities Act of 1933.

Cooperative leaders in other States, including

some with a rich history of cooperation, may ask their

legislatures to approve a new State law modeled on

the Wyoming statute. Before endorsing such legislation, cooperative leaders need to ask themselves, "Is a

law that permits this much deviation from the cooperative norms of user-ownership and user-control, coupled with a provision that only 15 percent of earnings

must be returned to users based on patronage, really a

law authorizing the formation of cooperatives?" If the

answer is "yes," then a second question needs to be

addressed, "What, if anything, does the term ‘cooperative' mean?"

Unfortunately, simply suggesting the Wyoming

Processing Cooperative Law goes too far in discarding

cooperative tenets doesn't solve the bigger problem

that it was intended to address: How can flexibility be

built into the cooperative model without destroying

the unique features that justify favorable public policy

treatment?

Recommendations

An array of issues and potential strategies for

addressing those issues were considered within the

focus groups and further analysis for this report. It is

neither the intent of this report nor within its scope to

present a list of detailed recommendations. But, the

following general recommendations are relevant to all

farmer cooperatives, regardless of size, commodity

involvement, or business setting.

Accept and embrace change

The business environment in which cooperatives

operate today is not the world of 1962 or 1982, or even

of 2000. Nor is it the world they will face in 2022 or

2042, or even in 2004. Wishing markets had stopped

changing at a certain time, or managing a cooperative as

if they had, is a strategy for disaster. Industrialization,

globalization, and technological innovation are here to

stay. They are continuously evolving and presenting

new and different challenges and opportunities. And as

cooperatives move through the 21st century, other

developments will have an equal or greater impact.

Cooperatives must accept and embrace change.

The recommendations that follow will not be

implemented if this one is ignored. Cooperative leaders who refuse to accept change can be expected to

take the easy way out when confronted by it: do nothing and hope for the best. Directors, managers, and

advisers must reject this approach and implement

strategic planning programs that systematically look at

yesterday, today, and tomorrow. Where we have been

and where we are should be viewed not as ends in

themselves but rather as foundations for building

cooperatives that thrive in the years ahead.

Be guided by competent directors

Directors are the single most critical component

of a cooperative. Most cooperative successes and a

large proportion of their failures may be attributed to

32
the board's performance, or lack thereof. The complexities of the decisions directors must make have never

been more challenging. Directors who are not knowledgeable in finance and other business fundamentals

will be overwhelmed by the dilemmas they face.

Cooperatives must establish the highest of expectations for the performance of their directors and hold

them accountable for their performance.

The basic standard for director selection in the

21st century should be business competency. Persons

chosen for board seats should either already have the

skills necessary to meet their responsibilities, or be

capable of acquiring them. Popularity and length of

service on the board should be only minor considerations as selection criteria. If sitting directors either are

unable or unwilling to do what is required of competent directors—understand the business environment,

identify what the cooperative is doing well and what

needs to be improved, hire a CEO who can function in

a cooperative setting, ask questions when something

isn't clear, make decisions independent of the influence

of management and advisers—then the membership

needs to take steps to replace them with people who

can do these things.

Whether through the use of outside expert directors or advanced training of farmer board members,

cooperatives must ensure that their boards possess the

knowledge and business acumen needed to assess and

decide upon critical strategies. This involves both a

method of identifying and grooming future board

members and leaders and providing adequate training

opportunities for existing directors.

Maintain a solid equity base

The message that cooperatives must pay special

attention to building and protecting their equity base

has been repeated many times. Without adequate equity, banks won't loan money to a cooperative and it will

starve for lack of funding. Some cooperatives, mostly

those with modest capital requirements, already have

adequate financing. But for others with substantial

capital needs—to either remain in farm supply manufacturing or engage in value-added food product processing—the challenge just won't go away. If anything,

it will be harder in the 21st century.

Reliance on retained earnings to generate equity,

when coupled with a program of systematically

redeeming equity issued in prior years, places cooperatives in the position of decapitalizing themselves in

years of modest earnings or losses. For many cooperatives, managing existing equity is as big a challenge as

attracting new equity.

Many farmers have large asset bases, particularly

the land that they own. They could safely borrow

against those assets to fund new cooperative ventures.

But first they have to be convinced that mortgaging

land and investing in off-farm enterprises will increase

their income enough to cover the interest and reward

them for their risk.

Some farmers are using new and creative financing strategies compatible with cooperative principles.

