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Report 127 Common
Abstract

Cooperative Marketing Agencies-in-Common

Bruce J. Reynolds

Marketing agencies-in-common (MACs) have been used

by farmer cooperatives for many years to accomplish specific

marketing activities. Relatively scant attention or concern has

been given to adequately defining MACs in terms of how they

differ from other forms of organization, particularly from other

federated cooperatives.

Distinctions can be made in terms of the development

and ownership of assets. Members of MACs retain individual

member ownership of assets, with their MAC providing various supplementary functions such as group communications

and product selling coordination.

Members often have assets that are highly specific to

their own marketing programs and have developed significant

expertise in their respective industries. With a membership of

this kind, MACs are governed in a multiple principal structure,

in contrast to the usual generalized single principal-agent relationship that prevails in most cooperative forms of organization.

Keywords: Cooperatives, marketing agencies-in-common,

principals, agency, and federated.

ACS Research Report 127

January 1994

Price: Domestic $2.00; foreign $2.50
Contents

Highlights ................................................................................

ii

Objectives of Study ................................................................ 1

Distinctive Form of Cooperative ............................................

.3

Multiple Principals and Single Agent ...................................... 7

Principal-Agent Is a Control Function .................................... 9

Examples of Marketing Agencies-in-Common . . . . . . . . . . . . . . . . . . . . 12

Marketing Agencies-in-Common Versus Alternative

Organizational Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Coordinating Strategic Plans ............................................... 27

Appendix Tables ................................................................... 31
Highlights

Marketing agencies-in-common (MACs) can be incorporated as cooperatives or non-cooperatives. As cooperatives,

they are a federated type, with organizations rather than farmers as direct members.

The purposes of MACs are, in most cases, coordinating

sales of member products and extending the marketing programs that member cooperatives have developed. This

involves relatively slight investment and ownership of assets,

which provides an empirical means of identifying MACs from

other types of federated cooperatives. An assets/sales ratio

below 0.1 was effective in separating MACs from a 1991 data

set of federated cooperatives.

Industrial organization economists, particularly in the

antitrust field, have developed a theoretical model and definition of common agency. Their work, while not completely or

readily applicable to cooperative organization of MACs, distinguishes the more general concept of common agency as having a multiple principal structure, in contrast to the single principal-agent relationship of most business and cooperative

organizations.

The principal in a common agency takes a multiple form

because assets are primarily retained by each member and

include many which are highly specific to their individual operations. Each member is a principal in its own right because of

its unique products and expertise. While tracking down federated cooperatives and determining their status as a MAC is

complicated, there is adequate information on about 10

MACs, which demonstrate the multiple principal structure.

MACs are a distinct alternative for cooperatives seeking

the benefits of coordination and economies of size. A comparison of several objectives and alternative organizational forms

reveals more advantages for MACs when members want

more interorganizational coordination but have a preference

for maintaining their separate identities. MACs have some disii
advantages in being the focus for developing distinctive capabilities and innovations.

The marketing coordination function of MACs can be

extended to interorganizational planning and decision-making

for certain areas of operation that involve mutual or interactive

impacts on members. The commitment to develop and maintain services to members is a distinct and economically difficult challenge for cooperatives in many cases. Often a lack of

coordination in planning and in carrying out certain operations

renders less efficient outcomes for cooperatives than if such

processes were handled within the framework of a MAC.
Cooperative Marketing

Agencies-in-Common

Bruce J. Reynolds

OBJECTIVES OF STUDY

The strategy of forming a cooperative marketing agencyin-common (MAC) was in use before the Capper-Volstead Act

was enacted in 1922. In recent years this strategy has received

increased interest among dairy and other commodity groups.

The purpose of this report is threefold: (1) to provide a

definition that adequately differentiates MACs from other

cooperatives and federated organizations, (2) to examine

MACs in practice and in a strategic decision making context of

alternatives, and (3) to extend the business applications of

MACs to a broader strategic objective of cooperatives’ role in

the farm economy that does not apply to firms operating on a

non-cooperative basis.

Many of today’s largest farmer cooperatives started out

as relatively small organizations with memberships concentrated in local geographic areas. Over time, regional expansion of membership took place. Many of these cooperatives

rapidly grew by consolidating or merging with cooperatives

in neighboring areas.

Cooperatives have also pursued an alternative to consolidation by forming organizations for intercooperative coordination of certain facets of their operations. This alternative is

particularly attractive, as certain marketing or processing

functions may benefit from economies of size.

Although a merger would accomplish the same

economies, intercooperative organization is advantageous

when some functions are more effectively carried out in a

decentralized structure of smaller and more geographically

localized cooperatives.
Intercooperative coordination is usually organized as a

federated cooperative. A board of directors consists of producers or managers or both from the member cooperatives.

Federated cooperatives are organized for various purposes.

Some carry out a substantial array of value-added and capitalintensive processing and marketing activities. Others coordinate marketing activities that do not involve intensive capital

formation.

The latter type of federated cooperatives are called marketing agencies-in-common. The term “marketing agencies-incommon” is explicitly used in the Capper-Volstead Act as a

way for cooperatives to coordinate their marketing activities.’

The first section of this report defines a MAC and empirically tests the definition as to its adequacy in identifying federated cooperatives that are MACs. The next two sections,

“Multiple Principals and Single Agent” and “Principal-Agent

Is a Control Function,” examine the principal-agent relationship as it applies to cooperatives, and specifically to MACs.

The principals are members of a cooperative whose

responsibilities are primarily carried out by a board of directors. Agents are employees of cooperatives, primarily management. The principal-agent relationship establishes the control and objectives of a business.

More general and applied information about MACs is

provided in the fourth and fifth sections of this report,

“Examples of Marketing Agencies-in-Common” and

“Marketing Agencies-in-Common Versus Alternative

Organizational Forms.” These brief case studies and comparisons of MACs demonstrate the concepts and distinctions

developed in the first part of the report.

