Page

Distinctive features of membership ..................... 2

Members are owners and patrons ................. 2

Member objectives ............................... 3

Member responsibilities ............................... 5

Understand the cooperative ....................... 5

Adopt legal papers ............................... 6

Select and evaluate directors ...................... 6

Provide necessary capital ......................... 6

Use and support the cooperative .................. 7

Participate in affairs ............................. 8

Provide information .............................. 9

Help obtain new members ........................ 10

Member control ...................................... 11

Voting methods .................................. I I

Nominating and electing directors ................. 12

Member decisions ................................ I5

Developments and challenges .......................... 16

Attention to member concerns

Advisory men? bers . . . . . . . . . . .

Member attitudes . . . . . . . . . . . .

................... 1 8

................... 19

................... 20

ner-members ....... 22

programs ......... 23

................... 24

Large vs. medium and small far‘r

Member understanding of capita 1

Member equity retirement . . . .

Cooperative Information Report 1, Section 7

Issued April 1990

Reviewed and approved for reprinting September 1993

Cooperative

Member

Responsibilities

hcl Control

“A cooperative is a voluntary’ contractual organization of

persons having a mutual ownership interest in providing themselves a needed service(s) on a nonprofit basis. It is usually

organized as a legal entity to accomplish an economic objective

through joint participation of its members. In a cooperative the

investment and operational risks, benefits gained, or losses

incurred are shared equitably by its members in proportion to

their use of the cooperative’s services. A cooperative is

democratically controlled by its members on the basis of their

status as member-users and not as investors in the capital structure of the cooperative.“1

Cooperative members are persons-individuals,

partnerships, corporations, and associations-holding membership in a cooperative organized without capital stock or

holding stock in a cooperative with capital stock. These persons

are instrumental in starting or keeping the cooperative business

going because they realize they can solve their economic problems and attain their goals only by working together. They

voluntarily affiliate with the cooperative.

Any person marketing, purchasing, or obtaining a service

through a cooperative is a patron. Members filling their obligation by patronizing their cooperative are called memberpatrons.

Cooperative Criteria. Job K. Savage and David Volkin. FCS Service Report 71. 1965.

11 PP.
Historically, members organizing farmer cooperative

businesses have developed self-help methods and techniques to

solve their problems and increase their net farm income. As

member-owners, they make capital investments to get the cooperative business started and keep it financially healthy. As member-owner-users, they hold membership, use the cooperative’s

services, and are interested in seeing that their cooperative effectively and efficiently serves them. Their objectives of service and

improved net margins rather than returns on investment are the

distinctive features of cooperative membership.

Members Are Owners and Patrons

The requirements for membership in local or centralized

farmer cooperatives usually consist of the following:

1. Members must be producers of farm products. They

may be a landowner receiving share rent as well as an owneroperator or tenant-operator. The bylaws of many cooperatives

provide that if members do not patronize their cooperative for

1 (or 2) consecutive years, they lose the right to vote and the

membership stock or certificate shall be transferred to a nonvoting status:

2. They must have a financial investment ranging from $1

to $100 or more. A few agricultural cooperatives do not have

any financial requirements-only that a person must be a

farmer patron, or in some cases also do a specified minimum

amount of business a year.

Federated cooperatives require that member cooperatives

must be agricultural producer associations; they usually require

a larger financial investment for membership, such as $25 to

$1,000 or more.

Members are obligated to patronize their cooperative.

This varies from a loosely implied obligation to a legally binding contract between members and their association to patronize it on a specific basis. Types of &vice members want dictate

the nature of the patronage obligation. Generally, these agreements are more binding in cooperatives providing marketing

services than in those purchasing supplies or providing specialized services. A few cooperatives require in their bylaws or

legally enforceable marketing contracts that members must do a

specified percent of their business with the cooperative

2
annually. Such arrangements do not destroy the voluntary character of members’ affiliation with their cooperatives.

A cooperative generally does most of its business with

members. The percent of member business required ranges from

50 to 100 percent. Three Federal laws-the Capper-Volstead

Act, the Cooperative Marketing Act of 1926, as amended, and

the Internal Revenue Code, and many State cooperative statutes-specify that to qualify as a cooperative, at least 50

percent of the dollar volume of business must be done with

member producers. The Internal Revenue Code further specifies

that to qualify for exemption from Federal income taxes, no

more than 15 percent of the nonmember business of a farm

supply cooperative may be done with nonmembers who are not

producers of agricultural products. Most agricultural cooperatives conform with the provisions of one or more of these acts.

Generally, agricultural marketing cooperatives have no problem

in maintaining a high volume (90 to 100 percent) of business

with members.

Farm Credit system cooperatives-Banks for Cooperatives, Production Credit Associations, and Federal Land Bank

Associations-require eligible persons seeking loans to purchase

membership stock before completing the loan. Rural residents,

nonfarmers as well as farmers, in areas served by rural electric

or telephone cooperatives become members to receive service.

Persons wanting to participate in rural housing, recreation,

credit unions, or other cooperative programs must become

members to receive these services.

Member Objectives

Farmer members form cooperatives to obtain needed

services and improve their farm’s earnings rather than to realize

a high return on their investments.

Farmers establish cooperatives as extensions of their own

farming operations-to function as the purchasing or marketing

departments of their own farms. Marketing cooperatives

provide farmers the tools they need in today’s mass marketing

of such products as fruits, vegetables, grain, livestock, poultry,

milk, forestry, flowers, potted plants, and others. Members’

products are assembled and graded or processed to meet buyer

specifications as to size, color, and other quality terms.

