Cooperatives in

International Trade

FARMER COOPERATIVES IN THE UNITED STATES

COOPERATIVE INFORMATION REPORT 1

SECTION 27

UNITED STATES DEPARTMENT OF AGRICULTURE

RURAL DEVELOPMENT

RURAL SUSINESS-COOP ERATNE SERVICE
Contents

Cooperatives-Going Global . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Exporting ...........................................

.

Export Arrangements ............................. .5

Interfirm Alliances ....................................5

Coventures ...................................... .

Foreign Direct Investment. ......................... .6

Foreign Sourcing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

TheFuture...........................................7

How RBS Can Help .................................. .7

For More Information ............................. .8

Cooperatives in International Trade

Cooperative Information Report 1 Section 27

Rural Business-Cooperative Service

United States Department of Agriculture

Washington, D.C.

April 1997

i
Cooperatives in

International Trade

Producer-owned cooperatives have long played a major role

in U.S. agriculture. Cooperatives allow farmers to control their commodities beyond the farmgate and into the marketplace. For many

cooperatives, this control extends only to the first-handler level,

where member commodities are assembled, graded, and sold in bulk

form.

Others have extended farmers’ reach to supermarket shelves

by producing, processing, and marketing consumer products.

Cooperatives have also taken their place alongside investorowned agribusinesses as global marketers of food and fiber

products.

Cooperatives-Going Global

Fueled by population growth, rising incomes, and liberalized

trade rules, today’s international marketplace offers great opportunity for firms willing to think and act “globally.” Cooperatives employ

the same types of business practices as investor-oriented firms (IOFs).

But, unlike IOFs, the mission of cooperatives is to serve producermembers.

Marketing cooperatives, for example, exist to provide a

“home” for their members’ products. This tie to a domestic production base defines cooperative motivations and sets boundaries.

Cooperatives may not freely substitute lower-cost imports for member-produced products or abandon domestic operations for more profitable overseas locations. Cooperatives must balance the interests of

producer-members with the need to compete in a dynamic and com-
petitive global marketplace.

Cooperatives compete in a global trading environment in any

manner that is compatible with member interests and available

resources. Properly structured and implemented, a variety of international business arrangements can benefit producer-members by

enhancing the market position of the cooperative and the marketability

of members’ products. Cooperatives must recognize that globally

focused strategies and business structures are essential to the interesb

of member-growers.

Exporting

Exporting, either directly or through intermediaries, is the

most common way cooperatives enter international markets.

Cooperatives actively pursue commodity sales in price-sensitive bulk

markets, as well as in niche markets for high-value specialty products

geared to consumers. In 1995, 91 U.S. farmer-owned cooperatives

exported agricultural products valued at more than $5.6 billion. More

than 69 percent ($3.84 billion) consisted of bulk commodities such as

grains, oilseeds, and cotton (figure 1). Consumer-oriented products

like fresh and processed fruits and vegetables, meats, dairy products,

and tree nuts accounted for more than 25 ($1.42 billion) percent of the

total. About 6.3 percent ($353 million) was from intermediate or

partially processed products such as flour, meals, hides and skins,

oils, and sugars and sweeteners. Farm supply cooperatives exported fertilizer, petroleum, machinery, and equipment valued at $69.5

million.

Cooperatives’ exports accounted for about 12.3 percent ($5.6

billion) of total U.S. agricultural exports in 1995 (table 1). Exports of

bulk commodities (primarily grains, oilseeds, and cotton) led with

14.77 percent, followed by consumer-oriented products (mainly fresh

and processed fruit, tree nuts, meats) at 7.6 percent ($1.4 billion),

and intermediate products (oils, meals, hides, skins, etc.) at a little

more than 3 percent of the U.S. total. Some individual commodities

or products account for even larger shares of U.S. exports.