A framework for developing new MACs and wider

applications is provided in the last section of this report,

“Coordinating Strategic Plans.” This section examines applications of MACs that go beyond the usual specific operating

1 Antitrust Laws: Legal Phases of Farmer Cooperatives, Part 3, ACS

Information Number 100,1983, p. 293.

2
objectives to comprise a broader strategic planning responsibility.

The complexity of expanding a cooperative’s business

resources and opportunities, as well as of maintaining its

objectives and governance integrity as a farmer cooperative,

requires a certain amount of coordinated action and planning.

It has no adequate parallel or analogy among non-cooperative

firms. MACs can provide an organizational mechanism for

coordinated planning of services to farmers and for strengthening the use of cooperative methods and forms of organization.

DISTINCTIVE FORM OF COOPERATIVE

Marketing agencies-in-common can be applied to cooperatives or non-cooperatives. Concern over potential violation of

antitrust laws may have reduced the number of MACs that

non-cooperatives would have otherwise formed.

The limited exemptions from antitrust provided by the

Capper-Volstead Act have enabled farmer cooperatives to

have more experience with MACs than most other segments

of American industry. Special legislation has provided some

antitrust exemptions for both investor-owned firms (IOFs)

and cooperatives to organize export agencies-in-common, but

the numbers formed and the extent of their exporting activity

have been relatively small.

Economic theory of common agency offers many critical

insights, but much of this theory has not been developed for

application to farmer cooperative MACs. Rather, theoretical

work on common agency is to a large extent a special topic in

the larger field of antitrust economics. In this context, the presumption is that a MAC formally organized by a group of

firms would be used for purposes of collusion. As a result,

economists’ understanding of common agency is much different from a MAC as established by cooperatives.
Economists view common agency as arising spontaneously when one agent represents several major firms in an

industry.2 No overt planning or actual federated organization

needs to exist for establishing common agency in this interpretation. Consequently, ideas on effective coordination and

governance of common agencies to increase efficiencies and

services are neglected topics.

The dearth of adequate definition and studies of the

applications of MACs has also occurred in economics literature on farmer cooperatives. Most studies of cooperative organization point out that a MAC is a type of federated cooperative, but its distinguishing characteristics have been

inadequately defined. In fact, it is even unclear how a cooperative MAC is different from a farmer cooperative, other than

to say that the former has organizations, while the latter has

individuals as members.

Some writers have defined MACs as a type of federated

cooperative that does not take title in marketing transactions.3

However, the distinction of title transfer is generally not applicable because there are far too many exceptions. In many

cases, the process of title transfer is necessary for coordinating

the marketing of a group of cooperatives.

While this definition is too restrictive, it makes an accurate assumption that information sharing and coordinated

selling, the function of marketing agencies that do not take

title to goods, is the major purpose of MACs, and not title

transfer. Unlike many other federated cooperatives, MACs do

not serve the purpose of sharing in the acquisition and ownership of financial and physical assets needed for adding value

from processing or packaging. In other words, marketing

agencies-in-common are organized by groups of cooperatives

2 Esther Gal-Or, A Common Agency With Incomplete Information,” The

Rand Journal of Economics, Summer 1991, Vol. 22 No. 2, p. 274-86.

3 Robert Cropp and Gene Ingalsbe, Structure and Scope of Agricultural

Cooperatives, Cooperatives in Agriculture, 1989, p. 49.

4
to coordinate marketing, with each member retaining exclusive ownership over a unique set of physical and human capital. The marketing agency may coordinate a wide range of

possible value-added services. But, it does not itself serve as

an organizational entity for acquisition or development of the

assets required to produce either products or services that

constitute participation in any given industry.

The above definition can be tested by examining whether

a group of MACs can be identified from a data set of federated cooperatives on the basis of having relatively low assets.

Table 1 summarizes membership and financial data for 63 federated cooperatives at the end of fiscal 1991, as surveyed by

ACS’s Statistical & Technical Services Staff. Federated cooperatives with mixed memberships, i.e., farmers and organizations, are excluded from the data set.

These data are sorted in descending order on the basis of

the proportion of assets to sales. Assets and sales are often

expressed as a ratio of sales over assets to measure turnover or

assets utilization. This particular ratio is meant to remove the

Table I- Membership and financial data in FY 1991 for 63 federated

cooperatives, 19 below and 44 above 0.1 assets/sales.

Members Assets/Sales Assets Sales

63 Co-ops

Averages

Median

56 0.43

10 0.28

19 Co-ops, with assets to sales below 0.1

Averages 9 0.05

Median 5 0.05

44 Co-ops, with assets to sales above 0.1

Averages 76 0.60

Median 12 0.42

$47.9 $203.8

$8.9 $36.6

$6.7 $247.6

$2.4 $97.3

$65.7 $184.9

$13.3 $29.7

5
distortion of significant differences in the size of federated

cooperatives. The assets of most MACs are confined to receivables and inventories, yet some with high sales volume will

normally have current assets that are as high or higher than

the total assets of relatively small processing federated cooperatives.

Out of 63 federated cooperatives, 19 have a ratio of assets

to sales below one-tenth of total sales. Most well-known

MACs are in this grouping and these organizations are listed

by name in appendix table A-l. The designation of MAC is

debatable for a couple of these federated cooperatives, but

generally this definition holds. The 44 federated cooperatives

above the 0.1 ratio threshold do not appear to contain any

organizations that regard themselves as MACs. These federated cooperatives are listed in appendix table A-2.

MACs generally have a much smaller number of member

cooperatives than other federated cooperatives. The variance

in the size of memberships is quite high, as indicated by the

difference between the average and median number of members for all 63 federated cooperatives and the subgroups of 19

and 44. Member organizations were significantly more numerous for federated cooperatives with assets-to-sales ratios

above 0.1, an average of 76 compared with 9 members for

those below 0.1.

When memberships are large, it is often a case of relatively small cooperatives having organized a federation to acquire

critical assets for some type of value-added service that each

could not feasibly carry out on its own. In contrast, small

memberships usually involve relatively large cooperatives

that establish a federation to coordinate marketing.

