United States

Department of

Agriculture

Rural BusinessCooperative

Service

RBS Research

Report 166
Pooling is a marketing practice distinct to cooperatives and refers to a particular

method by which a cooperative markets the crops of its producer-members.

Commodity pools are most prevalent in the fruit, vegetable, nut, rice, and dairy industries. This report will discuss the pooling practices of fruit and vegetable cooperatives

as a marketing alternative for their producer-members. The intent of this report is to

clarify cooperative pooling practices and to present the structural, managerial, financial, and coordination aspects of a successful commodity pooling program.

Keywords: Cooperative, pooling, fruit, vegetables, marketing

Cooperative Pooling Operations

Andrew A. Jermolowicz

Rural Business-Cooperative Service

RBS Research Report 168

May 1999

Price: Domestic-$5; Foreign-f550
Contents Introduction ..........................................................

.

TypesofMarketPools .............................................

.

AdvantagesofPooling .............................................

.

RiskSharing.. ...............................................

.

Improved Marketing ...........................................3

Increased Market Power ........................................3

Quality Control ...............................................3

EconomiesofScale ...........................................

.

Potential Barriers to Successful Pooling ................................3

Delayed Payments ............................................3

Loss of Individuality ...........................................4

Less Flexibility ...............................................4

ManagerialExpertise ..........................................

.

Marketing Agreements .............................................4

Pooling Illustration ................................................5

Pooling Policy ................................................

.

Determining Market Value ......................................

.

Determining Costs and Returns ..................................6

Sample Pool Calculations .......................................6

Single Versus Multiple Product Pool ...................................8

The Question of Subsidization ......................................11

Cooperative Examples ............................................12

Ocean Spray Cranberries, Inc.: .................................13

National Grape Co-operative Association, Inc. /Welch

Foods Inc., A Cooperative: .....................................13

Citrus Marketing: ............................................14

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

..15

References .......................................................

..16

i
Cooperative Pooling Operations

Andrew A. Jermolowicz

Pooling is a marketing practice distinctive to

cooperatives and refers to a particular method by

which a cooperative markets the crops of its producermembers. Commodity pools are most prevalent in the

fruit, vegetable, nut, rice, and dairy industries and to a

lesser extent, cotton and grain industries. This report

focuses on the pooling practices of fruit and vegetable

cooperatives as a marketing alternative for producermembers. Cooperative pooling practices are discussed

along with structural, managerial, financial, and coordination aspects of a successful commodity pooling

program.

Introduction

Pooling is a unique business agreement and

refers to the combination of production from many

producers under the marketing skills of a specialized

staff. Cooperative marketing pools use variable payment schedules and marketing agreements. Successful

pooling operations require considerable coordination

between the cooperative and producers regarding the

production, harvesting, and delivery of commodities.

Each producer-participant is paid the average

price received for all product of like quality delivered

during the duration of the pool. A member’s share of

the pool proceeds is determined by the volume of

product contributed and may be adjusted for either

premiums or discounts related to quality differences.

Pool operating costs are allocated among producers

and deducted from their returns prior to settlement.

The typical pool: provides an advance payment at, or

near, the time of product delivery; makes progress

payments as pool contents are sold; and-makes a final

payment to participants once the pool is liquidated

and all costs are reconciled.

Pooling is a distinct cooperative method of marketing with one major difference from either outright

purchase or selling on individual accounts where the

identity of each individual grower is preserved and

the grower is paid exactly what was received in the

market. In a pool, the producer turns over decisionmaking authority to the cooperative and no longer

controls when or for what price the crop is sold.

However, the increased volume of member product

from commingling production increases the cooperative’s leverage and impact in the market and mitigates

risk.

A cooperative operating a commodity pool for its

members must address a number of rather complex

issues. For example, when developing a pooling plan,

the cooperative must decide on the number of pools to

use and how each will be separated regarding commodity type and grade, the production areas to be

included,, and how long it will remain open. Careful

consideration must be given to each of these factors

and analyzed for their effect on the operation of the

cooperative. The pooling program must be fair to all

members by providing the appropriate differentials for

variations in product quality or timing of delivery,

ensuring equitable distribution of marketing risks, and

assigning equitable allocation of expenses. To some

degree, the success of a pooling program depends on

how effective the cooperative communicates the

importance of forgoing short-term gains for long-term

stability to its members.

vpes of Market Pools

Although a number of alternative structures exist

within each, there are basically two classes of market

pools, seasonal and contract. With the more common

seasonal pool, the cooperative’s management staff is

responsible for all marketing decisions. Member pro1
duction is commingled and marketed. Producers

receive payment based on the average price the cooperative obtains from joint marketing. Although

referred to as seasonal, there is no set length of time

this class of pools can remain open. Given the wide

array of horticultural crops marketed by cooperatives

and the fact that no two associations face exactly the

same circumstances, the length of time a pool remains

open varies from one cooperative to another. Two

factors that may influence the duration of a seasonal

pool are the type of commodity being marketed and

the geographic area being served. Certain high-value,

highly perishable, or commodities subject to extreme

price variability may require daily or weekly pools in

order to efficiently and equitably market a crop.

Commodities capable of being stored, processed, or

available in ample supply throughout the year usually

require longer pooling periods, some up to a year or

even longer.

Geographic differences among producer-members also affects how a pooling program is structured.

For example, a cooperative may have producers in two

or more distinct producing regions of the country. In

this case, there will likely be differences in crop varieties being produced, yields, grading standards, or

other quality related factors. Consequently, the cooperative may operate separate pools to capture these differences among members.

Contract pools are quite different because the

producer retains some control over when and for how

much his produce is sold. Contract pools can be

defined as either a call or purchase pool. In a call pool,

the cooperative serves as a broker. The producer in

effect has final authority for when his produce is sold

by setting a minimum or target price level. In the purchase pool, the return a producer receives for his crop

is determined by when he delivers to the cooperative.

Typically, a purchase pool will pay the member the

prevailing cash market price on the day the produce

was delivered. Producers participating in a contract

pool retain some control over the marketing of their

produce, but do not benefit from the cooperative’s

marketing expertise or the risk-sharing aspect found

with the seasonal pool.

Commodity pools may cover single or multiple

commodities. The single product pool deals with each

commodity or grade separately such as used in a citrus

marketing cooperative. Participants in this pool are

paid the average price received for their specific commodity during the marketing period. A multiproduct

pool uses a single accounting system to manage all

commodities and grades delivered to the cooperative.

In this case, producers are paid the average price

received for all products marketed during the pool

period. Multiproduct pools are more common with

cooperatives serving vegetable producers because

there is a much greater likelihood that the association

will be handling a mix of products.

Occasionally, a cooperative may be required to

establish a special pool to deal with abnormal marketing situations. For example, in the case of severe freeze

or hail damage, the cooperative may establish a new

pool to handle these affected commodities. A special

pool would be necessary if the damage to the produce

was significant enough that it would not qualify for

inclusion in any existing pool. Consequently, this produce would be commingled and marketed separately

to avoid reducing the average earnings of the regular

pool.