Members use purchasing cooperatives to buy high quality

production supplies in large volume. In the early years, cooperatives’ pooling of feed and fertilizer orders was successful.

3
Later, cooperatives began to handle and warehouse other

production supplies such as seed, spray materials, petroleum

products, farm equipment, fencing, roofing, paint, and many

more. In many cases, marketing and purchasing cooperative

operations combine to meet the broader service demands of

members.

Members also may obtain specialized services such as

spreading fertilizer and lime, spraying, pesticides, harvesting

crops, cutting timber, or irrigating crops and orchards. Members may provide a wide range of other services through their

cooperative regardless of where they live-in rural areas or in

the city:

I. Electric service through rural electric associations.

2. Credit service through Production Credit Associations, Federal Land Bank Associations, or credit unions.

3. Telephone service through telephone associations.

4. Craft marketing service through craft marketing associations.

5. Consumer purchasing such as food, drugs, furniture,

or other merchandise through cooperative stores.

6. Health services through group health associations,

community hospital groups, and others.

7 . Many other special services, including housing,

recreation, legal aid, and transportation through cooperatives.

So the purpose of a cooperative corporation is to serve

the member-users. Usually its success is directly related to the

amount of business it does for members or the services it

provides them.

Members establish their cooperatives essentially as nonprofit enterprises in the sense that they are not organized to

make monetary gains for the cooperatives as legal entities or for

members as investors. Where monetary gains do arise, they are

allocated and distributed to patrons in proportion to their use

of the services. Such distributions are called patronage refunds.

Where net savings in purchasing cooperatives or net margins in

marketing and service cooperatives are realized and distributed

to producer-member-patrons, they become a portion of the net

income of those patrons’ farming operations. Where net savings

arise in consumer cooperatives, they lower the patrons’ cost of

goods or services for family living purposes.
Member responsibilities start with the conception of the

cooperative and remain throughout its life to assure successful

organization, sound management, and operation. Members’ role

in management differs from investor-oriented corporations

because they both own and use the cooperative.

Specific responsibilities accompany members’ right to

make wishes known concerning needs and services desired from

the business. In organizing cooperatives, potential members

must obtain competent advisers, determine what is involved in

cooperative organization and operation, and get facts and figures to present to other potential members. The “potential

members’ survey committee” must judge whether the proposed

cooperative is likely to be successful and beneficial; and it

details the organization pattern for the new business. The

responsibilities of a “potential members’ organizing committee”

include signing the required number of members, obtaining subscribed member capital, arranging for capital loans, drafting the

legal organization papers, filing the articles of incorporation to

obtain a charter, and arranging the first meeting of original

members.

Understand the Cooperative

Members are responsible for understanding their cooperative-its purpose, objectives, benefits, limitations, operations,

finances, and long-range plans.

They should read the articles of incorporation and bylaws

to understand the purpose of their cooperative in serving its

members.

Members must also understand that laws limit their

rights or powers and those of their boards of directors. They

must operate within the framework of statutes and codes in

performing any function. Members also need to understand that

bylaws or policies of their elected directors may further limit

their operations by establishing member obligations,

regulations, and quality controls exceeding those prescribed by

legal statutes.

Members must understand the need for long-range

planning for services, facilities, and capital. Cooperatives have

had a part in bringing many technological changes to the business of agriculture; changes continue, however, indicating that

5
cooperatives need to update their long-range plans continually

through research and study based on projected member needs.

Members can accelerate this long-range planning by keeping

directors and hired management informed of their farm and

home plans.

Adopt Legal Papers

Members are responsible for understanding, adopting,

and amending legal papers. They should read and understand

the cooperative’s articles of incorporation and bylaws to know

how the business is to operate and what services it can provide.

They need to analyze proposed bylaw amendments and

determine how they will affect the association before voting to

approve them. Members are responsible for knowing the

contents of legally enforceable marketing contracts or other

legal papers before signing them so they can fulfill their obligation to the business.

Select and Evaluate Directors

Members should be intimately familiar with the cooperative and as owners assume a positive, broad role in its

management. Although the cooperative is a democratically

controlled form of business, members cannot make all decisions

directly. They elect directors from their membership to

represent them in most affairs of management.

Members should understand and evaluate board actions.

Directors not assuming responsibilities entrusted to them,

including complying with laws governing cooperatives, should

be removed. Members must exercise sound judgment and avoid

unnecessary pressure on directors. Member control of any

cooperative is, to a large degree, determined by directors’

actions. Members must encourage and challenge directors and

management to provide needed services and increase farm

income.

Provide Necessary Capital

Basically, members must provide equity capital for the

cooperative business. Most cooperatives have a small beginning

and find it necessary to borrow much of the needed funds.

Later, as they become established and business services expand,

cooperatives generally find it neither necessary nor wise to rely

.

6
on member capital to meet all financial needs. The member or

equity capital is used as a base to apply for a loan. Members’

investment in their cooperative must increase this base before

borrowing power can be increased.

using

Memb ersfinance

conve nti onal bu

thei r

sine S

cooperatively

s methods su

owned busin

ch as capital

ess by

stock,

debentures, reserves, bank loans, and a few practices distinctive

to cooperatives, ,such as revolving capital funds. Cooperatives

accumulate funds through retaining a portion of their patronage

refunds, or deducting per-unit capital retains from sales

proceeds. If the bylaws so stipulate, after the necessary capital

is acquired, the oldest equity amounts are paid off from current

retains. In some cases, retains are adjusted annually, based on

use of services. Members must be prepared to make necessary

changes in capital structure, including increases and decreases,

when member investment requirements change. Members must

understand these financing plans if they are to provide adequate

equity capital.