Results reported in table 1 confirm a characteristic of

MACs -- they generally have limited assets compared with

other federated cooperatives. Average and median assets are

lower and sales are higher for the 19 MAC-designated federated cooperatives, as compared with the group of 44.
There are other ways to use assets as a measure for identifying MACs than an assets-to-sales ratio. For example, the

condition that average or median assets of members be larger

than total assets of the federated cooperative could also identify MACs. This latter approach would capture potential situations of MACs that might have assets-to-sales ratios greater

than 0.1. Such cases could arise if federated cooperatives were

to acquire assets for some type of specialized processing or

packaging activity, while its members maintain exclusive

ownership of much larger portfolios of critical assets. Future

research in the area of using financial structures to identify

different organizational structures could develop this or other

techniques for analyzing MACs.

MULTIPLE PRINCIPALS AND SINGLE AGENT

A principal-agent relationship in business involves an

owner (principal), who has hired a manager (agent) to operate

the business. The notion of a single principal is applied when

there are multiple owners. A “multiple principals-single

agent” relationship is a distinguishing feature of MACs, and

relates to the condition that resources and assets be accumulated by each member and not by their MAC.

In recent theoretical work, Bernheim and Whinston apply

the term “multiple-principal/single-agent” to the concept of

common agency.4 While common agency includes all types of

formal coordination,.in addition to marketing, these

economists use a common marketing agency as an example.

Their study is of a wholesale trade, where manufacturers

establish contracts with merchandise agents or brokers to market their products to retailers. One of Bernheim’s and

4 B.D. Bernheim and M.D. Whinston, Common Marketing Agency as a

Device for Facilitating Collusion, 7% Rand Journal of Economics, V. 16,

No. 2, Summer 1985. Also see their article. Common Agency,

Econometricia, V. S4, No. 4, July 1986.

7
Whinston’s requirements for common agency is that the principals do not cooperate in selecting and in establishing a fee

structure for their common agent, nor do they communicate

about prices. These economists say that when such cooperation exists, the arrangement becomes the standard principalagent model.

Bernheim and Whinston do not address the opportunities provided by the Capper-Volstead Act for cooperatives to

establish a MAC. Nor do they reference the application of

MACs as authorized by the Export Trading Company Act.

They appear to assume that most formal or incorporated common agencies, established under certain enabling legislation,

would have a structural relationship of single rather than multiple principal.

One advantage of requiring that each participating firm

in a common agency not communicate with one another is

that they establish a definite and clear rationale for multiple

principals. In their view, common agency is an unplanned

occurrence of an agent seizing the opportunity to coordinate

the marketing of several firms’ competing products, without

their explicit direction or instructions. Even though these

firms do not control the system of coordinated marketing,

they do monitor the common agent’s performance with regard

to their own product sales.

Bernheim and Whinston are the first agency theorists to

develop the idea and conditions for multiple principals-agent

relationships. The distinction between multiple and single

principals provides a way to explain and understand some of

the differences between MACs and other federated cooperatives or a cooperative with direct producer membership.

This report follows a slightly different line of reasoning

from Bernheim and Whinston regarding criteria for multiple

principals. Some cooperatives have characteristics that distinguish them as separate principals in a common agency relationship without the strict requirement that they not formally

organize.

8
A broader definition of multiple principals, where they

directly communicate and coordinate their control of agent

performance, makes the distinction with a single principal

structure less clear-cut. In some instances, the distinction can

be made only on a case-by-case basis. Furthermore, a broader

definition raises a question as to why all cooperatives cannot

be viewed as controlled by a multiple principal structure.

Multiplicity among members or on the board of directors, and subsequent conflict of interests, is not uncommon in

most cooperatives. However, the distinction of separate principal status for each member is not based on diverse interests.

Rather, it hinges on the fact that some cooperatives, unlike

producers, have developed distinctive expertise, asset specificity, and intellectual property over many years.

Each cooperative in a MAC has a unique set of these factors or resources that it would like to augment and protect but

not transfer out of its direct and immediate control. The

results of sorting federated cooperatives into a MAC category

when assets to sales fall below 0.1 (table 1) reflect this specialization of assets by the reluctance of MAC members to share

or to transfer such assets outside their organizations.

PRINCIPAL-AGENT IS A CONTROL FUNCTION

The principal-agent relationship has not been widely

used in economic studies of cooperatives. Some agricultural

economists have used the theory of agency in the form of having both parties to a cooperative arrangement (members and

management) as agents. Under this approach, the board of

directors are referred to as the “representatives of the residual

claimants,” rather than use the term “principal.“5

The reluctance to regard members of a cooperative,

specifically the board of directors, as a principal, reflects a

mistaken perception that control responsibilities are relatively

5 John M. Staatz, Recent Developments in the Theory of Agricultural

Cooperative, Journal of Agricultural Cooperation, V. 2,1987, p. 85.

9
weak in most cooperatives. In fact, there is more control in

most cooperatives, although exercised in a different manner,

than in most publicly held IOFs. It is as a consequence of

active control by directors that most farmer cooperatives confine their activities to those that either facilitate members’

operations or benefit them by improving the market value of

their farm production and assets, but may not yield the highest potential earnings.

Evidence of managerial influence on the formulation of

policies and programs of a cooperative, and indications that

these are consistent with possible private agendas of management, does not discredit the notion of effective member control. It is impractical to expect that managers would not take

courses of action that are in their self-interest. Effective incentives and motivation require that managerial self-interest be

aligned with member interests. When interests are not

aligned, either performance or governance declines.

The primacy of the principal-agent relationship for cooperatives highlights several important distinctions with IOFs. It

is often pointed out that IOFs tend to serve investors’ interests

better when their control is restricted to general financial

structure issues.6 In other words, an IOF can more effectively

maximize returns to investors by not being directed into specific lines of business, but instead being able to pursue its own

distinct capabilities in any direction that its management

determines.