Advantages of Pooling

R/Sk Sh8f\ng: One of the key advantages of

participating in a commodity pool is sharing of risk.

Fruit and vegetable crops are very weather-sensitive

commodities and prone to wide swings in supplies

and prices. Income from these crops can vary widely

from year to year. Producers deliver product over a

specified period of time and receive an average price,

so many of the cyclical fluctuations in price or changes

in consumer demand will be spread, and thus

minimized, among all producers in the pool.

This is especially true for crops destined for the

fresh market. Prices for many fresh market commodities tend to be higher during the early and later stages

of the marketing season when product supply is light.

With pooling, higher-than-average returns offset

lower-than-average returns. As a result, producers

contributing products to a pool are not necessarily

penalized merely for the timing of their deliveries.

Participants in a multiproduct pool are likely to

receive additional risk sharing since although they

may specialize in a particular crop, they benefit from

the overall diversification of the cooperative’s marketing plan.

Members who produce high-value crops, or consistently deliver product of above average quality, may

feel that they are subsidizing marginal producers.

However, producers must realize that in any given

year a particular crop could have either a good or bad

financial performance. When costs and returns are

allocated over a number of commodities, those per2
forming well will support those doing less favorably.

Over time, the averaging of costs levelsthe periodic

ups and downs in the market.

/mpfowed Marketing: In a market pool the

cooperative maintains a staff of marketing specialists

to handle the sale of member produce. The primary

objective of the cooperative’s sales staff is to maximize

the returns to the producer. By having some

knowledge of the quantity and timing of member

deliveries, the cooperative gains considerable

flexibility in planning. The cooperative can also

exercise some control over when harvesting and

delivery occur.

This control enables the cooperative to maintain a

consistent supply. Many produce buyers emphasize

the importance of working with a reliable, consistent

supplier. Having knowledge of the needs of both

buyer and seller enables the cooperative to coordinate

a more orderly flow of product to the market and build

relationships with buyers. Also, by having the time

and resources to constantly monitor the market, the

cooperative can capitalize on any new market opportunities.

increased Market Power: Many fruit and

vegetable markets are characterized by a large number

of small (volume) producers selling to a small number

of large buyers. It is unlikely a single producer would

have enough volume to take advantage of market

opportunities available to large-scale sellers.

However, by pooling, the volume of produce

marketed can be significant enough to enhance bargaining position and possibly result in improved

prices. Pooling allows the cooperative to approach the

market as a single seller of a large quantity of product.

Buyers are frequently more willing to negotiate with a

single seller than with a large number of relatively

small sellers, especially when the buyer is seeking a

particular type or quality of product. Commingling a

commodity under a single seller may also increase

competition among buyers needing the raw product if

the pool can amass enough volume to become a primary supplier.

QU8/iry control: Producing and marketing a

quality product is essential to compete in fruit and

vegetable markets. Being able to consistently provide a

product with the size, color, or taste characteristics

demanded by buyers greatly enhances a seller’s ability

to market a crop. A pooling program enables the

cooperative to become involved in the production

process at an early stage and address product quality

issues before they become a problem. Cooperatives can

use marketing agreements to establish quality

standards.

Typically, a marketing agreement between the

producer and the cooperative will outline specifications for plant varieties, fertilizer and agricultural

chemical applications, irrigation, or other productionrelated activities. By having some control over the production, harvesting, and handling of a crop, the cooperative can minimize costly errors. Further, by having

members deliver produce to a central source for grading, sorting, and sizing, the cooperative can develop

and maintain a standard pack that appeals to prospective buyers. A cooperative pool that outlines and

enforces strict quality standards discourages producermembers from delivering inferior quality produce.

Establishing a reputation for quality and consistency

greatly enhances the cooperative’s ability to compete

in the marketplace.

Econom/es Of &&3/e: Frequently, individual

growers lack sufficient physical volume to efficiently

operate a grading or packing facility, a processing

operation, or distribution system. Marketing through a

cooperative pooling program lowers the per-unit cost

of most post-harvest activities because certain

expenses can be spread out over a greater volume of

product. Larger scale operations may also draw more

favorable prices when purchasing supplies or

negotiating harvesting, hauling, or other

transportation rates.

Most individual producers cannot economically

justify investing in state-of-the-art technology. For

example, the cost of controlled atmosphere storage is

prohibitive for an individual apple grower, but can be

obtained when the investment cost is allocated among

producer-members of a cooperative. Marketing

through a cooperative pool may enable producers to

become involved in certain value-added processing

activities.

Potential Barriers to Successful Pooling

Delayed Payments: By design, members of

a marketing pool do not receive full payment for their

crop until that pool is closed. Depending on the length

of the pool and the size of the advance and progress

payments, some producers may encounter temporary

cash-flow problems. However, pool managers invest

considerable time in establishing a base price and

payment schedule that is sufficient for most producers.

3
LOSS of Individuality: Producers

participating in a marketing pool must relinquish

control over the marketing decisions associated with

their crop. Producers who enjoy negotiating deals,

have good marketing skills, or enjoy taking risks may

find this component of pooling restrictive. Given the

dynamic nature of most produce markets, producers

may at times earn a higher price than the pool price by

selling on an individual basis. But, by relinquishing

individual marketing decisions to the cooperative,

marketing pools become financially beneficial to

producers over the long term.

L&?S F/eXibi//ty: Most pooling programs

focus on long-term versus short-term marketing

strategies. A cooperative having knowledge of the

timing, quantity, and quality of a crop will likely

benefit from the ability to negotiate early or long-term

sales agreements with buyers. Although an early

commitment will promote stable prices and product

movement, the association may no longer be able to

react to sudden market changes. However, the benefits

to producers from long-term market stability generally

outweigh any sacrifice of short-term profiteering.

Manager-la/ Expertise: Cooperative pooling

is an effective marketing method for many

commodities, but it can also be a complicated program

to establish and maintain. A successful pooling

program requires a knowledgeable and skilled

management team as well as the willingness of both

the association and the producer-members to invest

the time and money necessary to develop an effective

marketing plan. Clear communication between the

cooperative and its members regarding the marketing

philosophy of the pool must be maintained. Some of

the elements inherent with pooling such as long-term

commitments, delayed payment schedules, and capital

retains could lead to discontented members. The

cooperative must be ready to address the inevitable

conflict between individual members and the longterm stability of the association’s marketing program.

The key is a well-conceived cooperative member

education program.

Marketing Agreements

For an effective marketing program, the cooperative needs to have long-term support and commitment

from the membership. Knowing it has a long-term

commitment from its members to deliver high-quality

products, the cooperative realizes a much stronger

sales and bargaining position in the marketplace. This

improved marketing position allows the cooperative to

provide a greater degree of market stability.

