United States

Department of

Agriculture

Rural Business–

Cooperative

Service

RBS Research

Report 185

Cooperative

Conversion and

Restructuring In Theory

and Practice
Abstract This report is intended to develop the outlines of a sociological theory of cooperatives.

This objective is accomplished by: 1) critiquing neoclassical economic analyses of

cooperative conversions, (restructuring, acquisition, or sale of agricultural cooperatives

such that an investment-oriented firm is created in its place), 2) examining historical

data on cooperative restructuring generally and conversions as a subset of this data

and 3) developing a theoretical approach to a sociology of cooperatives, that is inductive and retains cooperative tensions (e.g. democracy versus economy, local versus

global).

Keywords: Cooperatives, sociological theory and conversions

Cooperative Conversion and Restructuring in Theory and Practice

Patrick Mooney, Ph.D. Thomas W. Gray, Ph.D.

Department of Sociology Cooperative Resource and Management Division

University of Kentucky Rural Business-Cooperative Service

Lexington, Kentucky U.S. Department of Agriculture

Washington, DC

Research Report 185

January 2002

Price: Domestic: $5

Foreign: $5.50

Acknowledgments

The authors thank Bruce Reynolds and Edmond DeGaiffier for their 

insightful comments.
Preface Ideally, theory development and practical development continuously inform one another, each providing feedback so each can progress and deepen. Most cooperative theory development has occurred in the area of neoclassical economics. While a powerful

mechanism of analysis for generic investment firms, the approach is deductive and

non-historical. It also tends to analytically homogenize goals and objectives.

Cooperatives are complex organizations that emerge out of historical circumstances

with complex economic and sociological goals. This report demonstrates the narrowness of a neoclassical analysis, by examining the cooperative conversion phenomenon. It then develops a sociological approach to cooperative analysis that retains various tensions and contradictions within cooperatives, while considering various

sociological and historical influences.

i
ii
Contents Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Restructuring and the Conversion ‘Problem’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

The Conversion Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Economic Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Empirical Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Theoretical Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

The Cooperative Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Cooperative Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Political Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Analytical Homogenization of Diverse Interests . . . . . . . . . . . . . . . . . . . . . . . .5

Sociological and Economic Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Unit of Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Assessing the Equity Conversion Theses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Method of Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Non-Economic Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Examining the Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Restructuring Cooperative Theory Toward a Sociological Approach . . . . . . . . . . . .10

Democratic Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Production and Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Local and Global . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Traditional and New Social Movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Conclusions and Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

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Highlights This report is intended to develop the outlines of a sociological theory of cooperatives.

This objective is accomplished by: 1) critiquing neoclassical economic analyses of

cooperative conversions, (restructuring, acquisition, or sale of agricultural cooperatives

such that an investment-oriented firm (IOF) is created in its place), 2) examining historical data on cooperative restructuring generally and conversions as a subset of this

data, and 3) developing a theoretical approach to a sociology of cooperatives, that is

inductive and retains cooperatives’ tensions and internal contradictions, and is presented in contradistinction to a neoclassical economics approach.

Cooperatives are multi-dimensional, contain multiple values and objectives (including

contradictory ones), and emerge out of historically specific circumstances. The most

recent theory development of cooperatives, accomplished in the field of neoclassical

economics, tends to be unidimensional, non-historical, and deductive.

Both neoclassical economic empirical studies and theoretical conceptualizations are

used to explain conversions.

Various empirical studies focus on the economic motives of individual investment,

including investment incentives that may be derived from cooperative business success. Excluded from the analyses are such other economic interests as those embedded in farm families and communities. Non-economic motivations are not allowed into

the analyses.

Theoretical arguments tend to be organized around understanding of cooperatives as

"pacemakers" or as having temporary "yardstick" functions that fix malfunctioning markets. Given the deductive nature of these arguments, these conversion theories tend

to miss the boom-and-bust character of agricultural markets, as well as their historical

tendency toward consolidation and oligopolization (concentration). Conversion arguments that understand cooperatives as "yardsticks" and "pacemakers" tend toward

historic meaninglessness, because cooperatives must become a permanent part of the

booms and busts, and as a countervailing force against continuing consolidation and

oligopolization of the market.

Neoclassical approaches tend to model cooperatives in the image of investment firms,

force fitting them to the model as if they were an intermediate and less advanced organizational type.

Cooperatives are different from IOFs in their basic organizing principles, means- andends rationality, and their inherent diversity of interests. Applying investment models to

cooperatives obscures this diversity and these differences. Cooperatives pursue a

variety of goals, some of which may be in conflict with one another. A cooperative may

meet multiple goals, but no single one completely.

To some extent in neoclassical analyses, the act of cooperation itself is a problem to

be explained. This occurs because the predominant focus of these analyses is on an

abstract, self-interested individual pursuing a single goal, e.g. to maximize a return on

investment. This individual is also assumed to be in competitive relationships with others. "Cooperative" behavior tends to lie outside of the neoclassical framework.

Unlike neoclassical economics, (as well as investment-firm models of analysis), sociological and institutional economics do not give a predominant focus to an individual

actor (or an individual enterprise). Rather, sociology focuses on the interaction

iv
Highlights between two or more individuals and to the character of that interaction. This may be

one of competition but, may also be characterized by conflict and/or cooperation.

A sociological (and institutional economics) approach can more readily focus on issues

of power and inequalities in assets in specific historical interactions. Cooperation is

less problematic for the sociologist. The development of cooperatives is more easily

understood as a response to enduring, unequal power relationships in the booms and

busts of an agricultural marketplace.

Sociology tends to recognize that in actual concrete reality, a plurality of values and

objectives are being pursed simultaneously by most people. Some of these interests

may be in conflict. Neoclassical economics tends to focus on the pursuit of specific

economic interests and to exclude other interests from analysis.

Analyses are scientifically sound if they represent all or a representative sample of

potential cases for conversion. The specific economic analyses of conversions reported here failed to consider non-events, i.e., cooperatives with market values greater

than their book values that did no convert.

Rather than analyzing case studies, a more comprehensive assessment of conversions can be made by examining restructuring events generally. The data show that

during the last 10 years, the most dominant form of restructuring has occurred entirely

within the cooperative sector. More than one-third (36.6 percent) of the restructuring

(consolidation, merger, alliance, joint ventures, acquisition) has occurred between

cooperatives and not between IOFs and cooperatives. Nearly one-quarter (23.2 percent) of these events involved the expansion of existing cooperatives. Various forms of

structural interaction between cooperatives and IOFs (joint ventures, strategic

alliances) constituted 15.3 percent of restructuring events. Less than 5 percent (4.8

percent) consisted of a full conversion from a cooperative to an IOF. The frequency of

cooperatives acquiring IOF assets was more than three times as common (16.6 percent) as IOFs acquiring cooperative assets.

While neoclassical models of the firm expect successful cooperatives to be purchased

by IOFs, the data suggest that successful cooperatives are more likely to expand their

own enterprises, form alliances and/or mergers with other cooperatives, or acquire IOF

assets.

These theories that suggest conversion in their subtext may in fact be promulgating

conversions, rather than providing neutral studies of them. Conversion recommendations become an artifact of the orientation itself. The neoclassical (and investment firm)

modeling of cooperatives is in its approach deductive, non-historical, and one-dimensional. It is not designed to include multidimensional and opposing tensions that can

be understood and observed inductively from a particular historical context.

A sociological theorization presented in this report complements the single dimensionality of neoclassical economics. Four cooperative and societal tensions are presented

as historically and inductively derived: 1) democracy versus capitalist economy, 2) production versus consumption, 3) local versus global, and 4) traditional versus new

social movement characteristics.

Democracy versus capitalist economy: Cooperatives are both economic and political (democratic) organizations. The principles of democratic governance give priority to

v
Highlights collective use of the cooperative for service (broadly defined) versus its use as a

mechanism for individual investment. Pressures upon cooperative democracy can

exist with 1) a management predominantly oriented to investment logic, 2) an organization that becomes so bureaucratic that little participation can occur, and 3) with

financial conversion to an investment firm. A cooperative that makes no margins will

not reproduce itself to provide a service. Democratic considerations may slow or complicate these earnings. However, to rid the organization of its democratic aspects will

fragment its definitional characteristics. Democracy versus economy is an inherent part

of cooperative organizational definition. Current restructurings test this tension, with

some stakeholders seeking to eliminate it by pushing the organization into an investment orbit, rather than contending, adapting, and strengthening it.