Exports by individual cooperatives ranged from less than $1

million to more than $250 million (table 2). Export sales of five

cooperatives exceeded $250 million each. This accounted for 77 percent of all reported exports by cooperatives. Of the remaining cooperative exporters, 37 had export sales ranging from $1 million to

$9.9 million. Another 27 cooperatives had exports of less than $1

million each.

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Figure 1 - Agricultural Exports by U.S. Cooperatives, 1995

Consumer-oriented

$1,428 million

Intermediate 6.28%

$353 million

25.4% -

Bulk 69.33% -

$3,842 million

Total cooperative exports $5.6 billion

Table l-Agricultural exports by U.S. cooperatives and cooperative

share of U.S. exports, 1995 ’

Cooperative Exports U.S. Exports Co-op Share

Bulk commodities 2 3,843 26,019 14.77

Intermediate products 3 354 10,992 3.22

Consumer-oriented products 4 1,425 18,788 7.60

Ag product total 5,625 45,689 12.31

Non-ag Products s 69.5

’ Preliminary.

2 Includes food grains, coarse grains, oilseeds, cotton, tobacco, pulses, and other bulk

commodities.

3 Includes flours, meals, oils, feeds and fodders, live animals, hides and skins, animal fats,

planting seeds, sugars, sweeteners, and beverage bases, other intermediate products.

4 Includes snack foods, breakfast cereals, red meats, poultry meat, dairy products, eggs

and products, fresh fruit, fresh vegetables, processed fruits and vegetables, fruit and vegetable juices, tree nuts, wine and beer, nursery products, cut flowers, pet foods, other

consumer-oriented products.

5 Includes farm production supplies such as fertilizers, petroleum, machinery, and farm

equipment.

Source: USDAWural Business-Cooperative Service, Washington, D.C.

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While some cooperatives export only in years of excess production, many consider exporting a key element in their overall marketing strategy. One measure of the importance is “export intensity” or exports as a percentage of total sales (table 3). Cooperatives

exporting bulk commodities registered export intensities ranging

from less than 1 percent to almost 70 percent. The average was 17.3

percent of total sales. Consumer-oriented products accounted for an

average of 13.3 percent of cooperatives’ total sales, ranging from

less than 1 percent to about 58 percent. Export intensity for cooperative shippers of intermediate products averaged 12.4 percent, ranging from about 2 percent to 53 percent.

Table 2-Concentration of export sales among cooperatives, 1995.

Range of export sales No. co-ops Export sales Concentration

$250 million+ 5

$ million

4,335

Percent

77.0

$50 - $249 million 8 862 15.3

$10 - $49 million 14 277 4.9

$1 - $9 million 37 142 2.5

<$l million 27 5,625 100.0

Source: USDA/Rural Business-Cooperative Service, Washington, D.C.

Table 3-Cooperative export intensity, 1995

Bulk commodities

Range of Export Intensity Average Export Intensity

<l percent - 69.7 percent 17.3 percent

Consumer-oriented products <I percent - 58.8 percent 13.3 percent

Intermediate products 2 percent - 53.7 percent 12.4 percent

Source: USDA/Rural Business-Cooperative Service, Washington, DC.

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Export Arrangements

Export arrangements range from indirect sales through U.S.

export management companies to direct sales via the cooperative’s

own overseas office. The former requires the commitment of fewer

resources, but gives the cooperative little control over its product.

The latter requires significant resources, but results in greater control.

Between the two are a variety of contractual arrangements with foreign brokers or distributors, each requiring varying levels of human

and capital resources. The type of arrangement used depends on the

product, market, and availability of resources. U.S. cooperatives use

all these options.

Interfirm Alliances

Beyond the buy-sell arrangements described above, cooperatives are increasingly pursuing more complex interfirm alliances

and foreign investment strategies in support of their international

operations. These arrangements represent higher levels of integration as the cooperative becomes increasingly involved in processing

and packing in foreign locations. They range from a variety of contractual alliances to equity-based joint ventures to wholly owned

subsidiaries.