The meaning of control and the concerns over failure to

exercise it in cooperatives and business organizations has

occupied much attention in academic work and in the media

regarding executive compensation. Much earlier attention followed in the wake of Berle and Means work from the 1930s on

the historical transition from owner-manager businesses to the

stockholders-manager organized corporation. While the sepa6 Robert C. Clark, Agency Costs Versus Fiduciary Duties, see, Principals and

Agents: The Structure of Business, ed. J.W. Pratt and R.J. Zeckhauser, 1985,

p. 56.

10
ration of ownership from management enabled new sources

of efficiency and growth -- a critical relationship in cooperatives -- they identified a concomitant trend of stockholding

owners having lost control.

E3erle and Means’ adopted phrase “separation of ownership and control” is unfortunate because it has resulted in the

notion of a principal’s responsibility to control as an activity

that management can appropriate. A more accurate expression is that control is lacking. Harold Demsetz noted this distinction when he used the term “control vacuum” to discuss

the separation of ownership and control.7

Although managers have certain fiduciary control tasks,

the predominant responsibility for control over the direction

of a cooperative lies with the board, not the manager.

Control involves monitoring managerial performance and

directing a firm’s course of action. It is applicable to management only if one wanted to introduce the idea of managers

having self-control.

The responsibility of cooperative membership for control

can be divided between governance and performance.

Governance is widely recognized as a key element of control

and is emphasized by ACS, reflecting concerns about the

integrity of a cooperative when professional management pursues business opportunities that provide high returns but do

not enhance the value of member products. In such cooperatives; governance control is lacking.

The notion of “performance control” may seem unrealistic because performance is subjected to many uncontrollable

environmental factors. However, in exercising performance

control, directors must evaluate how well management carries

out the objectives of their cooperative. Changes in the general

economy that have affected earnings should not influence

their evaluations.

7 H. Demsetz, The Structure of Ownership and the Theory of the Firm,

Journal of Law b Economics, V. 26, June 1983, p. 387.

11
Evidence of effective governance and performance control are long-run market development programs that successfully enhance the value of member products. Members capture part of this gain in increased value of their production

resources. This is preferable to benefits that arise only from

increases in a cooperative’s earnings.

The above discussion of control applies to all types of

cooperatives, but the multiple principal structure of a MAC

involves some different points of emphasis. A MAC requires

little governance due to its low accumulation of assets. In contrast, performance control of MACs is critical and often difficult. When a MAC’s performance is well below its potential, it

is often due to each principal’s preoccupation with its own

organization’s performance or to a lack of incentive for effective direction. Weak performance of MACs can also arise from

difficulty in achieving consensus on objectives in a multiple

principal structure.

A multiple principal structure also affects the role of

management. While a cooperative manager is in the role of

agent for farmers, its managerial function requires much initiative and leadership, perhaps more than what is usually

associated with the term “agent.” The notion that what agents

do is to strictly carry out the directions of their principals

inadequately reflects the true dynamic of most principal-agent

relationships. However, the specialized functions and multiple

principal structure of MACs place their management in the

restrictive type of agent role.

Several MACs have effectively overcome the special challenges that result from a multiple principal structure. Some of

them are reviewed below.

EXAMPLES OF MARKETING AGENCIES-IN-COMMON

Most MACs discussed here were included in the data

analysis of table 1. All were below the 0.1 assets/sales ratio

threshold. A couple MACs that went out of business are also

12
discussed in terms of how they demonstrate consequences

either of too large a membership or of involvement with operations more effectively carried out by consolidated organizational structures. Typically, these examples show that MACs

are ineffective for building assets and intellectual property

resources.

Most relatively large cooperatives that have substantial

marketing expertise, innovative processing techniques, and

established brand name awareness have slight incentive to

consolidate or even federate with other cooperatives. When

constraints or suboptimal economies of size are encountered

in isolated facets of their operations, these cooperatives often

seek some type of strategic alliance-- a MAC or other arrangement.

For example, a group of cooperatives may each be

involved with marketing byproducts that could be more efficiently handled by combining this function into a single organization. In addition, they may not want to focus their

resources on byproducts because management is evaluated

predominantly on how it enhances prices and develops marketing programs for the primary product of its members.

Midwest Agri-Commodities, Inc., is an example of a

MAC for marketing intercooperative byproducts. It merchandises beet pulp and molasses for three sugar beet processing

cooperatives. Assuming the relevant range of per-unit cost for

marketing beet sugar byproducts declines with increased volume, a MAC reduces total costs in comparison with the aggregate cost of each cooperative for the same volume of byproducts sold.

The marketing of beet sugar may have a similar cost

structure, but byproducts are an easier first step for intercooperative coordination. A couple members of Midwest AgriCommodities have established a MAC for their sugar, North

Central Sugar Marketing Co-op. Currently, the other member

in the byproducts MAC is considering membership in North

Central for coordinating its sugar marketing. Louisiana Sugar

13
Cane Products, Inc., a highly effective MAC for cane sugar,

has six members.

The relative ease of gaining acceptance of MACs for

byproducts is also demonstrated by contrasting soybean and

cottonseed processing. In 1963, several cooperative soybean

and cottonseed processors established a MAC called Soy-Cot

Sales, Inc.

The soybean side never effectively coordinated its marketing in this organization, but by the early 198Os, competitive

pressures forced participants to either achieve an economies

of size threshold or exit the industry. Merging soybean processing cooperatives or divisions into a non-MAC federation,

Ag Processing, Inc., was the outcome. Soy-Cot continues to

operate as a successful MAC, specializing in marketing vegetable oil for its cottonseed processing members.

Another segmented market situation that lends itself to

the establishment of MACs by cooperatives is the handling of

non-member sales as a separate operation. This condition is

present in the cattle artificial insemination (AI) industry In

addition to a product, AI cooperatives also offer substantial

technical service to their members for optimizing its application. Production above member needs is available for nonmember sales without providing the same amount of technical

services. Non-member sales, including exports, is a separable

operation. In terms of separability, it is akin to the handling of

by-products.

Three different groups of AI cooperatives have established MACs to handle non-member sales and exports. AI

cooperatives also have a marketing agreement with World

Wide Sires to export to Europe, Africa, and Asia. By specializing in non-member sales, most of these MACs are organized

as partnerships, without incorporating as cooperatives.