Production versus consumption: Cooperatives function in a marketplace organized

around a fundamental tension between production and consumption, and producers

and consumers. The paradox is that this antagonism is also a relation of interdependency in which these interests can be viewed as inter-connected. This history of the

cooperative movement reflects an interest in overcoming this division, e.g., "development of a cooperative commonwealth." New social issues organized around food and

production--human health, food safety, environmental issues, land use, community

sustainability—suggest a need for integrating (or regulating) food and fiber production

and consumption interests. The cooperative has the potential advantage of providing a

middle course of regulation, between the pure economic sphere (market regulation or

a private corporate regulation) and the public sphere of State regulation. Cooperative

regulation could entail control by producers and consumers in economic organizations

(cooperatives) with internal political structures that are democratized. The potential

synthesis of these spheres—production and consumption—is a cooperative advantage

over IOFs. IOFs tend to exclude larger social, ecological, and community costs, and

interests, making these organizations ill-designed to internalize and resolve larger

societal problems. Production and consumption (producers and consumers) are in

some respects in opposition. The retention of this tension in a cooperative form could

provide a democratic mechanism for resolving some of the more troubling societal difficulties.

Local versus global: Cooperatives function in an increasingly global economy.

However parallel and in some ways contradictory developments exist that give priority

to local needs and demands, i.e., localization. The equity retention principle in cooperatives functions to tie the organization to a particular geographic place. From the

standpoint of capital mobilized for investment, this may appear as an unnecessary and

unwanted constraint. From the standpoint of cooperative capital, it is a way to prevent

capital flight from local areas and into powerful global movements that shift value to

high-potential (geographic) investment points. The local ties of cooperatives also create the potential for local knowledge and innovation in the face of these same globalizing influences and pressures. Globalization tends to homogenize regional differences,

push products and service toward standardization, and eliminate unique local qualities.

The global and local tension points in the cooperative demand an expression of competitiveness without loss of local connection and commitment.

Traditional and new social movement: Agricultural cooperatives have been organized around production and farmer issues to retain value on the farm and to maintain

financial solvency. In these respects, agricultural cooperatives are fairly traditional in

their pursuits of particular class (farm) interests. New social movements are oriented to

increasing and generally giving priority to democratization in civil society. The basic

vi
Highlights principles of user ownership, user control, and user benefits—in the context of deepening societal interest in democratic relations—brings new social movement aspects to

these more traditional organizations. It also brings greater visibility to tensions between

participation and bureaucracy, and member grass-roots interests and managerial

expertise. The tensions are embedded in cooperative organizations. Their resolution,

rather than a movement and tradeoff between them, would signal the end of the cooperative organization.

This report contends that conflicting interests, values, and objectives exist within cooperatives. To eliminate, or to think about and analyze cooperatives as if these tensions

don’t exist, denies central and fundamental aspects of cooperative organization. The

acceptance and acknowledgement of these tensions can open up cooperatives to

greater overall effectiveness and adaptability without sacrificing several of their defining characteristics.

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Cooperative Conversion and Restructuring 

In Theory and Practice

Patrick Mooney, Ph. D.

Professor

University of Kentucky

Thomas W. Gray, Ph. D.

Rural Sociologist

Rural Business-Cooperative Service

I. Introduction

This report is concerned with the restructuring of

U.S. agricultural cooperatives, and whether this

reflects a movement toward their conversion to

investor-oriented firms (IOFs). Recent historical trends

in restructuring will be examined to evaluate the actual extent of cooperative conversion.

These developments will be used to consider the

relationship between cooperative practice and theory.

Ideally, theoretical and practical development should

continuously inform one another, and provide feedback that enables both to progress as evenly as possible. When cooperative practice moves ahead without

regard to theory or when theory moves ahead without

regard to the actual practices of cooperation the basic

principles of cooperation can be endangered.

This report argues recent theory has developed

with too much independence from the actual practices

of cooperatives and cooperators. Thus, the cooperative

"conversion problem" may have become overstated.

Further, the extent to which conversion has

occurred may, in fact, reflect this very separation of

theory from practices. The conversions, themselves,

may have been informed by, or be an effect of, a theory

of cooperatives that fails to resonate with the definitional principles of cooperation. Much cooperative theory contains assumptions that are not grounded in the

complex logic, the multiple values, broader--though at

times conflicting--interests and "common sense" that

underlies cooperatives as they actually function in

everyday life.

This report suggests that the theory of cooperation is increasingly accomplished primarily within the

framework of neoclassical economics. This model has

eclipsed the earlier institutional economics approaches 

by which cooperation had been guided. This distancing of cooperative theory from actual behavior is

inherent in the deductive logic of neo-classical economics. The theory tends to assume a unidimensional

motivation to behavior and decision making, and then

moves from these abstractions to examine actual conditions.

This tends to restrict observation to only that

behavior which is covered by such abstractions. This is

in direct contrast to the inductive quality of an institutional economics or a grounded sociological approach

in which the theory is derived (induced) from the actual principles and behavior of the actors and institutions themselves, i.e. the cooperatives, the members,

and the complex environment in which they exist.

Cooperative leaders, themselves, increasingly call

for flexibility in adaptation to the global marketplace

(Fairbarin1999). However, the unidimensionality of the

neoclassical model may lead practice along a relatively

inflexible road just when flexibility is most necessary.

Thus, new approaches (or even revival of older ones,

such as an institutional economics) are needed to generate multi-dimensional, interdisciplinary, holistic, and

grounded theories of cooperation. Such theoretical

developments are potentially more sensitive to the

actual practices of cooperatives and more compatible

with the basic principles of cooperation.

This latter model development should not displace purely economic theories of cooperation, but

rather complement them. This report seeks to develop

a theory that can recognize and use the adaptability

and flexibility inherent in the multi dimensional interests, values, and practices of cooperative institutions.

It is a "ground-up" theory rather than "top down." As

cooperatives continuously restructure in adapting to a

changing environment, so too, a restructuring of cooperative theory is needed so theoretical guides remain

1
embedded in the concrete reality of cooperative organization, rather than in an autonomous logic independent of environment and history (such as neo- classical

economics).

This report will first discuss the "conversion

problem" as interpreted by neo- classical economics,

and then critiques that interpretation based on

assumptions inherent in the model itself. After a brief

discussion of a sociological understanding of cooperation as a form of social interaction, we will then examine data on the "conversion problem" in relation to

other forms of cooperative restructuring.

Finally, we will explore a different approach to

thinking about cooperatives. This latter model focuses

on the tensions inherent in the practice of cooperation.

Rather than seeking to eliminate those tensions (as

neoclassical economics tends to do), this model uses

those tensions as sources of innovation and flexibility

that can help a cooperative adapt to a constantly

changing economic and political environment, while

retaining its defining characteristics.

II. Restructuring and the Conversion ‘Problem’

As we entered the 21st century, U.S. agricultural

cooperatives evaluated by almost any measure have

been highly successful. In the early 1960s, agricultural

cooperatives began to control at least 25 percent of

farm marketing (as high as 33 percent in 1981). Since

the early 1970s, farm production supply cooperatives

have held more than 25 percent of the market (USDA,

1993).

Suffering somewhat during the farm crisis of the

1980s, cooperatives rebounded strongly in the 1990s.

Although not the dominant form of agribusiness

(except in a few commodities), in recent years the

cooperative market share is nearly one third of marketed goods and more than a quarter of farm production

supplies (USDA, 1998).

Between 1992-97, cooperative gross business volume grew from $93.4 billion to $126.7 billion before

dropping somewhat in 1998, primarily due to lower

farm commodity prices. Between 1989-98, cooperative

net income grew from $1.85 billion to a record $2.36

billion in 1995 before dropping back to $1.7 billion in

1998, due to a combination of poor farm commodity

prices and rising costs of farm supplies and services.

During this time, cooperative total assets grew

from $29.6 billion in 1989 to 46.6 billion in 1998. In

1989, total net worth of U.S. agricultural cooperatives

totaled $13.3 billion and climbed to nearly $20 billion

by 1998. In 1998, net worth or equity financed 42.9 percent of total cooperative assets. This is, overall, a

strong balance sheet and from a historical point of

view, must be recognized a success given the difficult

origins of the movement.

It has been a hard won form of resistance to the

economic conditions faced by farmers at the turn of

the century, i.e. monopoly and oligopoly power at

local, regional, and national levels.