Coventures

Contractual alliances or “coventures” refer to coordinated

business arrangements that do not involve equity investment and

generally do not involve establishing a separate legal entity.

Coventures are frequently copacking or other processing arrangements, supply contracts, and licensing of trademarks and expertise.

Contracts between an exporter and a foreign distributor also fall into

this category. This type of arrangement offers less control than subsidiaries or ownership in foreign firms, but also requires fewer

resources.

International coventures are relatively common among U.S.

cooperatives. Most relationships with foreign distributors are formalized via contract or distribution agreement. Copacking arrangements between cooperatives and foreign processors are now commonplace. Welch’s 20-year distribution agreement with Pepsi-Japan

and Ocean Spray’s commitment to developing a network of local

“business partnerships** on a region-by-region basis are examples.

Cooperatives with well-known brand names like Sunkist increas5
ingly find that licensing these assets to foreign firms provides an

important source of revenue and brand recognition in foreign markets.

Foreign Direct Investment

Cooperatives are also beginning to find the motivation, financial resources, and grower support for foreign direct investmentacquiring foreign assets. While the numbers are still comparatively

small, cooperative assets overseas are increasing. This cooperative

presence is manifested in a range of ways, from one-person overseas offices to equity-based joint processing and marketing ventures,

and even wholly owned subsidiaries. Farmland Industries of Kansas

City, MO, acquired-as a wholly-owned subsidiary-a Swiss grain

trading firm which gives the cooperative built-m international expertise and presence to better serve their customers. Calavo Foods, Inc.,

Santa Ana, CA, has a facility in Mexico to process avocado pulp for

shipment back to the United States. Growmark, Inc., of Bloomington,

IL, expanded its supply operation into Canada by acquiring the assets

of United Co-operatives of Ontario.

Foreign Sourcing Strategies

Cooperatives can also “act globally” by developing complementary product sourcing strategies. The motivations and mechanisms for sourcing foreign products are usually related to cost reduction or market expansion. While domestic member and nonmember

products may fill some of these needs, foreign sources can offer significant cost savings or an array of supplemental or noncompeting

products. Cooperatives may source nonmember products or may

expand their membership to include foreign producers.

At any given time, at least 30 to 40 cooperatives are involved

in importing products into the United States. Most are farm production supplies such as fertilizer, petroleum, twine, and cordage (60 to

70 percent of all imports by U.S. cooperatives). Farm supply cooperatives view imports as central to their ability to provide an array of

affordable supplies to producer-members.

Food products account for the remaining 30 to 40 percent of

all cooperative imports. Marketing cooperatives generate cost savings

indirectly by supplementing member-grown products with imports.

Marketers of fresh produce use imports to spread overhead costs

over broader product lines. Processors import raw products to lower

per-unit costs through greater use of plant capacity. For example,

Tri-Valley Growers of San Francisco can operate its processing plants

6
year-round by importing additional fruits and vegetables.

Use of foreign sources to fill seasonal marketing windows

is especially critical where consumers expect year-round availability of products. For example, imported table grapes from Mexican

members give Blue Anchor, Inc., of Dinuba,CA, a jump on the U.S.

marketing season and a competitive edge over seasonal suppliers.

Imports can broaden a cooperative’s product line. Buyers can

reduce transaction costs through “one-stop-shopping” with multicommodity suppliers who source internationally. Calavo Growers

sources persimmons, Asian pears, and mangos from nonmember

growers overseas to expand their line of CALAVO-brand products.

Both Ocean Spray and Welch’s enhance the value of their brand

names by using imported ingredients to expand their juice lines.

Cooperatives also export directly from foreign sources to

other countries to consistently supply counter-seasonal marketing

windows. For example, Calavo Growers can export year-round to

Europe and Japan by filling the gap between the end of the California

crop and the beginning of the new crop year with Mexican avocados.