Use and Support the Cooperative

Members must supply an adequate volume of business if

the cooperative is to operate efficiently and successfully.

Through membership or marketing agreements, they should

commit most or all of their marketing or supply purchases to

the cooperative each year.

The strength of the bond between members and their

cooperative is a most important factor in cooperative success.

Underlying this bond is interest that develops loyalty to the

organization and its objectives.

The sense and pride of ownership responsibility means

more than merely patronizing the business and reaping financial

benefits. It involves more than building an organization with

adequate volume to employ talented personnel to operate the

business in the best interest of members. It is molding the cooperative into a force that influences the growth, development,

and business climate of the members’ farm and community and

helps shape the destiny of agriculture.

Lack of member support is one weakness that can retard

cooperative growth. Effective member involvement beyond just

patronage gives the cooperative the necessary vi&y to

maintain its competitiveness as a business, and keep atuned to

its member-owners’ needs.

7
Cooperative leaders have suggested ways to strengthen

member support: (1) Know how groups function and make

them successful through providing opportunities to initiate ideas

and discuss proposed actions; (2) accent member relations

because most members have not experienced the ‘inside’ feeling

of involvement of the founders-especially in today’s larger

cooperatives; (3) run the business efficiently; (4) provide upto-date service; and (5) remember that little things count big

in developing member loyalty.

Participate in Affairs

Members’ participation in affairs of their association

increases the feeling of ownership and responsibility for success.

But encouraging this participation requires planning and

considerable effort. Boards and managers must want members

to participate and must understand the requirements to keep

them active. Management’s function in providing for the twoway flow of information can create member interest,

enthusiasm, loyalty, and responsible participation.

Meetings-annual, educational, and special-offer a good

means of member group participation, especially where member

questioning is promoted. An important aspect of successful

member participation is providing adequate time for

explanation and discussion. While suggestions and complaints

will surface, this gives management an opportunity to determine

the underlying causes. Members want to question the decisionmakers directly, thus increasing the importance of this

exchange with management.

Cooperatives increasingly are providing time at their

annual meetings for member questions and suggestions. Others

hold community meetings, or director-conducted meetings to

solicit member inputs. Many marketing cooperatives continue

to use a question on the back of their checks for payment of

product to obtain member participation.

Members themselves must make an effort to participate.

They need to attend all meetings for members, and encourage

others to go. They should discuss the problems, express opinions, and generate ideas for better or new services. Members

should vote on issues presented and accept the decision of the

majority.

Members should accept special committee assignments

when asked. This will help them realize the cooperative belongs

a
to them and that it should be treated as a business.

Members can be good business citizens of their association by learning about it and other cooperatives. They should

plan, participate, and share costs in educational programs

targeted at nonmembers and the general public. Public knowledge about cooperatives affects attitudes and influences legislation. Members and other cooperative-minded people should

let legislators know their wishes.

Provide Information

Members are a cooperative’s unique resource, and when

properly informed, they make worthwhile contributions. Members must be provided both good and bad facts about their

cooperative -what it is, how it functions, what are its problems,

and options or choices they can help make.

Today’s cooperatives are larger and require greater operating skills as they assume more of producer-members’ work

and services. The ; entire team operating the cooperative-members, directors, manager, and employees-must know the

limitations and capabilities of the cooperative for it to appeal to

members as a way of improving their net income and welfare.

Top management-including directors-can most effectively

develop this member resource. Management must initiate member education to achieve two-way communication and member

participation.

Education and member relations personnel must establish

a relationship with other cooperative personnel at all levels to

ensure that each understands the importance of appealing to all

members-leading farmers, long-time members, women, young

farm couples, and others. Members must not only be informed,

but also they must have opportunities to convey their questions,

their needs, and their opinions to the association leaders.

Membersmust keep an open mind and be alert for new

services needed and new ways to make the cooperative more

effective. They have a responsibility to provide this information

to their directors and hired management.

Members place great responsibility on directors they

elect. They must share this responsibility by supplying directors

with information on needed purchasing, marketing, or other

farm-related services. Informed directors can better serve members by establishing board policy, planning for needs with hired

management, and voting when decisions need to be made.

9
Help Obtain New Members

A cooperative must continually replace members who move

away, quit farming, or die. In some cases, additional members

may be needed to financially strengthen the association or

increase its volume. Present members can help by encouraging

their neighbors to patronize the cooperative and become members.

The business operation of a cooperative and the statutes

under which it is organized influence its membership policies and

requirements. These policies have a bearing on member

responsibilities to increase or maintain membership.

People joining a cooperative should understand what a

cooperative is, how it operates, its possible benefits, and its

limitations. Contrary to some beliefs, few people join cooperatives

because of social objectives but rather for economic benefitsservices and increased income. Most people want to be shown the

advantages arising from cooperative membership, and unless there

are real advantages, few prospective members will join; or if they

do, they will not patronize it.

Members may join a cooperative by purchasing membership stock, paying a membership fee, or earning a membership

via patronage refunds.

If the association is a capital stock organization, members

receive stock certificates as evidence of their ownership interest.

Most stock cooperatives issue one share of common stock per

member to show membership and voting rights. Other classes of

common stock and preferred stock, generally nonvoting, reflect

additional capital contributions.

If the association is a noncapital stock organization, it

issues some kind of membership certificate. Revolving fund certificates or other documents will show capital contributions of members.

Cooperatives that provide supplies and certain services normally have open membership. They are interested in sales to both

members and nonmembers. Members usually benefit from

increased volume and therefore should feel some responsibility for

increasing membership and volume.

