Cooperative Benefits and Limitations

Farmer Cooperatives in the United States

Cooperative Information Report 1 Section 3

United States Department of Agriculture

Rural Business - Cooperative Service
CONTENTS

Page

How Cooperatives Benefit Farmers and the Public l .* . l . . l l . 1

Benefits to Farmers ................................ 1

Benefits to Rural Communities ...................... 10

Benefits to Consumers .............................. 12

Benefits to People Overseas ......................... 16

Limitations of Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Production Control ................................ 16

Farming Based on Labor Input ...................... 17

Price Fixing ....................................... 18

Middleman Functions .............................. 19

Market Power .....................................19

Influence on Prices and Services ..................... 20

Reserves Accumulation ............................. 20

Restrictions by Inherent Characteristics ............... 20

Cooperative Information Report 1, Section 3

Issued April 1980

Reviewed and Approved for Reprinting May 1990

Bendils and

limmMions

Successful cooperatives can benefit their farmer members

and others in many ways. But even the most successful cannot be

all things to all members. Understanding the more common benefits and limitations of cooperatives will help clarify their role in

American agriculture.

How Cooperatives Benefit

Farmers and the Public

Cooperatives marketing farm products and providing farm

supplies, credit, and other services vary widely in success. So their

benefits and limitations also vary.

Benefits of cooperatives are difficult to measure. Some are

tangible or direct as in the case of net margins or savings. Others

are intangible or indirect such as cooperatives’ effect on market

price levels, quality, and service. Some are most evident at the

time the cooperative is organized but become more obscure as the

years pass. Benefits are greater for some types of cooperatives or

in specific areas. Most benefits are evaluated in economic terms

but some also may be social.

Benefits to Farmers

In several major ways, cooperatives benefit farmer-members, and often nonmembers.

Ownership and Democratic Control

Cooperatives enable farmers to own and control, on a

democratic basis, business enterprises for procuring their supplies

and services (inputs), and marketing their products (outputs).

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They voluntarily organize to help themselves rather than rely on

the Government. They can determine objectives, financing, operating policies, and methods of sharing the benefits.

Through cooperatives, farmers can own and operate a useror service-oriented enterprise as contrasted to an investor- or

dividend-oriented enterprise. Farmer ownership allows producers

to determine services and operations that will maximize their own

farming profits rather than profits for the cooperative itself.

Increased Farm Income

Cooperatives increase farm income in a number of ways.

These include: (1) Raising the general price level for products

marketed or lowering the level for supplies purchased;

(2) reducing per-unit handling or processing costs by assembling

large volumes, i.e., economies of size or scale; (3) distributing to

farmers any net savings made in handling, processing, and selling

operations; (4) upgrading the quality of supplies or farm products

handled; and (5) developing new markets for products.

By pooling supply purchases, sales, and handling and selling expenses, cooperatives can operate more efficiently-at lower

costs per unit-than farmers can individually. This principle also

can be applied to succeeding levels in terminal marketing of

commodities and in wholesaling and manufacturing of supplies.

Farmers usually judge the benefit of belonging to a cooperative by its net margins or savings-a tangible measure. More specifically, they look at the amount currently paid to them in cash.

Next is the amount allocated to them in noncash forms that may

be revolved later. Many cooperatives annually make substantial

cash payments of earlier deferred refunds from revolving funds.

The net margins realized by 5,900 marketing and supply

cooperatives were about $1.3 billion in 1976, after eliminating

intercooperative distribution of patronage refunds and dividends

on member capital. These savings were equal to about 21 percent

of the $6.14 billion investment members had in these cooperatives

that year. Measured another way, such a savings constituted

about 7.1 percent of the total $18.8 billion net income U.S.

farmers earned in 1976.

In addition, many cooperatives operating on a pool basis

realize proceeds exceeding the average market prices in their trade

area. Riceland Foods, Stuttgart, Ark., through combined superior

marketing, processing, and exporting services, has for the past

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three decades paid its members an average of 40 cents or more

per hundredweight of rice above the average price received by all

U.S. rice growers. Riceland’s soybean grower members in the past

decade have received 35 cents more a bushel than average. Similar

benefits are substantial for fruit and vegetable, wool, and dairy

farmers. A number of dairy, sugar, and fruit and vegetable associations bargain primarily for price, but also terms of sale, including terms for certain input items. These associations encourage

members to produce quantities and quality of products needed to

meet market requirements. Overall information on the influence

of bargaining associations on prices received by members is not

available.

Cooperatives also provide important indirect benefits

through their effect on local prices for farm products, supplies,

and services. The savings aspect usually becomes less tangible over

a period of time.