The Future

Cooperatives will continue to evolve as members of a global community. Already, enhanced competition and new opportunities are driving the formation of new cooperatives geared specifically toward value-added niche markets, both international and

domestic. Producers, communities, and economic development practitioners increasingly recognize the need for businesses that can capture the returns from local value-adding activities.

As regional trade pacts expand, U.S. producers are beginning to understand the value of welcoming foreign producers of complementary products under the cooperative umbrella. Cooperatives will

continue to expand beyond exporting into myriad other offshore

activities which enhance the presence and visibility of producermembers in markets around the world.

How RBS Can Help

The International Trade Program (ITP) of the Rural BusinessCooperative Service (RBS) conducts research and provides technical

assistance to help cooperatives maximize their understanding of and

participation in international markets.

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Specifically, ITP monitors cooperative participation and performance in international trade; evaluates the impacts of trade policy developments on cooperatives’ domestic and international operations; and assists Federal, state, and local providers of export

counseling in understanding cooperative structures and operating

practices within the context of international business activities. ITP

also provides technical advisory assistance to individual cooperatives at their request.

For More Information

Additional information about the role of producer-owned

cooperatives in international markets is available from:

U.S. Department of Agriculture

Rural Business-Cooperative Service

1400 Independence Avenue, SW

Stop 3250

Washington, D.C. 20250-3250

Voice: 202-720-7558

Fax: 202-720-4641

E-mail: coopinfo@rurdev.usda.gov

Website: http://www.rurdev.usda.gov

Information about opportunities for exporters of U.S. agricultural products can be obtained from

U.S. Department of Agriculture

Foreign Agricultural Service

Trade Assistance and Promotion Office (TAPO)

1400 Independence Avenue, SW

stop 4939

Washington, D.C. 20250-4939

Voice: 202-720-7420

Fax: 202-690-4374

E-mail: fasinfo@fas.usda.gov

Website: http://ffas.usda.gov/
Sources:

Kennedy, Tracey L. Unpublished data. USDA/Rural BusinessCooperative Service.

Kennedy, Tracey L. and Karen J. Spatz. “Shop Around: Some

Cooperatives Boost Member

Income By Pursuing Non-traditional Supply Sources,” Farmer

Cooperatives,

USDA/Agricultural Cooperative Service, July 1993.

Kennedy, Tracey L. and Karen J. Spatz. “Over There, Part II: Legal

Aspects of Foreign

Sourcing Similar to Domestic Rules,” Farmer Cooperatives,

USDA/Agricultural

Cooperative Service, August, 1993.

Reynolds, Bruce J. and Karen J. Spatz. International Business

Arrangements Used by Cooperatives, USDA/Agricultural

Cooperative Service, Research Report 100, October 1991.

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U.S. Department of Agriculture

Rural Business-Cooperative Service

Stop 3250

Washington, D.C. 20250-3250

Rural Business-Cooperative Service (FIBS) provides research, management, and

educational assistance to cooperatives to strengthen the economic position of farmers

and other rural residents. It works directly with cooperative leaders and Federal and

State agencies to improve organization, leadership, and operation of cooperatives and

to give guidance to further development.

The cooperative segment of RBS (1) helps farmers and other rural residents develop

cooperatives to obtain supplies and services at lower cost and to get better prices for

products they sell; (2) advises rural residents on developing existing resources through

cooperative action to enhance rural living; (3) helps cooperatives improve services and

operating efficiency; (4) informs members, directors, employees, and the public on how

cooperatives work and benefit their members and their communities; and (5)

encourages international cooperative programs. RBS also publishes research and

educational materials and issues Rural Cooperatives magazine.

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

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

political beliefs and mariial or familial status. (Not all prohibited bases apply to all

programs.) Persons with disabilities who require alternative means for communication

of program information (Braille, large print, audiotape, etc.) should contact the USDA

Office of Communications at (202) 720-2791.

To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture,

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

USDA is an equal employment opportunity employer.

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