United States

Department of

Agriculture

Rural BusinessCooperative

Service

Research

Report 157

USDA

Cooperatives in a

Changing Global

Food System
This study examines how U.S. agricultural cooperatives are responding to current

trends toward the globalization of the agricultural and food sector. Information from

three case studies illustrates the extent to which cooperatives’ organizational structure

may limit or enhance their ability to compete with investor-owned firms (IOFs) on a

global scale. Concentration levels in key agricultural production, processing, and distribution markets are reviewed.

Next, the report examines new global strategies being employed by IOFs and their

impact on farmer-owned cooperatives. The international activities of three regional

cooperatives are examined in detail and data are used to highlight advantages and disadvantages that cooperatives may experience in global competition with IOFs.

Factors limiting international involvement by cooperatives include the diverse interests

of their members, ties to domestic resource bases and social groups, the high risk levels and long-term nature of international investment, and symbolic barriers, including

language barriers and the different connotations of the term “cooperative” in other

nations.

Potential advantages for cooperatives include their reputation as reliable, high-quality

suppliers and ethical business partners and their ability to meet specialty, niche

demand created within a global food system. Cooperatives must seek opportunities in

the new global system that their organizational structure makes them uniquely qualified to fill. They must also seek member response to questions of international involvement and encourage a spirit of “permanent innovation” among cooperative members

and staff. Finally, cooperatives must enhance the potential social, cultural and economic benefits from international cooperation for their membership.

Key words: agricultural cooperatives, concentration, globalization, agency theory

Cooperatives in a Changing Global Food System

United States Department of Agriculture

Rural Business-Cooperative Service

FIBS Research Report 157

Michael F. Seipel

William D. Heffernan

University of Missouri-Columbia

Department of Rural Sociology

October 1997
Preface Transnational corporations (TNCs), with little or no loyalty to any country, are currently

redefining the way food is produced, processed, and consumed. These agribusiness

firms use the flexibility offered by their multiple-nation locations to source commodities

from least-cost origins around the globe, reconstitute them into food products, and

deliver them to consumer markets throughout the world. They can also strategically

locate processing plants in various countries based on raw material supply, infrastructure, labor cost and availability, and regulatory considerations. Agricultural cooperatives with ties to resource bases and social groups within particular nations may be

limited in their ability to pursue such strategies. So, how can cooperatives compete in

this new global food system?

This report explores issues raised for cooperatives by the globalization of agriculture

and food. Information from three case studies illustrates the extent to which cooperatives’ organizational structure may limit or enhance their ability to compete with

investor-owned firms (IOFs) on a global scale.

First, we examine the level of concentration in key agricultural production, processing,

and distribution markets, the new global strategies being employed by IOFs, and how

these two related phenomena impact farmer-owned cooperatives. Next, we discuss the

set of concepts known as agency theory and demonstrate how it can contribute to our

understanding of the dynamics of a decision by a cooperative to pursue international

involvement.

Strategies of three regional cooperatives with significant international involvement are

examined. The decisions made and challenges faced by these three cooperatives provide insight into globalization issues. Based on the three case studies, we discuss

some general advantages and disadvantages that cooperatives may have relative to

IOFs and global competition. Recommendations are made on how cooperatives might

position themselves to take advantage of the strengths offered by their organizational

structure.
Con tents Highlights ......................................................... ..ii i

Implications of Globalization for Cooperatives ...............................1

An Agency-Theory Approach ............................................5

Methodology ......................................................... .

International Programs of Three Regional Cooperatives .......................7

LandO’Lakes,Inc. ............................................... .

Harvest States Cooperatives ........................................8

Farmland Industries, Inc. .......................................... 10

Discussion ....................................................... ..ll

Limitations to International Involvement by Regional Cooperatives ......... 11

Cooperative Advantages in the Global Food System ....................13

Conclusions and Recommendations .....................................14

Bibliography ...................................................... ..16
Highlights This report places the challenges currently confronting farmer cooperatives within the

context of the growing globalization of agricultural and food markets. Cooperatives

have long been used by producers to address problems of market failure and balance

the unequal bargaining power encountered in the marketplace. However, the viability of

cooperatives as an organizational form, and the ability of farmers to retain a direct

presence in agricultural markets, are currently being challenged by the emergence of a

global food system.

Transnational agribusinesses are currently shifting capital and technology from nation

to nation to capitalize on supply costs, labor availability, and favorable regulations. U.S.

cooperatives, because of their close links to physical assets and member-owners in a

particular country, are less able to duplicate these strategies. So cooperatives must

find ways to compete globally that do not compromise their commitment to member

service. Their very survival may rest on their ability to do so.

U.S. agricultural markets are quite concentrated at the national level. In every staple

commodity sector except turkey production and processing, four firms control 40 percent or more of the market. Many firms, such as Cargill, ConAgra, and Archer Daniels

Midland (ADM), are among the top four firms in multiple sectors. In the last decade,

these firms have moved to open strategic production and processing operations in

other countries. The three major beef-packing firms in the United States now dominate

all of North America and are moving aggressively into Australia and South America.

Cargill has demonstrated the mobility of modern livestock production technology by

duplicating a U.S. broiler production system first in Thailand and then in China to take

advantage of low-wage labor.

Some large regional cooperatives are attempting to compete with these investorowned firms (IOFs) at the international level. Land 0’ Lakes is active both in international development in lesser-developed countries, and in international marketing of its

dairy foods and feed products. The cooperative has recently been very active in the

expanding manufactured feed market in Eastern Europe.

Harvest States Cooperatives is a long-time exporter of U.S. grain and grain products.

In recent years, it has attempted to strengthen its competitive position through joint

ventures with investor-owned agribusiness firms for the marketing and processing of

members commodities. The cooperative is currently establishing stronger ties in

Mexico and seeking to build relationships with end-users of export commodities in

other nations.

Farmland Industries also has expressed a strong commitment to becoming a global

company. The cooperative currently exports grains and oilseeds, pet food, feedstuffs,

fresh and processed beef and pork, lubricants, and fertilizer. Farmland recently

increased its international presence by purchasing a Swiss-based grain trading firm.

These cases highlight the limitations and advantages of international activity by cooperatives.

The diverse interests of the membership in a regional multi-commodity cooperative

may present a constraint to international involvement because of the often commodityspecific nature of international ventures. Agricultural cooperatives’ ties to domestic

resource bases, both facilities owned by the cooperative and the assets of farmermembers, may also inhibit international investment which might be perceived to devalue these domestic assets. The risk level and long-term nature of international invest-
ments may also deter members of agricultural cooperatives. Different meanings associated with cooperative business forms in formerly centrally-planned economies may

create additional obstacles for cooperatives attempting to become established in these

nations. Finally, language and other cultural barriers may limit true international cooperation.

Cooperatives also enjoy several potential advantages in the global food system. They

are perceived to be reliable, quality suppliers and ethical business partners. This

makes it easier to establish working relationships with end-users in other nations. The

macro-level trend toward globalization is also creating many localized niches in the

food system, and cooperatives may be uniquely positioned to fill these by capitalizing

on their decentralized operating structure.

For cooperatives to successfully compete in the emergent global food system, they

must take advantage of the unique opportunities offered by their organizational structure instead of attempting to compete directly with transnational agribusiness firms.

The first step is to seek suggestions from members so that international strategies can

be designed to fulfill the multiplicity of goals that members may have for their cooperative.

