Agway Inc., Syracuse, N. Y., the largest agricultural cooperative in

the United States, is also one of the more complex in organization, structure, and junctions. It is a conglomerate of products in farm supplies,

marketing, and related services. Organization and structural arrangements encompass direct farmer members, local cooperative members,

retail outlets, wholly owned subsidiaries, and joint ventures with cooperatives and other firms.
CONTENTS

MARKETING COOPERATIVES ........................... 1

Basic Objectives ......................................1

Early Activities in Cooperative Marketing ................. 2

Current Position ......................................4

Principal Types .......................................6

Membership and Control

...............................8

Marketing Practices ...................................10

Operating Policies ....................................13

Vertical Integrated Functions .......................... .15

Related Services ......................................20

Financing and Taxation ................................20

Benefits ........................................... ..2 3

Challenges ......................................... ..2 5

Basic Alternatives .....................................27

PURCHASING COOPERATIVES ......................... .29

Basic Objectives ......................................29

Early Activities in Cooperative Purchasing ................29

Current Position ......................................32

Membership and Control

...............................33

PrincipalTypes .................................... .3 5

Operating Practices ...................................38

Operating Policies ....................................4 1

Vertical Integrated Functions ...........................43

Related Services ......................................47

Marketing Operations ..................................48

Financing and Taxation ................................48

Benefits ........................................... ..5 0

Challenges ......................................... ..5 3

Cooperative Information Report 1, Section 6

Issued 1988

Reviewed and approved for reprinting September 1993

i

Cooperative

Organimlion

and Sirwiure

From early in the development of commercial agriculture in the

United States, farmers have used cooperatives to market their commodities

and buy farm inputs. This report presents an overview of cooperatives

performing these activities. More detailed reports are available on

cooperatives handling each of the major farm products and farm supplies.

Marketing crops and livestock and their products is the principal

activity of a large number of cooperatives. In others it is important but

smaller in volume than the purchasing of supplies for members.

Basic Objectives

Farmers organize and operate marketing cooperatives to help their

farming operations fare better economically. Major objectives are to:

1. Maximize income from the sale of members’ products. This

may be realized by handling large volumes so that per-unit marketing

costs can be kept low; by providing a producer-controlled check on prices

and operating practices and margins of other marketers; by adding value

from processing operations; by moving some products in bulk from farms

to plants; and by returning net savings or margins above operating costs

to member-patrons each year.

2. Achieve quality improvements not available to individual

producers through grading and marketing large volumes.

3. Assure farmers of dependable services on a year-round basis.

This may include custom services on farms and at cooperative facilities.

4. Provide information to farmers that will help them produce

products of the type and quality that consumers want, that will encourage

efficient marketing practices, and that will help them to increase crop

yields and livestock gains.

1
Early Activities in Cooperative Marketing \

One of the early examples of producers using cooperative or group

action to market their products was in 1794 when farmers in Virginia

and the Carolinas joined in community drives of livestock to eastern coastal

slaughter centers. The first marketing cooperative was formed in 18 10,

and the development of cooperative marketing from then until 1933 may

be divided into four periods.

Farmers Experiment With the Idea, 1810-70

Farmers began forming cooperatives during this period in the

Northeast, Cotton Belt, Upper Mississippi Valley, and Far West. The

earliest efforts at ‘ ‘associated or cooperative’ ’ dairying were attempted

at Goshen, CT, in 1810. Several cooperative cheese and butter factories

were established in New York and other States after 1850. In 1836,

cooperatives were organized to conduct public auction sales’ of purebred

cattle in Ohio. In 1840, producers in New York cooperated in’ selling

wool through depots. \

In 1857, Wisconsin farmers formed the Dane County Farmers .

Protective Union and built a grain elevator at Madison. Two grain

associations were organized in Illinois 10 years later. In 1860, the first

association to market fruit was organized at Hammonton, NJ, and one

to market hogs through an auction was formed in Brown County, IL.

In 1865, Michigan passed the first law recognizing the cooperative method

for buying and selling. By 1867, more than 400 dairy marketing

cooperatives were in operation in the United States.

General Farm Organizations, 1870-90

The Grange sponsored cooperative marketing in some States and

both marketing of products and purchasing of supplies in others. They

concentrated on cotton in the South; on grain in the central part of the

country, with 40 cooperatives formed in Iowa alone by 1871; and in

Kentucky, they sponsored warehouses for receiving and handling tobacco.

In the 1870’s, California Granges sponsored cooperative marketing of

grain, wool, and other products. The State Grange exported some wheat.

After the decline of the Grange, the Farmers Alliance developed

in the late 1880’s in the South and started a number of grain marketing

efforts.

Farmers not affiliated with farm organizations also formed many

cooperatives during this period. By 1890, some 1,000 cooperatives were

2
active with 75 percent handling dairy products, 10 percent handling grain,

and more than 10 percent marketing fruits and vegetables.

Many Cooperatives Organized, 18904 920

Local cooperatives were formed during this period in nearly all

States. Livestock shipping associations developed to full stature.

Cooperatives were organized to market cranberries in Massachusetts and

New Jersey; grapes in New York, Michigan, and Iowa; and fruit and

eggs in California.

Two new general farm organizations were formed in 1902-the

Farmers Union in Texas and the American Society of Equity in southern

Illinois. The Farmers Union placed emphasis on marketing cotton in the

South and grain, livestock, and dairy products in the Midwest and North

Central States. The Equity first sponsored cooperative warehousing and

pooling of tobacco and controlling its production. Efforts then shifted

to the North Central States where it sponsored cooperatives to market

grain, livestock, potatoes, and general produce.

Many well-known regional or terminal marketing cooperatives

were formed during this period to handle livestock, wool, tobacco, poultry

and eggs, raisins, walnuts, grain, and dairy products. By 1920, the number

of active marketing cooperatives-local, federated regional, and large

centralized-had approached an all time peak of 12,000.

Large-Scale Commodity Marketing

Cooperatives Established, 1920-33

In 1920, farmers accepted a new slogan, “orderly commodity

marketing, ’ ’ to be attained by forming single-product regional associations

to handle the entire crop in important producing areas. Under the

leadership of Aaron Sapiro, a California lawyer, 16 State and regional

associations were formed for marketing cotton, tobacco, wheat,

broomcorn, white potatoes, peanuts, rice, sweet potatoes, olives, alfalfa,

milk, melons, and poultry. Farmers signed “ironclad” contracts to deliver

their crops to these cooperatives. By 1925, 74 associations with 880,000

members were in operation; but by the end of the Farm Board in 1929,

the rapid development of national commodity cooperatives had almost

ended. They could not live up to their high expectations, and they never

controlled a sufficient amount of any product to exert a strong market

influence.

Still another general farm organization-the Farm Bureau-became

active during this period. In the 1920’s, it sponsored the organization

of a few national cooperatives to market grain, fruits and vegetables,

3
and livestock. Also, the Farmers Union continued to organize local and

terminal grain cooperatives in the North Central region.

During the 1920-33 period, legal developments also occurred to

strengthen cooperative marketing. Legislatures in most States adopted

standard agricultural cooperative acts. The Capper-Volstead Act, passed

in 1922, gave Federal sanction to farmer cooperatives that met certain

requirements; and in 1926 Congress passed the Cooperative Marketing

Act that provided for a division of cooperative marketing, now known

as the Agricultural Cooperative Service, in the U.S. Department of

Agriculture. In 1929 the Agricultural Marketing Act established the

Federal Farm Board which assisted in the formation of a number of new

large-scale associations to market livestock, wool, cotton, and sugar beets.

Several were national in scope.

Current Position

Number and Volume

During the last three decades, the number, types, and functions

of cooperatives marketing farm products have changed greatly. The

number of predominantly marketing associations declined from 65 19

in 195051 to 3,441 in 1985 (table 1).