Consequently, the use of marketing agreements

or contracts becomes a critical component of any effective pooling program. A marketing agreement is a

written, legal document between the cooperative and

the producer-member. The agreement states the rights,

duties, and responsibilities of both parties regarding

the sale of produce through the cooperative. Growers

agree to deliver all or part of their production to the

cooperative. In turn, the cooperative agrees to sell the

member’s produce for the best price possible and to

return payment to the grower. Marketing agreements

are used to ensure that both the member and the cooperative comply with their obligations.

A marketing agreement is a planning tool that

allows the cooperative to coordinate the activities

involved in producing and marketing a crop. Control

over the quantity and timing of delivery enables the

cooperative to precisely schedule processing or marketing operations. Further, control over production

and harvesting allows for more efficient use of packing

and processing capacity which, in turn, generally lowers operating costs.

The marketing agreement also provides a legal

basis for penalizing nonperformance. For example, a

recurring problem for many marketing associations is

that producers abandon the cooperative during years

when production is short and prices are high. If the

percentage of members who bypass the cooperative is

high enough, the cooperative may have difficulty

meeting market commitments or covering operating

costs. The agreement clearly states contractually that

members are expected to abide by terms and conditions set forth in the agreement and that disciplinary

measures (i.e., penalties, such as liquidated damages

or expulsion from the association) will be taken

against offending parties.

Some of the more common provisions contained

in a marketing contract between the grower member

and the cooperative include:

l the amount of product a member must market

through the cooperative,

l acknowledgment of the grower-members obligation to deliver to the cooperative and the

cooperative’s obligation to market and/or

process the crop,

l the length of time the contract is in force,

l authorizing capital retains (equity capital),

l defining the penalties for noncompliance,

l quality and quantity standards, and

4
l payment methods including a description of

pool operations.

Pooling Illustration

Given the variety of commodities produced, their

use, and where they are produced, it is neither possible

nor practical to have one standard pooling policy for

every cooperative. Cooperative pooling programs

meet specific needs of producer-members. However, in

theory, and in practice, cooperative pooling programs

will share certain common elements, albeit to varying

degrees. The following section will present a generalized overview of a cooperative pooling program.

Poo/lng Po//cY: A cooperative’s pooling

policy is typically outlined in the association’s

governing documents. In general, the board of

directors establishes the pooling period(s) and the type

of pool (duration) appropriate for a particular

commodity. The board also establishes a measure for

crediting deliveries such as the number of units (boxes,

bushels, etc.) or weight (physical volume).

In most cases, payment to members is based on

the number of units of like quality produce delivered

to the same pool, less all charges and expenses associated with operating the pool. In the event of a natural

disaster, the board may authorize closing a pool of

product already delivered and establish a new pool for

the remainder of the delivery season. An example

would be a citrus marketing cooperative having to prematurely close a pool due to a major freeze.

Although pool accounting can become quite complex, it basically requires that a separate account be

established for each commodity pool the association

operates. Records indicate the amount of produce each

member delivers to the pool. Direct and indirect costs

associated with operating the pool are allocated and

then collected from sale proceeds of that pool. The

board establishes and approves the charges associated

with operating the pool. Revenues from the sale of

product are credited to a pool as they are received by

the cooperative. After deducting assessments, net pool

returns are credited to each member’s account on the

basis of how many units they delivered to the pool.

Determining Market Value: One of the

most important and sometimes difficult aspect of

operating a commodity pool is determining the value

of the raw products delivered. Establishing a realistic

raw product price, or economic value, is important

because the initial payments (advances) to growers are

often based on this estimate. Furthermore, if the raw

product is further processed or becomes a component

of a product mix, the cooperative needs to have an

accurate estimate of the raw product’s value relative to

the value of the final product. In this case, having an

estimate of the raw product’s final value will enable

the cooperative to maintain an equitable payment

schedule in cases where there are significant

differences in the quality of products delivered.

The calculation of an economic value for many

fruit and vegetable commodities has become increasingly difficult due to the rise in concentration among

buyers. Establishing an accurate value for member

produce is an integral component of the cooperative’s

sales, pricing, inventory, and accounting programs.

Mergers and consolidations among industry participants, particularly in the processed products sector,

have resulted in fewer buyers and transactions, and in

many cases, smaller cash markets. Consequently, reliable market and price information may be scarce or

nonexistent.

In cases where a cooperative handles a single

commodity and no established raw product value (i.e.

cash market) is available, proceeds to growers are calculated by subtracting marketing and operating costs

from the gross revenue generated from selling member’s products. Under these circumstances, the cooperative’s costs are the determinant of the value of the

raw product. This valuation is sufficient only as long

as the value of the raw product is greater than, or

equal to, any available alternative. If the cooperative’s

price was consistently lower than a competitor’s, producer-members may not remain loyal very long.

Consequently, using an established raw product

value to compare performance relative to alternative

markets is a common practice. When available, a cash

market price is often used as the basis for measuring a

cooperative’s performance. For example, if the return

to growers marketing through the cooperative was

$lO/unit, and the cash market price was known to be

$9/unit, the cooperative would have returned 111 percent of market value (lo/9 x 100) or 11 percent more

than the alternative market. The ability to measure

performance against the market or a competitor is

most beneficial to the cooperative that consistently

obtains a better-than-average return for its members.

Cooperative pools do not typically pay the entire

raw product value to growers at the time of delivery,

so having an established value at the time members

deliver product enables the cooperative to determine

an advance payment level that is consistent with the

prevailing market conditions. The level of the advance

payment compared with the final price varies among

5
cooperatives. Most try to make an advance payment

sufficiently large enough to help Rroducer-members

avoid cash-flow problems. The amount of the advance

payment is usually set by the board of directors. The

payment can be either a fixed-dollar amount or a predetermined percentage of the raw product value.

There are a number of ways for the cooperative to

establish a raw product value.

If a cooperative has extensive experience with a

particular crop and market, and has maintained

detailed records, it may rely on its own historical average for setting the raw product price. An alternative

would be to use commodity exchange prices.

In many case the negotiated prices that result

from collective bargaining between producers and

processors serve as the established market value. In

the fruit and vegetable industry, a number of cooperative bargaining associations represent producer interests during negotiations with processors. Bargaining

negotiations are conducted before the production season begins. Typically, the negotiated contract will

define the price level for various product grades in

addition to specifying any adjustments for qualityrelated factors or timing of delivery.

The negotiated price reflects the anticipated supply and demand conditions as well as current inventories. When both parties negotiate in good faith, their

efforts generally result in an accurate and equitable

raw product price. Consequently, a number of pooling

cooperatives use this negotiated price as their base, or

market value, when determining the level of initial

payments to members.

In markets characterized by the presence of a

dominant firm, the price it quotes often becomes the

industry price. The dominant firm announces a price

that it is willing to pay at the beginning of the season,

and given its status in the marketplace, the remaining

firms generally accept this price rather than enter a

potentially costly bidding war. Although the dominant

firm’s price may be arrived at in less than competitive

fashion, it may reflect what the market is willing to

pay for a particular commodity within the dominant

firm’s area of operation.