International activities can then be pursued to enhance member service as well as

earnings. Cooperatives can also help their members compete internationally by developing alternative products and markets, and looking for innovative ways to add value to

traditional commodities. Designing products to fit the demand niches created within a

global food system will require decentralization of decisionmaking and a spirit of innovation from both members and management. Finally, cooperatives must evaluate international opportunities on their potential social and cultural merits, as well as on the

level of economic return they offer in order to fully realize the potential benefits of international cooperation. The globalization of the agricultural and food sector entails creating many intricately intertwined local, regional, and international food production, distribution, and consumption networks. Within this system, there will be many roles for

cooperatives to fill.

iv
Cooperatives in a Changing

Global Food System

Michael F. Seipel and William D. Heffernan,

Department of Rural Sociology,

University of Missouri-Columbia

A

griculture in the United States has historically

been one of the best examples of an economically competitive system. Millions of farmers

purchased limited supplies from thousands of relatively small farm supply firms. The farmers sold their

products through hundreds of markets to a vast number of processors. Within a given geographic area,

however, transportation capabilities limited the number of markets to which any group of farmers had

access. Ironically, as time went on and farmers began

to rely more heavily on purchased supplies and

depend on commercial markets, competition at the

local and national levels declined.

Farmers sometimes responded to this lack of

competition or “market failure” by mobilizing in

protest. These farmers often blamed their economic

woes on the “cost-price squeeze” brought about by

middlemen who obtained a disproportionate amount

of the economic benefit of agricultural supply and

commodity marketing at the expense of farmers.

Early in the history of farmer movements, railroads, lending agencies, equipment manufacturers, and

others were the focus of attention. Shortly after the

Civil War, the Patrons of Husbandry (Grange) was

started as a collective effort by farmers to address some

of their concerns. The Grange and other farmer organizations were closely linked to broader social movements of the time, especially the Populist movement.

Farmers also responded to market failure by

forming local cooperative associations to purchase

supplies and provide services to a few members. In

1922, the Capper-Volstead Act provided legitimacy to

farmer attempts to level the playing field in agricultural supply and commodity markets. Cooperatives soon

found that to ensure continued service to members,

they must ensure their own survival through growth

and profitability. As investor-owned firms (IOFs) consolidated control of agricultural markets at the regional and national levels, local cooperatives responded by

forming regional federations to provide a “competitive

yardstick.“

In the intervening years, cooperatives and IOFs

and the markets in which they compete have continued to grow in size and complexity. Farmers in the late

20th century continue to seek ways to work together,

often through cooperative associations, to collectively

counter the economic efficiency and power of large

IOFs. However, the ability of cooperatives to continue

to provide their traditional “competitive yardstick”

function in this new “global food system” is being

challenged not only by the sheer size of their competitors, but by the flexibility offered by their multiplenation locations.

Globalization and Concentration Implications

Concerns about the unequal distribution of economic power in agriculture voiced by farmers more

than a century ago still ring true today. Table 1 indicates that many food processing firms achieve greater

than a 20 percent return on their investments. By contrast, farm management data from many Midwest

States suggests that most farmers receive only a 2 percent to 4 percent return on their investments.

A century ago, farmers facing a local monopoly

or monopsony joined to purchase supplies or market

products with a relatively small investment and limited organizational complexity. Today, however, the

increasing concentration of food processing and marketing in the hands of a few transnational corporations

(TN&) is bringing about the possibility of market fail1
ure for farmers and consumers, not just locally, but on

a regional, national, or global scale. The levels of capital and human resources necessary to avoid such massive market failure are much greater. Therefore, farmer

cooperatives are taking on much higher risks in

attempting to compete in this global food system.

Today, most of the major farm commodities produced in the Midwest move into an oligopolistic market system at the national level. Table 2 indicates that

within every commodity sector except turkeys, 40 percent or more of processing is controlled by four firms.

Although debate continues on what constitutes an oligopolistic market, much of the economic literature

suggests that when four firms control 40 percent of the

market, they can exert influence on the market unlike

that in competitive systems.

Table 2 also indicates that many of the same firms

are involved in the processing of multiple commodities. Firms like ConAgra, Cargill, and Archer Daniels

Midland (ADM) rank among the top four in several

commodities. Some observers of change in the food

system argue that for certain activities, like pork

slaughter, one set of firms has simply replaced another

set like Swift, Armour, Wilson, and Cudahay, that

existed half a century ago. But in fact, the movement of

IOFs into the processing of several commodities represents a qualitative difference. It allows such firms to

cross-subsidize. Firms operating in multiple commodities can survive a major loss in one commodity area if

they are making significant profits in other areas.

In the past decade, two major catfish cooperatives (Southern Pride and Delta Pride) had problems

competing against firms which were able to cross-subsidize. The cooperatives survived despite the fact that

their IOF competitor’s annual reports showed a loss

for at least 2 years in the catfish division.

The third change evident from the table is the

vertical integration in the food system. Although vertical integration began receiving considerable attention

by farmers 30 to 40 years ago in the poultry industry,

the complete integration from “seed to shelf” has

occurred quite recently.

In its annual report, ConAgra claims to be the

largest distributor of agricultural chemicals in North

America and one of the largest fertilizer producers. It

entered the seed business in 1990. ConAgra owns 100

elevators, 2,000 railroad cars, and 1,100 barges. It is the

largest turkey producer and second largest broiler producer. It produces its own poultry feed and other livestock feed. It also owns and operates hatcheries.

ConAgra hires growers to raise its birds and processes

them in its own facilities. This broiler meat can then be

purchased as fryers under the name of Country Skillet

or in further processed foods such as TV dinners and

pot pies under the Banquet and Beatrice Food labels.

From the basic raw materials for agricultural proTable I- The World’s Dominant Food Companies

United States 1993 Sales’ Rate of Return**

(bil 8 percent

Philip Morris 50.6 36.7

ConAgra 21.5 18.7

RJR Nabisco 15.1 1.6

Sara Lee 14.6 21 .l

IBP 11.7 8.2

ADM 9.8 13.2

General Mills 8.1 42.8

Ralston Purina 7.9 27.6

H.J. Heinz 7.1 25.4

CPC International 6.7 23.9

Borden 6.7 5.8

Campbell Soup 6.6 16.5

Kellogg 6.3 31.8

Quaker Oats 5.7 24.6

Farmland Industries 4.7 na

Tyson Foods 4.7 20.9

Sources:“Fonune, April 18, 1994

“Forbes, January 3, 1994 (annual average return on equity)

l ‘*Chilton’s Food Engineering International, June, 1994

European**’

Nestle S.A.

Nestle France

Nestle Deutschland

Nestle UK

Unilever

Deutsche Unilever

Unilever France

Grand Metropolitan

Groupe BSN

Kraft Jacobs Suchard

Eridania Beghin-Say

Allied Lyons

Dalgety

Assoc. British Foods

Hillsdown Holdings

Tate & Lyle

(Swz)

(Fra)

(Ger)

(UK)

(UlVNeth)

(Ger)

(Fra)

(UK)

(Fra)

(Swz)

(Fra)

(UK)

(UK)

(UK)

(UK)

(UK)

1993 Sales

(bil $1

36.3

4.3

4.0

2.5

21.6

4.1

2.9

12.1

10.7

9.1

8.6

7.7

6.7

6.5

6.0

5.7

2
Table 2- Largest Four Firms and Combined Market Share in Agricultural Commodity Markets

Broiler Production and Processing

Largest four control 46% of production

Tyson

ConAgra

Gold Kist

Perdue Farms

Beef Slaughter

Largest four control 72% of slaughter

IBP

ConAgra

Cargill

Farmland Industries

Beef Feedlots

20 feedlots market over 50% of fed beef

Continental Grain

Cactus Feeders

ConAgra (Monfort)

Cargill (Caprock)

Pork Slaughter

Largest four control 45% of slaughter

IBP

ConAgra

Cargill (Excel)

Sara Lee

Sheep Slaughter

Largest four control 70% of slaughter

ConAgra

Superior Packing

High Country

Denver Lamb

Turkey Production and Processing

Largest four control 35% of production

ConAgra

Rocco Turkeys

Hormel (Jennie-0)

Carolina Turkeys

Flour Milling

Largest four control 71% of milling

ConAgra

Archer Daniels Midland

Cargill

General Mills

Soybean Crushing

Largest four control 76% of processing

Archer Daniels Midland

Cargill

Bunge

Ag Processing (AGP)

Dry Corn Milling

Largest four control 57% of milling

Bunge

Illinois Cereal Mills

Archer Daniels Midland

ConAgra (Lincoln Grain)

Wet Corn Milling

Largest four control 74% of milling

Archer Daniels Midland

Cargill

Tate and Lyle

CPC

Source: Concentration of Agricultural Markets, Fall 1994

duction to the retail store, a major proportion of the

total system is owned and controlled by ConAgra, the

second largest U.S. food processor (behind Philip

Morris), and the fourth largest in the world.