The new generation model cooperative gives farmerowners the option to sell their equity to other producers at a market price. This complies with the userowner, user-control, or user-benefit tenets. In other

instances, outsiders may purchase dividend bearing

but non-voting preferred stock. While this is a modest

departure from strict user-ownership and user-benefit,

it protects the key principle of user-control.

If cooperatives are to be adequately capitalized in

the years ahead, either members will need to provide

additional funding or cooperatives will have to turn to

other sources. The pertinent questions then become,

how much capital can farmers provide without jeopardizing their own financial health and how much can

cooperatives accept from outsiders without jeopardizing their cooperative character?

Emphasize education

Cooperative education is an investment and

should be viewed as such by both public and cooperative decision makers. While the importance of cooperative education has not diminished over the past few

decades, the resources devoted to it have been severely

curtailed. Cost cutting within individual cooperatives,

in cooperative organizations, at educational institutions, and in Federal programs has been disproportionately targeted at expenditures on education.

In the name of adjusting to a more competitive

business environment, cooperatives have, at times,

focused on short-term returns, to the detriment of the

long-term success of the association. Institutions that

support cooperatives have also redirected resources to

other initiatives. Ultimately, farmers will pay for this

short sightedness. How, for example, can farmers

acquire the skills to become competent directors of

cooperative food manufacturing companies if solid

training in those attributes isn't available? Without the

proper training, the pressure will mount on farmerdirectors to abdicate their role as stewards of their

members' assets to outsiders with the expertise to run

the business but not the appreciation for the importance of the member-user that makes a cooperative

special.

33
This report emphasizes director training as the

number one priority in the cooperative education area.

However, cooperative education is urgently needed for

other audiences as well: employees, members, youth,

young farmers, and the general public. Cooperative

leaders have allowed, even facilitated, an across-theboard erosion in cooperative education. In the long

run, this failure to invest in cooperative education can

be as damaging as any failure in financial oversight.

Seek efficient structures

For decades, the picture of a cooperative was

pretty clear. It was a group of people who banded

together and furnished all of the required equity for a

company that provided a service they couldn't provide

individually for themselves. After a number of years,

the cooperative paid off the longest outstanding equity

investments with current year's earnings. When individual cooperatives weren't big enough to meet member needs, they pooled their resources and formed a

federated cooperative.

As farmers and cooperatives enter the 21st century, that traditional structure is under severe pressure.

Cooperatives are finding that when profit margins are

thin, internal conflicts among the layers of decision

makers in a federated system—as each strives to capture what margins there are—can become debilitating.

Cooperatives are also discovering that they lack both

the human and financial capital to deal with all the

change around them.

Cooperative leaders should consider whether the

age of the large, federated cooperative has passed.

Smaller, centralized associations, able to function with

less capital and to make management decisions relatively quickly, may be the way to future success. When

these associations see an opportunity to enter a new

market or grow in an existing one, they may be better

off forming a joint venture with other cooperative and

non-cooperative firms than forming a federated cooperative. This allows them access to people, funding,

and markets not otherwise available while allowing

them to continue to function as an independent cooperative organization.

Farmer-members must ask themselves some fundamental questions: Do they have to own physical

assets they can see and touch? Can they operate in an

environment of shared control and benefits? Can they

allow their cooperative businesses to evolve and

change?

Forge a strong public policy presence

Since enactment of the Capper-Volstead Act in

1922 and the Cooperative Marketing Act of 1926, cooperatives have been a central part of public policy for

the agricultural sector. While the specific applications

of the cooperative form of business have changed, the

value, from a public policy perspective, of this privatesector solution to agricultural market conditions,

remains highly significant today.

In the 21st century, cooperatives must enhance

their role in protecting and advancing the economic

interests of farmers. This includes educating legislators

on how cooperatives might receive stronger support in

terms of access to and assistance from Federal and

State programs. It also means collaborating with public program administrators to make sure producermembers receive the maximum benefit, or suffer the

least possible harm, from public sector initiatives.

Make decisions based on cooperative principles

The core cooperative principles enunciated in the

1987 report (user-ownership, user-control, and userbenefit) are still valid and are likely to remain so in the

21st century. This makes the cooperative a unique form

of organization with distinct characteristics, strengths,

and difficulties. As directors and managers weigh

options when addressing major business and organizational decisions, they must consider how the outcome

will affect the association's status as a cooperative.