The commercial market value (CMV) refers to the

base price used to value commodities delivered by

producer-members. Many cooperatives appoint a committee of either directors or producer-members to

determine the CMV. The commodity committee

attempts to establish a CMV competitive with prices

paid by other commercial processors handling similar

crops in the same production area. Frequently, the

CMV is represented as a weighted average. If the

cooperative is handling multiple commodities, it is

most likely that it will establish a separate CMV for

each crop.

In practice, a cooperative using the CMV usually

advances 50 percent of the CMV when the raw product

is delivered. An interim payment of about 25 percent

will be made some time after delivery, but before the

end of the pooling season. The timing and size of the

interim payment will vary and will most likely be

related to the pool’s duration and the cooperative’s liquidity. A final payment is made when the pool is

closed or the fiscal year ends.

Determining Costs and Returns:

Regardless of the type or duration of commodity pool

being operated, a cooperative must develop an

accounting system that accurately allocates the

expenses associated with marketing a particular crop.

The cooperative must record the direct and indirect

costs of operating the marketing pool and determine if

costs should be allocated on a flat per-unit basis or in

proportion to the crops value or volume. Direct

expenses such as labor, materials, transportation,

storage, and financing are assigned to each particular

pool. Indirect, or overhead, costs typically include

general expenses, taxes, insurance, and administrative

expenses and are similarly allocated. The methods of

determining and allocating costs will vary from one

cooperative to another and will be heavily influenced

by the nature of the commodity being delivered and its

intended final use.

sampie POOi Caicuiations: This example

shows how a cooperative may operate a pooling

program. In this case, deliveries of three apple

producers (A, B, and Cl will be used to illustrate how

pool payments are calculated and distributed.

Each grower produces the same (one) variety of

apples which are then sorted into three separate

grades. For this example, the highest quality produce

is designated Grade 1. Apples not meeting that specification are designated either Grade 2 or Grade 3

depending on the degree to which they differ from the

Grade 1 standard. The cooperative operates a separate

pool for each grade delivered by members even

though only one commodity is being marketed.

Consequently, this case can be viewed as an

example of a multi-product pool because each grade of

apples will be earning proceeds independently. This

example also assumes that the cooperative will operate

a seasonal pool, and that the entire crop will be sold

6
during the current production season ,fi.e., no inventory is carried over to the following year).

Tables 1 and 2 show how the cooperative would

account for raw product deliveries from members in

addition to how returns to growers would be calculated. In this example, the cooperative has established

separate accounts for each producer and, after the produce has been sorted and graded, recorded the appropriate number of bushels of each particular grade

delivered. Next, the cooperative combines or pools

the individual quantities of like-grade produce. In this

case, the cooperative’s three commodity pools are

comprised of a total of 17,000 bushels, 14,000 bushels,

and 13,000 bushels of Grades 1,2, and 3, respectively

(Table 1).

In this example, member produce was marketed

(sold) at an average price of !§8/bushel for Grade 1,

$7/bushel for Grade 2, and $6/bushel for Grade 3.

Multiplying the average price received by the total

number of bushels of each particular grade delivered

yields the cooperative’s gross revenue from apple sales.

Historical data and pre-season evaluations of

market conditions by the cooperative’s commodity

committee resulted in the establishment of raw product values (costs) of !&BO/bu. for Grade 1, !$4.55/bu.

for Grade 2, and !§3.60/bu. for Grade 3 apples. As previously noted, the value or cost of the raw product is

an essential component of a pooling program and is

frequently used as the basis for making initial payments to growers for the commodities delivered.

Additionally, the cooperative has determined the

per bushel direct costs associated with the specific

labor, handling, and packaging for each grade. In this

example, per bushel direct costs were established at $1

for Grade 1, $0.90 for Grade 2, and $0.75 for Grade 3.

Differences in the amount of direct costs being charged

Table I- Example of pool cakuiatlons

Raw Product Receipts From Members (bu.)

Grade 1 Grade 2 Grade 3 Total

Producer A 2,000 4,000 8,000 14,000

Producer 6 9,000 3,000 1,000 13,000

Producer C 6,000 7,000 4,000 17,000

Total 17,000 14,000 13,000 44,000

Cooperative Sales 17,000@$s

Gross Revenue $136,000

Cost/Value of Raw Product $31,600

Per Unit $4.80

Direct Costs (labor, packing, etc.) $17,000

Per Unit $1 .oo

Gross Margin $37,400

Overhead and Administrative Costs $5,000

Pool Proceeds $32,400

Per Unit $1.91

Return to Growers $114,000

Per Unit $6.71

Percent of Proceeds 140

14,000@$7

$98,000

$63,700

$4.55

$12,600

$0.90

$21,700

$5,000

$16,700

$1.19

$80,400

$5.74

126

13,000@6

$78,000

$46,800

33.60

$9,750

$0.75

$21,450

$5,000

$16,450

$1.27

$63,250

$4.87

135

!$312,000

$192,100

$39,350

$80,550

$15,000

$65,550

$257,650

Retain ( $0.2O/bu.) $3,400 $2,800 $2,600 $8,800

Cash Distribution

Per Unit

$110,600

$6.51

$77,600

$5.54

$60,650

34.67

$248,850

7
to the different grades of product reflect the additional

expenses incurred in preparing higher grade fruit for

sale. Subtracting the cost of the raw product and

direct costs from the gross revenue figure yields the

gross margin from apple sales.

A fixed overhead and administrative cost of

$5,000 is assessed to each of the three pools.

Subtracting these cost from the gross revenue figure

results in the proceeds or profit earned by the pool. In

this example, fruit in the Grade 1 pool earned $32,400

($1.91/bu.), Grade 2 fruit earned $16,700 ($l.l9/bu.),

and the Grade 3 pool earned $16,450 ($1.27/bu.).

Total returns to growers are calculated by adding

pool proceeds and the value of the raw product. Table

1 shows returns to growers to be $6.71/bu. for Grade 1

fruit, $5.74/bu. for Grade 2, and !$4.87/bu. for Grade 3.

A measure of how a cooperative pool participant fared

compared with the market can be determined by

dividing the grower return by the value of the raw

product. Again, this is a reasonable measure of performance because the value of the raw product should

reflect what the cash market would have paid for the

produce. In this example, each of the three pools

returned earnings above the cash market value.

Cooperative members received returns that were 40,

26, and 35 percent higher for Grade 1,2, and 3 fruit,

respectively.

The final stage of the pools accounting process is

deducting retained earnings. Earnings retained from

grower returns (profits) are used to finance the cooperative and ensure its ability to continue to function as a

viable market outlet for member-growers. The cooperative’s retain policy will be outlined in the association’s governing documents. The amount of earnings

retained by the cooperative is determined by the board

and will vary depending on the size and nature of the

cooperative’s business . In this example, the cooperative retains SO.20 for each bushel of apples marketed.