However, some analysts are concerned about the

health of the cooperative sector in the face of an accelerated pace of overall economic restructuring and

globalization processes.

The Conversion Issue

The general problem this report reviews is "the

conversion issue," i.e. agricultural cooperatives converting to investor oriented firms (IOFs). With the significant exceptions of Torgerson (1990) and Ketilson

(1995), that discussion has been largely confined to the

sphere of neoclassical agricultural economics.

Schrader (1989) and Collins (1991a, 1991b) examined the financial details of six cases of conversion or

partial restructuring by agricultural cooperatives. One

involved restructuring a cooperative as an IOF. Three

cases involved the sale of the business and dissolution

of the cooperative (although one of these sold its textile mill to another cooperative). The final two cases

involved restructuring small segments of the cooperatives as conventional corporations with minority public ownership. Since then, numerous other conversions

have taken place. We will evaluate the extent of these

changes later in this report, but first will examine some

of the current explanations for these conversions.

Economic Explanations

There are both economic empirical studies that

seek to explain conversions, as well as theoretical conceptualizations. The empirical studies seek to identify

various conditions and motives to conversion; the theoretical conceptualizations provide explanations from

an orthodox neoclassical "free market" approach.

Empirical Studies

Success--Schrader (1989) raises the apparently

paradoxical notion that intrinsic structural features of

cooperatives lead to their subsequent dissolution.

More specifically, he contends that certain cooperative

practices, as well as various State and Federal laws (all

based on fundamental cooperative principles) "result

2
in a chronic shortage of capital and the lack of a means

to reflect equity appreciation to owners (1989:51)."

Ironically, this is especially a problem for "successful"

cooperatives, if "success" is defined as an increase in

the market value in relation to its book value.

The difference between the book value of a cooperative’s assets and its value as a going business concern grow with this form of success. This eventually

results in the cooperator’s dilemma: "a cooperative

that produces net earnings in excess of the opportunity

cost of equity capital may be worth more to investors

as an ordinary corporation than it is to many cooperative patrons (Schrader 1989)." That is, the value of

members' investment in the enterprise as a conventional business may exceed the value of their participation in it as a cooperative, particularly if they have limited patronage horizons, e.g. a farmer close to

retirement. Schrader suggests this dilemma is the primary motivation for cooperative conversion. Decision

interests are defined as individual- financial investment interests.

Motives--Collins (1991a, 1991b) refers to the

possibility that the market value of members' equity

exceeds the book value as the equity liquidation

motive. He suggests three other hypotheses or motives

that might explain the conversion phenomenon. The

four motives are allowed to compete against one

another in developing an explanation of conversion.

The equity access motive posits that cooperatives

may gain greater access to capital by selling stock to

the general public. This motivation is primarily

assigned to "managers who see growth as essential"

but who face a membership that is reluctant to borrow

money or to provide enough equity capital to meet

those expansions needs (Collins 1991).

The corporate acquisition motive posits that conversions may be advisable when the market value of the

cooperative is high, and various parties want to buy

parts of the business as stock, and/or buy the entire

business.

The cost of equity motive refers to selling stock

when demand for the business is high resulting not

only in access to greater amounts of capital, but at a

low cost to the cooperative. While motives or causes of

conversion are discussed, all motivations are strictly

limited to economic interests.

Exclusion of Other Interests--These

studies exemplify some of the limits of neo- classical

models for the analysis of cooperative enterprise. They

assumed that patronage horizons are limited to

individuals. This neglects various other "economic"

interests that are embedded in the families, and

communities where cooperators live. Further, no "noneconomic" motivations are permitted as possible

explanations. As a rather striking example of the

deductive logic of this view and its detachment from

an empirical grounding, Collins concludes:

"It is also clear from careful scrutiny of the

public documents associated with these

conversions that, in at least some cases, the

reasons stated by the cooperative are not

credible. As a result, it is prudent to stay

with the usual presumption of economists

that aggregate economic choices may be

predicted by economic incentives".

In other words, in explaining conversion, cooperators and cooperatives themselves, often claim interests broader than mere economics. However, rather

than acknowledging such claims, the neoclassical

frame may simply dismiss these claims as unbelievable. This occurs because these non-economic interests

lie outside the neoclassical frame or model, rendering

them invisible or not credible to the observer.

Theoretical Explanations

Modeled in the Image of an IOF-- A

related theoretical strategy to explain cooperative

behavior has been to simply analyze IOFs and

cooperatives in the same way. Much of cooperative

theory has been driven by the desire to find

similarities, rather than differences, between

cooperatives and IOFs. This strategy forces

cooperatives into models designed for the analysis of

IOFs, and minimizes or excludes those aspects of

cooperatives that deviate from IOFs.

Torgerson (1990) suggests this results in a theoretical forced-fitting in which agricultural cooperatives

are often treated as deviant or degraded "firms" or

even as an intermediate organizational type--as agriculture is assumed to tend toward total industrialization and cooperatives shift toward IOFs.

Harte (1995), for example, describes the "life

cycle" of cooperatives in which "a transition from

cooperative to company structure would be expected

in a competitive market." This is a Noursian position

that challenges the conception that there is a continuous need for agricultural cooperatives in the economy.

Nourse (1991) argued that cooperatives emerge when

service is inadequate, missing, or costly. "It is important that cooperatives recognize when they have in fact

3
attained their real objective by demonstrating a superior method of processing or distribution or by breaking

a monopolistic bottleneck, and they should then be

content merely to maintain standby capacity or a yardstick operational position rather than try to occupy the

whole field or a dominating position within it. In some

cases, they may be well advised to entirely terminate

operations once they have stimulated regular commercial or manufacturing agencies to competition amongst

themselves."

This position reflects the assumption that the

only environment in which a cooperative "lives" is economic. Although this position certainly has advantages in arguments that advocate for the conversion of

cooperative capital, its defense on scientific and theoretical grounds is problematic.

For example, Harte assumes that market performance will tend to improve with industrialization and

will diminish the need for cooperatives. He also

assumes that in the long run, the cooperative form is

less efficient than its corporate counterpart. He argues

against the maintenance of cooperatives to perform a

regulatory "yardstick" function in the market, due to

the difficulty of proving or disproving this function

without dissolving the cooperative.

Of course, the author misses the point that it is

just as difficult to prove that competitive markets can

be maintained without the role of cooperatives,

because history presents us with markets that tend, not

toward competitiveness and equilibrium, but toward

chronic failure (Lauch 2000).

We suggest that the "boom/bust" history of modern agricultural economies--as well as continuing tendencies toward oligopolization (concentration)-- suggest more evidence for chronic market failure. For

Harte (1995), "only in the special case of chronic market failure would an infinite life be predicted for cooperatives." Far from a special case, we argue that agricultural markets have historically been more

oligopolistic than truly competitive (especially regionally, which is what matters most for the farmer). And

given a boom/bust character to the agricultural economy, the argument for "life cycle" conversions begins to

collapse, since the "yardstick" or "pacemaker" function

of the cooperative must be made a permanent part of

the economy.

A valid scientific test of this hypothesis would

demand a relatively long period of truly competitive

markets, a condition that may, in fact, never exist in

the historically concentrated and monopolistic markets

that most farmers have confronted in practice.

However, we can make a test of this hypothesized "life

cycle" in terms of the actual history of the last decade,

a period of unusually high levels of restructuring.

First, we will examine some of the ways in which

cooperatives differ from IOFs to show why they need

to be theorized independently.

III. The Cooperative Difference

Cooperative principles

Examination of the differences between IOFs and

cooperatives can begin with the basic cooperative principles. Adherence to these principles means that cooperative "investors" interests in the organization are

qualitatively different from those of conventional

investors.

Cooperative member interests derive from ongoing organizational use, control, and benefit, implying a

long-term horizon, versus short-term profit interests.

Both Lasley (1981) and Ketilson (1995) imply that

cooperatives combine multiple interests in a single

enterprise. Cooperatives are hybrid organizations

(Pestoff, 1992). They are simultaneously voluntary

associations and commercial firms and yet, by combining parts of both, are neither.

Moreover, agricultural cooperatives are often significant features of the communities of which they are

a part, and in ways that are not typical for IOFs (e.g.,

social networking; potential for localized, democratic

control; and information dissemination). Finally, due

to their history and relationship to rural communities,

agricultural cooperatives are part of a social movement

that developed as a response to the disadvantages of

small and medium producers caught in investmentoriented markets with strong concentration and centralization tendencies.