The total cooperatives engaged in marketing dropped from 7,283

in 1950-5 1 to 3,925 in 1985. The difference in the two figures for 1985

consists of farm supply purchasing cooperatives with marketing . operations. Primarily marketing cooperatives handled about 90 percent

of total cooperative marketing sales.

In 1985, the 3,925 cooperatives’ total gross sales of products were

$57 billion, of which about $10 billion was intercooperative business

(mostly products marketed by regional federated associations for their

member local associations). This left a net volume of $47.3 billion.

After deducting value added from processing and marketing

margins, the cooperatives’ net volume of $47.3 billion was about 28

percent of farmers’ cash receipts at the farm level. This was almost double

the cooperative market share in 1950-5 1 (table 1).

The five States with largest cooperative net volumes in 1985, the

latest year such data are available, were: Iowa, $5.9 billion; California,

$5.77 billion; Minnesota, $5.4 billion; Wisconsin, $4.2 billion; and

Illinois, $3.97 billion.

From 1950 to 1975, about 40 percent of farmers’ cash receipts

from products marketed have come from crops and the other half from

4
livestock and poultry products. Since then, through 1985, about one-half

consisted of crops and the other half consisted of livestock and poultry

receipts.

Farmers’ cash receipts from all product marketings increased from

$28.5 billion in 1950 to $142.1 billion in 1984 (table 2). Receipts from

crops increased almost 6 times from 1950 to 1985 with the largest increase

in oil-bearing crops and food grains.

In 1985, the largest crop sales were from food grains; those from

oil-bearing crops, fruits and vegetables, and all other crops (except feed

grains) were about the same. In that year, cooperatives marketed about

33 percent of the grain and soybeans, 17 percent of the fruits and

vegetables, 18 percent of the dry beans and peas, and 33 percent of the

cotton sold by farmers.

Receipts from livestock and products have increased about 4.3 times

since. 1950, with the greatest increases occurring in cattle and calves and

dairy products. In 1985, receipts from cattle and calves made up over

40 percent of the total. Those from dairy products were next with about

26 percent of the total. In that year, cooperatives marketed about 78

percent of the milk and dairy products, 8 percent of the livestock and

wool, and 8 percent of the poultry and eggs that farmers sold.

Table l-Net sales of farm products by cooperatives and cooperative share of

market at farm level, selected years, 1950-51 to 1985

Fiscal

year l

Primarily marketing Total Net value co-ops’

cooperatives co-ops of products share of

marketing marketed by market at

Number Memberships farm products co-ops* farm level3

1950-5 1 6,519 4.1 7,283 6,361.8 17.0

1955-56 6,284 4.2 7,024 7,495.2 21.9

1960-6 1 5,727 3.5 6,548 9,63 1.2 23.9

1965-66 5,194 3.6 5,842 12,197.7 25.7

1970-7 1 5,096 3.1 5,515 15,801.9 26.3

1975-76 4,658 2.8 4,840 29,783.1 29.6

1980 3,808 2.5 4,350 48,911 .O 3114

1983 3,647 2.55 4,175 49,343.5 31.0

1984 3,514 2.3 4,173 54,556.0 31.0

1985 3,441 2.2 3,925 47,320.8 28.0

Million

Million

dolla r-s Percent

‘Included co-ops’ business years ending between July 1 and the following June 30. In 1980 and thereafter, co-ops’ business years ending anytime in calendar years were used.

*After excluding business between cooperatives.

3After deducting co-ops marketing gross margins and value added from processing farm products.

5
Table 2-Farmers’ cash receipts from the sale of major crops and livestock

!md products, selected years, 1950435

Calendar

year Feed Food

grains grains

Crops

Oil Fruits,

bearing vegetables,

crops & tree nuts

All

other Total

1950 1,941 2,143 935 2,624 3,713 12,356

1960 2,450 2,986 1,362 3,509 4,952 15,259

1970 2,542 5,109 3,590 4,884 4,851 20,976

1975 7,760 12,150 7,273 8,875 9,092 45,150

1980 10,531 16,794 14,540 13,289 13,872 69,026

1983 16,191 9,733 13,505 14,132 13,256 66,817

1984 16,451 9,739 13,666 15,176 14,064 69,096

1985 21,397 8,846 12,237 15,394 14,828 72,702

Million dollars

Livestock and products

Cattle

and

calves

Hogs

Dairy

products

Poultry

and

eggs

All

other Total

1950 5,680 3,214 3,719 2,839 653 16,105

1960 7,380 2,869 4,760 3,293 687 18,989

1970 13,633 4,508 6,525 4,250 647 29,563

1975 17,524 7,883 9,923 6,810 919 43,059

1980 31,173 8,920 16,598 9,137 1,577 67,405

1983 28,682 9,785 18,757 9,738 2,481 69,443

1984 30,601 9,691 17,927 11,896 2,624 72,739

1985 28,742 8,940 18,135 11,195 1,589 69,401

Million dollars

Source: Statistical Bulletin No. 674 and later issues, Economic Research Service, U.S. Dept. of Agr.

Principal Types

Product

Most cooperatives specialize in one type of product, but a few

market two or more commodities.

Grain cooperatives were the principal type in number and equal

6
to dairy cooperatives in volume in 1985 (table 3). Livestock and fruit

and vegetable associations were next but much less in volume.

Of the 2,139 marketing grain, about 1,500 were primarily grain

cooperatives, and the remaining were primarily supply purchasing

cooperatives with grain as a minor business.

Trade Area

Local cooperatives serve a trade area around a town or city, and

some have one or more branch facilities in outlying communities. A few

serve two or more counties. They are most prevalent in the marketing

of grain in the central part of the country. In total, 3 $4 1 locals marketed

farm products in 1985.

Three types of regional cooperatives exist. The first is a largescale centralized association that serves farmers directly in an area

comprising several counties, district, or region. Examples are dairy and

fruit and vegetable associations. About 300 of these cooperatives operate

nationwide. The second is a federated cooperative that markets products

for member locals. These are most common in marketing grain. About

90 regional cooperatives are federated. Third, interregional cooperatives

Table 3-Major types of products marketed by cooperatives and net volumes

of each in 1985 and 1950-51.

Major product

1985 1950-5 1

Number Net Number Net

handling volume handling volume

Grain, soybeans and products

Dairy products

Livestock and products

Wool and mohair

Cotton and products

Fruits and vegetables

Sugar products

Rice

Poultry and products

Nuts

Tobacco

Beans & peas (dry edible)

Other

Total

2,139 $15,673.8

394 15,959.9

378 3,414.l

170 19.9

459 1,660 4

370 5,068.3

44 1,505.4

58 825.7

59 956.6

33 919.4

33 302.1

49 144.2

96 871.1

‘3,925 $47,320.9

Mllion

2,741 L361.5

2,074 1,933.7

755 L321.9

258 29.3

550 320.0

956 552.6

65 149.8

44 90.7

762 263.7

8 1 113.5

24 125.8

80 25.0

405 74.2

‘7,283 6,361.8

Million

‘Adjusted for duplication arising from multiple activities performed by many cooperatives.

7
serve their member regional associations. Most serve large areas, but

none are truly national in scope. Only a few marketing cooperatives are

of this type.

Organizational Structure

Centralized cooperatives directly serve their farmer memberowners. Control and volume flow from members to the cooperatives,

and services and patronage refunds flow back to the members. All local

cooperatives and those regional cooperatives with farmer membership

are of this type, making a total of about 4,07 1.

Federated cooperatives serve member local and regional

cooperatives. Both regional and interregional associations may be

federated in structure. Service and patronage refunds flow from

interregional to regional to local cooperatives and then to their farmermembers. Ninety-six cooperatives are either federations of locals or

regionals.

Mixed cooperatives serve both member farmers and member

cooperatives. They are a combination of centralized and federated

structures. Only six are in operation, but these are quite large.