Many cooperatives that process and market or bargain for

products have a selective membership policy. They are seeking

dependable volume and high quality products. Members of these

cooperatives should feel responsible for recommending to their

manager or membership committee farm operators whom they
believe are quality producers of the products their cooperative

processes and markets.

Some service cooperatives, such as rural electric or telephone associations, require membership of all persons served in

their service area. Members are responsible for recommending

persons who move to the area and obtain the service.

Farm credit associations require membership of those

producers borrowing capital from them. Members have the

responsibility to explain services they receive and encourage

: producers needing capital to explore membership.

One of the three distinctive characteristics of cooperatives is

democratic member control. Democratic control means authority

to control the cooperative’s affairs; it rests with the members

using it. Members exercise this authority by voting at annual

meetings and other meetings called when decisions are needed.

The democratic characteristic is steadfastly maintained by relating

voting power to use of the cooperative’s services.

Voting Methods

Most cooperatives limit each member to one vote. In some,

however, the basic member vote is supplemented by permitting

additional votes based on the previous year’s volume of patronage

in dollars or tonnage, or the number of shares held up to a stated

limit, or some other restricted basis.

In those cases where voting is permitted on other than a

one-member, one-vote basis, State and Federal statutory

limitations are placed on the rate of dividends cooperatives may

pay on capital shares.

Legal statutes permit cooperatives considerable latitude

concerning voting procedures. Quorum requirements vary from

those members present to a specific number or percent of the total

membership. Bylaw requirements may vary from no specification,

where laws of parliamentary procedure apply, to a simple

majority or to three-fourths either of those voting or of the total

membership.

Some cooperative bylaws, usually in regional cooperatives,

provide for proxy and mail voting. Written proxy designation

executed by the member, or his duly designated representative,

and filed with the cooperative secretary is provided by some asso-
ciation bylaws. Cooperatives using mail voting generally think

they get a better expression of member opinion. Federated or

mixed cooperatives may specify delegate voting procedures for

member associations.

Ward2 and others found that in 92.6 percent of the cooperatives responding to their survey, members vote on the basis of

one-member, one-vote; 3.7 percent vote on the basis of the

amount of business with the cooperative (proportional based on

patronage); 2.6 percent vote according to share of ownership

(proportional based on equity capital) in the cooperative; and 1.1

percent vote under some modification or combination of the three

previous methods.

In 99.3 percent of these cooperatives’ members vote for

directors rather than for delegates. Members vote at-large for

directors in 85.1 percent of the respondent cooperatives.

Nominating and Electing Directors

Democratic election of directors is vital to democratic member control. This involves three steps: Legal framework, informed

member electorate, and the election process.

Articles of incorporation and bylaws usually define who

may serve, number of directors and length of term, method of

selection, who may vote, and the duties and responsibilities of

those elected.

Members must have a background of general information

on the cooperative before they can make an intelligent evaluation

of the qualifications of candidates for directors.

The next step is nominating qualified members to serve on

the board of directors and voting in the election process.

Members choose a few of the leading persons from the

membership to serve as directors. These directors represent members in certain phases of management until their successors are

elected.

Bylaws of smaller cooperatives may provide for smaller

numbers like 5, 7, 9, or 11 directors. As cooperatives grow, merge,

become regional in scope, or federated in structure, bylaws often

provide for an increased number of directors to represent districts

or regions, affiliated local associations, volume of business, or

varying commodity or product interests within such associations.

‘Voting Systems in Agricu tural coo peratives. Clement E. Ward, Vernon E.

Schneider. and Ramon Lopez. ESCS Cooperati ve Research Repor t 2. 1979. 27 pp.

12
Early cooperatives tended to reelect directors as long as

they would serve or lived. In more recent years, many cooperatives have adopted policies or bylaws that limit the number of

successive terms or establish maximum age limits, such as 65 or

70 years.

According to Biggs3, when members of a farmer cooperative elect a director, they most frequently turn to a fellow member who is 35 or older, who has farmed for 25 years, who has

been in the cooperative more than 10 years, and who does 81

percent or more of his business with the cooperative.

Nominating Procedures

Most cooperatives apparently believe nominating committees are effective in assuring democratic selection of directors

because surveys show 80 to 90 percent use them.

Suggested guidelines for selecting a nominating committee

are:

1. Form it well in advance of the annual business meeting.

2. Limit it to members-no directors, manager, or staff.

3. Include former directors.

4. Select a minimum of three or maximum of five members, unless otherwise provided in bylaws.

5. Select members familiar with the cooperative’s bylaws

and State statutes.

While many nominating committees are appointed by the

board or the chairman, it is more democratic for members to elect

them. Bylaws of some large federated and centralized cooperatives

provide that chairmen of local boards serve on district nominating

committees.

Democratically selected boards should have balance-be

representative of geographic areas, age groups, and varied

interests, commodities, and services. When bylaws limit age or

terms of directors, this must be considered.

Each prospective director nominee should be considered on

an individual basis-i.e., training for job of director, personal

qualifications including character, talents to offer the board, and

adequate time to devote to the job. Biggs3 found that most cooperatives require 2 days or less a month of a director’s time for

planning and controlling operations, providing input to board

“Farmer Cooperative Directors, Characteristics, Attitudes. Gilbert W. Biggs.

FCS Research Report 44. 1978. 58 pp.

13
decisions, and preparing for decisionmaking.

Where they exist, members of advisory boards or committees and associate or junior members such as young farmers may

be top prospective director nominees.

Nominating committees should submit more nominees for

directors than positions to be filled.

After nominees are selected and before the election, cooperatives must acquaint members with the candidates. Members must

know the qualifications of each nominee to vote intelligently.