Subtracting the retain from the grower’s return results

in the total cash distribution that will be made to the

grower for the product delivered.

Table 2 extends the current example by illustrating a payment schedule the cooperative might use to

distribute crop payments and pool earnings to growermembers. Again, individual grower accounts have

been maintained to accurately record the volume of

each particular grade delivered by each member.

A cooperative commodity pool typically uses

some form of delayed schedule to allocate returns back

to growers. Generally, producers receive an advance

payment at the time they deliver their produce to the

cooperative. The advance payment is often a percentage

of the raw product value established by the cooperative.

In this case, producers receive 50 percent of the raw

product value for each particular grade they deliver.

As sales of product are completed and management can better assess market conditions, the cooperative generally authorizes an interim payment to producers. Size of the payment generally reflects the

success of sales. In this example, the cooperative pays

the remaining 50 percent of the raw product value.

After all produce in the pool has been sold and all

costs have been accounted for and allocated, the pool

is considered closed. The cooperative calculates proceeds (profit) earned by each individual pool.

Each of the three pools in this example earned

positive proceeds. After deducting $0.20/bu. for

retained earnings, the cooperative can make a final

payment to producers. In this example, producers

received a final payment of $1.71/bu., $0.99/bt.r., and

$l.O7/bu. for Grade 1,2, and 3 apples, respectively.

Although in this simplified example, all three

pools yielded a profit, a pool could show a loss. That

potential reenforces the need for the cooperative to

establish an accurate raw product value. It becomes an

integral component of the pooling program used to

account for a crop’s percentage (value) of the finished

product and to establish the grower payment schedule.

Although the cooperative has issued an initial payment at the time of delivery, it retains some discretion

on the timing and amount of interim payments. In a

year when market prices do not meet pre-season

expectations, the cooperative’s marketing staff may

consider this when determining the amount of the next

payment to growers. Interim payment decisions must

consider the cash-flow needs of the producer-member

as well as the cooperative. Consequently, it may be in

the best interests of both that no, or smaller, interim

payments be made.

Single Pool Versus Multiple Product Pool

The pooling and marketing of a single commodity is a relatively straight-forward operation. Although

many producers and cooperatives specialize in the

production and marketing of one particular commodity, many other associations handle a variety of different crops grown by producer-members.

There are obvious economic incentives (scale

economies, risk reduction, etc.) for a cooperative to

market or process an array of crops. This is especially

true in California where it is quite common for a farming operation to be producing several fruit and vegetable crops. However, handling a broad product mix

8
Tab@ 2- ~rowef pSyNWnt schedule

Product Receipts From Members by Quantity (bushels) and Grade

Grade 1 Grade 2 Grade 3 Total

Producer A 2,000 4,000

Producer B 9,000 3,000

Producer C 8,000 7,000

Total 17,000 14,000

Payment Schedule by GW (per bushel)

Advance Payment

interim Payment

Final Payment

Average Pool Price

Individual Member Paymenta

Producer A Advance Payments

interim Payments

Final Payments

Producer B

Capital Retain

Advance Payments

interim Payments

Final Payments

Producer C

Capital Retain

Advance Payments

interim Payments

Final Payments

Capital Retain

$2.40 $2.30 $1.80

2.40 2.25 1.80

1.71 .99 1.07

$8.51 $5.54 $4.87

2,000@$2.40 + 4,000@$2.30 + 8,000@$1.80

$4,800 + $9,200 + $14,400

2,000@$2.40 + 4,000@$2.25 + 8,000@$1.80

$4,800 + $9,000 + $14,400

2,000@$1.71 + 4,000@$0.99 + 8,008@$1.07

93,412 + 93,972 + $8,520

Total Cash Payments

14,000 Q 90.20

9,000@$2.40 + 3,000@$2.30 + 1 ,000@$1.80

$21,800 + 98,900 + $1,800

9,000@$2.40 + 3,000@$2.25 + 1 ,000@$1.80

$21,800 + $8,750 + $1,800

9,000@$1.71 + 3,000@$0.99 + 1 ,000@$1.07

$15,354 + 92,979 + $1,085

Total Cash Payments

13,000 Q 80.20

8,000@$2.40 + 7,000@$2.30 + 4,000@$1.80

$14,400 + $18,100 + $7,200

8,000@$2.40 + 7,000@!$2.25 + 4,000@$1.80

$14,400 + $15,750 + $7,200

8,000@$1.71 + 7,000@$0.99 + 4,000@$1.07

$10,238 + $8,951 + $4,280

Total Cash Payments

17,000 @ $0.20

8,000 14,000

1,000 13,000

4,000 17,000

13,000 44,000

$28,400

328,200

$15.904

$72,504

9 2,800

$30,300

$30,150

$19,398

$79,648

$ 2,800

$37,770

337,350

$21,447

$98,497

$3,400

9
raises the question as to whether the cooperative

should operate a separate pool for each commodity or

a pool for diverse products.

One primary benefit from handling a mix of commodities is that it enables the cooperative to represent

a greater volume of product, thereby gaining greater

influence in the marketplace. Further, diversification

allows the cooperative to minimize the impacts of

cyclical or seasonal fluctuations in price or demand in

a single crop. The increased physical volume likely to

result from marketing multiple crops may also lead to

more efficient use of plant facilities and lower per-unit

overhead costs which would be allocated among either

a greater number of producers or different crops.

The synergistic effects from marketing a broader

mix of commodities enable the cooperative to offer its

member-growers a more stable market for their produce because pool proceeds are not limited to the performance of a single crop. Pooling multiple crops

enables commodities receiving more favorable returns

to support those confronting poor market conditions.

This mutual support of commodities in a pool can benefit both the producer and cooperative.

In a multiple pool, each commodity is accounted

for separately and earns proceeds independently.

Again, although only one commodity was considered,

the example in Table 1 would be considered to be a

multiple pool because each of the three grades of

apples earned proceeds independently. General overhead, sales, and administrative costs are shared among

each commodity. However, direct costs for items such

as labor, processing, and packaging materials are

assigned proportionately to each commodity. A multiple pool may be appropriate for a cooperative with

members who produce widely diverse crops. For

example, a highly seasonal and perishable speciality

commodity that requires specialized handling may

need separable accounting, especially if the commodity is also considered high risk/high return compared

with other crops being marketed. A downside to operating separate pools is that the benefits associated with

market stability through mutual support are lost.

Critical to the success of this type of pooling

arrangement will be the cooperative’s ability to accurately identify and assign overhead and direct costs to

each commodity. Further complicating the procedure

are the potential challenges in identifying raw product

value. Because variations in volume of a commodity

delivered, the value of finished products, and differences in processing costs each affect-the raw product

value, the process of valuing each individual commodity can become arbitrary. Determining these values

will be less of a challenge to the cooperative’s management if a cash market or other form of price discovery

exists for the commodity.