The key point is that value-added components are controlled in a more localized or regional structure by individual

cooperatives, while activities where control is less of a concern

are the components organized into MACs.
A highly effective MAC, Amcot, Inc., provides coordinated marketing for the primary product handled by four large

grower-member cooperatives. Amcot’s success points out that

a potential advantage for organizing MACs for by-products or

segmented marketing is just that, an advantage and not a necessary condition for a successful MAC.

Amcot illustrates that MACs having cooperatives with a

substantial amount of non-competing products reduces the

extent of members’ concern about sharing a marketing agency.

It is misleading to regard Amcot members’ cotton as perfect

substitutes, such as with grain cooperatives. In fact, one of the

reasons Amcot works well is that, although each of its four

members handle some similar cotton types and qualities, they

are generally offering significantly different growths. Amcot is

to some extent a multicommodity cooperative. An agent needs

to represent a wide variety of cotton to provide effective representation in world cotton markets. This situation is perfect

for cotton cooperatives. Limited to the particular kinds of cotton in their member region, they can compete internationally

with a more comprehensive offering to textile mills with

Amco t.

There are examples of participation in MACs by cooperatives with highly developed marketing programs and established brands. Sun-Diamond is the best known. Much of its

coordination responsibilities involve public policy and relations. Sun-Diamond’s marketing responsibilities focus on

activities and functions that are subject to economies of size. It

provides order entry, coordinates distribution, handles

accounts payable and receivable, manages a network of foreign sales representatives, and handles export documentation.

Member cooperatives provide market development,

advertising, product improvements and developments, selection of product lines for export, sales objectives, and pricing.

These activities influence the core assets of each member.

While such activities may also benefit from economies of size,

15
they are too critical and involve special expertise, so that

shared management and control are unacceptable.

Sun-Diamond’s acquisition of Sunland, a proprietary

dried fruit and nut company, has brought to the fore the issue

of coordination and compromise in the use of brands.

Sunland’s brands were vacated. Its product lines have been

marketed under various trademarks of the members, primarily the Sun-Maid brand. Sun-Diamond manages the Sunland

division and selects the member brands to be used. This area

of MAC operations has been one of the most contentious for

members. While different from a situation of a MAC managing a members’ brands and the development of its markets, it

involves decisions about the use of brands that are not under

the complete control of each member organization.

Cooperating Brands, Inc., is a MAC organized to handle

brands of member cooperatives for specialized packaging. It

was established by six fruit processing cooperatives to manage a special institutional juice pack.

A small frozen juice cup is a required type of packaging

for a certain segment of the institutional market. None of the

cooperatives wanted to invest in this type of packaging, and

preferred co-packing arrangements. However, there are significant economic advantages to having both large volume

copacking arrangements and a comprehensive line of juice

varieties when selling to institutional buyers. Opportunities

for special packs of different kinds of fruit snacks have also

developed.

Cooperating Brands has a trademark licensing agreement

with each member cooperative. In a copacking arrangement,

the packing plant does not take title, and has no rights to use

the brands on their own products. A confidentiality agreement

restricts the packer or bottler from making any use or release

of the proprietary juice formulations. Recently, member cooperatives have avoided this problem for most of their products

by shipping pre-formulated concentrates to the bottlers.

16
These contractual arrangements indicate the extent of

proprietary information, and hence, specific capabilities that

value-added processing cooperatives possess. Juice marketing

cooperatives are highly successful and competitive with one

another.

Cooperating Brands gains access to a specialized and

segmented market, while protecting members’ distinctive

competence from duplication by competitors. Those cooperatives that have developed intellectual property and special

technical expertise in food processing and marketing will use

MACs to achieve economies of size for better access to particular market segments. Such cooperatives will typically establish individually designed contracts with the MAC, making

the multiple principal structure of the organization very

explicit.

Although examples of forming a MAC to pool member

resources for market development are few in number, Norbest

stands out as a potential model. However, it is important to

understand that its accomplishments are not a recent development. Norbest was formed in 1929 to handle turkey sales for

20 cooperative packing associations. It was an innovator in

using the branded concept for marketing fresh meat, and until

recently, was the largest marketer of turkeys in the world.

A similar case, with historical roots, is the early years of

Land O’Lakes, Inc. (LOL). It was originally established as a

federated cooperative to coordinate the promotion of a single

brand of butter among several cooperative creameries. It subsequently evolved into a diverse food and farm supply production and distribution association, with a mixed membership structure.

In recent years, dairy cooperatives outside the Midwest

have joined LOL to pack butter using its famous trademark

and coordinate the distribution of those particular product

lines. Even though these arrangements parallel both its early

period and the Norbest system, LOL’s evolution as a coopera17
tive extends far beyond the range of the coordinating activities of a MAC.

Like most MACs, Midwest Agri-Commodities, AMCOT,

and Soy-Cot are examples that do not involve major brandname products and operate in price-competitive commodity

markets. The milk marketing MACs, Central Milk Processing

Cooperative and the Regional Cooperative Marketing

Association, have operated pools for members in their marketing order areas. These pools have helped stabilize prices and

earned over-order premiums.

In apple marketing in the Northwest, federated marketing for cooperative packing houses dates back to 1922, and

persists today with Wenoka Sales. It sells directly to the grocery chains for six members. Wenoka is an alternative to contracting with a distributor.

The key advantage of this MAC is that members can

improve their earnings by participating in larger volume sales

and by having more control over their negotiating positions,

than if each were independently contracting with outside distributors.

The challenge of maintaining product commitment from

members of a MAC, particularly when operating in actively

traded commodity markets, often raises the issue of marketing

agreements. Although marketing agreements are not

addressed in this report, their application by MACs in some

form is usually necessary.*

Poorly designed marketing agreements have contributed

to the failure of some MACs, by allowing some members to

gradually reduce their product commitment. This has

occurred in grains with Producers Export Company and

Farmers Export Company, as well as in dried beans, with

Valley Marketing, Inc.