The earlier discussion of cooperative principles

used a continuum analogy to introduce the issue of

how far an entity can move from strict compliance

with these tenets and still be a cooperative. While all

three principles are important, the concept of user-control seems most critical to operating on a cooperative

basis. As farmers and other cooperative members

struggle to adjust to the demands of the 21st century,

they may find that some flexibility on the matters of

outside ownership and allocating benefits, particularly

returns on investment, are necessary to protect the

continued availability of a cooperative presence in the

industries where they do business. But only through

continued user control can the members ensure that

these deviations from the norm don't transform their

"cooperative" into just another investor-owned firm. It

is through control that members ensure business outcomes consistent with their goals for their cooperatives.

Control is the ability to make the decisions that

determine how the entity conducts itself. Memberusers can have 100 percent of the voting rights and still

give away control to management, lenders, outside

34
equity holders, or advisors. Thus, this report concludes

by re-emphasizing the single recommendation that is

most critical to cooperative success in the 21st century:

Cooperatives must have highly competent directors

who understand how to exercise effective control

over their cooperatives and do so in a manner that

promotes the best interests of the member-users.

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Appendix A. Classifying Cooperatives

by Structure

Those with a background in cooperatives, including the focus group participants, frequently use various terms to describe different types of cooperatives. A

brief review of the more common ways cooperatives

are classified should help clarify the following analysis

for readers with little experience with this topic. The

more important ways to categorize cooperatives are by

the geographical territory served, their governance

system, and the functions they perform.

Geographic territory served

One way of looking at cooperatives is the size of

the area served. Cooperatives are loosely categorized

as local, super local, regional, national, and international.

● Local cooperatives operate in a small geographic area, typically a single county or two or three

contiguous counties. They usually have only one or

two facilities to serve members.

● Super local cooperatives operate in several

counties, often with several branch facilities.

● Regional cooperatives usually serve an entire

State or a number of States.

● National cooperatives serve a major portion or

most of the United States.

● International cooperatives operate in more

than one country, with headquarters in the United

States or another country.

Governance system

Cooperatives can also be classified based on

membership structure, as centralized, federated or

mixed.

● Centralized cooperatives have individuals and

business entities (partnerships, limited liability companies, family corporations) engaged in agricultural production as members. Virtually all locals and super

locals are centralized. Regional, national, and international cooperatives may also be centralized.

A centralized cooperative has one central office,

one board of directors elected by its members, and a

manager (chief executive officer) who supervises all

operations. Business may be conducted through

numerous branch stores or offices staffed by employees responsible to the central management team.

● Federated cooperatives have other cooperatives

as their members. Each member of a federated is a separate cooperative that owns a membership interest

entitling it to voting rights in the affairs of the federated. Local cooperatives commonly form federateds to

perform activities too complex and expensive for them

to do individually, such as manufacturing production

supplies, tapping major financial markets, and marketing on a national or worldwide scale. Each member of

a federated typically has its own board of directors,

manager, employees and facilities to serve its members. The federated has its own hired manager and

staff and a board of directors elected by and representing its member cooperatives.

● Mixed cooperatives have both individuals and

other cooperatives as members. Cooperative members

are usually given voting rights representative of their

own membership.

Functions performed

Cooperatives may perform one or more of three

core functions: marketing products, purchasing supplies, and providing services.

● Marketing cooperatives sell products produced

by their members, in either raw or processed form, to

persons further along the food marketing chain. Some

marketing cooperatives limit their activity to negotiating prices and terms of sale with buyers. Growers of

fruits and vegetables for processing and dairy farmers

are primary users of these cooperatives, called bargaining associations.

Other marketing associations assemble member

production into large quantities for sale to further

processors, wholesalers or retailers. This first-handler

role is common for cooperatives of grain growers and

producers of fruits and vegetables for the fresh produce market.

Other such associations add further value to

member production by processing or manufacturing

member products into other, more valuable products.

These may serve as ingredients in further processed

products or be sold to institutional buyers and restaurants for their direct use, to grocery chains for resale as

private label products, or to brand-name companies

for resale under their brand. Cooperatives that process

dairy products, fruits, vegetables, grains, livestock,

and fish exemplify these value-added processing activities. Still others put member products right on the

grocery store shelf under their own brand name. Land

O'Lakes, Sunkist, Ocean Spray, Welch, Tree Top, and

Knouse Foods are examples of cooperatives with

established brands.