Responsibility for informing members may be assigned to

the nominating committee, member relations committee or

department, present board of directors, or management. Cooperative leaders generally agree a biographical sketch of each nominee should be mailed to members before the election. Cooperative

newsletters, newspapers, or magazines provide excellent channels

for providing data on nominees to members.

Election Procedures

Most cooperatives elect directors at their annual meeting.

This is a democratic practice if a high percent of members attend

and exercise their right to vote. Careful planning, good publicity,

and a strong member relations program are effective.

A hazard to democracy is the temptation for some member

to propose that the present board be reinstated, or that the nominations be closed as soon as the minimum number are nominated

to avoid an election. These situations occur more often if director

election is the last item on the annual meeting agenda. Mail voting or secret ballot voting at the annual meeting helps avoid such

situations.

Public and Associate or Junior Directors

Public directors to look after the so-called public interest

are often required by State cooperative statutes. These directors

are usually appointed by a designated State or land grant

university official. They meet, function, and vote as all other

directors.

Some cooperatives have established an associate or junior

director system designed to train potential directors. Each director

may select one cooperative member-preferably a young farmerto serve with him for 1 year, attend all board and member meetings, and serve on committees. During the year, associate or

junior directors participate in discussions at board meetings and
speak at special member meetings. They do not vote in director

meetings.

Member Decisions

In cooperatives, members as owners make a number of

broad management decisions. Some of these are required by

State statutes; others by the cooperative’s bylaws. Still others

are subject to the general policy of the cooperative and the

judgment of its current board of directors.

Statutes pertaining to cooperatives only and those

pertaining to all businesses impose limitations and specify

actions that members can and must take to comply with the

law. For example, the Capper-Volstead Act of 1922, a Federal

law, recognizes the rights of producers to act together in associations without being in restraint of trade. Several other Federal

statutes provide rights for cooperatives to conduct business on

Main Street. The Farm Credit Act of 197 1 defines the cooperatives eligible to borrow from district Banks for Cooperatives

and the terms for loans to cooperatives. The Internal Revenue

Act of 1962, as amended in 1966 and 1969, provides tax treatment for farmer cooperatives and their member-patrons.

Every State has laws authorizing the formation of cooperative corporations. These Federal and State laws plus local

regulations determine many decisions members must make.

Many decisions require the advice of experts in a specialized

field such as law, accounting, engineering, and other technical

subjects.

Differences of opinion or philosophy sometimes exist

among cooperative leaders as to the types of problems or

propositions that should be brought before the membership for

decision. Certainly they should be limited to major ones

because members delegate to their boards most of the decisions

dealing with policy. As a rule, greater member understanding

and support will result if major items are brought before members for discussion and decision rather than explaining to them

after the fact why decisions were made by the board.

Members usually do not automatically assume their

responsibilities. Cooperative executives and boards of directors

are morally accountable for helping members understand their

role in management as owner-users. They provide the methods

and opportunities for members to express needs and desires

reievant to managing their cooperative.
Members’ input to major decisions is through discussions

at meetings and by voting. When organizing, members vote on

the bylaws prepared by the organizing committee with the help

of an attorney. They decide how their cooperative will operate.

After organization, members or their delegates may approve or

reject proposed bylaws, policies, and resolutions. Directors,

other cooperative leaders, or management may present

previously written resolutions for member consideration. Members may also present proposals.

Examples of major decisions members must consider to

comply with most State statutes are:

I . Changes in articles of incorporation, including

changes in capital structure, name, and number of directors.

2. Merger, consolidation, or sale of all assets.

Examples of other major policy decisions members often

consider are:

1. Amendment of bylaws;

2. Long-range objectives and plans;

3 . Major expansion of facilities and capital

expenditures;

4. Addition of major supplies or services, or expansion

into new markets;

5. Purchase of major assets of another firm or cooperative;

6. Major operating policies such as those pertaining to

credit, pricing, or subsidizing a department or service;

7. Retirement plan for member equities;

8. Sharing of net margins and risks among departments;

9. Handling nonmember business; and

10. Approval of major policies.

DEVELOPMENTS AND CHALLENGES

Internal growth, mergers, and acquisitions have rapidly

expanded many agricultural cooperatives. New multi-State and

national cooperatives have been created to help existing cooperatives gain economic efficiencies and increase market power

nationally and internationally.

Cooperative corporations are making efforts to retain

member-producer control and- influence as they become larger

and more complex organizations. Through local and commu-
nity efforts, cooperative business organizations are and must

continue relating to members and potential members through

their involvement, participation, and patronage. Through

developing programs to provide better understanding of cooperative characteristics and practices, associations plan to retain

and improve member and public attitude.

Cooperatives may be asking members the same basic

questions as in previous years to obtain ideas. But the memberpatrons and general public attitudes have changed. The “feedback” has changed; cooperatives are hearing plenty. The members want involvement; they want to talk to decisionmakers. To

obtain member participation and recruit new members, the followup must focus on what members are thinking.

To gain member participation, priorities must be established. The priorities may be based on urgency, importance, or

merit. A program then must be added to the priorities. The

program can be considered a plan of procedure and execution.

However, priorities plus program must result in member

participation, or sharing in common with other members to

make the difference.

Historically, cooperative members have participated as

established in Section 2 of the series of publications making up

Cooperative Information Report 1. Members accomplished

many jobs through actively working together-participating.