Regardless of which source of market information is used to value raw products, a well-defined and

documented method for allocating both commodity

values and costs is essential. Arbitrary assignment of

raw product values and costs must be avoided to

ensure that no real or perceived issues regarding equitable treatment arise among pool participants.

In the single pool, commodities are accounted for

as a whole and earn proceeds mutually versus independently in a multiple pool program. Just like the

multiple pool example, general overhead, sales, and

administrative costs are shared among each commodity marketed in the single pool structure. Direct costs,

although accounted for on an individual crop basis,

are aggregated for the group of commodities in the

pool.

Pool proceeds are calculated by subtracting total

direct costs, total overhead costs, and the total cost

(value) of the raw products from the revenue generated from the sale of finished products. Proceeds are

allocated to grower accounts in proportion to the percentage of raw product value. A common example of a

single pool would be vegetable producers delivering

corn, green beans, peas, and carrots that will be combined to produce a vegetable blend. Instead of operating four individual pools, it is more efficient for the

cooperative to operate one pool and treat each individual crop as an input in the production of the final

product.

One advantage of the single versus multiple pool

is that difficulty in assigning costs or problems associated with arbitrarily assigning costs are lessened.

Further, the single pool allows both the cooperative

and member-grower to capitalize on the efficiencies

from allocating market risk among multiple commodities.

Table 3 presents a modification of the apple producer example in Table 1. All product volumes, market

prices, and costs are assumed to remain the same.

Direct costs are also calculated and assigned in the

same manner. However, indirect costs are no longer

assigned to individual pools but are deducted in total

from the gross margin on aggregated sales.

Proceeds are distributed based on the relative

value of individual commodities in the pool. In this

example, the value of Grade 1 apples represent 42.5 of

gross revenue ($312,000/$136,000) and Grades 2 and 3

represent 33.1 ($312,000/$98,000) and 24.4

($312,000/$78,000), respectively. Pool proceeds are cal10
Table 3- Example of single pool calculations

Grade 1

Raw Product Receipts From Members (bu.)

Grade 2 Grade 3 Total

Producer A 2,000 4,000 8,000 14,000

Producer B 9,000 3,000 1,000 13,000

Producer C 6,000 7,000 4,000 17,000

Total 17,000 14,000 13,000 44,000

Cooperative Sales

Gross Revenue

Cost/Value of Raw Product

Per Unit

Direct Costs (labor, packing, etc.)

Per Unit

Gross Margin

Overhead and Administrative Costs

Pool Proceeds

Return to Growers

Per Unit

Percent of Proceeds

17,000@$8

$136,000

$81,600

$4.80

$17,000

$1 .oo

$37,400

$15,000

14,000@$7

$98,000

$63,700

$4.55

$12,600

$0.90

$21,700

13,000@$6

$78,000

$46,800

$3.60

$9,750

$0.75

$21,450

$312,000

$192,100

$39,350

$80,550

$109,459

$6.44

134

$85,397

$6.10

134

$62,794

$4.83

134

$65,550

$257,650

culated and allocated among each individual grade by

multiplying pool proceeds by the percentage value of

the crop. In this example, a pool proceeds allocation of

$1.64/bu. (e.g. ($65,550 x .425 I/17,000), $1.55/bu., and

$1.23/bu. is made to Grade 1,2, and 3 apples, respectively. These results differ slightly from the multiproduct pool example.

In the single pool case, Grade 1 and Grade 3 fruit

earn $0.27/bu. and $O.O4/bu. less and Grade 2 apples

earned !$0.36/bu. more. Because pool proceeds are calculated on aggregate rather than individual pool sales,

the percent of proceeds relative to the value of the raw

product is also affected. As with the multi-product

case, each crop in the single pool returned earnings

above the cash market value. However, because proceeds are determined collectively rather than individually, the average earnings for each of the three grades

is the same 34.

This result reflects a slight reduction in the percentage return for Grade 1 and Grade 3 fruit and a

moderate improvement in the percentage return for

Grade 2 apples. This comparison also illustrates how

commodities marketed through a single pool can support and complement each other. In this example,

although the average prices paid for Grade 1 and

Grade 3 fruit were somewhat lower than they were in

the multi-product pool, there was an improvement in

average price received for Grade 2 apples. Consequently, producers delivering Grade 2 apples benefitted from pooling their fruit with Grades 1 and 3.

It,is important to realize that this example only

considers the marketing and pooling activities for a

given year. Over time it is most likely that each of the

three grades will experience cyclical fluctuations in

prices received. Therefore, although Grade 1 and

Grade 3 fruit yielded higher returns this year, the converse could also occur. Further, if this example were

carried out over a number of years, it is expected that

the average pool would provide a more stable and

consistent return to the grower.

The Question of Subsidizing

The number of pools a cooperative may operate

can vary considerably. In the most simplistic case, the

cooperative wouId operate a single pool for all products. On the other hand, the cooperative may choose to

operate separate pools for each variety and/or grade

of product it receives.

11
For a cooperative handling multiple commodities

or varieties, the effect of not operating separate pools

is an increase in the average number of products, as

well as greater diversity, in the pool or pools operated.

Operating fewer, but broader, pools should reduce

accounting costs because there is no longer a need to

separate products or for allocating costs among a larger number of pools. Further, averaging the combined

returns of a number of heterogenous products should

reduce the yearly variation in grower payments.

One problem with operating a broad product

pool is that the potential for some members to subsidize others is increased. Subsidization is possible

when commodities generating high net returns are

combined with products yielding lower returns and

producers of the higher valued products do not receive

proportionately higher payments. Consequently, producers who feel they are not receiving adequate compensation are likely to be less than enthusiastic about

pooling to market their produce. Further, given the

potentially complex relationships between commodities in a marketing pool, it can become increasingly

difficult to ensure that equitable payments are being

made to all producers. Consequently, there is potential

for dissatisfaction with the pooling program and the

average price paid.

This situation can also lead to apathy among

growers who may feel that there is no incentive to produce and deliver high-value or high-quality crops to

the cooperative. This particular issue is sometimes

cited as a drawback of a pooling operation. The challenge to the cooperative is to operate a commodity

pool that accurately values raw products according to

their future profitability.

Buccola, et al, addressed the issue of subsidization in their examination of flexible grower payment

formulas. The cooperative principle of service-at-cost

implies that producer-members should receive the

final product value of products delivered less any processing and handling costs. A cooperative can easily

apply the service-at-cost principle if it separates member products and maintains individual accounts.

However, this is often a highly inefficient and costly

method of accounting. Pooling can offer greater marketing flexibility and an increased ability to diversify

and reduce member income risk. The issue that certain

products in a pool subsidize others arises from the

argument that by returning an average price, the pool

violates the service-at-cost principle.

In their research, they examined alternative pool

payment formulae with an objective to address the

subsidy problem. The study reviewed the structure of

pool payments and alternative ways of valuing raw

products in addition to outlining conditions under

which the service-at-cost principle is or is not violated.