● Purchasing cooperatives are used by farmers to

gain access to affordable, quality production supplies

36
such as feed, fuel, fertilizer, and seed. Many local purchasing cooperatives have affiliated with other such

organizations, often through regional and national federated cooperatives. The combined resources enhance

buying power to lower per-member costs of securing

supplies and make possible direct ownership of largescale facilities such as petroleum refineries; phosphate,

potash, and nitrogen manufacturing plants; feed mills;

research facilities, and laboratories.

● Service cooperatives provide both farm-specific

and general support to producers. Some farm-specific

services include recommending and applying fertilizer, lime, or pesticides; animal feed processing; and

crop harvesting. General services include credit

through the Farm Credit System, electricity through

rural electric cooperatives and communications service

through rural telephone cooperatives.

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Appendix B. Forum Participants

St. Louis Panelists:

Bruce Anderson, Facilitator, Cornell University

Robert Andersen, Nebraska Cooperative Council

Richard Bell, Riceland Foods, Inc.

Dennis Bolling, United Producers, Inc.

Barry Flinchbaugh, Kansas State University

Joan Fulton, Purdue University

Roger Ginder, Iowa State University

Steve Hunt, U.S. Premium Beef

Paul Lasley, Iowa State University

Joe Lieber, Kansas Cooperative Council

Frank McDowell, New Vision Cooperative

William Patrie, North Dakota Association of Rural Electric Cooperatives

Maura Schwartz, Minnesota Association of Cooperatives

Atlanta Panelists:

Robert Cropp, Facilitator, University of Wisconsin Center for Cooperatives

Gene Anderson, Southern States Cooperatives

Jim Baarda, The Ackerson Group

Larry Baumeister, University of Kentucky

Glenn Glover, Gold Kist, Inc.

Brian Henehan, Cornell University

Frank Hunt, Florida's Natural Growers

James O'Shaughnessy, Ocean Spray Cranberries, Inc.

Kathy Ruhf, New England Small Farm Institute

Carlyle Teague, Cooperative Council of North Carolina

Minneapolis Panelists:

Robert Cropp, Facilitator, University of Wisconsin Center for Cooperatives

Rodney Christianson, South Dakota Soybean Processors

Mike Cook, University of Missouri

Majid Dagher, Mississippi Small Farm Development Center

Dan Dillon, Welch's Corp.

Gary Hanman. Dairy Farmers of America

John Johnson, Cenex-Harvest States

Phil Kenkel, Oklahoma State University

Tom McKenna, United Sugars, LLC

William Nelson, The Cooperative Foundation

Al Shively, American Pride Co-op

Ed Smith, Texas A & M University

Curt Stofferahn, University of North Dakota

Walt Wosje, Michigan Milk Producers

Sacramento Panelists:

Ken Farrell, Facilitator, California Center for Cooperatives

Roberta Cook-Canela, University of California-Davis

Everett Dobrinski, CoBank

Ronald Giraridelli, Diamond Fruit Growers, Inc.

38
Stan Gomes, Land O'Lakes

Donald Gordon, Agricultural Council of California

Bill Heffernan, University of Missouri

Sue Hine, Colorado State University

Larry Kallem, Iowa Institute of Cooperatives

Barry Kriebel, Sun-Maid Growers of California

Richard Sexton, University of California-Davis

Theresa C. Tuttle, Tuttle and Van Konyenburg

Frank Van Konyenburg, Tuttle and Van Konyenburg

John Welty, California Tomato Growers

Dave Zollinger, Blue Diamond Growers

Washington, D.C. Panelists:

Bruce Anderson, Facilitator, Cornell University

Ken Auer, Farm Credit Council

Ron Gaskill, American Farm Bureau Foundation

David Graves, National Council of Farmer Cooperatives

Paul Hazen, National Cooperative Business Association

Julian Heron, Tuttle, Taylor and Heron

Gene Paul, National Farm Organization

Don Schriver, Dairy Farmers of America

Lee Swenson, National Farmers Union

Leroy Watson, National Grange

National Institute for Cooperative Education Panelists:

Richard Subia, Center of Outreach, Langston University

Stevin & Stephanie Armstrong, SE Arkansas Vegetable Growers Cooperative

Lewis Bruner & Rachel Bruner, Oklahoma Landowners & Tenants Association

LaDonna McCowan, Oklahoma Landowners and Tenants Association

Dr. Marte Daniels, Family Farmers Cooperative, Mississippi Association of Cooperatives