B As an example of terms in a marketing agreement for a MAC, see,

Carolyn Liebrand and Karen Spatz, Exporting: A Marketing Agency-lnCommon for Dairy Cooperatives, ACS Research Report 126.

18
Without exploring all the reasons for the demise of these

MACs, it is worth observing that these examples exhibit the

segmentation pattern discussed earlier. In each case, a group

of cooperatives identify a particular marketing function or

market segment that they are willing to delegate to a MAC.

Valley Marketing consisted of local grain cooperatives

that handled a relatively small volume of beans from some of

their members and a couple of predominantly specialized

dried bean cooperatives. It was inefficient for the grain cooperatives to each market a small volume, so a MAC worked

well for them.

However, their interests eventually conflicted when the

two local dried bean cooperatives wanted to build their own

processing facilities for frozen beans. This pressured Valley

Marketing to buy non-member beans to maintain customer

accounts. The two largest members opposed the idea of nonmember business and dropped out of the organization, leaving it with an unsustainable level of volume.

The case of the grain marketing interregionals reflected

the segmentation pattern around exporting. Regional grain

cooperatives reasoned that grain exporting, particularly in

operating port elevators, was subject to more economies of

size than they could individually attain. Hence, the regional

cooperative members handled domestic marketing, while the

interregional specialized in exporting. But grain markets cannot be segmented in this way for effective trading. A successful MAC for marketing large volumes of grain would require

responsibility for both export and domestic marketing decisions.

Delegating special activities to a MAC can work in many

contexts, but this approach is destined for failure when cooperatives have tried to separate responsibility for grain exporting from control over domestic marketing. However, the disadvantages of divided responsibility do not apply to more

localized grain marketing systems. Given the recent reduction

in the number of regional grain cooperatives, many relatively

19
small groupings of local cooperatives have established MACs

for coordinating shipments to export locations or to more distant milling destinations. Members use a part of their grain

volume to supply their feed mills and local buyers, allocating

the balance for marketing by their MAC. This type of decentralized system of decisionmaking and of divided responsibility does not encounter the magnitude of risk and inefficiency

that such a segmented system has in the context of regional

and interregional grain marketing.

MACS VERSUS ALTERNATIVE FORMS

When a group of cooperatives consider forming a MAC,

they must compare expected benefits with their current system and evaluate other alternatives for increasing their scope

and coordination of operations. This section compares MACs

with general alternatives.

In some cases, however, cooperatives may regard a MAC

as a potential transitional structure, rather than a mutually

exclusive alternative. By establishing a MAC, members buy

time to obtain more information for evaluating future steps

toward either complete consolidation or partial combinations

within a federated cooperative.

There is a potential weakness in trying to use MACs as a

middle ground or transitional step. A decision to form a MAC

can often be a delaying tactic in that cooperatives postpone

having to make difficult restructuring decisions. Rather than

lay groundwork for making difficult but economically necessary adjustments, MACs can become entrenched. In sum, the

coordination that a MAC provides, without requiring consolidation or transferring of assets, can work in either positive or

negative ways. It is preferable to choose an alternative “as if”

it were a final and irreversible decision. The evaluation presented below considers MACs strictly as a competing rather

than a transitional alternative.

20
While there are numerous types of benefits and different

considerations in ranking the alternatives, this discussion

selects a few key points and some general assumptions in

making an evaluation. It is a simple example of what, in actual

practice, is a complicated process. The following four organizational structure alternatives are contrasted and compared:

1. MAC,

2. Non-MAC federated cooperative (NMFC),

3. Consolidation or merger of cooperatives (COM),

4. No intercooperative coordination (NIC).

MACs are primarily responsible for marketing coordination. If the members of a MAC instead formed a COM structure, it would accomplish marketing coordination and handle

the full range of activities and member services otherwise conducted on a smaller scale by several cooperatives in an NIC

structure. NMFCs take on more functions than MACs, but are

also an incomplete cooperative structure without the linkage

to the services and functions of their member organizations.

To compare these four organizational alternatives, the

operations of member organizations must be evaluated as a

single system with their federations, MAC or NMFC, to form

a complete structure.

Six objectives used to evaluate each alternative are:

1. governance control,

2. performance control,

3. economies of size,

4. use of capacity and assets,

5. development of assets and distinctive capabilities, and

6. member involvement and loyalty

Governance Control concerns directors’ responsibility to

oversee the activities of a cooperative in compliance with the

objectives and bylaws of the association and civil and commercial laws and regulations.

21
Table 2-Ranking of organizational SASrnStiVSS by SffSCtiVSnSSS in

accomplishing objectives.

Governance Control

1. NIC No Intercooperative Coordination

2. MAC Marketing Agency-in-Common

3. NMFC Non-MAC Federated Cooperative

4. COM Consolidation Or Merger

Performance Control

1. NIC

2. COM

3. NMFC

4. MAC

Economies of Size

l.COM

2. NMFC

3. MAC

4. NIC

Use of Capacity and Assets

1. COM

2. MAC

3. NMFC

4. NIC

Development of Assets and Distinctive Capabilities

1. COM

2. NIC

3. NMFC

4. MAC

Member Involvement and Loyalty

1. NIC

2. MAC

3. NMFC

4. CdM

22
The alternative of no intercooperative coordination (NIC)

is the highest rank in table 2 regarding ease or simplicity of

governance. The fact that a consolidation or merger (COM) is

placed fourth should not imply that smaller cooperatives have

superior governance. Rather, governance is more complex in

large cooperatives and federated systems. Even so, with systems for voting and board representation that reflect membership diversity, governance can be effectively carried out in

large organizations.

Governance responsibilities of most MACs, due to low

assets, are usually less demanding than in other cooperative

organizational forms. In contrast, governance is the major control challenge when cooperatives confront a consolidation or

merger (COM) decision. In fact, when merger discussions

break, it is often due to uncertainties about governance control. Questions about a proposed merger creating poor performance are rare.

Perfomzance Control -- motivating and monitoring cooperative staff to meet a cooperative’s objectives at the highest levels of achievement.