Functional

Marketing cooperatives may be classified according to their

principal market functions such as bargaining, auctioning, buying and

selling, pooling and selling, and processing and exporting. These are

discussed in later sections.

Membership and Control

Marketing cooperatives are owned by members who are producers

of farm products. They usually own a share of common stock or pay

a one-time membership fee in the cooperative.

Federal and State laws and regulations usually specify that member

business must exceed nonmember business in marketing cooperatives.

In 1985, the 344 1 predominantly marketing cooperatives reported

about 2.2 million memberships, but this total included a considerable

number of farmers with membership in two or more cooperatives.

In most marketing cooperatives, a member has only one vote. In

some, particularly on the West Coast, members have additional votes

based on the volume of business the member does with the cooperative.

8
Organizational Structure

FEDERATED

&m

LOCAL

COOPERATIVES

CENTRALIZED

FARMER MEMBERS
Several, however, have a limit of 5 or 10 votes per member. A few in

the Midwest sponsored by a farm organization permit one vote for each

share of capital stock owned, and the farm organization owns a majority

of such stock.

Members elect directors, usually seven or nine, to provide overall

management for the cooperatives, and the boards employ general

managers or chief executive officers to manage daily operations.

Marketing Practices

Facilities and operations of marketing cooperatives are in many

ways similar to those of other firms. They must employ resources such

as management, labor, and capital. They are subject to market and

competitive factors and to all regulations regarding industries in which

they operate, including those that affect handling, packing, processing,

marketing and transporting products.

Marketing cooperatives, as well as other firms, must determine

handling charges and margins, storage rates, and hauling practices and

rates. They must find market outlets, investigate credit ratings of buyers,

and manage accounts receivable. They must manage inventories so as

to minimize market risks and product deterioration. They must provide

benefits and incentives for employees and training for managers,

employees, and directors.

Marketing cooperatives also have some business practices that are

somewhat unique because of their member ownership and basic objectives.

Sales on a Bargaining Basis-About 110 farmer-owned bargaining

associations operated in 1985. Most bargained with processors for their

members’ products. Dairy, fruit and vegetable, and sugar associations

account for nearly all bargaining cooperatives. Members pay a small perunit charge called a check-off to cover the associations’ operating

expenses. Their managers bargain for sales prices, grade and quality

differentials, and dates and methods of delivery. Also, they often bargain

with processors for fertilizer, pesticides, and other production supplies.

Sales on a Commission Basis-Only 163 cooperatives sold products

of members on a commission basis in 1976, the latest year such data

were available. Their commissions or incomes totaled $74 million. Onethird of these cooperatives marketed livestock. Those handling fruits and

vegetables and dairy associations made up most of the remainder. The

10
sales value or receipts that farmers received sometimes are channeled

through the cooperatives, and in other cases they are paid directly to the

farmers by the buying firms but sent to the cooperatives for distribution

to their members.

In the 1960’s, several regional livestock cooperatives began country

commission selling operations. They operate as exclusive sales agents

for a group of animals or for all animals marketed during a specified

time period. They contact and negotiate with buyers, but producer-sellers

approve each sale. The cooperative arranges transportation and delivery,

returns sales proceeds less commission fees to sellers, and collects from

buyers. As livestock marketing has decentralized, country commission

selling has increased as producers sell more slaughter livestock direct

to buyers. This activity is sometimes called feedlot sales, feedlot

contracting, or direct telephone sales.

Sales Through Auctions- A number of local and several regional

livestock cooperatives operate auctions. Producers deliver livestock to

the auction where they are weighed and sorted. After the sales price is

determined by auction, the proceeds less marketing charges are forwarded

to producers. Many local associations ’ main activity is sponsoring special

or graded feeder pig and feeder cattle auctions.

Sales on a Buy-and-Sell Basis-This is the most common practice

of marketing cooperatives, especially those handling grain. Of 3,63 1

marketing and marketing/supply associations in 1976 (latest data

available), 3,016 operated on this basis, and their receipts accounted for

about 80 percent of total cooperative marketing receipts. Two-thirds of

these cooperatives were marketing grain.

Advantages of buy-and-sell operations are that they (1) give the

farmer full market value on the day the product is sold to the cooperative,

and (2) that each farmer retains the decisionmaking prerogative on which

day to sell products.

Sales on a Pooling Basis-Two hundred eighty-one cooperatives

operated on this basis in 1976 with fruit and vegetable associations

accounting for almost 60 percent of the number and 45 percent of total

pooling receipts. Second in amount of pooling receipts were dairy

cooperatives. Other types that operated pools were cotton, sugar, rice,

grain, livestock, poultry, and seed.

Pooling means assembling and commingling products from many

producers, combining sales returns and operating expenses, and prorating

or distributing net returns among members in proportion to the volume

each provides through the cooperative over a specified time. Pooling

usually involves a series of payments to the producer. An initial or advance

payment, at least sufficient to cover harvest costs, is frequently made

11
when producers deliver their products to the cooperative. Successive

payments may be made as products are sold, depending on the length

of the pool. A final payment is made shortly after the pool is closed.

Pooling cooperatives have various policies regarding advance

payments to growers. A few make no advances, but most make an initial

advance sufficient to cover harvesting costs. The number of advances

after that varies, depending on the length of the pool. It is important that

boards of directors have conservative policies so the cooperative does

not make over-advances (payments that exceed final sales receipts).

A cooperative may operate a single product pool or a multiple

product pool. The length of the pool may be monthly, seasonal, or

annually. Some cooperatives operate storage pools where advances are

made to members who pay a stipulated amount per pound per month and

other carrying costs.

In a pool operation, members bear the risks and gains of changes

in market prices. Advantages of pooling usually are that (1) it spreads

market risks although farmers must be satisfied with a good average price;

(2) it permits management to merchandise products according to a program

it deems most desirable and to one that can be planned with considerable

precision in advance; (3) it permits management to use caution in placing

and timing shipments to market demands and in developing new

markets-i.e., orderly marketing; and (4) it helps finance the cooperative.

Use of Marketing Agreements or Contracts

An important problem of marketing cooperatives, particularly those

operating on a pooling basis and handling highly perishable fresh produce,

is the coordination of grower production and harvesting with marketing

requirements and opportunities. Grower marketing agreements or

contracts are increasingly used to achieve this coordination.

The basic purpose of such an agreement is to ensure the association

of a definite volume of business. They usually require the entire crop

of each member to be marketed through the association. In addition, such

contracts may specify in detail certain other rights, duties, and obligations.

Orderly marketing requires a degree of control over the product

by the selling agency. The sales or processing plant staff need advance

information on quantities available for marketing or processing and

authority to make firm sales commitments. Other coordination techniques

may be adopting planting schedules, estimating quantities available for

sale or processing, controlling delivery from field or storage by sales

or process scheduling, maintaining quality of product, and sharing

expenses and receipts among growers.

12
The marketing contract, as an integrating and coordinating device,

transfers some decisionmaking from individual growers to the

cooperatives. For such contracts to be successful, a full understanding

and commitment by growers is necessary. They must be willing to

compare their returns over a 3- to 5-year period with those received in

nonpooling operations. They must believe that, on the average or over

time, specialized management, backed with market analysts, in a pooling

cooperative can do better than individual members in selecting the times

to sell their products.

Contract Production and Marketing

Cooperatives marketing broilers, eggs, hogs, and canning crops

have developed contract production programs in the past three decades.

Poultry and livestock contract producers provide land, labor, and facilities,

and the cooperatives provide breeding stock, feed, medicine, technical

and managerial assistance, and processing and marketing services.

Producers usually are paid a fee per unit of production with incentive

payments for efficient production.

Cooperatives may contract with two or more groups of producers

for specialized products. For example, one may contract with pullet flock

growers, another with hatching egg flock producers, and yet another with

finished&broiler producers. With hogs, one group contracts to produce

pigs and another to feed them to finishing weight.

Canning cooperatives provide seed, fertilizer, pesticides, technical

and management assistance, and processing and marketing services.