Member participation, and it must be on a brogram priority

basis, is even more important today. Recent events that underline this importance include: (1) Continued escalating

production, supply, marketing and service costs; (2) shifts of

national agriculture policies toward market orientation;

(3) questions about the public trust afforded cooperatives in

tax and antitrust laws; (4) increasing pressures on levels and

sources of supply; (5) increasing demands for environmental

regulations; (6) more interest in involving women; (7) signing

the first generation of life-long television viewers as members;

and (8) increasingly larger capital commitment needs,

especially on the part of young farm couples. These and others

increase the importance of member commitment and

participation at an accelerating rate in an industrialized agriculture.

The major adjustments cooperatives make in program

priorities of member participation in this transition period

could well determine the future of cooperatives and the member

as a family farmer in the next decade.
Farmer members need to continue working together a,,ld

participating in their cooperatives to achieve the adjustments

needed as supply and marketing aspects become more closely

associated. Management can and should provide the facts, but

members must participate with their vote in making decisions.

Member participation makes the difference in the priorities they

establish and the program they want.

In comparison to earlier members, today’s farmer cooperative members are probably better educated, have more

sophisticated entertainment tastes, guard their time more jealously, and are more appreciative of an efficient organization.

They want a board and a chairman who accomplish things

briskly and in a business manner. No matter what the operating

statement reads, the cooperative must readjust communication

channels, including conduct of annual meetings, to preferences,

habits, and expectations if it is to foster member participation.

Attention to Member Concerns

As cooperatives grow in scope and operation, members

often feel excluded from the decisionmaking processes. In more

recent years, extended efforts have been made to determine

member concerns and to communicate with them.

Many older members who started today’s cooperatives

are gone. The present generation has learned about the system

from them. The new generation must be told about their cooperative, and leaders must be prepared to listen to feedback.

Cooperatives that want to learn of member concerns are

taking the cooperative to the members. Examples are Farmers

Union Oil Co. meeting members face to face, Southern States

Cooperative’s directors holding community meetings, and

Indiana Farm Bureau Cooperative Association. co-op couple

dinners.

South Dakota4 researchers noted that farm supply and

marketing firms cannot hope to satisfy all the farmers of their

area. Special concerns found included the personality and

integrity of managers and employees, quality of products and

services, and competitive prices. The handling of deferred

4Factors that Determine Where Farmers Buy and Sell. Arthur B. Sogn and

Karla .lean Wilson Kraner. South Dakota State liniversity Agricultural Experiment

Station B662. 1978. 8 1 pp.
refunds is important. Most of the respondents understood the

need to defer refunds to purchase equipment and facilities or to

add new services, but seemed to say “defer the refunds but tell

us when they will be paid.” Respondents wanted good

information and many indicated they would be willing to pay

for it.

Cooperatives have learned they must stay close to members to survive. They must obtain members’ ideas and react by

presenting the facts straightforwardly, keeping their houses in

order, and acknowledging member concerns with actions.

Advisory Members

Cooperatives both small and large effectively use advisory

members (also called advisory councils, advisory committees,

community directors, consulting committees, or other titles) for

contact and communication between

bers.

management and memThese advisory groups are usually without legal status

and serve terms of 1 to 3 years. Cooperative bylaws may or

may not provide for their appointment or election. They may

serve a national, regional, or local association. Advisory committees of five to seven members are most frequently used by

branches of large centralized organizations. Some cooperative

bylaws stipulate that the chairman, or chairman and a few

other advisory members, serve on the nominating committee for

directors.

Advisory members usually meet two to four times

annually. The agenda at a local center affiliated with a regional

includes reports of sales or marketing at the local installation

and for the entire cooperative, discussion of new or expanded

services members need, and production and marketing

programs affecting producers.

From its early days, Central Carolina Farmers Exchange,

Inc., Durham, N.C., has effectively used “community directors,”

consisting of about 235 members from the areas served by its

eight stores. Agway has found advisory members most helpful

in organizing and keeping in touch with members in its diverse

operations. FCX Inc., Raleigh, N.C. has recently renewed

training efforts for local service store advisory members.

Other advisory groups,such as AK consulting committees, are appointed by management and serve at its pleasure for

a year or for a specific program or purpose.

19
Some objectives of advisory members are to:

1. Be well informed and keep up to date on operations,

products, and major service or program changes in the cooperative.

2. Promote the cooperative, its products or services, and

programs.

3 . Help members become better informed and

motivated to participate in cooperative affairs.

4. Consider and evaluate member ideas, opinions, and

concerns-relaying them to cooperative management for action.

5. Communicate with nonmembers, both rural and

urban, to help them become knowledgeable about cooperatives.

6. Strive to keep State and Federal legislators aware of

cooperatives and of member concerns about cooperative legislation.

Cooperatives using advisory member programs rely on

them to keep management informed and stimulated with member ideas and concerns, and motivate management action not

previously obtained. This program also provides a framework

for quick contact with members when needed as in the Dairylea

Member Family Program.

Member Attitudes

Member attitudes about cooperative service, prices, quality, control, and other related matters become increasingly

important as cooperatives grow larger and come under attack

by some Federal agencies who misunderstand the basic role,

function, and purpose of cooperatives in our economy. This

means that cooperatives have a tremendous educational job in

developing an understanding of the basic dynamics of cooperatives and communicating this understanding to the various

publics, including members, employees, various levels of Government, and the public at large.

Member attitude studies and opinion polls have been

conducted in Missouri, Kansas, California, Indiana, Virginia,

Nebraska, and other States. A Missouri5 study’s findings of

members’ knowledge about cooperatives showed that 7 percent

do not understand cooperatives; 20 percent know the objective

of cooperatives is to help members; and 73 percent both know

5Farmers’ Attitudes

and Randall E. To

1976. 14 pp.