Some large, regional cooperatives have also

remained competitive at the national level by in part

following the example of IOFs. Gold Kist is the third

largest producer of broilers, Farmland Industries ranks

fourth among beef processors, and Ag Processing

(AGE’) is the fourth largest U.S. soybean processor.

However, in the last decade, the most meaningful

changes in the concentration of agricultural markets

have occurred at the global level.

global grain market became so critical to the economic

well-being of U.S. grain and oil crop farmers. As these

farmers became more dependent on the global market

to establish the price of their commodities, they again

realized the unequal nature of the power relationship

between themselves and the large IOFs. Although

farmer-owned cooperatives originate much of the

grain from the farm level, this grain frequently must

pass through the facilities of their competitors to

access the export market. In the process, cooperatives

and their farmer-members begin to lose their own

identity and increasingly come under the control of the

IOFs.

Concentration of control in some sectors of the Recent trade journals report that TNCs like

global food system is not new. At the turn of the centu- Cargill and Continental each control about 25 percent

ry, seven closely held family firms controlled the glob- of the international grain market. ADM, which has

al grain trade. But it was not until the 1970s that the recently acquired the U.S. operations of Louis Dreyfus

3
and portions of Ferruzzi, controls another quarter of

the U.S. grain that moves in global markets. These

TNCs often are involved in more than just delivering

the products to a country. They own grain handling

and processing facilities in many countries.

For example, Cargill has operations in 60 countries. Its chief financial officer reports it generated

more than $2 billion in revenue per year, most of

which will be reinvested someplace in the world.

Often, profits generated from the U.S. food sector will

be reinvested in other countries, leading to direct competition with food products produced in this country.

Qualitative changes in the food system, brought

about by horizontal and vertical integration at the

global level during the past decade, continue to challenge the ability of farmers to retain an independent

identity as an essential component in the food system.

Three examples will demonstrate the nature of this

challenge.

The first underscores the movement of foreignbased TNCs into the United States. Sometimes these

firms compete vigorously with one another in certain

parts of the world and in certain products, but at

other times and in other places form joint ventures.

Ferruzzi from Italy joined forces with Mitsubishi from

Japan to establish Innovative Pork Concepts (Indiana

Packing), and constructed a state-of-the-art hog

slaughtering facility. They then signed an agreement

with Cotswold Pig Development Company, one of

England’s primary breeding companies, to provide

the genetic stock for this highly controlled pork production and processing system.

The second example focuses on the beef industry.

In the past decade, the Canadian beef industry has

been restructured as the result of the activities of

TNCs. In 1987, ConAgra acquired Monfort beef operations, the dominant beef facility in the northern Great

Plains. Soon after that action, Cargill moved across the

border into Alberta, Canada, and set up that country’s

largest beef slaughtering operation. At the time,

Canada Packers was Canada’s largest manufacturer of

livestock and poultry feeds, largest cattle slaughterer,

only national poultry processor, and Ontario’s largest

hog slaughterer.

Shortly thereafter, Canada Packers began experiencing very serious financial problems. Eventually, it

was bought by Hillsdown of England and “exited the

fresh beef market.” In the past few years, much of the

cattle from northern Alberta has moved into the

Monfort feed lots and then to slaughter, or directly to

slaughter from Canada. In recent months, IBP purchased Lakeside Packers to give the three major beef

slaughter firms in the United States dominance in all

of North America.

In the late 198Os, ConAgra purchased half interest

in Elders, the dominant beef slaughtering operation in

Australia. It is the largest exporter of beef and lamb in

the world. Shortly after the Conagra-Elders purchase,

Mitsubishi began constructing new beef slaughtering

facilities in Australia. Most recently, Cargill purchased

beef slaughter facilities in Australia. Cargill also has

operations in Brazil, Honduras, and Mexico. ConAgra

has recently shown interest in the largest beef slaughter facilities in New Zealand. Although these firms

presently control only a small proportion of the beef

that is consumed worldwide, they control the major

portion of beef that is traded in the global market.

A third example comes from Thailand and represents, perhaps, the best example of how the TNCs

operate across national borders. Fifteen years ago,

Thailand was not considered an important commercial

producer of poultry. A local agribusiness firm, the G-P

Group, formed a joint venture with Arbor Acres to

obtain access to the best genetic stock in the world and

a joint venture with Continental to gain access to feed

grain and nutritional information. Months later, the GP Group began to duplicate the U.S. poultry production system in Thailand. Within a couple of years,

Cargill also duplicated the U.S. poultry production

system in Thailand. Cargill formed a joint venture

with Nippon Meat Packers, the largest meatpacker in

Japan, to gain access to the marketing and distribution

system in the Far East. Today, Thailand ranks seventh

in the world as a poultry exporter.

In Thailand, the firms found both farmers and

processing plant workers who were willing to work

for much lower wages than their U.S. counterparts.

Processing plant wage rates were well under $5 per

day in rural Thailand. As economic growth led to a

doubling of the wages in Thailand (still under $10 per

day), both firms began similar operations in China and

other countries in the region where workers still work

for less than $5 per day.

Thailand is an excellent example of the emerging

organization of the new global food system. This

example underscores the fact that in the global food

system, both capital and technology are highly mobile.

Capital and technology can be transferred to any country in the world, almost instantaneously. The question

global firms then face is that of how to combine the

other factors of production most effectively.

Under the name of Sun Valley Thailand, Cargill,

Nippon Meat Packers, and Thailand have developed

organizational arrangements to take advantage of

4
each partner’s strength. Cargill supplies the production technology and social relations; Nippon Meat

Packers supplies the access to markets; and Thailand

provides the low-cost feed and labor, plus a “friendly

business climate.”

Given that capital and technology are constants,

the four major costs of producing meat are labor, feed,

transportation, and government regulations (such as

those applied to the environment or the health and

well-being of farmers and other workers in the food

system). TNCs roam the world seeking production and

processing sites that offer the most favorable combination of these four classes of inputs, an activity known

as “global sourcing.” Because cooperatives have developed within specific national contexts, and generally

continue to be owned by producers within a particular

nation, they lack the same freedom to shift production

and processing around the globe. This global sourcing

presents the strongest challenge to cooperatives ability

to compete in this new global food system.

For several years, researchers at the University of

Missouri have been documenting this globalization by

tracking the international activities of TNCs active in

food production, processing, and distribution

(Bonanno, et al.; Heffernan; Heffernan, et al.). The

increasing concentration of food processing and distribution in the hands of a relatively small number of

these TNCs raises the question of whether cooperatives will be able to continue to compete in this emerging global food system.

The purpose of this report is to examine the

extent to which agricultural cooperatives are currently

competing internationally with the food TNCs, the

challenges cooperatives face, and the strategies being

employed by the most active and successful cooperatives. Previous cooperative research and the agencytheory literature suggests that cooperatives unique

organizational structure might generate conflicts

between members and management over international

involvement.