Cooperatives inject competition into the system by

providing services at cost to members. This leads to pricing

adjustments by other organizations; thus the real benefit may be

their day-to-day impact on market prices. Based on the competitive influence of cooperatives since they began operations,

many leaders report that these economic benefits greatly exceeded

the annual net margins of the cooperatives.

Also, a few large supply cooperatives have reduced prices

and margins temporarily during periods of drought or unusual

price-cost squeeze to provide direct benefits on a seasonal basis

rather than at the end of the year.

Farm credit cooperatives, including Federal Land Bank

Associations, Production Credit Associations, and the Federal

Land Banks, Intermediate Credit Banks, and Banks for Cooperatives serving them, had net income of about $369 million in fiscal

1978 and $334 million in fiscal 1977. Data were not available on

rural credit unions. Rural electric cooperatives had net margins

totaling $388 million in fiscal 1978 and $340 million in fiscal 1977.

Most cooperatives have programs to retire equities farmers

have built up over the years with their patronage. These amounts

can be substantial, as exemplified by the $19,992 check Bill Clifford of Plymouth, Neb., received on his 65th birthday. The check

represented his equity built up between 1944 and 1976 from using

his cooperative in support of his 80-acre hog farm.

In 1979, farmers had $16.9 billion invested in cooperatives,

an average of $6,423 per farm.

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Improved Service

A basic objective of cooperatives is to serve their members’

needs. They do this by providing services not available or by

improving existing services. Rural electric cooperatives and

artificial insemination associations are outstanding examples of

making a new service available in rural areas. Production Credit

Associations pioneered in making loans based on carefully

planned budgets-still an important part of their services.

Providing a year-round grain marketing or processing

service are meeting a need in some communities. Other new

services are electronic auctions to encourage competitive pricing in

livestock and cotton, bulk assembling and handling of citrus, use

of bulk farm tanks and tank trucks for assembling milk, and further processing of a variety of raw farm products.

In the supply field, soil testing followed by bulk blending,

delivery, and spreading of fertilizer are services first developed

and now provided by many cooperatives. More recent services are

application of liquid fertilizer and pesticides, “keep-full” services

for gasoline and fuel oil, car care centers, and telephone-to-computer service for information on recommended types of fertilizer

and feed for specific uses.

Cooperatives are supplying various custom services to help

farmers meet labor shortages or to minimize individual

investments in equipment.

Cooperatives have led in improving services to farmers

because their objectives have been to meet members’ needs even

though little or no net margins are made for the cooperative in

every operation.

Quality of Supplies and Products

Farm supply cooperatives have been noted for providing

supplies giving the greatest value-in-use to the farmer. Their

objectives have been to provide the feed, seed, and fertilizer that

gave the farmer maximum gains or yields rather than those that

returned the largest net margins to the cooperatives.

Cooperatives long have relied heavily on State experiment

stations for advice as to variety of seed, analysis of fertilizer, and

formulation of feed that would best meet the needs of their

farmer-members.
In marketing farm products, cooperatives’ pricing practices

have been based on differentials for quality. And they have

provided information and advice on ways to produce quality

products and to maintain that quality in the marketing process.

Basically, cooperatives encourage production oriented to market

requirements by developing producer payment plans based upon

meeting grade, size, time, and other market specifications.

Marketing cooperatives have led in demanding industry

grade standards, then using them in offering top quality products

to buyers. Their efforts to improve quality, reliability, and

integrity of exports can increase the cooperatives’ share of the

export market.

Assured Sources of Supplies

Cooperatives provide members with a dependable source of

reasonably priced supplies, especially during shortages or

emergencies. This service may require cooperatives to forego

larger net margins from other domestic or foreign business to

meet the needs of their member-owners.

Cooperatives operated as pacesetters in the public interest

in supplying petroleum and fertilizer to farmers during the shortages of the early 1970’s. Specifically, cooperatives (1) confined sale

of supplies to member-patrons to enable farmers to expand

production; (2) made special purchases at extra costs; (3) added

storage and transport equipment to acquire or store products

when they were available; (4) expanded refining and

manufacturing capacity; and (5) formed an international

petroleum trading and purchasing cooperative to acquire foreign

sources of supplies.

In 1975 during a period of fertilizer shortages and skyrocketing prices, cooperatives held the line by charging an average

of $31 per ton less than noncooperative suppliers, resulting in a

cost saving to farmers of nearly $200 million.