MACs are ranked last in performance control because of

the challenges involved with coordination. Cooperatives with

a MAC would be expected to outperform those operating with

no intercooperative coordination (NIC), but members’ exercise

of control over performance is often weaker. In fact, when a

MAC has improved results over each members’ previous NIC

experience, such success may mask the potential for better

performance, if directors were to exercise more control.

While coordination is a MAC’s key performance advantage over a NIC, it is difficult to control in a multiple principal

structure. Each participating cooperative remains in existence,

retaining their respective assets, so that their primary performance concern is with their own cooperative. In fact, the principals that serve on a MAC’s board are usually managers of

23
the member cooperatives, and their concerns can weaken performance control.

For example, some members may become concerned if

others appear to benefit more. They may become preoccupied

with establishing rules for how benefits and costs will be equitably shared or veto proposed operations which they anticipate would not benefit them as much as other members. In the

multiple principal structure of MACs, these governance concerns are apt to move to the forefront, while performance control becomes less important.

Economies of Size -- when larger capacity results in lower

per unit costs.

Economies of size is the classic advantage for many large

businesses. Its effects are usually significant in agricultural

production, processing, and marketing. In regard to physical

handling and processing of agricultural products, transportation costs often limit the extent of economies of size. By contrast, those aspects of marketing that involve communications

and movement of documents are likely to have lower per unit

costs with increased capacity.

For example, transactions costs for a large sale are often

proportionally smaller than costs on a smaller volume sale. If

a MAC accomplishes fewer but larger sales transactions than

separate transactions by several different agents for the same

volume, then it has an economies-of-size advantage over the

fragmented structure of NICs. COM and NMFC alternatives

accomplish the same economizing of transactions, while also

achieving more economies of size in physical facilities for

value-added services than the members of MACs or cooperatives in an NIC structure.

Use of Capacity and Assets -- involves the concept of

turnover, with increases in sales volume on a fixed capacity or

in relation to a firm’s assets resulting in a lowering of per-unit

costs and a higher return on assets.

24
The case for a COM alternative (table 2) is usually based

on the advantages of higher use of member facilities, as well

as economies of size. When use of capacity or assets is the key

objective, a single organization structure has advantages in

avoiding duplication or excess.

MACs are often more effective than other types of federated cooperatives in improving members’ access to more market outlets, and in this way, helping them increase their volume of throughput. However, this type of comparison is only

meaningful in terms of each member’s sales volume. It does

not consider the value added from the operations of a nonMAC federated cooperative (NMFC), which increases margins

per unit of sales.

NMFCs, with significant assets to use, do not function as

well as MACs in the agent mode of helping members find

buyers. In some cases, MACs operate on a type of brokeragefee basis. If members independently make sales, their MAC is

credited. This operating policy creates a large network of market contacts. In contrast, many NMFCs have processing schedules that require supply commitments from members.

Development of Assets and Distinctive Capabilities -- over

time, a business will accumulate a wide range of assets that

extend beyond those with reported book values to include

intellectual property, such as trademarks and patents, as well

as human capital development of management and other personnel.

Developing unique assets and human resources are the

tools for creating a value-added system for member products.

It is often believed that adequate financing is sufficient to provide an effective value-added system, and that common agency can coordinate the needed financing. However, this view

neglects a critical ingredient, an organizational environment

for innovation. While the potential exists for success in using

MACs for value-added marketing strategies, MACs’ multiple

25
principal structure is a disadvantage, as pointed out by some

of the examples.

Value-added strategies involve internal development of

staff capabilities, as well as substantial accumulation of “book

value” types of assets. Historically, most cooperatives have

carried out this type of development within a single organization structure. If they lack adequate resources, cooperatives

have often joined together in a COM structure. When a group

of cooperatives want to coordinate such long-term programs

for value-added activities, their established organization will

usually be a NMFC rather than a MAC.

MACs do not provide the kind of managerial leadership

and initiative needed for conducting most value-added programs. Similar to the problems of performance control, a multiple principal structure often involves a “management by

committee” approach. While such an approach has advantages for certain tasks, examined in the last section of this

report, it can inhibit the necessary risk-taking and the longterm nature of developing products, techniques, and specific

expertise.

Confusion and conflict over property rights are more

prevalent in the multiple principal structure of common agency, which would tend to undermine the development of a

value-added program.

Member Involvement and Loyalty -- involves active patronage and keeping informed about a cooperative’s policies and

programs.

Cooperatives of all sizes and structures should never

assume member involvement and loyalty, and must make

explicit efforts to maintain strong member relationships. In

general, a cooperative with a relatively small number of producer-members and limited geographic scope has more

opportunities for keeping members involved and loyal. When

a group of cooperatives contemplate forming a federated

26
organization or consolidating, the latter alternative often raises concerns about potential erosion of member relations.

More than other types of federated organizations, a MAC

has an advantage in requiring less commitment of resources

and allowing member cooperatives more independence with

their operations. In addition, MACs do not require complicated systems of voting and layered structures of boards and

management, usually concomitant with the formation of large

centralized or federated cooperatives. These systems and layered structures facilitate the process of control and the maintenance of member relations. But they also involve additional

costs that a MAC alternative largely avoids.

Table 2 demonstrates how organizational alternatives

might be ranked by a typical group of cooperatives. In an

actual study of alternatives the goals or objectives will usually

be more specific than the very general ones provided in this

discussion. Market access conditions vary by commodity, and

MACs can be used to conduct diverse business strategies.

Their most common service is to provide coordinating mechanisms for cooperatives to have adequate volume to build trading relationships with major buyers.

COORDINATING STRATEGIC PLANS

Cooperatives confront many distinct economic challenges that underline their need for coordinated planning and

opportunities to form MACs. A cooperative system is a dual

business of cooperative operations and of members’ farm

enterprises. The major challenge for cooperatives, that IOFs

need not confront, is to simultaneously facilitate and augment

the economic performance of their members’ businesses,

while maintaining their own financial solvency.