Agency-Theory Approach

The small size and informal organizational structure of early cooperatives often allowed for consensusbased decisionmaking with participation from all

active members. This form of governance, based on the

model of participatory democracy, was in keeping

with their concept as voluntary organizations. They

depend on a high level of participation from their

membership that is often based on a personal commitment by the member to the goals of the organization

(Garkovich and Bokemeier). However, the attempt to

provide reliable, efficient service to their members led

to what Paul Lasley (Iowa State) has described as a

“dual objective” for cooperatives: the need, as voluntary organizations, to maintain a high level of member

involvement, coupled with the business organization

mandate to generate a profit and survive in a competitive marketplace.

These two objectives often proved inherently contradictory. However, cooperative leaders realized that

to have the opportunity to achieve the first objective,

member participation, they must meet the second

objective, economic survival, and over time the economic function came to dominate cooperative decisionmaking. For cooperatives competing in relatively

concentrated agricultural markets, survival normally

entailed growth, which often lead to reduced member

participation.

As cooperatives grew in size and complexity, it

became necessary to delegate authority for operational

decisions to a hired staff familiar with the cooperative’s specialized operations. The model of governance

shifted from participatory democracy to representative

democracy. Members maintained control through voting in the election of a board of directors which was

responsible for selecting a manager, making strategic

decisions for the cooperative, and representing members interests to the manager.

In this type of organization, the manager is seen

as an agent, hired to act on behalf of, and in the best

interests of the principals-the cooperative membership. However, the assumption that the manager will

always follow the directives of the principals has been

challenged by organizational theorists. The set of concepts known as agency theory has been most fully

developed by authors Jensen, Meckling, and Fama,

and has previously been applied to agricultural coopera tives by Vitaliano and Condon.

Agency theory suggests that a manager’s interests may be quite distinct from members, and as such

the manager attempts to operate the cooperative based

on goals other than those of maximizing member service or member profitability. To prevent the manager

from actively pursuing these alternative goals, members must monitor the manager’s behavior. The

expenses associated with such oversight are known as

agency costs. The elected directors on the cooperative’s

board can be analyzed as agents, rather than principals, if they advocate policies of personal benefit to

them if unmonitored.

The principals of any organization must structure a set of controls and incentives to obtain performance by agents, and be able to monitor results. For

5
many IOFs, increased value of the firm is the goal,

and the stock market provides a monitoring mechanism. In a cooperative, members do not have an

equivalent monitoring mechanism. Cooperatives are

service organizations rather than investment entities.

Members usually take a customer approach by monitoring performance in relation to what the competition offers. Unlike a customer, a member is a principal, with equity in a cooperative and a greater stake in

its success as a business. Determining appropriate

agent rewards and obtaining effective performance is

a complex challenge for cooperatives. They are concerned with many aspects of performance and have

no reference to a stock market for evaluating the

worth of the cooperative.

The managerial labor market also plays a role in

creating incentives for manager behavior in both cooperatives and IOFs. Managers realize their compensation and the subsequent demand for their services are

based on the current performance of the company, as

reflected by sales growth or earnings. This may lead

the manager to focus efforts on those activities that

increase margins and enhance the manager‘s own

marketability.

Members may perceive that this single-minded

focus on earnings or sales growth results in the neglect

of other activities that could enhance member service

or meet other member goals. Ironically, as some students of agricultural cooperatives have noted, management’s desire for long-term growth may actually serve

to protect the cooperative as a “going concern” from

the behavior of members who are mainly concerned

with immediate and tangible benefits to be gained

from the market and often have an incentive to underinvest in their cooperative (Murray; Staatz).

The creation of a “division of labor” between

management and board of directors regarding decisionmaking also plays an important monitoring role.

Decision management, the initiation and implementation of operating strategies, rests with hired managers.

Decision control, the ratification of strategic decisions,

rests with the directors. It is meant to set the parameters within which management operates on a day-today basis.

In an IOF, the board often includes “outside

experts” who are well versed in the firm’s primary

operations. Cooperative boards are often composed

largely of farmers, whose expertise is in production

agriculture. As large, diverse cooperatives pursue

business activities that are increasingly removed from

their members’ and directors’ agricultural experience,

oversight is weakened. In the extreme case, the board

may become merely a rubber stamp for management

decisions.

The framework of agency theory helps highlight

the complexity of a decision by a cooperative to pursue international involvement. Like any investment

decision, international involvement promises varying

payoffs for different groups of members and managers

within the cooperative. The decision to initiate an

international investment is usually part of an overall

growth and/or diversification strategy for the cooperative. This serves to fulfill management’s goal of continued growth, a goal often shared by some groups of

members. Others may resist such investment due to

the actual or perceived higher risk level associated

with international ventures. For them, foreign investment also represents the delegation of operational control to agents separated from them by both bureaucratic hierarchy and great physical distance. This further

increases difficulty in monitoring. Overseas investment, especially in processing facilities, also tends to

be commodity specific; it may enhance the market for

one commodity produced by some members, but does

little for other members products. Those who don’t

profit from the overseas facility may pressure cooperative leadership to direct capital to other ventures, such

as domestic processing.

The theoretical framework of the agency theory

helps in understanding the international investment

strategies pursued by the three cooperatives analyzed

here, as well the potential conflicts that may arise

between different groups of members and managers.

Methodology

Information used in this research was gathered

from an analysis of secondary data and interviews

with key cooperative management personnel. Initial

informational requests were sent to 75 cooperatives

perceived to have widely differing levels of international involvement.

Annual reports and other pertinent information

were received from 25 of these cooperatives. Based on

our prior knowledge of them, it appeared that most of

the cooperatives that didn’t respond had little or no

international involvement. This material, along with

previously published research, provided an inkling of

international activity by these cooperatives. In some

cases, followup contacts were made to clarify information. From these 25 cooperatives, three regional cooperatives were selected for a more in-depth analysis.

The cases examined in this report were selected

because all were highly involved in global agricultural

and food markets. They are all diversified regionals

6
involved in multi-commodity marketing and farm supplies. Large regional cooperatives are most likely to be

in direct competition with the global food TNCs, both

by virtue of their size and the product markets in

which they compete. They tend to be active in the basic

grain, oilseed, and livestock sectors that have become

extensively globalized. The extent of the cooperatives’

international activities suggested that they had been

relatively successful in global competition, yet the heterogeneity of their membership indicated the potential

for conflict between groups of members and managers.

They were selected for study, given that their behaviors

best represented extensively both the challenges and

the potential rewards offered by globalization.

Data analysis was supplemented by interviews

with current and former management personnel.

Those chosen for interviews were regarded the most

knowledgeable concerning their respective cooperative’s international activities. They provided information on specific activities considered by the cooperatives, and were able to shed light on various unique

problems and/or successes the cooperative experienced. Such a research approach is based on “key

informant” interview techniques proven effective in

past research on cooperatives (Gray, Butler and

Lasley).

International Involvement

Land 0’ Lakes

Land 0’ Lakes (LOL), of Minneapolis, the regional supply and marketing cooperative, has four core

businesses - feed, seed, agronomy, and dairy foods. It

has a long record of successful involvement in international markets. Its involvement has recently been

expanded to include ownership of foreign assets. The

primary activity has had a dual focus - international

marketing and international development.

International marketing seeks to expand overseas

markets for dairy foods and feed through direct sales,

licensing of cooperative products for foreign manufacture, and establishing foreign-based processing plants

through ownership or joint venture. International

development promotes rural development in underdeveloped nations, and also develops long-term markets in these countries by establishing ties for the

cooperative with local producers, distributors, and

processors.

LOL is currently purchasing a feed manufacturing plant in Poland which will operate under the auspices of the international marketing division. This purchase was fostered from contacts initially through the

international development division’s work with Polish

dairy processors. This allowed LOL to become familiar

with the structure of the dairy feed market and led to

establishing a small feed plant to manufacture calf

starter in 1991. This larger feed mill represents a substantial expansion of the company’s product line. The

plant, originally built and operated by a group of state

farms in the region, will operate as a wholly owned

subsidiary, distributing dairy and swine feed to independent producers throughout Poland.