Operating Policies

Pricing Policies

Cooperatives operating on a buy-sell basis usually set their buying

prices in line with those of other firms in the trade area. They do not

attempt to always have the highest price, i.e., meet every competitor every

day, but to realize a reasonable buying margin that will produce reasonable

yearend net margins or savings and patronage refunds.

Pricing may involve differentials or discounts for various grades

and hauling charges unless they are listed separately. These factors plus

changes in the value of inventories affect the gross margins per dollar

or unit realized over various time periods.

Pricing at prevailing market levels reduces the likelihood of extreme

pricing practices by competitors. It increases the chances for the

cooperative to realize net margins and accumulate operating reserves to

13
cushion the effects of market price declines or unusual expenses.

Most cooperatives resist the desires of some members to price at

“cost of doing business” every day because it is impossible to calculate

and leaves no leeway for unforeseen expenses.

Patronage Refund Policies

Marketing cooperatives operating on a buy-and-sell basis distribute

net margins or net savings at the end of each fiscal year. The general

practice is to (1) pay a dividend, which cannot exceed 8 percent per year

in most States; (2) transfer a specified percent to “retained earnings or

unallocated reserves; ’ ’ and (3) declare the remaining net margins on

member business as patronage refunds. Under Federal tax laws, however,

at least 20 percent of such refunds must be paid in cash. The remainder

may be paid in noncash forms, such as capital stock, certificates of equity,

or capital book credits. Some cooperatives place these noncash or deferred

refunds in a revolving capital fund to be redeemed or paid later in order

of their age.

Many marketing cooperatives declare patronage refunds to both

members and nonmembers to comply with specified income tax laws or

to increase volume and membership. In such cases, refunds to

nonmembers usually are credited first toward the purchase of a share

of common capital stock or to payment of a membership fee.

Most marketing cooperatives declare different rates of refunds on

a per-unit basis on different products marketed, depending on variations

in gross margins, handling costs, and net margins realized on them. Some

declare one rate of refund on the total sales of products marketed.

Informing Members

Cooperatives are unique in that their member-owners are also their

patrons. This poses the problem of attaining and maintaining an informed

membership-one that will elect competent directors, demand sound

financial and business policies, follow cooperative principles, and operate

for the benefit of farmer-members.

Continuous information is needed to educate new members and

to maintain the loyalty of old members. Sometimes this means members

foregoing short-term gains to ensure the long-range stability and success

of the cooperative.

Thus, cooperatives use various communication methods to keep

members informed. They must budget for special and annual meetings

and for newsletters or membership publications.
Obtaining New Members and Redeeming Member Equities

Cooperatives must develop ways of obtaining new members to

replace those who move away, die, or otherwise cease to support the

cooperatives. This requires knowledge and continuous effort on the part

of cooperative managers, field personnel, and haulers of farm products.

It requires development of annual recruitment programs and participation

of boards of directors.

Many marketing cooperatives require a relatively small membership

fee or share of common stock for membership. A majority credit patronage

refunds to nonmember patrons with the initial amount credited toward

the purchase of a membership. While some founding members may

believe this method gives undue benefits to nonmembers, many believe

the benefits of the additional volume and savings in income taxes outweigh

the disadvantages.

Changes in membership are continuous, and cooperatives must

adopt definite policies for obtaining capital from new members and

redeeming that held by old members-especially those dying, retiring

from farming, or moving out of the trade area. The revolving capital

plan, which will be discussed later, provides an excellent method for

accomplishing this. Cooperatives not using this plan must set aside reserves

from net savings and use them-plus the capital acquired from new

members each year-to redeem equities of inactive members on a regular

or scheduled basis. Failure to do this can

relations problems.

cause serious member and public

Vertical Integrated Functions

From the beginning, cooperative marketing operations have become

more diversified and complex. Cooperatives have integrated horizontally

by adding branch facilities to perform the same types of services and

sometimes to handle additional products and services. But the greatest

progress has been in integrating vertically; that is, in performing more

functions and services in marketing the same product as it moved from

the farmer to the consumer. Following are the more common functions

in this vertical chain:

Bargaining

A number of cooperative associations were established as a

bargaining agent for members. They bargained with buyers for prices,

orderly delivery dates, and often for seed and other production supplies.

This activity required few facilities, personnel, and capital and

15


often led to year-round marketing operations. It was most prevalent among

fruit, vegetable, and dairy farmers. About 200 bargaining associations

were in operation in the early 1980’s.

Auctioning

Some cooperatives operate auctions for marketing livestock,

especially for feeder pigs and cattle. Cooperative egg auctions were

common many years ago. Beginning in 1965, tele-auction marketing has

increased among regional associations for feeder pigs, sheep, and lambs.

In 1976, a photo-auction was first tried by a California cooperative. It

uses a sales catalog and color slides with a large screen.

Assembling, Storing, and Selling

Most local cooperatives, especially those marketing grain, buy

products from farmers and sell them to regional or terminal cooperatives

and other grain firms, flour millers, processors, and the like. The

cooperatives are the assemblers or first handlers. They grade, wash, and

pack products such as fruits, vegetables, nuts, and eggs, and sometimes

store members’ products before selling them. Many now custom store

grain for farmers.

A few regional cooperatives operate as livestock dealers in country

markets, buying hogs directly from producers. Several regionals also have

programs wherein producers contract for future delivery of livestock or

grain at a guaranteed market price. These cooperatives then hedge their

contract purchases on the futures market.

As mentioned, a number of cooperatives market fruits, vegetables,

wool, and rice on a pooling basis for their members.

Semi-Processing

After assembling farmers’ products, some cooperatives perform

a semi-processing operation such as pasteurizing and homogenizing milk,

washing and shelling walnuts, and ginning cotton. These activities require

additional facilities, employees, and operating funds. Most are small and

at the local level.

Processing

Another major step many marketing cooperatives have taken to

enhance returns to members has been to process farm products, either

at the local or regional level. Dairy cooperatives, for example,

18
manufacture butter, cheese, dehydrated milk products, and ice cream.

They now produce about 64 percent of all butter, 47 percent of cheese,

and 87 percent of dry milk products in the United States. Cooperatives,

especially those marketing fruits and vegetables, process products under

their own brands or labels. Many also pack products for food chains under

the chains’ private brands or labels.

Fruit and vegetable cooperatives freeze, can, or dehydrate products.

Some process natural strength and concentrated juices and beverage bases.

Cooperatives process about 40 percent of all citrus used for processing

and 40 percent of the total dried fruit pack, 33 percent of the canned

deciduous fruits, and 10 percent of the canned vegetables in this country.

Other examples are milling rice; processing sugar cane and sugar

beets; processing soybeans, cottonseed, turkeys, and broilers; dehydrating

eggs; and slaughtering livestock. One cooperative manufactures denim

cloth from lint cotton. Two operate durum flour mills.

Many grain marketing cooperatives mix or mill feed from some

of the grain and soybeans they receive from members. If these same

members buy the feed, they benefit from savings on both their marketing

and purchasing transactions.

Further Processing

Some cooperatives have found it advantageous to process more

products as they are moved toward food retailers and consumers. Poultry

cooperatives further process by cutting, cooking, and freezing broiler

parts, breaking eggs into whites and yolks for sale to bakers, and preparing

turkey rolls. A few make meal for feed from poultry feathers and waste

products.

Meatpacking cooperatives can hams, box beef, and make various

types of sausage. Cottonseed oil mills refine cottonseed oil, and some

use the oil to make mayonnaise. Several fruit and vegetable cooperatives

make beverage bases, essential oils, pectins, and pharmaceuticals.

Central or Terminal Warehousing, Distribution, and Selling

Most local grain marketing cooperatives now are members of

regional associations that sell their grain at terminal and subterminal

markets. Buyers may be flour millers, feed manufacturers, and exporters.