A cooperative provides many services that otherwise

either would not be supplied or offered with less quality or

fewer options. While cooperatives only offer services that

maintain their earnings, they cannot carry out their agent

27
responsibility by strict reliance on the same kinds of profit

measures and market signals that IOFs use to guide their decisions on supplying services. Cooperatives use both traditional

and special financial measures, but by serving the interests of

other business entities, i.e., farms, the monitoring of their performance is more complex than that of a for-profit IOF.

Another distinct economic challenge for cooperatives are

benefits they provide that cannot be exclusively captured by

those who have paid for them through membership. These

external effects occur from marketwide actions of cooperatives

in negotiating higher prices with processors, managing an

even flow of product deliveries, or in conducting promotional

activities that enhance prices.

Intercooperative coordination of planning can help cooperatives manage their distinct challenges. MACs are one vehicle for that purpose. MACs increase cooperatives’ knowledge

of one another so their plans and actions are more likely to

reinforce rather than adversely affect each other. The latter situation is more apt to happen from extremely independent and

isolated planning.

Members of federated cooperatives customarily share

aspects of their business plans that relate to the effective functioning of their federation. With the relatively large memberships of most non-MAC federations, such sharing of information is often too limited in scope to be regarded as coordinated

planning. By contrast, the smaller memberships in most

MACs afford more opportunities for member contacts.

Although members of MACs maintain confidentiality of their

respective organizations’ strategic plans, close working relationships foster more sharing of information and marketing

ideas than would occur without a MAC.

Coordinated planning is often required for MAC operations, particularly with few but large member cooperatives,

where each provides a large share of the collective sales vol28
ume. In addition, cooperative MACs often become a mechanism for coordinated strategic planning.

The group dimension that a MAC brings to the process of

strategic planning is one of its key advantages, and one that is

lacking in the organizational alternatives discussed earlier. In

commenting on this dimension of MACs, a cooperative manager once made the point:

In a marketing agency-in-common you have more

groups helping you make a decision. Centralized decision-making is for an opportunist, and cooperatives

are not in that business.g

The central point of this observation is emphasized in

much recent business literature on decisionmaking. One

example points out the advantages of collective versus individual decisions:

Groups are likely to outperform individuals only

to the extent that productive conflict arises among

their members and such conflicts get resolved

through balanced debate and careful intelligencegathering. When that happens, a group is likely to

understand the issues better than an individual, and

is more likely to choose wisely.lO

These attributes are effective for all types of organizations or teamwork situations. The difference for MACs is that

lacking a chain of command and leadership role for manageg Edward Breihan, interview on May 14,198O. Former manager of SWIG,

Inc., and Plains Cooperative Oil Mill, who was also a director for Amcot,

Soy-Cot, and the Farm Credit System.

lo J. Edward Russo and Paul J.H. Schoemaker, Decision Traps, 1989,

p. 145.

29
ment, they are especially dependent upon effective group

decisionmaking. MACs provide a system where individual

experience and expertise from several organizations is

brought together to address common problems.

But cooperative MACs do not yield easy advantages.

This is evident by the relatively small number that have been

established in recent history. The highly decentralized nature

of a MAC’s leadership, or multiple principal structure, places

greater demands on group working than exists with single

principal structures. When there is a willingness to meet such

demands, MACs can provide significant benefits from coordinated marketing and strategic planning. Marketing agenciesin-common are also more conducive to a wider application of

cooperative methods than if cooperatives are more organizationally independent or isolated.

30
Table A-I- Nineteen Federated Cooperatives with Assets/Sales Below

0.1, FY 1991.

Midwest Agri-Commodities Company

Allied Federated Cooperative

Atlantic Processing, Inc.

Waterloo Service Company

Norbest, Inc.

National Woof Marketing Corporation

Seald-Sweet Growers, Inc.

Equity Co-op Livestock Sales Assn., Inc.

Wenoka Sales

Marketing Association of America Cooperative

Horticultural Producers Federated Assn.

Cooperating Brands, Inc.

Interstate Producers Livestock Assn.

Sun-Diamond Growers of California

Soy-Cot Sales, Inc.

Louisiana Sugar Cane Products, Inc.

Texas Cooperative Marketing Exchange

Chicagoland Dairy Sales, Inc.

Amcot, Inc.

31
Table A-2-Forty-four Federated Cooperatives with Assets/Sales

Above 0.1, FY 1991.

Central Ferry Terminal Association

AGRI, Inc.

Lewis-Clark Terminal Association

Select Sires, Inc.

Ne-Tex Cooperative Oil Mill

Valley Cooperative Oil Mill

Federated Co-ops, Inc., of East Central MN

Texas Citrus Exchange

Pacific Coast Producers

Producers Cooperative Oil Mill

Plains Cooperative Oil Mill

Tri-Ag Cooperative

Federation of Southern Cooperatives

Medora FS, Inc.

Citrus World

Co-op Service, Inc.

Alabama Farmers Cooperative, Inc.

Helena Cotton Oil

Planters Cotton Oil Mill, Inc.

Yazoo Valley Oil Mill, Inc.

SF Services, Inc.

CENEX

GROWMARK, Inc.

Ranchers Cotton Oil

FFR Cooperative

Osceola Products Company

DIVACO Cooperative

Universal Cooperatives, Inc.

Tennessee Faners Cooperative

North Central Sugar Marketing Coop

Ag Processing, Inc.

Cherry Central Cooperative, Inc.

West Virginia Wool Marketing Association

Union Equity Cooperative Exchange

First District Association

0-AT-KA Milk Products Cooperative, Inc.

Countrymark Cooperative, Inc.

Northland Foods Cooperative

Big Six Cooperative Terminal

Northwest Wholesale, Inc.

Delta Purchasing Federation A.A.L.

Colorado Potato Growers Exchange

Highland Exchange Service Cooperative

United Purchasers Association, Inc.

32
U.S. Department of Agriculture

Agricultural Cooperatlve Service

P.O. E3ox 96676

Washington, D.C. 20090-6576

Agricultural Cooperative Service (ACS) 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 agency (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 fhrough 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.

ACS publishes research and educational materials and issues

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