Through simulations, the research tested several alternative methods of determining per-unit returns: moving average; exponential smoothing; econometric

model; and raw product market price.

Results of the simulations indicated that weighting raw product deliveries with simple 3-year averages of their previous returns resulted in lower mean

subsidies and more equitable income allocation than

any of the other three methods. The simpler methods,

moving averages and exponential smoothing, outperformed the more complicated models as well as the

standard practice of weighting patronage by raw product market prices.

The research concluded that a product should,

over a reasonable period of time, be paid its long-run

contribution to pool net returns. Further, any random

deviations between payment and contribution must be

small enough to be acceptable. Recognizing that raw

product weights act as relative forecasts of per unit

returns, if the quantity of products delivered are

uncorrelated with per unit returns and all products per

unit returns are biased in the same proportion, no

product can subsidize another in the long run

(Buccola).

Competitive market prices provide considerable

information about future market prices and are frequently a good predictor of future net returns.

Consequently, the raw product prices obtained in a

competitive market are frequently used as the basis for

establishing patronage weights. However, if a cooperative is operating in a market where trading is thin and

information is either inconsistent or unavailable, estimates are likely to be unreliable and the cooperative

must evaluate alternative payment plans to ensure

equitable treatment of members.

Cooperative Examples

Several examples of pooling programs are currently being employed by several different fruit and

vegetable cooperatives. This section illustrates how a

cooperative pooling program is structured in practice.

These examples are not a comprehensive summary of

all existing pooling programs, but rather, present actual applications of many of the components of a pooling

program previously discussed.

Ocean Sprsy Cranbetrles, Inc.: It is

headquartered in Lakeville-Middleboro, MA, and

occupies a leadership position in the cranberry

12
industry. Ocean Spray’s marketing of member product

accounts for about 80 to 85 percent ofthe North

American production of cranberries. The cooperative

buys product from members farming in

Massachusetts, Wisconsin, New Jersey, Oregon,

Washington, Florida, and Canada. The cooperative’s

product line includes fresh cranberries, fresh

grapefruit, processed products, juices, and dried fruit.

Ocean Spray also operates several bottling plants

throughout the United States.

This centralized cooperative organization for

cranberry growers aids in efficient marketing, new

product development, enhancing demand, and planning the necessary production required to meet that

demand in a way that is most advantageous to its

members. The cooperative provides numerous marketing and processing alternatives for its members plus

many production-related services. Members share pest

management and water nutrient expertise provided by

the cooperative, as well as the use of harvesting containers. Each member bears the shipping costs to the

nearest receiving station, but remote shipping is often

subsidized. Specific regional delivery requirements

and fruit standards are itemized in a grower code book

provided annually.

Ocean Spray uses marketing contracts with members. Current marketing agreements are 3-year contracts. Production is carefully planned by the membership through the cooperative. All bogs are mapped

and production is planned well into the future. The

grower must communicate how delivery will be made,

provide a reasonable crop estimate, and report any

changes in Ocean Spray contracted acreage every

growing season. A pesticide plan and report must also

be submitted by each grower for review and approval

each season. Random samples are taken from every

delivery to the receiving station to test for excessive

pesticide residues.

Ocean Spray operates a single commodity pool

that includes cranberries for both fresh and processed

use. The board determines how much fruit can be sold

fresh and the number of barrels needed to meet this

projection. There are very different cultural practices

between fresh and processed bogs, and fresh fruit

must possess a “keeping” quality. Typically, fresh sales

account for 10 percent of the crop while processed

products represent the remaining 90 percent.

Various premiums are offered to growers delivering product that meets certain quality parameters,

such as cranberries with high sugar solids that are suited to blending for juices. Discounts are imposed for

any trash, defective fruit, and poor color. Incentives

are provided for production and harvesting for the

fresh market and for producing for export overseas.

Fresh fruit production must be pm-qualified and meet

an additional delivery qualification to earn a premium.

All revenues received from the sale of cranberries

through the cooperative are pooled. Member growers

receive advances upon crop delivery and final compensation shortly after the completion of harvest from

this pool, based on the quantity and quality of the

cranberries they have delivered to the cooperative (It

generally takes 18 months to pay out on a particular

crop. The fiscal year is September 1 to August 30.) The

costs of the marketing services the cooperative provides and the related operating expenses are also taken

from this pool.

Each grower must obtain common shares of stock

in the cooperative. The amount of stock that must be

held depends on the grower’s recent production 1eveIs

and the pre-determined common stock equity quota.

There is usually a period of time over which the grower can accumulate the necessary number of shares, but

arrangements with the cooperative to acquire them

vary.

This becomes a significant capital expense for the

grower because the shares must be held until termination of the contract, when they are then redeemed or

transferred. Changes in the member firm’s legal structure must be communicated to the cooperative.

Transferral of ownership or leasing with controlling

interest in the cooperative must be approved by the

cooperative. The agreements between the growers and

the cooperative are renewed every 3 years, but subject

to termination by an advanced written notice.

N8tionai Gr8pe C&opemtive

ASsod8tiOn, inc. / Welch Foods inc.: Welch s is

the processing and marketing affiliated cooperative of

National Grape Co-operative Association, Inc., whose

1,500 patrons supply its principal raw products,

Concord and Niagara grapes from more than 41,000

acres of vineyards in Michigan, New York, Ohio,

Pennsylvania, Washington, and Ontario, Canada.

Welch’s manufactures and markets fruit juices,

blended fruit juice and cocktails, frozen concentrated

fruit juices and cocktails, jams, jellies, preserves and

spreads, fruit juice bars and fruit-flavored carbonated

beverages. The cooperative operates plants in Lawton,

MI; North East, PA; Grandview, WA; Westfield, NY;

and Kennewick, WA.

The cooperative operates two commodity pools

for members grapes. Deliveries to the Eastern Pool

1 3
consist of Concord and Niagara grapes produced in

New York, Pennsylvania, Ohio, Michigan, and

Ontario, Canada. Western Pool deliveries come from

the State of Washington. Both pools are operated on a

crop-year basis, but due to the storability of the

processed products manufactured, it may actually

take up to 2 years for the pool to be closed.

Pool payments are structured to emphasize

grapes with higher sugar solids. The economic motivation behind this premium is that deliveries of raw

products with high sugar content enables the cooperative to produce sweetened fruit products without having to add other sweeteners. Below standard grapes

may either be rejected or received under a low solids

program, and at a lower value.

Prior to 1992, National Grape allocated net proceeds from pooling operations on a direct accounting

basis. However, this method was found to produce

increasingly artificial results. Consequently, the cooperative developed a new method of valuing member

produce which measured the value of the cooperative’s crops relative to cash market purchases in each

local production area. These values are weighted by

the respective volumes of each processor to produce a

commercial market value (CMV) for the cooperative’s

crop in each area. Proceeds are distributed to each pool

on a proportionate basis.