Cooperatives worked closely with congressional committees

and Government agencies to obtain priorities for fuels and plant

foods needed to meet food and fiber production goals. Also, they

offered various suggestions to members for conserving fuel and

fertilizer supplies. Furthermore, cooperatives began extensive

long-range planning for strengthening the supply position of members in the years ahead. For example, petroleum refinery facilities

were purchased to improve cooperatives’ fuel sources.

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Enhanced Competition

Strong successful cooperatives introduce desirable competition that raises the going market prices for farm products, the

type of services provided, and the quality of supplies farmers

purchase. Individual farmers have little bargaining or purchasing

power, but by joining in cooperatives they can acquire “muscle in

the marketplace.” Farmers in many areas are forced to deal with

fewer product buyers or supply sellers. In some industries, only a

few large companies control a substantial share of the market at

various integrated levels in the marketing process.

Cooperative competition can have a salutary or regulative

influence on the daily operating practices of business firms. Local

prices for farm products often advance when cooperatives enter

the market, and the prices of purchased farm inputs frequently

declines. After Tri-Parish Cooperative, Slaughter, La., opened in

1960, other feed companies dropped prices $20 a ton within the

first year. In 1975, Moroni Feed Company, a turkey cooperative

in the Sanpete Valley of Utah secured a $7.50 ton reduction in

Midwest shipments of soybeans, a benefit producing $125,000 in

savings to members.

The basic cooperative principle of providing services at cost

injects a highly competitive force in the marketplace even though

there are a small number of large firms. Cooperatives provide a

“yardstick” by which members can measure the performance of

other firms that serve farmers. This can help cooperative officials

decide whether to integrate operations on a more intensive scale.

Cooperatives, due to their nonprofit and service-at-cost

nature, tend to push performance closer to the competitive norm.

The reason is that they bring more to market at a higher producer

price than would be the case if all firms were profit-seeking. This

assumes open membership in the cooperatives.

When cooperatives enhance competition in the marketplace,

usually nonmembers as well as members benefit. They may gain

from increased price levels for farm products or lower price levels

for supplies; from upgrading of quality or improvement of

services; or from development of new markets.

Expanded Markets

Through pooling products of specified grade or quality,

many marketing cooperatives can meet the needs of large-scale

buyers better than can individual farmers. A number of cooperatives have developed markets in other countries and their exports
provide outlets for more production than m

could sell.

.embers otherwise

In many cases, cooperatives have expanded-or acted to

retain markets by processing members’ products into different

forms or foods. Major cooperatives have been organized to

preserve farmers’ link to a market and to protect their production

investment. Examples are: Pacific Coast Producers, formed to

process growers’ fruits and vegetables after a large cannery closed;

and American Crystal Sugar Company, purchased by sugar beet

growers and converted to a cooperative after previous owners

began closing plants that refined beets into sugar. Some associations have pioneered in developing new types of processed food

products. These approaches simply use members’ production in

different combinations. In some instances additional markets are

created by improved storage techniques such as controlled atmosphere for fresh products.

Farmers have used cooperatives to capture a greater share

of the value added to a product as it moves to the consumer. By

the mid-1970’s, more than 80 cooperatives were marketing

farmers’ products under nearly 300 cooperative-owned processed

food brands.

Improved Farm Management

Progressive managers and field staffs of cooperatives

provide valuable information to members on farm production and

management practices. Advice may be offered on the quality of

seeds, fertilizers, and pesticides, and on feeding and cropping

practices. Also, many cooperatives provide market and economic

information about various products or enterprises. Many cooperatives assist county extension agents in implementing the

recommendations of State experiment stations. Many farmers are

looking to their cooperatives for more complete purchasing and

marketing services.

Legislative Support

Another financial benefit, not easily measured, is the legislative support cooperatives provide for their members. This is

supplied by the large centralized cooperatives, the federations of

locals, State cooperative councils, and National cooperative

organizations such as the National Council of Farmer Cooper-
atives, the National Milk Producers Federation, and the Cooperative League of the USA.

An example is the passage in 1978 of the Tax Reduction

Act, which increases the investment tax credit for cooperatives.

Directors and employees of many cooperatives devoted much time

and experience to help get this change through Congress. Officials

estimate that this bill will mean added annual savings of $1 to $2

million just for members of the Land O’Lakes cooperative system.

Local Leadership Development

Successful, growing cooperatives often develop leaders

among directors, managers, and other employees. And members,

by participating in business decisions on a democratic basis,

become more self-reliant and informed citizens in their communities. The practical business experience acquired as directors or

committee members is often supplemented by specialized formal

training. This experience of working with the cooperative

contributes to improved rural leadership.