Toward Cooperatives. Carl Eric Utte rstrom, William Hefferman,

rgerson. University of Missouri - co lumbia. Special Report 18 1.
this objective and understand who owns cooperatives. Only 16

percent of the farmers interviewed added to their answers

something about cooperative practices and principles. The factor analysis of member attitudes suggested that, in general, a

farmer is either positive or negative toward all aspects of

cooperatives.

About 20 attitudes were categorized. For example, when

asked about what a cooperative should do in the future, 93

percent agreed it should build membership locally to achieve

more volume and efficiency. About 92 percent answered they

would do more business with the cooperative if it could bring

more income to them. But 50 percent did not know if their

cooperative planned any expansion.

A Kansas study6 compared 1977 farmer attitudes and

understanding of cooperatives with those found in a 1964 study

among farmers in the same area. Attitudes toward the nature

and role of cooperatives were more favorable in 1977 than in

1964. However, attitudes toward cooperatives were considerably

less favorable in 1977 than in 1964. In 1977, farmers were much

more opinionated.

The greatest positive influence on Kansas farmers’ attitudes toward cooperation was their attitude toward the local

cooperative. A correlating factor-the strong positive

relationship between good understanding and favorable attitudes toward cooperatives-emphasized the importance of an

effective member relations program. This strongly suggests that

farmer attitudes toward cooperatives can be improved by

increasing their understanding of cooperatives. Local level

member relations programs appear to have the greatest

potential for improving farmers’ attitudes because attitudes

toward cooperatives in general are developed mainly through

experiences with local cooperatives. Anything the local cooperative does to increase satisfaction for owner-patrons appears to

improve attitudes about cooperatives in general.

Information sources over which cooperatives have the

greatest control were found to be highly associated with

favorable attitudes. In contrast, information sources that were

associated with negative attitudes or had no real bearing on

attitudes were subject to little or no control by cooperatives.

hAttitudes of Kansas Farmers Toward Cooperatives. Milton L. Manuel,

Allen L. Hurley. and Richard Phillips. Kansas Agricultural Experiment Station

manuscript. 1978. 38 pp.

21
These and other member attitude studies reveal effective

communication is essential for building and maintaining espirit

de corps within the organization. The task of informing members is greater in larger associations than in small ones, but it is

not insurmountable. And it is vital.

Large vs. Medium and Small Farmer-Members

Cooperatives are characterized as being organized by

large numbers of small farmers to deal with firms few in number and relatively large in size. As cooperatives have come of

age in the past decade to efficiently serve farmers’ and ranchers’

needs for farm supplies, credit, marketing, and related services,

so have their farmer-members become more diverse in size.

Cooperatives are not capable of meeting a wide range of needs

until they become strongly financed, of sufficient size to achieve

economies, and capable of hiring professional management.

Some cooperative leaders feel that a conflict of interest

between members with large or small farm operations can be a

serious problem. Some farmer-members want a full range of

service-the feed, ground or mixed, delivered, and placed in the

feeders, or the fertilizer spread on the land with a highly competent co-op staff to provide technical information. Others want

only the product discounted for volume and cash payment.

Many cooperatives have responded with flexible service

and differential pricing that recognizes the difference in cost of

providing the service needed to adapt to member needs. This

includes direct service to larger users with product pricing on a

cost-of-service basis. Regional cooperatives-Agway, Gold Kist,

Landmark, FS Services, Farmland, CENEX, and others-aim

to be leaders by providing complete programs through local

cooperatives by innovative planning.

There is danger in concentrating on large producers to

the exclusion of medium and small size farmers. Efficient

smaller dairy farmers, poultry raisers, produce growers, and

part-time farmers in many areas of production will continue to

represent a sizable share of cooperative business in supply and

marketing.

The Missouri study however, does not support any feeling of conflict among sizes of farm operations in cooperatives.

A majority (76 percent) of the respondents agreed that small

farmer-members really help the large cooperative more than

22
they hurt it. A larger majority (82 percent) agreed that small

farmer-members benefit the large cooperative. Two-thirds also

agreed that cooperatives are beneficial to both small and large

farm operations.

A former official of Sunkist Growers, Inc., Sherman

Oaks, Calif., summed up the feeling that large and small members can benefit from working together in the same cooperative.

He says this cooperative offers producers opportunity to market

their crops along with fellow growers regardless of size in an

organized way to organized buyers.

Whatever the members’ size, cooperatives must be ready

to meet their needs. The challenge is to obtain member feedback, to anticipated need signals, and keep all members

informed so they have the choice of available services to fill

their needs.

Member Understanding of Capital Programs

Members want a better understanding of the principle of

cooperative financing. They continue to challenge cooperatives

for better explanations of why members must provide funds in

proportion to their use of the business. Members must realize

this is consistent with the theory that cooperatives are owned

and controlled by those using their services.

This ownership and control of cooperatives can continue

only when current members actually own a majority of the

organization capital. It is imperative that new and younger farm

operators understand this method of cooperative financing

developed by their forefathers. Members and cooperative

management alike have the responsibility to help these younger

producers understand their obligation even though they may be

hard pressed for on-the-farm capital.

Members often have problems understanding why cooperatives have tended to price at the going market rate for

services or products when a distinguishing cooperative characteristic is “operating at cost.” Cooperative management and

employees need to understand and explain to members that

cooperative net margins at the end of the fiscal year are

distributed as patronage refunds to member patrons in

proportion to their use of the business, thus reducing operations

to a cost basis. Cooperatives could attempt to charge the exact

cost of production supplies plus operating expenses each day

23
that would result in zero margins, but this involves a pricing

policy that most cooperatives cannot predict.