Savings at this level flow back to the locals and their farmer-members.

. Turkey processing cooperatives own a central sales agency that

sells most of their product to institutions. The larger dairy and fruit and

vegetable cooperatives sell products direct to retail food chains and other

large-volume buyers.

19
Seven fruit cooperatives in widely scattered areas own a cooperative

with distribution centers in the East to serve buyers in high population

areas.

Retailing

Few marketing cooperatives have attempted to market their

products through their own retail food stores. Several cooperatives in

the Northeast joined to operate a chain of supermarkets but discontinued

operations after several years because they could supply only a small

percent of the large number of items their stores were required to carry.

One dairy cooperative in the East successfully operated for many years

about 300 convenience food stores that sold many other products besides

milk, butter, ice cream, and cheese. The operation was sold in the

mid- 1980’s. Another large-scale dairy cooperative operates several retail

dairy stores featuring carry-out deli foods and other dairy products. Several

fruit and vegetable cooperatives operate produce curb markets that sell

directly to consumers.

Most marketing cooperatives now provide related services for

members. Examples include hauling, grading, weighing, drying and

storage of grain; hauling milk from farm to plants; helping producers

obtain high-quality breeding stock and feeder animals; and providing

financing, seed cleaning, cotton ginning, offering future trading services,

and disseminating market and production information.

Of about 110 specialized related service cooperatives, about 40

percent engage in trucking, drying, and similar services related to

marketing farm products. Others provide services related to purchase

of farm production supplies.

.

Financing and Taxation

Financing Methods

Many financing methods and practices of marketing cooperatives

are similar to those of other firms. They differ, however, in the way

they raise member capital and in their major source of borrowed capital.

In 1976, the latest year complete data were available, 3,63 1

marketing and marketing/supply cooperatives had total assets of $14.3

20
billion, of which $5 5 billion or 39 percent was equity capital. Grain

cooperatives had about 40 percent of these assets and 50 percent of the

equities.

Equity capital consisted of the following:

Type

Percent of

total amount

Percent of

co-ops

using each

Common stock 14.4 70.9

Preferred stock 12.8 37.5

Membership certificates .5 .8

Certificates of equity and capital credits 58.2 89.4

Unallocated reserves or retained earnings 14.1 78.9

Total 100.0 _-_

These cooperatives realized $1.3 billion of net savings or net margins

in 1976, including intercooperative savings, which were distributed as

follows: cash patronage refunds, 41.4 percent of the total; noncash

refunds, about 42 5 percent; retained earnings or unallocated reserves,

7.4 percent; dividends on equity capital, 2.5 percent; and income taxes,

6.2 percent.

Most of the common and preferred stock represented patronage

refunds retained in the business. Some pay moderate rates of dividends;

some pay none. Capital stock directly invested by members usually bears

dividends up to 8 percent a year-the maximum permitted under most

State agricultural cooperative laws.

The certificates of equities and capital or book credits also

represented noncash or deferred patronage refunds. Many marketing

cooperatives place these equities in a revolving capital fund. Under this

plan, some or all of them, after paying 20 percent in cash as required

by law, are retained in the business until the needed amount of equity

capital is accumulated. These deferred refunds are revolved or redeemed

in order of their age, often on a 5- to 7-year basis, at the discretion of

the board of directors. Such equities may be evidenced by certificates

of capital stock, equity or indebtedness; by allocated book credits or equity

reserves; or by individual statements of deferred patronage refunds. They

do not carry definite maturity or due dates; if they did they would be

member debt capital rather than equity capital.

A revolving capital plan has definite advantages. It provides a

convenient and regular method by which member patrons provide capital

in proportion to the amount of business they do with the cooperative;

and it keeps ownership and financing of the association largely in the

hands of active members by redeeming the oldest outstanding equities

on a regular basis.

21
A unique plan of financing used mainly by pooling cooperatives

involves the use of per-unit capital retains. Members authorize their

cooperative to retain a specified amount per case, carton, hundredweight

or per dollar from sales or service proceeds. Equity capital is accumulated

in a revolving fund to the level desired by the board of directors to

adequately finance the cooperative, and then the oldest amounts are

redeemed annually.

In 1976, a total of 301 marketing cooperatives used this method.

Of that number, 17 1 were fruit and vegetable and 52 were dairy

cooperatives. The 301 marketing cooperatives had about $796 million

of outstanding capital retains at the time. They constituted about 72 percent

of the allocated equity capital of fruit and vegetable cooperatives, 50

percent of the capital of rice cooperatives, and 27 percent of the capital

of dairy cooperatives.

Marketing cooperatives borrow large amounts of capital. At the

end of 1976, they had almost $5 billion outstanding. Their main source

of borrowed funds was the 13 banks for cooperatives supervised by the

Farm Credit Administration. About 64 percent of their outstanding

borrowed capital was from the co-op banks and only 9 percent from

commercial banks.

These banks for cooperatives are now entirely owned by farmer

cooperatives, and they distribute much of their annual net income as

patronage refunds based upon interest paid by the borrowing cooperatives.

About 21 percent of cooperative borrowings represented debt securities

such as debenture bonds and certificates of indebtedness issued by the

cooperatives.

Income Taxation

Marketing cooperatives are subject to all types of taxes, including

property, sales, and income.

Federal income tax laws provide for a single current tax at the

farmer patron level on income produced through a farmer cooperative

if the cooperative adheres to certain requirements as to the form in which

it distributes patronage refunds and makes distributions within a prescribed

time. In conforming with tax laws, a cooperative has two major

alternatives:

1. It may shift its income tax liability to patrons, by meeting the

strict requirements of Section 521 of the Internal Revenue Act of 1954.

This act requires that after paying up to 8 percent dividends on member

capital and setting aside reasonable capital reserves, the remaining net

margins must be distributed

as patronage refunds.

to all patrons except government agencies

22 I
2. The cooperative may reduce its gross income for tax purposes

by distributing patronage refunds to member patrons or to all patrons

according to precise rules or procedures.

Under either alternative, cooperatives must conduct more than 50

percent of their marketing business with members who are agricultural

producers. The law also says farmer cooperatives must pay at least 20

percent of their patronage refunds in cash. Choices are available for form

and timing of patronage refunds, type of written notices of allocation

used, and ways to get patrons’ consent.

Of the 3,63 1 farmer marketing and marketing/supply cooperatives

in 1976 (latest year available), 1,767 or 49 percent were operating under

Section 52 1 of the Internal Revenue Code. More than 67 percent of the

dairy, livestock, fruit and vegetable, cotton and rice associations were

in this group, but only 31 percent of the grain and soybean cooperatives

were under Section 521.

The cooperative marketing of farm products has benefited farmers

in numerous ways. These benefits have varied among products and regions

of the country, and they have been both tangible or direct and intangible

or indirect. Some cooperatives have achieved little or no success and

discontinued operations; but most have benefited not only members but

also nonmembers, rural communities, and consumers. Following are some

benefits brought about by cooperatives:

1. Farm income has been increased. First, substantial net savings

have been made most years, with most of them distributed to members

as patronage refunds and dividends on member capital. Substantial

amounts also have been retained in the cooperatives to finance facilities

and operations.

Overall data on net margins from strictly marketing sales are not

available because many cooperatives realize part of their net margins from

farm supplies and from federated cooperatives of which they are members.

Estimates based on a study in 1976, however, indicate net savings from

marketings on a buy-and-sell and pooling basis were near 2.2 percent

of sales. If 2 percent w,ere applied to all cooperatives’ net marketing

volume, including the value of products bargained for and those sold on

a commission basis, total net savings would have been almost $600 million

that year. In 1980, they would have totaled almost $1 billion. Some of

these savings have resulted from low per unit handling and processing

costs due to assembling large volumes.