In July 1976, Secretary of Agriculture Earl L. Butz, speaking at the 50th anniversary of the Cooperative Marketing Act and

Farmer Cooperative Service of USDA, stated: “I think there is no

better training ground for democracy in this country than in the

self-management and operation in these cooperatives. That, to me,

has been the great contribution that cooperatives have made in

the past 50 years and I think it will be the great contribution they

will make in the next 50 years.”

Family Farmer Control of Agriculture

These benefits, which vary among cooperatives, all indicate

ways cooperative enterprises help the family farm stay in business

and thus keep control of production.

The credit and supply cooperatives help the family farmer

enlarge and operate his production units more efficiently on an

independent basis. The marketing and processing cooperatives

provide members market access and help them sell their products

to advantage- either in the original state at harvest or later following storage, or in a processed form. These cooperatives help

him (1) remain an entrepreneur rather than a contract producer or

piece-worker, and (2) retain control of his products further up the

marketing chain on the way to consumers.

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Many leaders believe that marketing cooperatives have

three basic alternative strategies or approaches in the future:

maintain the open market, offer cooperative contracts, and

forward integrate into advanced markets.

There are increasing indications that input requirements

(credit, supplies, and equipment) and product marketing (assembling, processing, and selling) will need to be in one cooperative

system to be most effective. It could offer farmers supplies on a

for-sale or custom basis and provide each of the three marketing

alternatives mentioned above.

Dr. Ronald D. Knutson, Texas A&M University, recently

expressed this view to an audience of young farmer couples: “In

the future every farmer will be a part of a system. The only question is whether it will be a corporate system controlled by

someone else or a cooperative system controlled by producers. . . .

Family farmers can survive only if cooperatives survive. . . . If

cooperatives fail to relate, accept, and perform to meet the challenge, the family farm system of agriculture is finished.”

Some cooperatives have become full-service, integrated

enterprises. They now provide an alternative business system in

which farmers can compete with the large industrialized corporations that are increasingly important in agriculture.

A new type of cooperative approach also is being used in

some areas of the United States to combine features of the traditional marketing cooperatives with some aspects of production

cooperatives. Briefly, individuals, often migrant farm workers,

have combined their financial resources into equity capital. Using

this as a corporate fund base, the cooperative arranges financing

to either purchase or lease a tract of land. The cooperative then

proceeds in the following manner: The board of directors, elected

by the members, allocates the land to each family member. The

member then assumes the production responsibility. To date, this

type of cooperative has been involved primarily in intensive agriculture such as strawberry and vegetable production.

Some special features of these cooperatives need emphasis.

Membership is on a family basis because production requires

considerable labor. Family members become deeply involved in

the operation by their total commitment of labor and all available

capital resources. It is important to point out that the individual

farm family member is the operator. His decisions determine how

effectively he produces and, therefore, his annual returns.

The cooperative is the central focus for the entire operation.

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The board of directors is exceptionally active and establishes

guaranty and quality performance standards. These standards can

be used as criteria for accepting or retaining the family member as

a producer. The basic decision of land allocation becomes the critical decision made by the Board. The marketing is done by the

cooperative. Thus, the operation of the organization ensures that

fully responsive production patterns are developed through the

land allocation power and the exclusive marketing arrangement.

These new types of cooperatives are another adaptation of

the highly integrated cooperative operation. The production

enterprises require a total family labor commitment, in contrast to

the high capital requirement of other integrated efforts.

Considerable progress has been made by these cooperatives as an

organizational means for assisting migrant workers achieve economic and community status.

Benefits to Rural Communities

Cooperatives benefit the economy of rural areas in a number of ways.

Added Community Income

Most of the additional income farmers get through cooperatives is spent with hometown firms for goods and services.

Successful cooperatives also have substantial payrolls and their

employees’ patronage of local businesses adds to the economic

well-being of the community. The cooperatives also spend money

for supplies, utilities, insurance, and local taxes.

As an example, a cooperative in the Midwest for many

years provided grain storage and marketing; petroleum, feed, and

fertilizer distribution; and the handling of general supplies. Later

it added feed manufacturing and seed cleaning services. As the

rural population declined, some businesses closed in the small

town where the cooperative was headquartered. The cooperative

took over or added lumber, furniture, carpet, and appliances to

serve the remaining farmers and rural residents. And it acquired

or built elevators in two adjoining towns.

In a typical year in the early 1970’s the cooperative had net

margins of $300,000 of which $200,000 was paid in cash dividends

and cash patronage refunds. The remainder was retained for

capital reserves and income taxes. The savings realized from its

operations were returned locally, not sent to stockholders in

distant cities.