Thus, cooperatives are unique. They exist between

markets and politics and when owned by those who

use the cooperative, they constitute a fundamental

building block of a community of interests (i.e., producers or consumers of similar products, rather than

merely owners of investment capital as in IOFs). In

agricultural cooperatives it is a community of farmers.

When principles are followed, cooperatives comprise a third way of organizing economic activity.

Analytically, they represent an alternative to the simple dichotomies: "market versus state" or "public versus private (Pestoff, 1992)."

Rationality--A further difference between

cooperatives and IOFs is based in their different

approaches to profits and service. Cooperatives need

4
to make a margin over costs (loosely understood as

profit) to continue providing for patron’s long-term

needs. IOFs, on the other hand, provide services to

generate a profit. The singular interest in profit is

assumed to reflect diverse needs.

Other interests, such as democratic or local control, and/or helping to sustain local communities, a

dispersed agriculture and family farm survival for

example, are subordinated, if not eliminated--insofar

as these interests and values cannot always be bought

or even measured in accounting books.

Managerial and director attitudes can be fundamental to what values are privileged. Profits (financial

returns) and service, and means, and ends can become

confused. According to Ketilson (1995), "Briscoe found

in his study that many managers and directors of

cooperatives perceived cooperative values to be

incompatible with business success." Managers who

held this view suffered from what he termed the

"frozen co-op syndrome." They were unable to formulate long-term goals and strategies that would enable

them to move out of this situation, to profitable positions without compromising cooperative character.

The confinement of cooperative managerial style

to a neoclassical model of investment (and profits as

an end) can paralyze a cooperative and impede its

ability to meet the long-term service interests of its

members. In part, this results from the dismissal of

"non-economic interests," as well as an insistence that

IOFs hold superior efficiency advantages over cooperatives. As an example, Harte (1995) argues, "the efficiency of cooperatives is not proven by their survival

and development over so many years, as cooperatives

in most countries have been favored by government

policies (and sometimes used as instruments of government policy) through tax breaks and other direct

and indirect supports."

Of course, this ignores the tremendous support

that IOFs have enjoyed in most Western societies in the

form of tax breaks, state sponsored research and development, infrastructural development (O’Connor 1973;

Barlett and Steele, 1998). (Ironically, the first cooperatives in the U.S. grew out of the reaction of farmers

against the transportation monopolies created by huge

land grants from the Federal Government to railroad

companies.)

Further, these arguments dismiss the political by

isolating the economic and speaking of "efficiency"

only in terms of economics. Thus, the practical political question is not raised. Why would there be such a

pattern "in most countries" that would lead governments to support cooperatives in this way?

Perhaps there is a political efficiency in this. If

cooperatives have this efficiency, even if derived from

the political sphere, it doesn't invalidate their capacity

to survive or function to meet some (perhaps unspoken or unheard) needs of society, even if the economic

model dismisses those interests. The theoretical exclusion of extra-economic interests from the model doesn't amount to the elimination of their practical or historical role.

Political Interests

In their historical origin, cooperatives were clearly also political institutions. Their development has

variously generated intense political opposition from

competing economic interests. The neoclassical framing of cooperatives tends to minimize or exclude these

political histories. Fraser (1989) describes this process

in reference to the power of administrative expertise.

"Experts" translate broad human needs into administrable needs by uncoupling them from their social, cultural, and political context. In the process, the original

oppositional quality of the stated needs tends to be

lost.

The complex needs of social actors are simplified

and transformed into purely economic issues and technical problems. The democratic interests of cooperative

patrons, for instance, can than become depoliticized

from any social movement base, and may be "rewritten" by, or for, cooperative management, for government administrative interests, or even in the academic’s interest of better fitting within an economic model.

This economic reductionism then tends to narrow, and

construct simpler problems from a much broader array

of needs and concerns.

Analytical Homogenization

Framing the cooperative as a "firm" also tends to

eliminate other "irrationalities" or interests that are

external to a neoclassical focus. By taking the enterprise as the unit of analysis, the heterogeneity and

diversity of a cooperative's membership tends to be

ignored--as are the divergent, perhaps conflicting

interests between members and management.

Harte (1995:9) views the plurality and diversity

of interests represented by cooperatives’ democratic

organization as "confused objectives." He recognizes

the non- coincidence of interests between management

and members as being a control "problem" for cooperatives. His solution is to concentrate ownership as well

as control under fewer persons and a single objective.

However, the natural plurality of interests intrinsic to cooperatives is glossed over, if not eradicated, by

5
viewing the cooperative as a single and homogenous

entity that "seeks to maximize a single objective (Staatz

1989)," i.e., the maximization of net margins. Ketilson

(1995:6) specifically addresses this issue with a contrary view. She writes:

"unlike the picture of goal setting and

behavior posited by rational models of

organizations, not all behavior in the cooperative organization is completely integrated or functionally indispensable, contributing to the achievement of an ultimate goal.

Rather, the cooperative pursues a variety of

goals, some of which may be in competition

with each other. It is possible that conflict

can be resolved only be serial attention to

this multiplicity of goals, but the end result

may be that no one goal is adequately

achieved. In order to understand what

therefore is perceived as seemingly erratic

or non-rational behavior, a multi-constituent perspective regarding goal setting

and decision-making is required."

The models we propose seek to deal with the pluralism and the diversity of interests within cooperatives as an advantage rather than a liability.To formulate this model, we first consider some basic

differences between sociological and neoclassical economics approaches.

IV. Sociological and Economic Analyses

Most of the analysis of this conversion process

has been within the framework of neoclassical economics. We propose an alternative model with which

to view cooperative restructuring and conversion.

After introducing the basic premises of a sociological

framework, we examine some data concerning the

nature of restructuring and conversion in order to

assess the relative usefulness of the two frameworks.

Next, we will return to specify in more detail a

sociological approach to cooperation. We will not

argue that one frame is true and the other false--only

that the two models provide different vantage points

of the same phenomenon. Thus, a sociological framing

of the conversion issue will raise different questions

and accentuate different concerns.

Unit of Analysis

Sometimes the difference between the two

approaches is in the unit of analysis. Neo-classical economics begins with a focus on the individual actor (or

enterprise) as the initiating unit of analysis. The sociologist, on the other hand, begins with the interaction, or

the relationship itself, between two or more individuals (or enterprises).

Social relationships can take many forms. From a

sociological view an interaction might be understood

as characterized by conflict, as in the case of the relationship between a buyer and seller or a landlord and

tenant. One actor’s gain comes at a cost to the other.

An interaction might be characterized by competition,

as in the case of two gas station owners at the same

intersection or two carpenters bidding for work on the

same house. An interaction might be characterized by

cooperation such as two assembly line workers or two

carpenters building the same house.

In agriculture, two or more farmers producing

the same commodity can choose to compete with one

another in the market (like the two carpenters bidding

against one another) or they can choose to cooperate with

one another, pooling resources to confront the market

together (like the two carpenters building the house

together).

The neoclassical economics model generally

assumes competition among actors as the predominant

relationship. Social relationships are assumed to be

competitive with similar members of the environment

and conflictual with dissimilar members (although

the languages of market power, rather than conflict

are used). These assumptions are then applied in a

deductive manner in the analyses.

Sociologists generally assume these relationships-

-competition, conflict, cooperation--are empirical questions. They seek to discover the predominant form of

interaction in social relationships which are generally

understood as adaptations to complex cultural, historical and environmental conditions. The analysis is

inductive.

To some extent, for neoclassicists, the act of cooperation can become a "problem" to be explained. This

occurs because, first, the unit of analysis is the selfinterested individual pursuing a single goal. Second,

because that individual is also assumed to be in competitive relations with other actors, cooperative behavior tends to lie outside the boundaries of the neoclassical framework.

The Noursian framing of cooperation can be seen

in this light. Nourse assumes that cooperation is an

aberration, a "problem" to be explained. Cooperation

only emerges from the "failure" of the competitive

market and should recede once it has accomplished its

corrective function. This view of cooperation derives

6
from the deductive logic, and assumptions of isolated

and rational individuals acting in their own best interest in the context of a competitive market.