Many cooperatives operating on a pooling basis realize net proceeds

23
that substantially exceed the average market prices in their trade area

and the average for their State. For example, a rice marketing-processing

cooperative has for the past three decades paid its members an average

of 40 cents per hundredweight above the average price received by all

rice growers in the United States. Also, its soybean growers have received

35 cents a bushel more than the average.

Second, daily market price levels have been increased in the trade

areas cooperatives serve.

This is most evident when cooperatives first begin operating but

is difficult to evaluate years after they have become established. Many

farm leaders believe the daily “yardstick” or competitive effect of

cooperatives exceeds their annual net savings and patronage refunds.

Likewise, they believe that in pooling, bargaining, and commission selling,

cooperatives acting on behalf of farmers favorably influence prices paid

to them. The steady increase in cooperative volume and share of the market

seems to support this belief.

2. Dependable and improved services have been provided.

Cooperatives have provided year-round marketing or processing service

in some communities when they otherwise would not be available.

Cooperatives have provided or improved services, such as hauling

products, to meet the needs of members even though these services made

little or no net savings for the cooperatives.

Some cooperatives have developed new services such as electronic

auctions to encourage more competitive pricing, bulk assembling and

handling, and use of bulk farm tanks and trucks to move products to

cooperative plants.

Managers and field staff in progressive cooperatives have provided

valuable information to members about farm production and management

practices and on farm markets and economic conditions affecting their

industries.

Farmers own and control marketing enterprises that are serviceoriented as contrasted with investor- or dividend-oriented businesses.

3. Improved quality of products has been encouraged. In marketing

farm products, cooperatives’ pricing practices have been based on

differentials for quality. Also, employees have provided information on

ways to produce quality products and to maintain that quality in the

marketing processes. Cooperatives have encouraged production oriented

to market requirements by developing producer payment plans based upon

meeting grade, size, time, and other market specifications. Some of the

major cooperatives have led in demanding industry grade standards and

then using them in offering top quality products to buyers.

4. Markets for farm products have been expanded. Through pooling

24
products of specified grade and quality, many cooperatives have met the

needs of large-scale buyers. A number of cooperatives have developed

markets in other countries, thus providing outlets for more production

than members otherwise could sell.

A number of cooperatives have expanded markets by processing

members’ commodities into different forms or foods, thus capturing a

greater share of the value added to a product as it moved toward

consumers.

5. A training ground has been provided for the development of

local farm leaders. Also, cooperatives have helped members to become

more self-reliant and informed citizens in their communities.

6. Rural communities have benefited. Cooperatives have provided

payrolls that have helped other local businesses. Most of their net savings

or additional returns to farmers have remained in the community. Also,

the leaders and resources of cooperatives have often supported community

projects.

7. Consumers have benefited. Many marketing cooperatives have

helped consumers by encouraging farmers to produce quality products,

providing consumer information, introducing new products and processes

such as frozen applejuice concentrates, and helping establish Federal and

State inspection and grading. Also, some of the benefits from lowered

production and marketing or distribution costs of cooperatives have

accrued to consumers.

Further, many U. S . cooperatives have helped develop cooperatives

overseas or have provided information to foreign cooperative leaders on

the operation and services of our marketing associations.

Challenges

Marketing cooperatives face many challenges in the years aheadsome common to most of them, some peculiar to the type of product

they market. Many challenges are internal that involve structure, size,

membership, financing, and operations. Others are external that pertain

to agricultural, economic, and competitive pressures in the food marketing

industry of which cooperatives are a part.

A list of “musts” for cooperatives:

1. Cooperatives must increase volume so as to lower unit costs

and increase returns to producers. In some products, expanding sales

to high volume private label buyers might be helpful. New facilities will

require careful decisions regarding location, design, and capacity.

2. Cooperatives must omit continuous emphasis on cost control

and marketing efficiency to help meet the effects of inflation and high

25
interest rates. A more active leadership role in shaping and influencing

transportation policies and regulations should help.

3. Cooperatives must maintain reputations for being a dependable

source of products of reliable and consistent quality.

4. Cooperatives must explore ways to improve the pricing

arrangements for their products. These may include use of more forward

contracting and electronic auctions to help increase buyer competition.

5. Cooperatives must look for opportunities to vertically integrate

their operations by processing or further processing some of their product

volume. This applies especially to cooperatives marketing grain, cotton,

tobacco, livestock, and wool.

6. Cooperatives must increase the use of marketing agreements

or contracts-in some cases tailoring them to specific variety, quality,

and volume considerations.

7 . Cooperativ‘es mu

method followed by

st consider more use of pooling-a unique

some successful cooperatives.

8. Cooperatives must expand exports.

9. Cooperatives must increase cooperation among cooperatives in

processing, in both domestic and foreign selling, in use of common brands,

in warehousing and distribution, in transportation, in researching of market

requirements of buyers, and in plant breeding and testing of new varieties.

Such efforts may involve joint ventures, regional federations of local

cooperatives, and interregional associations.

10. Cooperatives must strengthen member equity capital bases.

Possible ways include the sale of cooperative securities, such as preferred

stock, and the use of per-unit capital retains. With a good memberunderstanding program, such retains might be used in cooperatives

operating on a buy-and-sell basis as well as in those operating on a pooling

basis. At the same time, cooperatives will need a plan for regularly

redeeming equities of estates and members who move out of their trade

areas.

11. Cooperatives must improve management effectiveness and

operating efficiency. This involves, among others, evaluation, training,

and long-range planning.

12. Cooperatives must develop an informed membership that

understands and supports the operating policies, financing methods, and

objectives of the cooperatives, and which will help obtain new members

as the older ones become inactive. Also, cooperatives should strive to

develop a better public understanding of their objectives and benefits to

rural communities and consumers as well as farmer-members.

26
Basic Alternatives

Many believe marketing cooperatives have three basic alternative

strategies or approaches for the future. These are to maintain open

markets, offer cooperative contracts, and integrate into advanced markets.

In the future, most commercial farmers will be a part of a systemeither a corporate one controlled by investors or a cooperative one

controlled by producers. For the cooperative to be most effective,

indications are that both input requirements (credit, supplies, and

equipment) and product marketing (assembling, processing, and selling)

will need to be coordinated in one cooperative. Such full-service integrated

enterprises will be necessary for competing with the large industrialized

corporations that are becoming increasingly important in agriculture.

Small and part-time farmers and migrant workers pose special

challenges. Including production resources and management into the input

purchasing and product marketing cooperative, which is being tried in

the West, may prove to be of assistance to this group in the future.

27

PURCHASING COOPERATIVES

Farmers annually buy a substantial amount of production supplies.

Some are produced on farms, such as feed grains, hay, pasture, seed,

feeder pigs and cattle, and turkey poults; other supplies produced off

farms include fertilizer, petroleum, farm chemicals, equipment, and

broilers and layer chicks.

Basic Objectives

Farmers organize cooperatives to purchase supplies and improve

farming profitability. These cooperatives have the following objectives :

1. To reduce costs of production supplies and equipment for

members. This is realized by volume buying, manufacturing or

processing, distributing some supplies in bulk directly from plants to

farms, developing more efficient practices, and returning net margins

above operating costs.

2. To ensure farmers of a dependable source of supplies. The

objective is to purchase supplies needed by farmers throughout the year,

even though this may result in greatly reduced net margins during unusual

supply situations or in fewer sales opportunities elsewhere.

3. To provide supplies of a quality that will produce the greatest

returns for farmer-members. Cooperatives act as purchasing agents to

select supplies to produce maximum yields per acre and gains per pound.

For example, they usually help provide the type and quality of feeds,

seeds, and fertilizer recommended by State agricultural experiment

stations.

4. To provide dependable services to help improve farm practices

and reduce time and labor for farmer-members. Cooperatives provide

many services related to the supplies they handle, such as bulk delivery

of feed, custom spreading of fertilizer, and equipment rental. Cooperatives

also provide specialists to advise on use of supplies and on-farm

management practices.