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The cooperative also spent many dollars in the communities. Each year it paid more than $200,000 in salaries; $30,000 as

real estate and property taxes; $200,000 for telephone, lights,

water, and fuel; and $100,000 for insurance. By the end of the

1970’s these amounts had almost doubled. The cooperative thus

has been a major aid in rural development.

Stronger Rural Communities

A local cooperative usually has several hundred members

who use its services frequently. This in turn helps bring patrons to

other types of business in the community. In small towns, the

cooperative often is the major or only business. Without it, people

would have to go elsewhere for goods and services.

A majority of the farmer cooperative plants and other facilities are located in rural areas-a plus value in stimulating home

ownership and retaining rural industry. Participation in cooperatives often encourages participation in other community projects

and in State and local government. Cooperatives often provide

funds for community fairs, health centers, fund drives, and the

like. As a result of working together in cooperatives, members

better understand how to unite in solving community problems.

And leaders developed in cooperatives also become leaders in

other community organizations.

Goods and Services to Nonfarmers

Rural electric cooperatives serve many rural nonfarm

residents. Likewise, diversified supply cooperatives supply

gasoline, fuel oil, car care, fertilizers, pesticides, lawn and garden,

and various home supplies and equipment to nonfarmers. Some

cooperatives also provide custom services related to these supplies

and distribute patronage refunds to these customers.

Good performance by farmer-owned cooperatives promotes

their image with the public and helps obtain outside support in

case adverse legislation or regulations are proposed.

Benefits to Consumers

Although farmer cooperatives are organized to serve their

members, they also operate in the public interest. Five ways they

contribute to consumers were discussed by former Assistant Secretary of Agriculture George B. Mehren several years ago. They are

still valid today.

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Quality Products

Producers in many cooperatives hire trained people to help

them produce quality farm products-all the way from the seed to

fertilizing, cultivating, harvesting, and transporting products to

the cooperative packing or processing plant.

Many cooperatives have been leaders in searching for better

varieties and handling methods; in establishing uniform grades

and standards; in using quality testing laboratories; and in identifying quality by use of brands and labels. As a result, millions of

consumers can buy with confidence products bearing cooperative

brands such as Land O’Lakes, Sunkist, Ocean Spray, Diamond,

Sun-Maid, Seald-Sweet, and Welch.

Cooperatives led the way in working with the U.S.

Department of Agriculture on grading and standardization

programs that help assure quality products. For example, Norbest

Turkey Growers, Salt Lake City, Utah, was the first commercial

firm to adopt U.S. grades and standards for turkeys. The Turtle

Lake (Wis.) Cooperative Creamery Association became the first

dairy manufacturing firm to receive a permit to label its dried

skim milk products as Grade A quality. And the Lake to Lake

Dairy Cooperative, Manitowoc, Wis., was the first firm USDA

authorized to label consumer packages of cheese with its U.S.

Grade AA shield.

Plains Cooperative Association, Lubbock, Tex., tests

producers’ cotton to measure staple length and ability to take and

retain dyes. And it has developed techniques to classify fineness

and color. These tests assure buyers of product quality and help

growers produce the type and variety of cotton to meet consumer

demands.

Varied Services

Cooperatives have been alert and responsive to the changing demand for convenience foods, good packaging, and effective

merchandising. Some conduct dealer and consumer education

programs on proper care and handling of their products and ways

to use them. A number use another merchandising device, the test

kitchen, where they develop recipes for consumer use.

Cooperatives developed the system of classified pricing,

later formally adopted in Federal milk marketing orders. These

and other marketing orders and agreements stabilize the market,

identify quality, shift low-quality products to byproduct use, and

provide a more stable supply of products.

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New Products and Processes

Cooperatives have introduced new products and processes,

including: (1) Tree Top, Inc., Cashmere, Wash., was the first to

produce on a commercial scale, a frozen apple juice concentrate

that USDA research had developed; (2) National Grape Cooperative Association, Westfield, N.Y., has developed many new

products such as apple-grape drink under its Welch brand;

(3) Sun-Maid Raisin Growers of Fresno, Calif., was responsible

for much of the early work in developing machinery for cleaning

and destemming raisins as they come from the growers’ trays; and

(4) Skookum Growers, Wenatchee, Wash., helped make Golden

Delicious apples popular by helping breed better varieties and find

better handling and holding procedures.

Land O’Lakes is an example of a cooperative that has

striven to market foods that meet the needs and desires of

consumers. Shortly after organizing in 1921, it pioneered quality

control in butter production and was the moving force behind the

establishment of Federal and State inspection and grading.