For sociologists, none of these assumptions are

given. Because the focus is on the social interaction

and the analysis is inductive, alternative forms of

interaction-- competition, conflict cooperation--are

more easily considered. The actor is neither in isolation

nor is the interaction (the market) assumed to be characterized as competitive. A sociological (and institutional economics) approach can more easily give attention to issues of power and inequalities in assets or

resources brought by respective actors to historically

given interactions.

These factors make the issue of cooperation less

problematic for the sociologist (and the institutional

economist). The actual development of cooperatives is

more easily understood as a response to enduring,

unequal power relationships in the boom and bust

agricultural marketplace.

Finally, sociologists do not always assume individuals to be rational. Nor is there a need to privilege

rationality as an assumption in the approach. Indeed,

though rational action is a possibility and some sociological models make this assumption explicit as a

means of simplifying explanations, social action may

also be driven by emotion, affection, or tradition.

The economist actors’ rationality consists of a

means-ends schema, i.e., what is the most "rational"

means by which a particular end can be attained? The

sociologist also entertains the possibility of a different

type of rationality in which the means and ends tend

to be fused around the adherence to a particular value

or a constellation of values.

For example, the common expressions, "Winning

isn’t everything, it is the only thing" and "it is not

whether you win or lose, but how you play the game"

would be examples of this difference. The former

expression suggests that all play is subordinated to the

singular objective of victory, i.e., the play is only a

means to the end of winning. The latter expression

suggests the orientation toward winning the game is

not necessarily subordinated to the play itself but

exists in a tension with, or as part of, the process of

playing the game, i.e., means and ends are fused.

This points to a larger distinction between the

neoclassical economic and sociological framing.

Sociologists tend to recognize that in actual social life,

a plurality of values and objectives are being pursued

simultaneously, while the economist tends to focus on

the pursuit of economic objectives and to the exclusion

of other interests. The sociologist might, for example,

view cooperative economic practices as simultaneously satisfying such other (non-economic) interests as

democratic decision-making, the enhancement of a

community’s solidarity by extending social networks,

and/or deepening commitments to historic cooperative traditions. We return to some of these issues and

these differences between sociological and economic

analysis in more detail later.

The bulk of existing literature on cooperative

conversions has been written from the neoclassical

economics point of view. Insofar as the conversion of

cooperatives has, thus far, been explained largely as a

function of various interests in equity capital, the sociological analysis must ask, Is there more at stake in the

conversion of cooperatives to IOFs than equity interests alone? More specifically, we must consider: 1)

other values that might be lost or sacrificed with conversion, and 2) alternative functions of cooperatives

not captured by the (neoclassical imputed) analyses of

self-conscious interest (e.g., to impede capital flight

from specific geographic places). Such considerations

pull upon the strengths of sociological approaches and

can supplement the weaknesses of neoclassical economics.

V. Assessing the Equity Conversion Theses

Method of Analysis

We have reviewed the incompleteness of theories

of cooperatives based solely in neo-classical concepts.

However, we also question the case study methodology used in these analyses. Schrader and Collins took

existing conversions and explained them in light of

what would be expected of "successful" cooperatives,

i.e., those whose market value is greater than their

book value.

This is the equivalent of studying a number of

cases of juvenile delinquency, finding the predominance of low socio-economic status in cases of juvenile

arrest and conviction, and concluding that low socioeconomic status causes delinquency. This conclusion

would have been reached without examining all those

other cases of low socio-economic status that do not

result in juvenile delinquency.

The conversion case studies are scientifically

sound, only if the cases studied represent all, or at

least a representative sample, of the potential cases for

conversion. However, there are, in fact, many other

cooperatives that have market value far in excess of

7
their book value that haven’t converted or perhaps

haven’t even considered conversion (Wissman,

Kraenzle).

Thus, the most that can be said about the four

hypothesized explanations is that these may be necessary, but not sufficient conditions for conversion. Most

cooperatives do not convert, even though they meet

the equity conditions for it. Anticipating sociological

considerations, we then ask, why aren’t these sufficient

conditions? There must be other intervening variables

that modify or reduce the significance of these

motives.

Non-Economic Interests

Sociological analyses suggest there are other values held by cooperatives and their members that are

not willingly sacrificed in the interests of short-term or

more fluid equity.

Non-economic interests may include a democratically structured organization, the valuing of a locally

controlled economic organization, self determination

and self reliance, political networks and power developed via cooperative organization, and/or leadership

development potential of the cooperative. In asking,

"How would rural America and Midwest farming differ if cooperatives had never existed?," Torgerson

(1999) has posited several of these "other than economic"

values and interests.

Thousands of American farmers exercise a similar rationality in practice every day. They have considerable capital invested in their farms. The market

value of their land may yield more income (as liquidated capital assets) than they can make by farming. Yet,

they do not convert this equity. The common saying,

"Farmers live poor and die rich," expresses this behavior. There may be many reasons why this equity is not

converted. The economic explanation would likely be

limited to the hypothesis that the farmer hopes or

expects the value of the farm to increase and is simply

waiting for a higher return on his or her investment at

a later date.

The sociologist examines other values or even

traditions and emotions that inhere in this decision (or

non-decision). Salamon (1992) has shown that many

farmers in central Illinois have a greater interest in

passing the land on to the next generation than in

holding the land for speculative purposes. Indeed, her

observations point to the fact that it is the profit-maximizers that actually disappear from agriculture. They

"cash in" on the value of their farms, retrieve the equity, and leave farming to be replaced by those who

place other interests above profit, per se.

Another such interest might be in the independence (being "my own boss") afforded by farming

compared with many other occupations. Some farmers

simply value the farm work itself, the immediate interaction with nature, with the land or the animals; or the

diversity of tasks demanded by farming compared

with most other occupations (Mooney 1988). The same

logic that supports maintenance of a cooperative, even

at the cost of access to invested equity is similar to that

played out on the farm. Economically, invested equity

permits the existence of the cooperative to provide

economic services and functions that might not be provided otherwise. However, cooperatives can also provide a range of social, political, and cultural capital for

farmers and their communities that IOFs are generally

incapable of creating (Torgerson 1999).

Other Economic Interests--Sociology looks

behind the actions, values, and interests of individuals

and toward deeper structural explanations. The

retention of equity capital by the cooperative can be

understood as a functional adaptation to the cyclical

character of the agricultural economy. Whether or not

members or even leaders are conscious of this

function, cooperatives function to impede the problem

of capital flight. It is precisely in the retention of equity

that this mechanism is located.

An IOF might readily abandon a community during a prolonged recession because its primary objective, the pursuit of profit, is impeded by such conditions. This is much less likely in the case of the

cooperative which, by holding the equity reserves of

members, is not only more likely to survive the crisis

but is impeded from leaving the community and relocating.

This insight derives from the sociological (and

institutional economics) tendency to view structures

within a historical context. When the analytical focus is

on the individual (as is the case with neoclassical economics) structural considerations that span generations, and account for community changes, tend not to

be readily considered, and are easily overlooked.

Those cooperatives that convert to IOFs sacrifice

this structural function. Should hard times come to

their region or commodity, there will be no assurance

that this service will be sustained by an IOF. Under

such circumstance, it may simply close down the operation or move to a more profitable location. In fact, the

IOF would be obligated to its stockholders to do exactly that, just as the cooperative would be obligated to

its members-owners to stay put.

8
In staying put, other economic interests or values

are met, and at the level of the family and/or the community, not just with the individual. Torgerson (1999)

posits such values and interests are in the form of economic "public goods" such as strengthening overall

rural economic infrastructure, access to markets for

smaller farms, market development via cooperative

promotion programs, and bargaining power in contract negotiation.

Conversion tends to be expected from the neoclassical perspective (and from Noursian views of

cooperatives). However, this suggests that its anticipation may lie more in the realm of theory than practice.

It is an action expected by the theory due to unjustified

assumptions. When conversion occurs, it may be cause

for celebration of the theory being realized in practice.

However, it may in fact be an exception to actual historical developments.

Just what is the extent of cooperative conversion?

Considerable cooperative restructuring has taken place

in the last decade. The extent to which this is actually

conversion from cooperative forms to IOFs needs to be

examined. It is possible that much of the restructuring

is simply taking place within the cooperative sector

itself and does not reflect a shift to IOFs.

Market share analysis does not indicate any significant losses in the cooperative sector as a whole.

While there are periodic ups and downs in market

share, the general trend indicates a strong and healthy

market share and net worth (Kraenzle).