Poland is unique among the former Soviet satellites. Most of its agricultural land has remained in private hands and agricultural production comes from

small, diversified farmers. This relatively stable situation has attracted investment from western agribusinesses that expect current trends toward agricultural

consolidation and specialization to lead Polish farmers

to purchase a larger portion of their feed and other

production supplies. LOL and other western feed companies view Poland and much of Eastern Europe as a

potential growth market for manufactured feed compared with the mature U.S. market.

The atomistic structure of Polish agriculture presents feed companies with a problem of how to distribute their feed to farmers. Most western feed companies

attempt to surmount this distribution bottleneck by

using local commission agents who are in contact with

a large number of producers or by selling their feed

through the privately owned local “farm stores” where

farmers buy many of their supplies. LOL’s cooperative

structure gives it access to an additional distribution

strategy by working through existing Polish dairy

cooperatives to market feed to their farmer-members.

Although being organized as a cooperative

proved beneficial in establishing this initial contact

with Polish dairy cooperatives, LOL does not promote

its status as a cooperative as a strategy to attract feed

customers. Polish farmers associate the term “cooperative” with the quasi-governmental organizations they

were forced to join during communist occupation and

are generally not eager to form producer associations.

Therefore, in the short term, the cooperative is content

to run its Polish feed mill as a limited corporation.

However, LOL is grappling internally with the issue of

whether or not the customers of the Polish feed mill

should become members of the cooperative and this

question may culminate within the next 5 years. The

integration of Polish producers as full members of the

cooperative raises many complex issues, but, if carried

out successfully, would represent a large step toward

true international farmer cooperation.

Drawing on the framework of agency theory, it is

7
possible to conceptualize upper-level cooperative

management personnel as agents of the members.

Expansion of cooperative milling operations in Poland

or elsewhere in the world’ serves to meet management’s goal of continued cooperative growth. LOL

officials note that member and director support for the

Polish feed mill has been strong to date because investment levels are small and the operation shows signs of

producing large net earnings.

However, despite financial success, this investment does little to enhance member service or directly

expand markets for members’ products. It is possible

to conceive of a situation where overseas investments

such as this would meet resistance from members

desiring capital to be spent to expand domestic dairy

processing operations or other such activities. This

may represent a situation where the strategic vision of

management is necessary to “protect” the cooperative

as a going concern from its members. The return projected from foreign milling operations may be significantly higher than that available from other investments which would more directly enhance member

service. Therefore, it may be necessary to allocate capital to this foreign enterprise to assure survival of the

cooperative. Members and managers must work

together to arrive at satisfactory tradeoffs between the

twin imperatives of member service and profitability.

The second thrust of LOL international involvement is in the development area. This division largely

uses funds available from the U.S. Agency for

International Development (USAID) to provide management and technical assistance as well as production, marketing, and processing training to persons

and organizations in developing nations. As well as

aiding in rural development, the program establishes

important contacts for the cooperative within these

countries and serves the goal of long-term market

development.

Since 1981, the program has provided a wide

array of services to people in Latin America, the former Soviet Union, Central and Eastern Europe, Africa,

and Asia. Recent projects have focused on providing

technical assistance and training geared toward privatization and establishing a market system of agriculture in Central and Eastern Europe and the former

Soviet Union, which are seen as rapid-growth markets

for LOL core businesses.

’ In 1993, LOL purchased a Hawaii-based feed milling

operation in order to gain access to its distribution network

and, potentially, as a stepping-off point for further expansion

into Pacific feed markets.

For example, division personnel have been

involved in transforming the Bulgarian and Romanian

dairy sectors into market-oriented systems by helping

organize producer associations and providing technical expertise to processors. The division is placing volunteer agricultural specialists in Russia and Ukraine to

assist private and privatizing agricultural businesses

in the areas of processing, storage, distribution, and

marketing. Technical assistance has also been provided

to aid in the establishment of market-based agriculture

in Poland and the establishment of an agribusiness

center in the Tula region of Russia which will provide

technical expertise to developing agribusinesses.

LOL’s investment and marketing strategies indicate a clear recognition of the importance of global

markets for the cooperative’s survival. The cooperative’s overall strategy seems to be to use its international development activities both for long-term market development and to identify potentially profitable

areas for investment. When a geographical area

appears to offer a growth market in one of LOL’s core

businesses, the cooperative may move quickly to

establish a presence in that market.

The criteria of growth and profitability of the

international activity are weighted quite heavily in the

investment decision, independent of whether it directly expands markets for producers’ products or reduces

the costs of their inputs. This indicates that agents

(cooperative managers) enjoy relative autonomy in

pursuing international strategies and that there is relatively little difference between LOL’s approach to

international investment and that of an IOF, particularly in the feed sector.

Harvest States Cooperatives

Harvest States, of St. Paul, MN, is a regional

grain marketing and farm supply cooperative active in

exporting a wide range of agricultural commodities.

Export sales are made both directly to end-users and

through U.S. or foreign-based sales agents. The cooperative also participates with a transnational grain corporation in a joint venture established to export feed

grains and shares a Mexico sales office with another

large U.S.-based grain processing firm.

With the organization’s long history of marketing

grain sales throughout the world, Harvest States recognizes the importance of the international marketplace and views it as a major potential growth area for

U.S. agribusiness firms. However, Harvest States also

sees some major expansion opportunities for its valueadded operations in grain and food processing in the

domestic market. In reconciling how best to allocate its
available capital, Harvest States management is committed to assessing risk versus reward and establishing priorities accordingly.

Harvest States’ management sees two trends

combining to make it increasingly important for U.S.

agricultural exporters to secure working relationships

with end-users in importing nations. First, budget constraints dictate a reduced role for the U.S. Government

in promoting U.S. agricultural commodities abroad.

This means that more export transactions will take

place under private negotiation instead of under

Government programs. Second, many countries are

taking steps to privatize their agriculture and foodprocessing sectors, thereby moving the task of importing raw materials from governmental agencies to endusers and private buying groups.

Harvest States has taken steps to position itself

for this transition by establishing ties with end-users in

importing nations whenever possible. The regional

cooperative is also a member of a consortium of U.S.,

Dutch, Swedish, French, and German cooperatives that

together own nearly 48 percent interest in an international grain trading firm. The balance of this international firm is owned and controlled by a large, U.S.-

based grain processing firm. Contacts initially fostered

through this group have evolved into commodity trading relationships with the Dutch, Swedish, and French

members of this international consortium.

Recently, Harvest States was offered the opportunity to establish a joint venture in grain processing

with a private company in another country. The cooperative is an attractive joint-venture partner for such

private processors because it is seen as a reliable

source of high-quality raw material (grain), with direct

linkages to U.S. producers. Forming alliances with producer-owned entities is seen by such processors as a

way to reduce their reliance on transnational grain

merchants and gain more control over supply.

One potential sticking point to Harvest States

involvement was that the joint-venture processing

entity would have to be committed to using the appropriate quality of grain from the cheapest source. That

meant the plant would not necessarily always use U.S.

grain, a factor that could have rankled some Harvest

States’ members. That possibility never materialized,

however, because another company submitted a higher bid for the processing facility that the joint venture

had considered buying and operating.

Had the joint venture moved ahead, the ultimate

investment decision would have required approval of

the cooperative’s board of directors, all of whom are

farmers and, as a result, sympathetic to the concerns of

their producer-constituents. Management believes a

final decision would have been subject to much discussion. The outcome would depend on how all the factors involved finally came together. The transaction

didn’t reach that point, and management could not

speculate on what the board‘s decision would have

been.