Land O’Lakes has continually diversified until its products

now are found in about 400 different forms-in the grocer’s dairy,

meat, and frozen foods cases, and on shelves displaying dry and

canned foods with Land O’Lakes products as ingredients. The

basis of this diversification is its Research and Technology

Division that comprises a Research and Product Development

Department, an Analytical Laboratory, a Quality Assurance

Department, and a Consumer Affairs Department. The Land

O’Lakes Kitchens, located in Marketing Services, works closely

with the Research and Development unit.

Lower Production and Marketing Costs

Lowered production costs on the farm and marketing efficiencies brought about by cooperatives help hold down food costs

to consumers. Farm credit associations and rural electric cooperatives make credit and electricity available to farmers at reasonable rates. Farm supply cooperatives make important

contributions in controlling production costs.

By eliminating transfer of ownership and some of the stages

of marketing and by keeping marketing and processing costs per

unit at minimum levels, cooperatives influence the performance

and margins of other firms. Some benefits of these more efficient

distribution systems accrue to consumers.

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Moreover, to the extent that agricultural cooperatives

achieve increased returns for farmer-members, farm production

and supplies may increase and prices become lower. Thus, for a

period consumers indirectly may benefit as much or more than

producers.

The question often arises as to whether increasing

marketing and bargaining power of cooperatives will mean higher

prices to consumers.

First, increased bargaining power often means more than

bargaining for higher prices. It means bargaining for other terms

of sale and results in more orderly marketing and market stability-thus providing ultimate benefits to consumers as well as

farmers.

Second, the cost of farm products is only a small part of

the total cost of many foods to consumers; hence, any price

increase to the farmer has a relatively small effect on the

consumer price. Further, if prices become too high on an item,

consumers have a wide range of choices they can substitute and

thus bring the price back down.

Third, farmers’ increased bargaining power through cooperatives may interject a countervailing force on any excessive

margins being taken by other handlers of food products. And

increased efficiency resulting from strengthened cooperative operations or mergers could give the farmer added income without

increasing consumer costs.

Fourth, in specific products, areas, or years a reasonable

increase in costs to consumers may be justified to attain a more

equitable balance between returns to producers and costs to

consumers, or to assure more adequate supplies of the product.

Improved the General Welfare

The additional income farmers receive through ownership

in cooperatives is spread among thousands of farmers in communities throughout the country.

Cooperatives help reduce members’ costs for supplies and

services by distributing most of their net savings above costs of

operation back to member-patrons on a patronage basis.

Cooperatives also employ thousands of employees who

largely reside in rural communities. The cooperatives’ substantial

payrolls are spent for consumer goods and services in small towns

and cities.

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In addition, cooperatives are good customers of many other

businesses that provide supplies, building, equipment, fuels, utilities, advertising, and the like.

> The economic literacy and leadership qualities of rural people are also improved, thus making for stronger communities and

citizens.

All of these contributions to farmers, rural communities,

small towns, and consumers promote the general welfare of our

country.

Benefits to People Overseas

Several regional cooperatives have helped cooperatives

develop in other lands. U.S. cooperatives organized the Cooperative Fertilizer International, headquartered in Chicago, to help

farmers in India build a large cooperative nitrogen plant. They

also contributed $1 million to get the project started.

Many cooperative employees and leaders have gone abroad

on specific assignments to help build cooperatives, or strengthen

existing ones, in emerging countries.

Hundreds of trainees and representatives of cooperatives

and governments in other countries come to the United States

each year to learn about our cooperatives. Leaders and managers

here hold conferences and conduct tours to explain the operations

and services provided. For many years, visitors took courses and

special training at the former International Cooperative Training

Center at Madison, Wis. Officials of our cooperatives lectured

and participated in seminars at these sessions. The center’s

activities were taken over by the University of Wisconsin in the

early 1970’s.

Limitations of Cooperatives

Cooperatives are subject to the same economic forces, laws,

and human relationships that contribute to the success or failure

of other types of businesses. Cooperatives, however, have various

intrinsic limitations. Some relate to the agricultural industry and

others pertain to their objectives and the inherent nature of cooperative organizations.

Production Control

Agricultural surpluses have plagued farmers from time to

time since the Civil War, stimulating cooperatives to attempt

production controls. They have found through bitter experience,

16
however, especially during the commodity marketing activities in

the 1920’s and the Federal Farm Board era a decade later, that

they could not control production to any substantial degree.

It became increasingly clear that if production control

programs were to be effective they would require the help of the

Federal government with its power to allocate output, to offer

incentives for restricting production, and to secure compliance

with such programs.

Furthermore, at the present time, it is not legal for cooperatives to control members’ production. The basic role of cooperatives is to market the available supply in the most effective

manner possible, not to limit production.