Early Activities in Cooperative Purchasing

Cooperative purchasing of supplies by farmers began early in U.S.

history. A few farmers in a neighborhood-often members of the same

church, farm organization, or club-would pool their orders and buy a

carload of seed, coal, salt, twine, flour, feed, or fertilizer.

Earliest efforts in organized cooperative purchasing occurred about

29
1850 in farmer clubs in Illinois and Wisconsin. One of the earlier farm

supply associations was organized in 1863 at Riverhead, NY, to buy

fertilizer at wholesale.

Buying Activities Sponsored by Three

Farm Organizations, 1875-l 920

For about 10 years after the Civil War, a surge of cooperative

buying developed through local and State Granges. Purchasing agents

were established to assemble and place orders with dealers who shipped

directly to farmer-members at special prices.

The most important contribution of the Grange to cooperative

purchasing, however, was said to be its policy of recommending

cooperatives be formed according to Rochdale principles. After 1875,

numerous Grange supply and general warehouse stores were organized

throughout the country, but many lasted only a few years.

Between 1880 and 1890, Farmers Alliance organized many

business agencies and exchanges similar to those of the Grange. But despite

all the interest, less than 100 farm supply purchasing cooperatives were

operating by 1900.

The next nationwide stimulus to cooperative purchasing came from

Farmers Union, organized in 1902. At first, business agents for local,

county, and State Farmers Unions made purchases for members. Mail

orders also were used. Farm supply purchasing cooperatives were then

organized, and many Farmers Union grain-marketing cooperatives in the

Wheat Belt and in Wisconsin, Minnesota, and Iowa also added supply

services. The American Society of Equity, also formed in 1902, sponsored

cooperative purchasing and marketing.

From 1901 to 1920, about 2,260 farm supply purchasing

cooperatives were organized and 350 discontinued operation. More than

half were formed in 19 16-20. The number of active purchasing

cooperatives reached a peak of about 3,000 in 1922. However, only about

1,000 of these cooperatives reported to the U. S. Department of Agriculture

and were listed in its records as operating in 1922.

Several Regional Purchasing Cooperatives Formed, 1907-l 918

Regional wholesale cooperatives formed during this time to supply

member local cooperatives were Fruit Growers Supply Co., Los Angeles,

CA, organized in 1907 to provide containers and packaging materials

for citrus growers in California; Farmers Union State Exchange, Omaha,

NE, 1914, to serve both farmers and local cooperatives; and Central

30
Cooperatives, Inc., Superior, WI, 19 17, to serve local cooperative stores.

Two regionals organized to mainly serve farmers direct included

Eastern States Farmers Exchange, Inc., West Springfield, MA, 1918,

operated branch warehouses and a car-door distribution system; and

Cooperative Grange League Federation Exchange, Inc., Ithaca, NY,

1920, which employed private agents and local service cooperatives as

distribution outlets.

A factor encouraging this rapid development of cooperative buying

was the opportunity for savings from the wide gross margins taken by

existing firms. World War I also stimulated food production and farmers’

use of supplies and equipment.

Deflation in prices after World War I caused the failure of a number

of supply purchasing cooperatives that had overexpanded. This trend was

offset to some extent, however, by a number of marketing associations

adding supply services. During the 1920’s, adverse economic conditions

facing farmers, along with a growing mechanized and commercialized

agriculture, spurred new interest in purchasing cooperatives.

Many Farm Bureau and Independent

Cooperatives Formed, 19204 935

The Farm Bureau provided stimulus to cooperative purchasing in

the 1920’s. County and State Farm Bureaus first used an agent to purchase

carloads of supplies. Others bargained with local dealers for price

concessions for members. Not long after, numerous countywide Farm

Bureau cooperatives were organized that soon formed State wholesale

supply associations, mostly in the Central and Southern States.

Mississippi Farm Bureau Federation began purchasing fertilizer

for members in 1921, Indiana followed in 1922, and Ohio in 1923. Within

a few years, all had organized separate State wholesale associations.

Similar ones were formed in Illinois in 1927 and in Michigan in 1929.

Petroleum products were among the newer items these cooperatives began

to handle in quantity.

These statewide Farm Bureau cooperatives pioneered in forming

interregional associations to purchase and manufacture supplies. One

developed into what is now Universal Cooperatives, Inc., Minneapolis,

MN.

Numerous purchasing cooperatives also were formed independently

of general farm organizations in Minnesota, Wisconsin, and other

Midwestern States during this period. In 1926, local cooperatives formed

the first petroleum wholesale cooperative-now known as Midland

Cooperatives, Inc. (which later merged with Land O’Lakes), in

31
Minneapolis. Consumers Cooperative Association, Kansas City, MO,

(now Farmland Industries, Inc.) was organized 3 years later.

A few regional cooperatives resulted from mergers of two or more

associations. Cooperative G. L. F. Exchange, Inc., Ithaca, NY -the largest

for many years-resulted from merging its supply department with those

of Dairymen’s League Cooperative Association in New York City, and

Farm Bureau Federation in New York State. It merged with other

cooperatives in the 1960's to become Agway Inc., Syracuse, NY.

From 19 10 to 1930, Eastern farmers organized cooperatives mainly

to purchase feed, seed, and fertilizer. Southern cooperatives specialized

in fertilizer and seed. Midwestern farmers formed many separate

petroleum cooperatives or added petroleum services to grain-marketing

cooperatives. In the Far West, feed and poultry equipment, fertilizers,

insecticides, containers, and other orchard and packing supplies were

bought cooperatively.

USDA listed 1,588 predominantly supply purchasing cooperatives

active in 1930-3 1. They had 392,000 members and a volume of about

$2 15 million.

Supplies Added by Marketing Associations

Over the years, marketing cooperatives diversified their operations

by handling supplies as a sideline. The most common items added were

petroleum products, feed, seed, and fertilizer by grain-marketing

associations; feed and equipment by dairy and poultry marketing

cooperatives; and containers, fertilizer, seed, and insecticides by cotton,

fruit, and vegetable marketing cooperatives. Regional marketing

cooperatives also began manufacturing supplies members used in quantity

such as fertilizer, feed, and shipping containers to attain additional savings

or to improve quality of supplies, or both.

By 1950, about 75 percent l of all associations marketing farm

products as their major activity also handled farm supplies, but their net

supply volume accounted for only 25 percent of total supplies handled

by all cooperatives.

Current Position

Agricultural Cooperative Service first obtained annual data on

number of cooperatives handling supplies and types of volume for fiscal

years 1950-5 1.

32
Membership and Control

Purchasing cooperatives are owned by their members who are

producers of farm products. They may be landowners, tenants, or both.

Usually they must own a share of common stock or pay a one-time

membership fee.

Federal and State laws usually specify that member business of

purchasing cooperatives must exceed their nonmember business. If they

wish to comply with Section 52 1 of the Internal Revenue Code, they

must-among other requirements-limit their purchasing business with

nonmembers who are nonproducers to not more than 15 percent of their

total.

In 1984, the 2,136 predominantly purchasing cooperatives reported

about 2.4 million memberships, but this total included a considerable

number of farmers with membership in two or more cooperatives.

In almost all purchasing cooperatives, each member has one vote.

Some of the federated wholesaling/manufacturing cooperatives permit

one vote for each share of capital stock, but the amount of such stock

is owned in proportion to the amount of business member local

cooperatives have done with their federated cooperatives over a specified

period of time.

Members elect directors, usually seven to nine, to provide overall

management of the cooperatives, and the boards employ general managers

or chief executive officers to manage the daily operations.

Number and Volume

In 1985, there were 2,036 predominantly farm supply purchasing

cooperatives with 2.39 million memberships, including some duplication.

Peak number of such cooperatives was 3,375 in 1955-56.