Examining the Evidence

Wadsworth’s recent publications on cooperative

restructuring (1998) and cooperative unifications

(1999) may be helpful in measuring the extent of cooperative conversions. Wadsworth has drawn from various news sources and USDA’s Rural Cooperatives

magazine as well as those cooperatives that have been

dropped from USDA’s mailing list as they have been

restructured or converted out of existence for one reason or another. We have reformulated Wadsworth’s

six-fold classification (expansion, contraction, revamping, agreement, unification, and joint venture) into six

different categories that better address the question

with which we are concerned. These categories are:

1. Interaction between two or more cooperatives:

a. alliances,

b. joint ventures,

c. mergers, and

d. acquisition of assets.

2. Acquisition of some or all of an IOFs assets by a

cooperative.

3. Other forms of interaction between a cooperative

and an IOF.

a. an alliance

b. joint venture

4. Acquisition of some or all of a cooperative’s

assets by an IOF.

5. Expansion of a cooperative (building of new

facility, investment in renovation, etc.)

6. Other forms of closure, consolidation.

We eliminated from Wadsworth’s sample other less

relevant forms of restructuring such as changes in

location of headquarters, changes in name or logo,

reports of study or talks of mergers, cases reported

more than once, etc.

These data show clearly that the most dominant

forms of restructuring occur entirely within the cooperative sector. While there is considerable consolidation,

merger, alliance, and joint venture activity, more than

one-third (36.6 percent) of this is between cooperatives.

Nearly another quarter (23.2 percent) is merely expansion of existing cooperatives.

Various forms of interaction between cooperatives and IOFs that fell short of outright conversion

(alliance, agreements, and joint ventures) constituted

15.3 percent of the sample. Less than 4 percent

involved the closure of cooperatives. About 5 percent

of the sample actually consisted of full conversion, i.e.,

the acquisition of cooperative assets by an IOF.

Actually, the frequency of cooperatives acquiring IOF

assets was more than three times as common (16.6 percent) as IOFs acquiring cooperative assets!

While the neoclassical economic model would

expect successful cooperatives to be purchased by

IOFs, it appears that successful cooperatives might be

9

Table 1--Form of restructuring Number Percent

Cooperative/cooperative

interaction 115 36.6

Cooperative acquires IOF assets 52 16.6

Cooperative/IOF interaction 48 15.3

IOF acquires cooperative assets 15 4.8

Expansion of cooperative 73 23.2

Closure of cooperative 11 3.5 —— ———

Total 314 100.0
far more likely to simply expand their own enterprise,

to achieve some alliance or merger with another cooperative, or acquire IOFs. This quite clearly contradicts

the various concerns posed by the economic framing

and the idea that cooperatives should mature into

IOFs.

These data would suggest that the "threat" of a

tendency toward conversion of cooperative capital to

private capital is not nearly so great as might be

implied by neo- classical economic and Noursian theory. The greater threat to cooperation probably lies in

the increase in scale that inheres in the process of concentration (merger, joint venture, alliance, etc.) that is,

in fact, taking place within the cooperative sector. As

Torgerson (1998) notes, "This isn’t your father’s cooperative." Cooperatives are changing to remain competitive, sometimes in the belief that they need to be one of

the two or three competitors in any sector that are

increasingly assumed to constitute the upper limits of

what now passes for "competition" in contemporary

markets (Merlo 1998).

Heffernan (quoted in Merlo) claims he is less concerned with cooperatives merging with each other,

than cooperatives merging and forming joint ventures

and strategic alliances with IOFs. This form of restructuring is more prominent than outright conversion,

although still not as pervasive as cooperative expansion or various forms of intra-cooperative restructuring.

Can the democratic principle of onemember/one-vote, which is the basis of user- ownership, user-benefit, and user-control, survive such

increases in scale? Torgerson (quoted in Merlo) cautioned, "The administrative hierarchy can get far

removed from the cooperative’s member orientation...there’s a danger that the cooperative could be

viewed as just another business." In this setting, and

particularly in the cooperative/IOF interactions, the

firm might shift to a "culture that is more corporate

than cooperative."

The model that we will now develop seeks to

focus on tensions within cooperatives. The presence of

these tensions has been, and can continue to be, a positive force in the cooperative movement. Most current

cooperative theory, however, seeks to eliminate tensions in the attempt to develop a unidimensional

model that unrealistically simplifies the intrinsic social

and political character of economic action and agricultural cooperatives.

VI. Restructuring Cooperative Theory:

Toward A Sociological Approach

In 1935, George Fauquet observed, "A cooperative consists of two essential elements, a democratic

association of persons and an economic enterprise. In

separating these for the purposes of analysis the essential is lost. It is the manner in which the two are coordinated that forms the basic problem of cooperatives

(Vitaliano 1977)."

Much of our criticism of the neoclassical

approach can be traced back to this impulse of cooperative theory to separate these elements of cooperation.

Theorization has generally been made as if cooperatives and the cooperative movement were an abstraction separate from the socioeconomic and historical

context in which they exist.

This model seeks to 1) theorize cooperation without separating the economic from the democratic and

2) to inductively incorporate aspects of the cooperative

context into the theorization. To consider both the economic and the democratic simultaneously necessitates

theorizing aspects of cooperation that are frequently in

tension or in contradiction with each other. The retention of contradictions in our theorization serves to

resist the simplification and single dimension typical

of such models as neoclassical economics.

The model developed here seeks to retain tensions between opposing tendencies in cooperatives as

they actually operate, and to account for a context that

itself, is frequently laden with contradictions. To follow Grabher and Stark (l998), "although organizational

homogenization may foster adaptation in the short

run, a loss of the diversity inherent in conflicting tensions and interest, can impede organizational adaptability in the long run. Institutional friction that blocks

transition to an already designated future [e.g. conversion] keeps open a multiplicity of alternative paths to

further exploration." Four contradictory tensions will

be theorized (figure 1).

First, and following Fauquet, as a capitalist economic form usually governed by a democratic principle,

cooperatives bring together qualities that do not easily

co-exist--democracy versus bureaucracy, and economic

performance versus participation. (This can become

manifest paradoxically in the need to accommodate to

a diversity of membership interests, and in an interest

to develop a more governable, homogeneous whole.)

Second, cooperatives also provide the tensions noted

by Friedmann (1995) in her work on the relationship

10
between production and consumption. Third, in this time

of increased attention to processes of globalization,

cooperatives present unique tensions between the global and the local. Finally, in terms of the sociology of collective action, the predominant representation of cooperatives would lead us to classify them as traditional

social movements. However, there are at least latent elements of "new" social movements within even the most

traditional cooperatives.

In these ways, the cooperative organizational

form encompasses tensions that (in separating the elements of democratic association from economic enterprise) have too often been seen as an obstacle to the

pursuit of a single-minded interest. Those very tensions may, in fact, be the wellspring of strength, innovation, and flexibility that has historically served multiple and sometimes, apparently contradictory

functions quite well.

Democratic Capitalism

The most apparent manner in which cooperatives

reveal a contradictory tension is in the interface

between their economic and political elements. As economic entities, cooperatives are capitalist enterprises,

created, in part, to compete with monopoly and oligopoly enterprises. The historical conditions that gave

rise to U.S. agricultural cooperatives led to a strong,

although sometimes merely formal, democratic structure in their organization.

Unlike other capitalist enterprises, cooperatives

have traditionally incorporated a democratic political

principle (one member, one vote) into their internal

governance. This aspect has always stood in contrast

to IOFs in which voting privileges are directly proportional to levels of investment.

The vast majority (93 percent) of agricultural

cooperatives are still formally run by democratic principles (Reynolds, Gray, and Kraenzle, 1997). However,

this democratic quality is increasingly coming into

question. Two forces seem to be largely responsible for

this challenge.

First, following the logic of only the economic

element of cooperatives, some theorists find cooperatives’ democratic element to be at odds with purely

economic interests. This leads to calls for either wholesale restructuring of cooperatives as IOFs or for the

elimination of the "one member, one vote" principle

and substituting proportional representation. The simplified logic and interests of size and scale of individual members (and implicitly investment) are given priority over the broader and more complex interests of

the community of diverse members (as privileged by

the one member, one vote principle).