The management of this cooperative tends to be

growth-oriented and willing to pursue lucrative new

business opportunities, even if somewhat outside the

cooperative’s traditional core-commodity areas.

Management sees international investment as having

the potential for a rate of return that will help ensure

survival of the cooperative as a going concern, an elusive factor in mature U.S. markets. In the view of management, if Harvest States does not allocate its capital

according to the dictates of the market, it is doomed to

stagnation and eventual failure.

Management recognizes there is often little shortterm incentive for members to support international

investment by the cooperative. These types of ventures

tend to be long-term investments, with projected payoffs anticipated to be several years ahead. Meanwhile,

in any business such as Harvest States, where there are

limits on available capital, foreign investment takes

resources away from other projects perceived by

farmer members to offer more immediate and tangible

benefits, such as domestic processing facilities. Finally,

the often higher-risk nature of foreign investment,

along with the perceived loss of control due to the

physical distance of the asset, can dampen enthusiasm

for international ventures.

Management views such limitations as challenges

to be addressed through member education and communication whenever promising international opportunities develop. They feel that over the long term,

farmers will recognize that carefully selected international investments can be in the best interest of the

cooperative, even if such ventures don’t appear to provide direct, immediate benefits to members.2 While

this suggests a scenario of the agents educating the

principals as to what is best for the principals, management noted that the process can and should be a

positive, constructive one. The same process is fol2 The example given by one manager is how the decision was made

to accept shipments of Canadian wheat at the cooperative’s

elevators. Management finally convinced the board of directors

that, despite significant member opposition, this action was

necessary for the cooperative to remain competitive with

surrounding, private elevators that were buying the grain at a

substantial discount to the price of U.S. wheat.

9
lowed whenever the organization considers anything

new or different.

Meanwhile, the board of directors plays an

important role in articulating alternative goals held by

the principals to management. The board also must

approve any major investment decision entailed by

international expansion. This requires reconciling market information, member demands, and cooperative

principles in an attempt to make strategic decisions

that will simultaneously enhance financial performance and fulfill the cooperative mission of providing

services to its members.

Harvest States gives high priority to international

involvement, especially to the extent that it complements a policy of increasing value-added processing

operations. Recent strategies used by the cooperative

indicate a willingness to seek out joint ventures or

other alliances with either cooperatives or IOFs where

such arrangements appear synergistic. Discussions

with management also indicate that Harvest States’

board continues to play an important role in seeing

that new activities started by the cooperative retain an

orientation to member service. In this way, Harvest

States is somewhat more restricted in its choice of

international investments than an IOF in a similar market situation.

Farm/and Industries, Inc.

Farmland Industries of Kansas City, MO, is a federated regional cooperative active in producing, processing, and distributing agricultural inputs and products. In the early 198Os, some members of Farmland’s

management team felt that the cooperative could

increase its international involvement through better

intra-company coordination. A subsidiary was formed

to synthesize and coordinate trade activities by

Farmland’s various divisions.

The subsidiary attempted to arrange barter trade

with other countries involving Farmland’s grain,

petroleum, and fertilizer divisions. However, according to a former Farmland executive, top management

at the time tended to be domestically oriented and was

never fully behind this venture. It is also likely that the

tendency for individual division heads (as agents) to

pursue their own agendas vis-ri-vis international trade

contributed to the failure of this attempt to institute a

unified international strategy.

In the intervening years, Farmland has had a significant management turnover and today, as stated in a

recent annual report, the cooperative’s “commitment

to becoming a global company is strong.” One upperlevel manager said the cooperative’s objective regarding international involvement is “to move all members’ commodities and products into all world markets

wherever they can effectively compete in quality, price,

and customer service.“ The company’s commitment to

increase international marketing is evidenced by the 85

countries to which they shipped products in fiscal

1994, versus only 44 in 1993. Farmland currently

exports grain and oilseeds, pet food, feedstuffs, fresh

and processed beef and pork, lubricants, and fertilizer.

The cooperative also imports crude oil and fertilizer

inputs for further processing in the U.S.

In 1993, Farmland aggressively moved to increase

its presence in the international grain market by purchasing a Swiss-based grain trading firm. The grain

trading group, with offices in Geneva; London; Paris;

Bremen, Germany; Buenos Aires, Argentina; and

Memphis, TN, is a transnational entity with a worldwide network of buyer and seller contacts and no particular loyalty to any one country. It will allow the

cooperative to compete head to head with transnational grain merchants in the “optional-origin” sourcing of

grain. The grain trading group operates as a wholly

owned subsidiary with the marketing of U.S. grain as

an “absolute priority,” but other origins are also used.

Farmland says this purchase represents the culmination of a 50-year struggle by U.S. agricultural cooperatives to establish a viable presence in the international

grain market.

The international firm not only facilitates the sale

of more U.S. grain, but also provides Farmland with a

global network of contacts and a wealth of market

intelligence, including information on world grain

supply and demand, weather, political unrest, and

other trade-related matters. The worldwide trend

toward privatization makes this network of contacts

and market information even more essential. As countries transfer food importing from governmental entities to private end-users, direct contact with those endusers becomes paramount. Having direct contact

recently paid off for Farmland when it signed a longterm wheat supply agreement with private millers in

another country. Particularly attractive to the foreign

millers was the opportunity for identity preservation

of grain offered by the cooperative’s network of local,

sub-terminal, and export elevators.

Despite the obvious strengths gained by

Farmland through ownership of the transnational

grain trading firm, this presents an interesting paradox

for the cooperative. At a fundamental level, the two

organizations are built around contrasting, even contradictory, purposes. The marketing cooperative was

initially conceived as a vehicle to facilitate the sale of

10
its members produce. These members were linked by a

shared identity and concentrated in a given geographical area. As such, they could see themselves in competition with other producers outside their relevant area.

This relevant area was initially local, but today

tends to be regional or national. Ultimately, the marketing cooperative became a means to improve its members competitive position vis-li-vis producers in other

areas. The trading firm, on the other hand, is an entity

designed to generate profits through the arbitrage of

commodities between locales, regions, or nations. Profit

accrues to the entrepreneur-owner or investor. The success of this entity is directly related to the fact that it has

no loyalty to or identity with any one locale, region, or

nation, and is thus able to trade freely among all.

Thus, it is paradoxical when such a trading entity

comes under the ownership and control of a marketing

cooperative owned by producers within a given region

and nation. The cooperative cannot hold the transnational trading firm strictly to its own imperative to increase

markets for member products first without jeopardizing

the essence of the trading firm critical to its success.

Farmland also established its first international

office in 1993, a wholly owned subsidiary operating in

Mexico. Its main purpose is to expand sales of and

develop new markets for products and services of U.S.

members. The office will also allow the cooperative to

gain familiarity with Mexican business culture and

may open the door for expansion into other Latin

American countries.

Based on the cooperative’s past activities and the

statements of management personnel, Farmland’s

international activities seem to be guided by a fairly

restrictive imperative to expand markets for member

products or reduce the cost of member supplies-in

sum, to serve the needs of a majority of the principals

(member-owners), as the agents (managers and directors) perceive them.

As opposed to an IOF, which might establish a

feed plant in another country based strictly on a projected risk/return ratio, Farmland wouldn’t do so

unless that country had the potential to be a long-term

importer of U.S. feedstuffs. Farmland’s international

involvement is part of a larger strategy of diversification and expansion into more value-added processing

operations. Farmland seeks to add value to members’

raw commodities in mature markets that are often

mature or stagnant. International markets, especially

in countries undergoing privatization, often offer

greater earnings potential.

Discussion

Using agency theory to frame these three case

studies reveals the often paradoxical nature of international involvement for agricultural cooperatives.

Cooperatives often find themselves forced to pursue

international strategies as a way to remain competitive

with IOFs, given the concentrated agricultural markets

in which they compete.