Fred Broughton, South Carolina State University

Canston Scott, Sr., Beat 4 Cooperative

Larry & Shirley Blakley, Beat 4 Cooperative

Sotero Agoot, Kona Pacific Farmers Cooperative

Joe Radford, Tyler, TX

Charles J. Henry, Jr., Coastal Georgia Small Farmers Cooperative

Faye Radyard, Department of Health Immunization, Tyler, TX

Lonnie John Johnson, Coastal Georgia Small Farmers Cooperative

David Richardson, Coastal Georgia Small Farmer Cooperative

39
Appendix C. Discussion Outline

Cooperative principles

Our focus today will be to build on the identity of cooperatives defined under the contemporary principles.

● User ownership - A cooperative is owned by its members.

● User control - A cooperative is controlled by its members.

● User benefits - The benefits of the cooperative accrue to its members.

Core issues

Let's begin by identifying some core issues faced by rural Americans.

● What do you see as the principal challenges confronting agricultural producers in the years ahead?

● What do you see as the principal challenges confronting agricultural cooperatives in the years ahead?

Changing nature of markets

Let's discuss the changing nature of markets for food and fiber products.

● How are cooperatives affected by changing competition?

As buyers?

As sellers?

● How are cooperatives affected by changing distribution systems?

● How are cooperatives affected by changing consumer characteristics?

● How might these and other changes in the food and fiber sectors be addressed by cooperatives?

Changing nature of production

We finish setting the scene by discussing the changing nature of production agriculture.

● How are cooperatives affected by the diffusion of farm characteristics (large corporate farms v. small part

time farms)?

● How are cooperatives affected by the closure of agriculture through contracts and integrated production 

systems?

● How are cooperatives affected by the changing nature of farmers’ loyalties, attitudes, lifestyles, and community?

● How might these and other changes in production agriculture be addressed by cooperatives?

Changing nature of cooperatives

Let’s direct our discussion toward the evolution of the cooperative system.

● With regard for the evolving stresses in the local-regional cooperative system, describe the essential elements needed for cooperation among cooperatives. In other words, what enables cooperatives to work

cooperatively?

● With regard to capitalization strategies, discuss the roles and implications of non-traditional alternatives

to farmer cooperatives.

● With regard to inter-business relationships, discuss the roles and implications of alliances.

40
Leadership challenges

Given these changes, pressures and demands,

● What skills will cooperative leaders need in the years ahead?

● What steps are needed to build these capacities in present and future cooperative leaders?

Public policy

Finally, discuss the roles that cooperatives play to set and implement public policy.

● What larger roles can cooperatives play in the design and carrying-out of farm and agricultural policies?

● Are there any changes needed in existing laws and regulations that would strengthen cooperatives’ ability to serve in the public interest?

41
U.S. Department of Agriculture

Rural Business–Cooperative Service

Stop 3250

Washington, D.C. 20250-3250

Rural Business–Cooperative Service (RBS) provides research,

management, and educational assistance to cooperatives to

strengthen the economic position of farmers and other rural

residents. It works directly with cooperative leaders and

Federal and State agencies to improve organization,

leadership, and operation of cooperatives and to give guidance

to further development.

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

rural residents develop cooperatives to obtain supplies and

services at lower cost and to get better prices for products they

sell; (2) advises rural residents on developing existing

resources through cooperative action to enhance rural living;

(3) helps cooperatives improve services and operating

efficiency; (4) informs members, directors, employees, and the

public on how cooperatives work and benefit their members

and their communities; and (5) encourages international

cooperative programs. RBS also publishes research and

educational materials and issues Rural Cooperatives magazine.

The U.S. Department of Agriculture (USDA) prohibits

discrimination in all its programs and activities on the basis of

race, color, national origin, gender, religion, age, disability,

political beliefs, sexual orientation, and marital or family

status. (Not all prohibited bases apply to all programs.)

Persons with disabilities who require alternative means for

communication of program information (braille, large print,

audiotape, etc.) should contact USDA’s TARGET Center at

(202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director,

Office of Civil Rights, Room 326-W, Whitten Building, 14th and

Independence Avenue, SW, Washington, D.C. 20250-9410 or

call (202) 720-5964 (voice or TDD). USDA is an equal

opportunity provider and employer.