The conversion to an IOF is a logical outcome in

an analysis that considers only the investment and

market value of the cooperative to the exclusion of

more general values embedded in the cooperative

principles i.e. user-ownership, user-control, user-benefit. Under democratic governance, the priority of dispersed and collective use of the cooperative is protected against its usurpation as a mechanism for

individual exchange, and ultimately individual investment. Substituting proportional voting can compromise the mutually democratic character of the cooperative by allowing into the decision making processes

the disproportionate representation of larger farm and

investment interests. That erosion, in turn, can threaten other fundamental principles of cooperation.

A second force opposing the democratic principle

is the increasing bureaucratization of ever larger and

more complex cooperative organizations. Control is

assumed by management, as members are increasingly

defined as incapable of making decisions on "technical" matters that only experts are held qualified to

evaluate. Drawing on Lasley’s (1981) analysis of cooperatives’ inherent "dual objectives," Seipel and

Heffernan (1997) argue that maintaining member

involvement and the generation of profit necessary for

survival in the economic marketplace can be inherently contradictory. They contend that as authority has

increasingly been delegated to hired management and

staff, purely economic interest has become dominant

in cooperative decision making.

This latter form of erosion of the democratic element may be more threatening than actual conversions. As indicated earlier, cooperatives are not converting to IOFs in substantial proportions, but rather

are consolidating or merging with other cooperatives.

This restructuring adds to the complexity and scale of

cooperative organizations, creating large bureaucracies

far removed from the member. As a general manager

of a large dairy cooperative recently noted, "Size can

be traded for the members’ best interests. You get big11

Figure 1--Institution friction Site of Tensions

Capitalism/Democracy Political Economy

Production/Consumption Social Relations

Global/Local Spatial Relations

Traditional/New Social

Movement Collective Action
ger to create positive efficiencies but the best interests

of local members are traded for the greater good of the

whole (Merlo 1998)." However, local members can be

left wondering if the cooperative is truly different from

any other large organization.

A third tension pulling against democratic

aspects of the cooperative can be management itself.

Drawing on agency theory, Seipel and Heffernan

(1997) argue that cooperative management may develop a set of interests that are quite distinct from the

interests of the cooperatives’ members. Cooperative

managers may tend to administer it as an IOF, singlemindedly focusing on "earnings or sales growth" to the

"neglect of other activities that could enhance member

service or meet other member goals." This can happen

when managers’ thinking is confined to a neoclassical

economic perspective or, when they have an interest in

enhancing their own individual marketability as business managers in the IOF labor market.

Active democratic participation is the way an

autonomous interest of management can be countered.

Democratic participation may ensure that multiple

objectives, if they exist, remain "on the table," and are

not reduced to a single objective. Retention of democratic principles facilitates the institutional friction that

managerial interests tend to work against as they seek

to rationalize the cooperative along a singular, more

easily administered, dimension of economic interest.

However, if this friction is overcome by management, bureaucracy, and/or conversion, it will fragment

the multiple interests members have in the organization. Cooperatives are both economic and political

(democratic) organizations. Without this tension, the

organization would not be a cooperative. Its continued

persistence allows for addressing multiple if not contradictory although contentious interests.

Production and Consumption

Cooperatives function in a context of a market

place organized around a fundamental tension

between production and consumption, and between

producers and consumers. The paradox here is that

this antagonism is also, of course, a relation of interdependency--interests can be connected. Indeed, each

sphere can only be meaningfully understood in relation to the other.

The history of the cooperative movement reflects

an interest in overcoming this division. The vision of a

cooperative commonwealth (Voorhis 1961) recognized

both the distinctive and common interests of producers and consumers and sought to create an organizational structure that unified these interests.

Voorhis expressed this longstanding interest to

link production and consumption through cooperative

structures, "...if a considerable proportion of farm

crops could be sold directly by farmer-owned enterprises to consumer-owned ones, the ‘spread’ between

what farmers receive and what consumers pay would

amount simply to the costs of processing, transportation, and sale."

Further, he argued strongly for the development

of consumer cooperatives. "But only as major consumer needs are met cooperatively, only as the people

come into ownership of businesses supplying the

things on which their big expenditures are made-- only

then can the full influence of cooperative enterprise

upon a nation’s economy be brought to bear. Only then

can ‘consumer preference’ begin to have any meaning,

and only then can the consumer interest begin to be

asserted and defended."

More recently, Friedmann (l995) contended that

there are a series of "newer" problems--human health

and food safety, environmental issues, land use, community sustainability--that suggest a need for integrating (or regulating) food and fiber production and consumption interests. However, how to effectively

mobilize to address these problems is not clear.

Friedman (l995) argues that "strategic power [to

affect change in agriculture] has shifted from farmers

to corporations." Further, she contends that

"Economists and corporate managers, who have considerable clout in setting political agendas, count [such

costs as] hunger and the ecological costs of mono-cultural farming as "external [and therefore of little priority, relative to their own explicit institutional agendas]."

Some suggest agricultural policy is at an impasse

to confront these problems with no readily identified

mechanism for solution. A possible alternative could

involve revitalization of the older cooperative commonwealth view. "An environmentally and socially

sensitive agriculture presupposes consumers whose

food needs are effectively transmitted to farmers, as

well as citizens whose environmental needs are effectively transmitted to farmers (Friedmann)."

These varied needs can be internalized via producer cooperatives (production) and supply and service cooperatives (consumption). Cooperatives oriented to either production concerns, or consumer

interests, share the capacity of democratizing both

spheres. This long-standing interest of the cooperative

movement can be found in recent comments by Elroy

Webster, co-chair of Cenex Harvest States, in reference

12
to their mega-merger. "We wanted to create a seamless

agricultural food system to link producer to consumer

(Merlo 1998)."

Friedmann asks if there is some happy medium

"between public regulation and private power" over

food production and consumption. The cooperative

form has the advantage of providing a middle course

in which regulation lies neither purely in the

economic sphere (market regulation, or a private, corporate regulation) nor in the public sphere of state regulation.

Rather, cooperative regulation could entail control by producers and consumers of food in economic

organizations whose internal political structure is

democratized. The synthesis of these spheres--production and consumption--is a cooperative advantage.

Democratization via distinct (producer and consumer)

cooperative structures could ameliorate the tendency

to view many of the "costs" of the current food production and consumption as external costs.

To the extent that cooperatives tend to be tied to a

geographic place more than IOFs, democratically organized cooperatives present a potential for internalizing

into a community of members, health, environmental,

and land-use issues as part of one’s everyday life

world. This internalization is not open to investment

organizations, given their strong internal tendencies to

exclude and make external to the firm, larger social,

ecological, and community costs.

Local and Global

Cooperatives function in an increasingly global

economy. However, parallel and in some ways contradictory developments exist that give priority to local

needs and demands. The equity retention principles in

cooperatives tie them to a particular geographic place.

From the standpoint of capital mobilized for investment, this may appear as an unnecessary and unwanted constraint.

Paradoxically, from the standpoint of cooperative

capital, it is a way to prevent capital flight from areas

due to various globalizing tendencies. Economic models that emphasize returns on investment to holders of

capital may criticize this lack of mobility as likely inefficient. However, a more historical and holistic view

reveals this "place- fixedness" as a long-term, adaptation that protects cooperatives (and their communities)

from recessionary periods when strict capital investment interests may opt to leave a geographic area

(Mooney 1995).

Agricultural cooperatives were partly created to

compete with and challenge oligopoly (concentrated)

interests. To the extent IOFs enter the global market

place, agricultural cooperatives may need to as well.

However, this complicates member governance, not

only by adding to the complexity of the cooperative

bureaucratically, but also by creating assets vastly separated from members by physical distance. It also raises questions concerning membership in the cooperative by foreign customers. Seipel and Heffernan (1997)

and others argue that cooperatives’ attempts to have a

presence in a globalizing market place are characterized by both constraints and unique opportunities.

Hassanein (1999), for instance, has argued for the

importance of developing local knowledge in response

to processes of globalization. She details the advantages that can be obtained by familiarity with a locale

and its specificity. This can be a competitive advantage

in the face of a globalization that tends to homogenize

regional differences, push products and services

toward standardization, and eliminate unique local

qualities. Hassanein shows that democratic forms of

organization are far more capable of producing and

retaining local knowledge related to agricultural production than the bureaucratically organized, hierarchical forms of knowledge production and exchange

employed by large IOFs.