Farming Based on Labor Input

Cooperative farming usually refers to a cooperative

enterprise where a number of farmer-members pool their land,

capital, equipment, and labor, and share in the returns on the

basis of their labor input .1 Although this type of cooperative generally has not been successful in this country,2 a few church

groups operate farms on this basis or a modification of it. Frequently incentives are lacking, problems occur in decisionmaking,

and dissatisfaction results from the distribution of net income.

Another major problem has been the transfer of equities from one

generation to another.

In the 1930’s and 1960’s, encouraged or assisted by Government agencies, low resource farmers formed a number of farm

machinery-use cooperatives, sometimes called machinery pools.

These did not last long because some members did not take

proper care of the equipment or problems arose in scheduling its

use among the members. Others were dissolved when members

became able to purchase their own machinery. Much informal

cooperation, however, still exists among groups of two or more

Some statutes pertaining to agricultural marketing and purchasing cooperatives authorize the production of farm products. Other State statutes do not. Farmers, however, can

form cooperative farms under the general cooperative or general corporation statutes of

most States.

Tanada reported 16 farming cooperatives in 1975, with no change in recent years, and

23 farm machinery-use cooperatives. Also, Canada reported 304 other production cooperatives, including grazing, feeder, fodder, artificial insemination, woodcutting, and other

types. In 1974 the 343 total production cooperatives had assets of $36.1 million; sales of

livestock, lumber, pulpwood and other, of $36.1 million; and service and other income of

$8.3 million.

17
farmers in using specialized equipment such as that for terracing,

combining, draining, and cutting ensilage.

Interest is developing in the modified type of cooperative

farming discussed earlier wherein the cooperative leases or buys

land and the members assume production responsibility for the

acreage allocated to them. Experience will determine whether this

type of activity will grow.

When diversified marketing/ supply cooperatives attempt to

engage in agricultural production to guarantee a supply of

products for their processing plants, or to attain capacity operation of their feed mills, inherent difficulties arise. If cooperatives

operate farms, they may in effect compete directly with many of

their members. They would compete in the farm labor market,

and during periods of surpluses many members might believe that

cooperative farming contributes to reduced farm prices. Also, the

question might arise as to how much resources should be used

and how many risks should be assumed by the entire membership

for the benefit of one group of producers or type of product.

The basic question of risk-taking by the cooperative

becomes apparent. Any gains made through production efforts

are, of course, returned to the members. But, if substantial losses

are incur *ed, members may not be willing to accept them.

Price Fixing

In

through 1

.1 .

the 1920’s, Aaron Sapiro espoused the philosophy that

arge, strong cooperatives, farmers could tell buyers what

the price of farm products were to be. Experience demonstrated

that cooperatives could not fix prices because of their inability to

control production. While cooperatives often could influence

demand for the particular product they marketed through emphasizing improved production, better merchandising, and more effective bargaining, they were unable to substantially influence the

overall demand for farm products.

Some question whether cooperatives handling a large share

of a commodity’s total production, such as cranberries, citrus

fruits, or milk, could fix prices. This, however, does not take into

account the basically inelastic nature of most agricultural

consumption and the fact that consumers usually have a wide

variety of food choices available to them, including those resulting

from competition among cooperatives. Further, some farmers may

choose to market independently and take advantage of the coop-
erative price umbrella rather than be a part of the cooperative.

Should prices for any of these products increase too much,

consumers may substitute other products.

Middlemen Functions

Cooperatives generally cannot short-circuit the marketing

system or functions within it. The usual steps are necessary in

serving buyers although cooperatives may influence market structure and where and how marketing functions are performed.

While not eliminating functions, they may improve or change

inefficient marketing practices and replace middlemen who

perform them. These changes can reduce marketing margins.

At the same time cooperatives cannot do the impossible in

the marketplace. For example, they cannot always market members’ surplus or poor quality products to advantage. Neither can

they provide the highest quality nor the most complete services

and still have the lowest prices for the supplies they sell.

Market Power

Not all cooperatives acquire the leadership and financial

abilities to deal effectively with other firms in the marketplace.

Leaders of some local cooperatives want only to do an efficient

job at the assembly and storage stage of the marketing process.

They may acquire sufficient size and strength to influence the level

of service and margins and thus return higher proceeds to members, but have little or no influence on the basic price level for a

farm product or supply item. The heavy dependence on memberpatron equity capital is a critical limiting factor in acquiring size

and diversification.

Because of a lack of vision, leadership, managerial ability,

capital, or for other reasons, some cooperatives do not or cannot

vertically integrate their operations, either individually or jointly

with other cooperatives in federated associations. They do not

acquire strength at the processing or manufacturing level where

the real market power may be found in the industry.