However, these international strategies, as developed by IOFs, are premised on the logic of shifting

capital among enterprises and nations based on anticipated rate of return. Such a “light-footed” investment

strategy often appears at odds with cooperatives’

founding purposes, which were tied to enhancing services, providing markets, or reducing input costs for a

group of members within a specific region and nation.

Thus, international involvement may show the potential contradictions that cooperatives face as they

attempt to fulfill their dual objectives of enhancing

member service/increasing member participation and

ensuring survival through growth and earnings.

Through our empirical analysis, we attempt to

demonstrate how agents (cooperative managers and

directors) may pursue their own goals via international involvement and how these goals may or may not

be compatible with those of the principals (cooperative

members). Interviews with management personnel

show they tend to support international involvement

by their cooperative as a profitable growth strategy.

Some members may also support international

investment, while others resist it on the basis that it

diverts capital away from other enterprises that could

more directly enhance member services or earnings.

The cooperative’s board of directors, as an agent of the

members, plays an important role in determining to

what extent the voices of these dissenting members are

heard in the debate over international investment.

The diverse activities and organizational structures of U.S. cooperatives preclude generalizations

regarding the role of cooperatives in the global food

system based on these three cases. However, our

analysis suggests some advantages and disadvantages for regional, multi-commodity cooperatives versus IOFs as they attempt to compete in the global

food system.

Limitations to International Involvement

1. The diverse interests of members in regional,

multi-commodity cooperatives may present a structural constraint to international involvement. Investment

in overseas assets or the importation of commodities

for domestic processing or marketing tends to provide

11
commodity-specific benefits, and is likely to be perceived to provide greater benefit to some producers

than to others. The heterogeneity of the membership in

regional cooperatives handling production supplies as

well as the marketing of multiple commodities, will

make such international investment controversial and

contested.

Disagreement about proposals for specific international endeavors may coalesce into direct conflict

between coalitions of members or between members

and management concerning the cooperative’s international activities, or on the relative importance of

growth or stability to the long-term interests of the

cooperative. Resolution of such conflicts tends to be a

long process, and the window of opportunity for international investment may be relatively small.

2. A related structural issue, noted by Kennedy

and Spatz, is that cooperatives often have ties to a

domestic resource base that may limit their international activity compared with IOFs. These ties include

both the “physical plant” owned by the cooperative in

its country of origin and the assets owned by its

farmer-members, the value of which the cooperative

has been charged with protecting.

International activity of the cooperative which is

perceived to devalue the productive assets of its

farmer members (through, for example, enhancing

markets for foreign grain relative to U.S. grain) is likely to be resisted by the membership, even though it

may enhance survival of the cooperative as a going

concern. Other authors such as Bager have noted that

cooperatives are usually tied to particular social groups

within particular nations and, by extension, to certain

same terms as an IOF, i.e., strictly instrumental, economic terms. This undercuts a major resource of cooperatives-the knowledge of how to organize producers

for collective action. This has traditionally been cooperatives’ comparative advantage over IOFs in competing for farmers business.

6. Important social, cultural, and political barriers

to international involvement by cooperatives may

exist, such as language differences and nationalist ideology by cooperative managers and/or members.

Nationalist ideology may represent a more significant

barrier for cooperatives than for IOFs because the principals in a cooperative (the members) have more voice

into the decisionmaking process than principals in an

IOF. Also, farmers from a given nation, as a group,

have traditionally seen themselves in competition with

those from other nations for a share of limited international commodity markets.

Language is an especially significant barrier to

international cooperatives because members come

from multiple countries. The governance structure of

cooperatives demands a certain amount of member

participation in the decisionmaking processes to be

effective. Achieving this ideal becomes more difficult if

members do not share a common language.

12
Cooperative A dvan tages

Although the globalization of agriculture and

food presents formidable challenges, there are areas

where cooperatives may be at an advantage compared

with IOFs, if they properly position themselves.

1. Cooperatives are perceived as reliable, quality

suppliers. End-users in other countries often feel that by

forming alliances with cooperatives they are aligning

themselves with producers and thus assuring themselves of a consistent supply of agricultural and food

products. Furthermore, the organizational structure of

regional cooperatives can provide for the identitypreservation of agricultural commodities from the farmgate through processing and export or through export

in their unprocessed form to foreign-based processors.

This provides an example of structure as enabling,

rather than constraining, for cooperatives. Direct links

to producers and the nature of their commodity-marketing infrastructure has led to cooperatives being

sought out as joint venture or supply agreement partners by end-users in other countries, especially those

that are highly concerned about quality, uninterrupted

supply, or with identity preservation of a product from

the farm level to the foreign processing plant.

2. Cooperatives are often seen as highly ethical,

trustworthy business partners by agricultural entities in

other countries. Because U.S. cooperatives were formed

in response to economic concentration and market failure and have been historically associated with selfempowerment of economically or politically disadvantaged small producers, they are not perceived as

exploitive, capitalist organizations. This may make them

attractive investors for developing nations seeking to

avoid exploitation at the hands of TN&. Such a perception has contributed to LOLs success in international

development. Today’s U.S. agricultural cooperatives

have undergone significant transformation since their

founding by small, agricultural producers and must continue to prove that they are worthy of this reputation.

3. As the macro-level trend toward globalization

proceeds, it is constantly creating local and regional

niches in the food system that cooperatives may be

uniquely qualified to fill. For example, in some consumer markets, the reaction to globalization has been

manifested in increased concerns about food safety

and quality. Many consumers are becoming increasingly interested in not just how much their food costs, but

in knowing where it comes from, how it gets to the

supermarket shelf, and what processing operations are

performed on it. Such consumers are increasingly

seeking out alternatives to conventional food channels.

In fact, a recent article suggests that in the future

as much as 12 percent to 18 percent of food may be produced and marketed outside of mainstream channels

(Smith). Cooperatives can play an important role in this

alternative food distribution system by using their marketing infrastructure to reestablish direct links between

food producers and consumers, thereby alleviating

concerns over food safety and quality. However, doing

so will necessitate moving beyond traditional commodity channels to encourage their members to experiment

with new products and production methods and seeking out new alliances with consumer groups.

4. As improved communication technology facilitates the reorganization of highly centralized, corporate bureaucracies into more flexible, diffuse organizations, the federated cooperative system could be well

positioned to compete in a “post-industrial” food system. Authors such as Piore and Sabel suggest that

globalization involves a fundamental shift away from

systems of mass production, to methods resembling

craft production. These authors suggest that the production system around which modern industrial

nations are built entails using semi-skilled workers

and special-purpose machinery to produce standardized goods for mass markets. They contend this historically specific system has reached its limits, as reflected

in recent economic slowdowns.

Piore and Sabel believe that future production of

consumer goods will be characterized by “flexible specialization,” a strategy of permanent innovation that

involves using highly skilled workers and multi-purpose machinery to produce a variety of goods customized to meet the needs of different groups of consumers. The federated cooperative system has the

potential to offer such flexibility through encouraging

autonomy and innovation at the local level. Like the

process of establishing producer-consumer linkages,

adopting a strategy of flexible specialization would

entail a decreased reliance on the mass marketing of

traditional commodities through current transportation and processing infrastructures and a shift toward

the marketing of more specialized consumer products.

However, many large cooperatives are still consolidating control and centralizing decisionmaking at

the regional level. Such trends in the past have tended

to stifle local innovation and have given regional cooperatives a reputation as largely stagnant and resistant

to change. The ability of these cooperatives to use the

strengths of their local associations is still in question,

but our case studies provide two examples of decentralizing tendencies.

Harvest States is returning more local autonomy

to some of its centrally held locations by combining

13
their operations with a locally controlled, affiliated

member cooperative in their region. This venture centralizes such functions as risk management that offer

economies of centralization and specialization, but it

localizes operational decisions. Farmland has recently

established joint venture processing operations with

some of its local affiliates to combine the grain origination strength of the local with the regional’s technical

expertise and ability to generate investment capital.