The Internal Revenue Act of 1962 as amended requires

cooperatives to pay a minimum of 20 percent of their patronage

refund in cash at the end of the fiscal year. Cooperative

management must keep members informed and help them

understand that the directors they elect can decide to retain any

portion of the remaining 80 percent to finance capital growth,

provide operating capital currently needed in the business, or

redeem earlier retained refunds. Usually these retains are placed

in a revolving fund for which certificates, notifications, or

allocated equities are issued as evidence of member equity

capital or investment. The board of directors determines when

these distributions will be paid to members in order of age.

They are usually rotated out in 5 to 15 years.

The cooperative must help members understand that they

are obligated to pay an income tax on the total amount of the

patronage refund in the year it is declared to them. The 20

percent cash payment aids producer-members who are

responsible for reporting the full amount of cash and noncash

refunds on their annual income tax returns. Some cooperatives

declare more than 20 percent of the refund in cash to help

members in higher income tax brackets pay the current income

tax due.

The revolving of member capital or equity is a unique

cooperative method of financing that has proved historically

satisfactory and beneficial. Some cooperatives make annual

adjustments of the revolving fund based on the patronage of

members over a recent period rather than revolving the full

amounts in the fund. Both plans offer management the opportunity to impress annually the importance of producers leaving

some of their money in the cooperative to provide sound

financing and liquidity to its operations.

Educating members to financing policies established by

the board of directors improves members’ understanding of the

cooperative and is vital to good member and public relations.

Members who understand these practices can help set the

record straight with their neighbors and the publics.

Member Equity Retirement

Grave concern sometimes arises regarding: (1) New

members getting unfair advantage of old members’ capital in

financing the cooperative’s fixed and operating needs; (2) how
to retire revolving funds in order of age; and (3) in cooperatives in financial difficulty the fact tnat members’ capital often

is frozen for many years. The problem of how to retire the

equity without jeopardizing the association’s financial structure

has confronted some cooperatives since their conception.

However, in today’s economy and climate, they must face the

problem of members’ equity retirement or transferability. There

is increasing concern that unless all cooperatives try to solve

this problem, laws contrary to sound business practices and not

imposed on other firms may be enacted.

Members may cease to patronize their cooperative

because of death, retirement, disability, change of occupation or

type of production, moving from the trade area, or for many

other reasons. Adoption of definite policies for establishing

reserves and retiring member equity or transferring it to active

members can improve the cooperative’s image in the business

world, establish a sounder member-patron financial support

base, and improve the member relations program.

Of the cooperatives studied by Brown and Volkin’, 71

percent had a program for redeeming patron equities. On the

average, cooperatives were redeeming equities at a rate equivalent to 8 percent of their net margins.

Most prevalent is the “first in, first out revolving

program,” in which the older equities are redeemed first. Of

cooperatives having a systematic redemption program, 90

percent used this “first in...” plan.

The most cogent factor influencing the presence or

absence of an equity redemption program was sheer size of

total assets. The larger the cooperative the greater the probability of its carrying out a redemption program.

The authors conclude that some sort of program can be

adopted by practically all cooperatives if they decide to plan

and budget for equity redemption. They urge that cooperatives,

through voluntary initiatives, should be able to demonstrate

that they have taken steps to implement a basic cooperative

philosophy-namely, those who patronize their cooperatives

should bear the primary financing responsibility and those who

effectively terminate their patronage should be relieved of their

financing responsibilities.

‘Equity Redemption Practices of Agricultural Cooperatives. Phillip F. Brown

and David Volkin. Farmer Cooperative Service, U.S. Department of Agriculture. FCS

Research Report 41. 1977. 30 pp.

25
A Colorado8 study showed that in 1975 82 percent of the

cooperatives in that State retired equity held by estates of

deceased members, but most did not have written equity

retirement policies.

Some cooperatives have updated their methods of capital

financing and retirement. For example, members of Sunkist

Growers are required to make payments into a capital fund basecl

on their volume of fruit shipped fresh and delivered to produclt

plants during a moving 6-year period. Capital financing;

requirements of the cooperative are determined by the board on.

an annual basis. Members’ shares of this requirement are calcu-a

lated and and then compared with their current capital

contribution. Each member is either assessed for an additional

amount or receives a payout.

Farmland Industries, CENEX, and other regionals have

adopted affirmative equity retirement programs to assist their

member locals. Their programs are presented to affiliates with

procedures and the extent of the regional cooperative’s

participation. An area of concern is the inability of some local

cooperatives to handle equity capital retirements. CENEX will

consider special assistance by providing guaranteed loans for local

cooperatives in financial difficulty but still showing promising

futures. Farmland is offering a participating formula program to

its locals.

Financial planning is an integral part of these programs as

member equity capital retirement and transfer to active members

is an important consideration in the cooperatives’ cash flow.

Cooperatives must take affirmative action, survey member equity

capital that needs retiring, and make plans with approval of lenders so as to maintain cash flow. Once all plans are made and

adopted by the board, extensive educational efforts among members individually, in meetings, and through news media should be

made to inform them of the retirement plan.

*A Handbook on Retirement of Member/Stockholder Equity Capital in

Marketing and Purchasing Cooperatives. Alton L. Scofield, Forest E. Walters, J. Hugh

Winn, and William P. Spencer. Department of Economics, Colorado State University

Extension Service. Miscellaneous # Il. 1975. 20 pp.

Author/ C., H. Kirkman, Jr., Senior Cooperative Education

Specialist .

26 T? U.S. Government Printing Office: 1993 - 359-886 (90344)