Furthermore, should large regional supply cooperatives

acquire substantial market power, the likelihood of their abusing

it with members is limited. Members would not permit them to

charge exploitative prices, and if the cooperatives realize

unusually large net margins, these usually must be distributed

back to member patrons on the basis of their patronage.

19
Influence on Prices and Services

When a cooperative is first organized, the general tendency

is for gross margins of all firms serving the area to narrow. Prices

for farm products increase and prices for supplies or services

decrease to varying degrees. The cooperative’s influence is clearly

evident but after a few years it becomes obscure. Members tend to

forget the situation prompting formation of the cooperative and

young farmers never experienced it. Thus, cooperative leaders

cannot state with certainty what the level of market prices,

margins, or services currently would be if the cooperative did not

exist.

Reserves Accumulation

Where cooperatives operate fully on a cost basis by

distributing to patrons any net margins remaining over operating

expense, management sometimes feels this limits the cooperatives’

ability to accumulate capital reserves similar to those in other

businesses. This method of operation also may limit the use of

carry-back and carry-forward provisions concerning any losses

that might occur.

Restrictions by Inherent Characteristics

Although such features as ownership by farmer-users and

operating at or near a cost basis give cooperatives some

advantages, they also present limitations. Some are self-imposed.

Some have been alluded to earlier.

Frailties of Human Nature

Cooperatives are subject to the same “people problems” as

any business, but have additional problems stemming from being

owned by those who use them. Some of their members and

directors are misinformed; some have little realistic knowledge

about business activities or how effectively their cooperative is

operating or what it can be expected to accomplish. And directors

and managers at times can neglect their responsibilities or take

advantage of their -positions, resulting in poor performance or

failure of the cooperative.

Not all farmers in an area believe alike and thus not all will

join or trade at a given cooperative. Likewise, leaders among

20
farmers and cooperatives do not always agree on objectives, policies, and approaches, often leading to intense competition and

duplication of services and facilities between cooperatives serving

the same area. This situation can limit their efficiency, market

power, and members benefits.

Directors of cooperatives frequently are faced with the

difficult choice between building financial strength of the cooperative through retained patronage refunds, or increasing returns to

farmer members. The frailties of human nature may result in decisions that do not build cooperatives to their full potential.

Limited Objectives

Members may organize a cooperative to market only one

specific product or to handle only specified kinds of farm

supplies. Also, their objectives may preclude handling supplies

used by both farmers and nonfarmers, distributing patronage

refunds to nonfarmers, or handling unrelated products on which a

net income could be realized. These restrictions may limit the

cooperative’s volume and opportunities to reduce per-unit costs or

to serve all farmers or all rural residents in the area.

Decisions by Large Numbers

While boards of directors may have authority to make

major decisions, they may first wish to discuss them with the

membership. This sometimes requires time or delays action. Also,

hired management has a more difficult job than the comparable

chief executive in other types of businesses. He must give attention to member relations as well as strictly business activities. He

must try to keep members satisfied as patrons and also informed

of their responsibilities as member-owners.

Member Attention and Support

Their voluntary nature is a weakness of some cooperatives,

especially those not using annual marketing or purchasing agreements with members. Farmer-members thus may not always

participate in annual meetings, provide adequate capital, or fully

support the cooperative with their patronage. A lack of commitment by members may greatly limit a cooperative’s ability to fully

develop its potential for serving farmers.

Local cooperatives handling most farm products have

formed federated regional cooperatives to sell their commodities

2 1
or buy supplies. But in some cases these member locals do not

fully capitalize and use the regionals and thus limit their ability to

be most effective. Perhaps more basic is their failure to analyze

the services of the regionals against the real needs of the locals

and make adjustments accordingly.

Member Competing Needs for Capital

At the same time a cooperative needs capital for some

purpose, members may need additional capital for their farming

operations. Or two divisions within a cooperative may need funds

at the same time. Thus major expansion in one of the cooperative

services may be limited and occur at a much slower rate than

management or some of the members desire.

Patronage Refund Policy

While it is understandable that some members may need

considerable cash for payment of income taxes, they often do not

understand their cooperative’s needs for retaining patronage

refunds to finance additional facilities, and how such actions

could improve services or income to members.

Authors/J. Warren Mather and Homer J. Preston/Directors of

Cooperative Management Division and Cooperative Development

Division, respectively/ Dr. Preston retired in December 1978.

22 ~U.S.GOVERNMENTPRINTING OFFICE: 1990 - 722-098 - 1302/20094