Such innovation and decentralization may be crucial to

cooperatives survival in a global market.

Conclusions and Recommendations

Our main objective in this report is to provide a

broad conceptualization of the major issues faced by

cooperatives during the globalization of agricultural

and food markets. The three cases show that some

regional cooperatives are becoming quite active in international markets, but they also highlight the difficulties

they face in competing with IOFs on a global scale.

The framework of agency theory has been used to

show how cooperative members, managers, and directors may hold incongruent goals for their cooperative,

and may see international involvement as providing an

opportunity to pursue personal goals at the expense of

the general well-being of the cooperative and its membership. This theoretical framework, when applied to

the case studies, suggested several possible limitations

for international involvement by cooperatives.

The organizational structure of cooperatives may

be constraining in that the diversity of the membership

in regional cooperatives, as well as these cooperatives’

ties to domestic resource bases and social groups, may

limit international involvement. The high-risk and

long-term nature of much international investment

may also limit this activity by cooperatives. Finally, the

perception of cooperatives as quasi-state entities and

other social, political, and cultural barriers may limit

their international involvement. However, the organizational structure of cooperatives could be enabling as

well as limiting, by giving them an advantage in establishing international alliances with end users of agricultural products. Cooperatives direct links to producers make them a reliable, quality supplier for end users

and have contributed to an international image of

cooperatives as ethical, trustworthy business partners.

Further, the organizational structure of cooperatives

could enable them to take advantage of new technologies which would put them at the forefront of postindustrial trends toward the decentralization of operational control in industry. This same structure could

also help them to establish direct producer-consumer

linkages and fill the local and regional niches that may

be an important part of the food system of the future.

Here are some specific recommendations on how

cooperatives might draw on the enabling features of

their organizational structure to take advantage of

opportunities offered them by this new global food

system.

1. Cooperatives need to seek out member commentary on questions involving international involvement. Cooperative participants must educate themselves about the dynamics of the new global food

system. But this educational process should not be

strictly an endeavor of managers educating members

in the tenets of economic logic. While managers must

play a crucial role in providing market information to

members, management and boards must also allow

themselves to be educated by members. They need to

make a concerted effort to listen to farmers’ views of

the globalization process and try to understand the

multiplicity of goals that farmers may hold for their

cooperative.

Then members, directors, and managers need to

work together to address how the cooperative can

meet these goals, and what role international involvement for the cooperative may play in meeting them. A

likely outcome of such a mutual education process is

that international involvement could be directed

toward those endeavors that provide enhanced member service as well as increased earnings and ultimately a secure organization. This evaluation is essential if

cooperatives are to continue fulfilling their historical

purposes.

2. Cooperatives must seek international opportunities that they are uniquely qualified to fill. The globalization of agriculture and food is a multi-dimensional phenomenon that opens up many new opportunities

in food production, processing, and distribution, both

domestically and internationally. Competing successfully in the international arena does not require that

cooperatives go head-to-head with TNCs in a battle for

a share of the traditional mass production and marketing commodity channels. Cooperatives may be poorly

equipped to compete in this arena with better financed

and “internationally seasoned” transnational IOFs.

Cooperatives must keep in mind the admonition

by Piore and Sabel that domestic and international

consumer markets of the future will reward “permanent innovation,“ flexibility, and attentiveness to consumer demands. Cooperatives whose strategy for

international competition involves solely a redoubling

of efforts to compete with IOF agribusinesses for a

share of traditional commodity markets at the global

14
level may be resigning themselves to failure. Instead,

cooperatives should seek business opportunities provided by globalization in which their organizational

structure offers them a comparative advantage over

IOFs. At the local or regional level this may involve

facilitating producer direct-marketing of food products

to health- and food-safety-conscious consumers. On an

international level, it might involve drawing on cooperatives’ reputation as quality suppliers and ethical

business organizations to establish alliances with foreign-based end-users of agricultural commodities.

3. Closely related is the need of cooperatives to

help members develop alternative products and markets as well as new ways of adding value to traditional

agricultural commodities. Both domestic and international markets of the future are likely to increasingly

call for differentiated consumer products rather than

build commodities. Many regional cooperatives,

including the three discussed in this report, have

become fairly active in further processing of traditional agricultural commodities in recent years.

However, like other traditional commodity markets, these processing sectors tend to be relatively concentrated in the hands of a few large IOFs. The more

promising market opportunities of the future may lie

in development of new, customized products to meet

specialized consumer demands. These new products

will increasingly be produced, processed, and marketed outside of traditional channels. Pursuing such alternative markets will require considerable courage and

innovation from cooperatives.

4. Capitalizing on the opportunities mentioned in

points (2) and (3) will require high levels of member

involvement and innovation within cooperatives.

Creating an environment that will foster such a spirit

of innovation may necessitate further decentralization

of control. At the regional level, this may require flattening hierarchical managerial structures and returning more operational autonomy to local affiliates, line

stations, and operating units. At the local level, it may

involve increased member participation in formulating

strategic goals for their cooperative, increased informal

working relationships between local associations, and

closer, but more informal relations between the local

association and the regional cooperative staff. The federated structure of many regional cooperatives offers a

model which could facilitate such decentralization, but

it will take a conscious effort by the upper levels of

management to make it a reality. Relinquishing such

control is difficult and often goes against the historical

tendency toward centralization of decisionmaking

within cooperatives. However, it may be essential if

cooperatives are to foster the spirit of “permanent

innovation” required by intensely competitive global

markets.

5. Finally, cooperatives need to broaden their definition of what international involvement entails and

what goals may be served by it. To this point, the international activities of U.S. agricultural cooperatives

have been primarily economic in nature. Proposals for

international involvement are evaluated in instrumental terms, based on potential earnings capacity. Such a

narrow focus may obscure the potential social and cultural benefits offered by participation in a global marketplace.

U.S. cooperatives can use their organizational

structure to facilitate international cooperation

between farmers of different nations by seeking

alliances with producer-owned and -controlled organizations in other countries. Aside from any direct economic benefit they may provide, such alliances could

initiate an exchange of information among agricultural

producers of different nations that could result in cultural enrichment for all groups and enhance the quality of rural life throughout the world.

There are many roles for cooperatives in the global food system. This is partly because the globalization

of agriculture and food does not imply one monolithic

global market, but many intricately intertwined local,

regional, and international food production, distribution, and consumption networks. Some large regional

cooperatives can and will persist for a number of years

in head-to-head competition with the transnational

IOFs on a global scale, much as they have done for

years on a regional and national scale.

These organizations will continue to provide the

“competitive yardstick” function in the global marketplace that Nourse envisioned them providing in the

national economy. However, these cooperatives may

be able to improve their competitive position vis-24s

IOFs by seeking innovative new working relationships

with their local associations and farmer members that

involve developing customized products for different

groups of consumers. Other cooperatives will operate

entirely in these niches created by globalization, helping to shape and create alternative food systems.

If U.S. farmers are to maintain a direct presence

in the international marketplace, cooperatives must

explore the ways in which their organizational structure is enabling in an international context, and they

must take into account social and cultural, as well as

economic, benefits to international cooperation.

15
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16
U.S. Department of Agriculture

Rural Business-Cooperative Service

1400 Independence Ave., SW, Stop 3257

Washington, D.C. 20250-3257

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 United States Department of Agriculture (USDA) prohibits discrimination in its

programs on the basis of race, color, national origin, sex, religion, age, disability, political

beliefs and marital or familial 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, write the Secretary of Agriculture, U.S. Department of Agriculture,

Washington, D.C. 20250, or call l-800-245-6340 (voice) or (202) 720-I 127 (TDD). USDA

is an equal employment opportunity employer.