Under democratic principles, the cooperative

would be better able to facilitate the production and

exchange of knowledge related to local production

conditions. Indeed, such a function would be an

advantage of the cooperative that would be difficult

for large IOFs to duplicate. Seipel and Heffernan

(1997) recognize this possible cooperative advantage,

but also warn that such innovation "may require flattening hierarchical managerial structures and returning more operational autonomy to local

affiliates...."They argue that, "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 decision making in cooperatives."

Seipel and Heffernan contend this decentralization of control is predicated on high member involvement, i.e., the practice of democratic principles. It’s

promise is high in terms of developing the "permanent

innovation," flexible specialization, and quality that

"health-and food-safety-conscious consumers" are

expected to demand in the future. Cooperatives may

have an advantage in the development of "new, customized products...marketed outside of traditional

channels." Their suggestion that cooperatives seek out

13
"new alliances with consumer groups" relates back to

the cooperative commonwealth vision of bridging

social relations of production and consumption, as

well as bringing together the local with the global.

Hassanein’s treatment of these forms of development of local knowledge is tied to issues raised by the

literature on what are often referred to as the "new

social movements." This brings us to a consideration of

a fourth site of contradiction upon which cooperatives

seem uniquely situated--the tension between the old or

traditional forms of social movements and the new

ones.

Traditional and New Social Movements

U.S. agricultural cooperatives have in part been

organized farmer reactions to changes in government

policy or relations with large enterprises such as banks

and processors [railroad companies, other agribusiness] that have affected them adversely (Mooney and

Majka 1995).

They have been organized around production

and farmer issues to retain value on the farm and

maintain financial solvency. In these respects, agricultural cooperatives are fairly traditional in their pursuits of particular class (farmer) interests. Like other

traditional movements, they have also tended to privilege bureaucratic forms of organization at the expense

of democratic aspects, frequently with reasoning that

priviledges economic expediency.

Writings by Johnston, Larana and Gusfield (l994)

and Beuchler (l995) suggest new social movements are

oriented to "enlarging the systems of member participation in decision making." They tend to give priority

to democratization generally, and are based in actions

and interests beyond those of simply class position.

Beuchler (l995) refers to this broadening aspect of new

social movements as a search for "other logics of

action." They cut across several different groups and

interests, with democratization being of prime importance.

Agricultural cooperatives contain characteristics

of new social movements or, at least, potential incubators of new social movements. The basic cooperative

principles of user-ownership, user-control, and userbenefit and their ties to democratic relations opens the

door to the "other logics of action" that characterize the

new social movements.

Following Castells (quoted in Beuchler 1995),

democratic aspects provide the possibility of resisting

"the standardization and homogenization associated

with bureaucratic forms of organization." It allows

alternative values and interests and avoids reducing

the meaning and purpose of the organization, for

example, to only return on investment. It also creates

the potential for valuing cooperation for its own sake.

From a new social movement perspective, cooperation is no longer seen as merely a means to a given

end (improving the financial solvency of

farming/cooperative business). The means and ends of

cooperative are fused; i.e. there is a value inherent in

the very process of cooperating. This orientation is

reflected in the comments of Elroy Webster, co-chair of

Cenex Harvest States."Co-op members are rooted in

tradition and personal feelings of ownership." He also

observed that concentration of cooperatives can lead to

a "perceived loss of an organization’s institutional history and culture (Merlo 1998)."

Historically, and from an old social movement

perspective, agricultural cooperatives have been organized around issues of production and class (farm).

However, Tourain (l988) has argued that the cooperative movement presents an antagonism that corresponds with the predominant conflict in contemporary

society, i.e. the conflict between consumers/clients as

the popular class and managers/technocrats as the

dominant class. In a broad societal sense this conflict

gives focus to "a system seeking to maximize production, money, power and information, versus subjects

seeking to defend and expand their individuality."

A parallel expression of this conflict between

principals (members) and agents (management) within

cooperatives was described by Seipel and Heffernan

(1997). Resistance to the concentration of decision

making and control in the hands of experts and administrative apparatus would reflect this new social movement quality within the cooperative movement.

The dual objectives intrinsic to cooperatives suggest, however, that even with a strong emergence of

specific member interests, they would need to exist

alongside a continued and important role of economic

performance. Both interests exist simultaneously. The

tension, itself, can provide a positive source of organizational development. Without this tension, an organization would perhaps still exist, but not as a cooperative. It is only in the context of continued democratic

governance (a new social movement perspective) that

these tensions are maintained and can serve as a

source of long-term cooperative adaptation.

14
VII. Conclusions and Implications

The last decade saw the agricultural cooperative sector

recover from the farm crisis of the 1980s and often in

restructured form. One form, the conversion of cooperatives to IOFs attracted attention from cooperative

analysts. Some viewed this outcome as a natural or

inevitable consequence of cooperative "success."

Research however, revealed very little conversion of

cooperatives to IOFs. Successful cooperatives are far

more likely to expand operations, merge with other

cooperatives, or even to acquire IOFs.

The expected conversion is grounded more firmly in theory than practice. Cooperative theory has

increasingly developed as a body of deductions from a

set of assumptions that oversimplify actual human

economic behavior. A sociological approach was posited that might complement the economic approach

with a multidimensional quality tied to a broader and

more inclusive range of values and interests, rather

than the unidimensional analysis of neoclassical economics.

Thus, we laid the premises for the development

of a theory that is grounded in, or deduced from, the

actual conflicts and dilemmas or tensions that persist

within cooperative organizations: 1) bureaucracy versus democracy, 2) production versus consumption, 3)

global versus local, and 4) traditional versus new

social movements.

While these tensions may be defined as problems

by cooperative management and troublesome for the

development of a deductive theory, these tensions may

also provide the institutional friction that facilitates the

innovation and flexibility of the cooperative sector.

These tensions, describe cooperative strengths as a

unique form of economic democracy in an agricultural

system, ever more dominated by the bureaucratic

character of corporate organizational culture.

This analysis has been guided by an interest in

the process of institutional democratization and a furtherance of democratic civil society (Cohen and Rogers

1995). This interest has in part been stimulated by the

eclipse of institutional economic (and sociological

analyses) of cooperatives by a neoclassical economics

tradition of unidimensional analysis.

As an economic entity, cooperatives are among

the few institutions in the late 20th century U.S. that

retain semblances of democratic governance. In this

way, they might constitute an important building

block of a more democratic society. Etzioni (1993)

argues: that communities congeal around such institutions. However, when these institutions are "consolidated" in the name of greater efficiency, communities

are often undermined.

In the context of an increasingly global economy,

cooperatives provide opportunities to participate in

local economic life and can even function to lay the

sort of moral claims upon members that Etzioni cites

as fundamental to the construction of community.

Such moral claims are, of course, excluded from those

neoclassical models that are grounded in individual

self-interests.

Even the business management literature reflects

trends moving in new directions. Seiling (1997), for

instance, argues that IOF employees should be directed toward an organizational model in which they are

referred to as "members," and that the workplace

should encourage them to "assume ownership of and

responsibility for the organization’s performance and

success." In this sense, cooperatives are already ahead

of the game. For cooperatives, this is not just rhetoric.

In fact, they have ownership, at least formally.

Ironically, it may often be necessary for these member/owners to reassert this structural role in the face of

its eclipse by the managers, that are, in fact, the employees of the cooperative.

Such movements demand adherence to the longstanding basic principles of the cooperative movement. Torgerson, Reynolds, and Gray (1997) contend,

"Cooperatives are strategically adjusting and repositioning their operations, but to maintain a role of acting in the interests of producers, they will need to use

fundamental cooperative principles as their primary

logic and discipline of organization." The democratic

aspect of cooperatives as a principle is fundamental to

their continued success, both internally regarding

effective management and externally about the role

various associations can play in revitalizing and sustaining a democratic society and culture.

The authors highlighted the increasing difficulty

of recognizing differences in cooperative and IOF

behavior. They note the trend toward bureaucratization, centralized decision making, and the predominance of neoclassical economic theory over social (and

institutional economic) theory as a development that

"paradoxically" drives the cooperative "away from

cooperative logic form" in a process of "goal inversion."

Members may become merely "residual

claimants" in their own cooperative. This report calls

for a "more holistic and multi-disciplinary approach to

theory" and research on cooperation in U.S. agriculture. As a movement toward a political economy of

15
cooperation, perhaps this can inspire further work

toward the development of an even more multidimensional theorization in the form of a sociology of cooperation.

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17
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.