Since its inception of the CMV pool program,

National Grape has evaluated and assessed whether

this methodology resulted in improved allocations

between the Eastern and Western pools. The cooperative’s board of directors began evaluating viable

options to resolve the allocation issue after a season in

which the spread in proceeds between the two pools

was significantly larger than normal.

After evaluating the existing method of allocating

proceeds, and the impacts of various options, the

cooperative formulated a new method that would

improve equitability for all members. The new system

is known as the modified CMV method (MCMV).

Under this plan, net proceeds are distributed (and

equity inputs required) on the same number of dollars

per ton in both pools. Producers share net proceeds

above CMV on an equal basis regardless of the pool to

which they deliver. Equity requirements are also

required on an equal, rather than proportional basis.

MCMV program advantages include: dampens

the volatility of the current CMV method; avoids the

complications and disadvantages of the former direct

accounting method; sends a strong value signal to

patrons whenever production falls short of, or exceeds,

market requirements; pool results average out close to

both previous methods used; and is relatively easy to

explain and comprehend.

The change from CMV to MCMV is not dramatic.

MCMV should prevent the spread from widening further when the difference between the CMV in the East

and West is abnormally large and when Welch s is very

profitable relative to CMV. Pool program changes will

be reflected in new membership and marketing agreements.

Citrus Marketing: Cooperatives have

traditionally played an important role in handling and

marketing fresh and processed citrus products.

Further, the marketing method most often used by a

citrus packinghouse is pooling. Although each

cooperative is unique in its application of pooling,

there are enough similarities to offer a generalized

overview of how a marketing pool is used in this

industry.

These cooperatives receive and market member

produce for either fresh or processed use. Given the

nature of the product, the cooperative is typically

active in both markets. All like-variety products are

generally combined in a seasonal pool. Citrus pools

are further separated by grade, variety, and use (fresh

or processed).

Appearance factors are important in citrus products going to the fresh market, and the cooperative

will operate individual pools to reflect differences in

size, color, or other physical characteristics. Fresh citrus is accounted for on a per-box basis. This unit of

measure is a legally defined term indicating the average weight by variety in a given box. Physical appearance is not an issue for processed citrus products. The

industry standard for valuing processed citrus is

pounds of solids.

The variety of citrus produced and contracted to

the cooperative generally determines in which pool the

grower will participate (i.e., fresh or processed).

However, once the crop has been harvested and delivered to the cooperative for grading, the cooperative

makes the final determination on which pool a grower’s fruit will be assigned to. Produce not meeting

fresh market standards is sent to processing outlets

where it is graded and allocated to a pool.

Most citrus cooperatives calculate returns to

member-growers on a per-box basis and use some

variation of a delayed payment schedule. Handling,

packing, capital retains, and other pool operating costs

are deducted from the grower s account.

14
Summary

This report defines and discusses the structural

aspects of commodity pooling programs as used by

fruit and vegetable marketing cooperatives. The

homogenous nature of many fruit and vegetable commodities has made pooling a common method of marketing by agricultural cooperatives. The ability to commingle grower-members production gives an

association considerable influence or control over the

timing, quantity, and quality of produce marketed. The

ability to consistently deliver both product volume

and quality will assist a marketing association in establishing itself as a reputable supplier which will in turn

enhance its ability to cultivate working relationships

with other market participants.

The benefits of cooperative pooling of produce

include risk sharing, improved marketing, increased

market power, quality control, and economies of scale.

Pooling can also be an effective way to insulate producers from periodic or seasonal price swings that

commonly characterize the marketplace. To ensure

equitable treatment, responsibilities and benefits are

shared proportionally by all pool members.

Marketing agreements are a critical component in

a cooperative pooling program because these contracts

ensure that the association has the long-term support

and commitment of its members. Marketing agreements provide the cooperative with information that

will assist in coordinating supply with demand and

provide an improved sales and bargaining position in

the market.

The objective of a commodity pool is to consistently return an average price higher than that

received by non-pool producers. Aggregating producer-member output gives the cooperative access to a

large quantity of product and enhances the association’s competitive position in the market. Further, allocating operating costs among a greater volume of

product generally results in a lower per unit handling

cost and more efficient use of plant or packing shed

capacity. The cooperative pool also benefits from an

experienced management team that generally has

access to market information and other expertise not

available to individual producers.

Successful cooperative pooling programs hinge

on their ability to provide excellent service and results

while ensuring that all producer-members are treated

equitably. Successful pooling programs require commitment from members. It will be difficult to preserve

loyalty if there is a perception that high-profit products being delivered to the pool are subsidizing lower

margin products. The cooperative must maintain harmony between small and large producers. The latter

may be more demanding in what they expect from the

cooperative.

A cooperative pooling program that rewards producers who meet or exceed minimum delivery standards will realize the benefits of greater marketing

flexibility while also assuring that all participants are

treated equitably All producer-members must understand the philosophy and mechanics of how their

cooperative and its pooling program work.

No singular pooling plan applies universally to

all fruit and vegetable marketing cooperatives. To

achieve the economic efficiencies and cost savings

associated with pooled marketing, a program must be

tailored to meet the individual characteristics of the

commodity being produced, the membership of the

cooperative, and the market being served. As the food

industry continues to become increasingly competitive, concentrated, and global, the advantages of commodity pooling become a more important aspect of

successful produce marketing program.

15
References

Buccola, Steven T., James C. Cornelius, and Ron R.

Meyersick, Pool Payment Equity in Agricultural

Marketing Cooperatives, Journal of Agricultural

Coupmtion, Volume 4,1989.

Dunn, John R. And Stanley K. Thurston, and William

S. Farris, Some Answers to Questions About

Commodity Market Pools, United States

Department of Agriculture, Economics, Statistics,

and Cooperative Service, EC-509,198O.

Jacobs, James A., Cooperatives in the U.S. Citrus

Industry, United States Department of

Agriculture, Rural Business and Cooperative

Development Service, Research Report 137,1994.

Jacobs, James A., Fruit and Vegetable Cooperatives,

United States Department of Agriculture,

Agricultural Cooperative Service, Cooperative

Information Report 1, Section 13,199O (revised).

Reilley, John D., Cooperative Marketing Agreements,

United States Department of Agriculture,

Agricultural Cooperative Service, Research

Report 106,1992.

Stewart, Bob and Michael A. Mazzocco, Investment in

Pro-Fat Cooperative, The Food and Agribusiness

Management Program, Case Study Series, Case

No. 931102, University of Illinois.

16
U.S. Department of Agriculture

Rural Business-Cooperative Service

Stop 3260

Washington, D.C. 20260-3260

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; (21 advises rural residents on developing existing

resources through cooperative action to enhance rural living;

(3) helps cooperatives improve services and operating

efficiency; (41 informs members, directors, employees, and the

public on how cooperatives work and benefit their members

and their communities; and (6) 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. 20260-9410 or

call (202) 7206964 (voice or TDD). USDA is an equal

opportunity provider and employer.