A total of 4,288 purchasing and marketing cooperatives reported

handling farm supplies in 1984, a substantial decline from 1950-5 1, when

the number was 7,4 14. During this period, however, the number handling

fertilizer, pesticides, and building materials increased substantially. States

with the largest number of cooperatives handling supplies in 1985 were

Minnesota, Wisconsin, North Dakota, Iowa, and New York.

Farmer cooperatives had gross supply sales of $26.4 billion in 1985.

After eliminating intercooperative business, such as wholesale to retail,

net sales were $16.6 billion. Most of these were to individuals; a small

amount was to other firms. These data compared with a gross volume

of $3.7 billion and a net volume of $2.5 billion in 1960-61.

States with the largest net volume of cooperative supplies in 1985,

33
the latest year such data were available, were Iowa, $1.5 billion;

Minnesota, $1.1 million; Illinois, $1.06 billion; New York, $1.05 million;

and Wisconsin, $893 million.

Primarily purchasing cooperatives accounted for about 75 percent

of supplies sold by all cooperatives, with marketing cooperatives’ supply

departments handling the remaining fourth.

Petroleum was the largest dollar volume item, accounting for 34.9

percent of total supplies in 1985 (table 4). Feed and fertilizers were next,

and with petroleum, they represented 74 percent of the total net supply

business. Farm chemicals, building materials, farm machinery, farmstead

equipment, containers, meats and groceries, and unclassified general farm

supplies and equipment accounted for the remaining 26 percent.

In 1985, combined intercooperative supply business of regional

and interregional cooperatives was about $9.8 billion-the difference

between gross and net sales. Data indicate local cooperatives are now

obtaining a larger proportion of farm supplies from regional wholesale

cooperatives, and such regional associations are making greater use of

interregional cooperatives as sources of supplies.

Factors bearing on patronage of wholesale cooperatives are that

many local cooperatives operate feed mills, and some wholesale

cooperatives do not carry all of the types of supplies that member locals

sell.

Table 4-Major types of supplies and equipment sold by cooperatives and net

volumes of each in 1985 and 1951-52

Major type

1985 1951-52

Number Net Number Net

handling volume handling volume

Building materials 1,775 396.5 790 40.2

Containers 489 149.6 925 17.8

Farm chemicals 3,204 1,450.g 1,115 24.7

Farm machinery & equipment 1,590 356.1 1,794 76.5

Feed 3,099 3,120.7 4,252 810.9

Fertilizer 3,237 3,341.6 3,380 183.7

Meats and groceries 410 153.0 860 38.0

Petroleum products 2,579 5,800.5 2,657 421.5

Seeds 3,120 5 10.3 3,437 95.0

Other supplies & equipment 3,688 1,361.6 4,525 210.4

Total ‘4,288 16640.7 ‘7,426 1,918.7

Million Million

‘Adjusted for duplication arising from multiple activities performed by many cooperatives.

34
Farmers purchased about 26 percent of their production supplies

and equipment through cooperatives in 1985. This compared with about

12 percent in 1950-5 1 (table 5). Their market share of petroleum products

was 43 percent; for fertilizer, 44 percent; for farm chemicals, 29 percent;

for feed, 16 percent; and seed, 15 percent.

The greatest increase in market share since 1950-5 1 occurred in

the first three items. Feed remained steady, after increasing to 20 perc&nt

in 1959-60 but then declining after cooperatives in the East stopped

contracting with broiler producers.

Principal Types

Many primarily marketing cooperatives of the same type also

handle farm supplies. The primarily supply-purchasing cooperatives may

also be classified into the following types:

Centralized-About 2,080 local and 10 regional purchasing

cooperatives are called centralized cooperatives because farmers have

direct membership in them and are served directly from the cooperatives’

Table SNumber of cooperatives handling farm supplies and equipment, and

number of memberships in farm supply cooperatives, in specified years,

1950-51 to 1985

Fiscal

year*

Primarily farm supply

purchasing cooperatives

Total Memberships

Net value

of

supplies

sold by

all co-ops

Co-ops’

share of

market

1950-5 1 3,283 2.87 $1,685.4 11.9

1955-56 3,375 3.43 2,046.O 13.5

1960-6 1 3,222 3.67 2,472.2 14.9

1965-66 2,949 3.15 3,085.3 15.4

1970-7 1 2,731 3.02 4,339.5 15.8

1975-76 2,731 3.05 9,411.6 18.3

1980 2,369 2.80 16,134.l 20.0

1983 2,208 2.40 15,942.9 220.0

1984 2,136 2.39 16,968.9 220.0

1985 2,036 2.39 16640.6 26.0

Million Million Percent

‘Business years ending between July 1 and following June 30, except 1979 and 1980 which included business years ending between January 1 and December 31.

*Estimates.

35
facilities. Control and patronage flow from farmer-members to the

t cooperative, and services and patronage refunds flow back to members.

Federated-Local retail cooperatives form regional federated

wholesale cooperatives to supply their needs. Regional cooperatives, in

turn, form national federated purchasing associations or area

manufacturing associations, often called interregionals, to provide various

supplies. Patronage refunds flow down from interregional to regional

to local cooperatives and finally to farmer-members. In 1985, there were

about 30 primarily federated purchasing cooperatives.

Eked--About 10 regionals serve local cooperatives on a wholesale

basis and farmers on a retail basis. These mixed types are a combination

of federated and centralized associations. They also market some farm

products.

Trade Area

Local-Most purchasing cooperatives serve a trading area around

one town. Some have one or more branches in outlying communities,

and in some Central States, trade territories comprise a county or two.

These local cooperatives retail supplies to farmers, and some of the larger

ones manufacture the feed or bulk blend the fertilizer they sell. In 1984,

about 2,080 primarily supply-purchasing associations were classified as

locals.

Regional-On the West and East Coasts, supply purchasing

cooperatives serve large trade areas through branch stations or service

centers, local subsidiary cooperatives, and noncooperative private outlets.

Most of these large-scale or regional cooperatives also wholesale, and

some manufacture, supplies for member local cooperatives. Some of the

large ones retail supplies to farmers, and a few perform both functions.

Thus, regionals consist of both centralized and federated cooperatives.

Some regional associations also provide management, financing,

auditing, insurance, member information, training, and field services for

member local cooperatives.

An example of a regional federated association that wholesales

or manufactures supplies for local cooperatives is Farmland Industries,

Inc., Kansas City, MO. An example of a regional mixed or combination

association that provides both retail and wholesale services -is Southern

States Cooperative, Inc., Richmond, VA.

Interregional-Regional cooperatives have found they can improve

purchasing power and increase net margins by purchasing and

36
manufacturing supplies on a joint or cooperative basis. As a result, they

have formed nine national or area interregional purchasing associations.

These associations are federations of regionals. They generally specialize

in manufacturing one type of supply or in pooling the purchasing power

of a group of regionals for several kinds of supplies, such as tires and

steel products.

An example of an interregional cooperative is Universal

Cooperatives, Inc., Minneapolis, MN, formed in 1974 through a merger

of National Cooperatives, Albert Lea, MN, and United Cooperative,

Alliance, OH. It has 36 member regional cooperatives in the United States,

Canada, and Puerto Rico and handles a variety of farm supplies and

farmstead equipment. Another example is CF Industries, Inc., Long

Grove, IL, owned by 16 regionals in the United States and Canada. It

manufactures anhydrous ammonia and other nitrogen and phosphate

fertilizers and manages nitrogen plants for other regional cooperatives.

Lines of Supplies

Qecialized-Petroleum cooperatives were formed in the Central

and North Central States, and a number of Grange oil cooperatives and

stores began in the Pacific Northwest. Many later merged with local grain

marketing cooperatives that were handling feed, seed, fencing, roofing,

and the like. Some petroleum cooperatives in the East still deliver fuels

in larger areas than the general supply cooperatives serve.

In the West, feed is the main sideline of poultry and dairy marketing

cooperatives, and containers and pesticides are sidelines of fruit marketing

associations. Several interregional cooperatives specialize in either

fertilizer, seed, or petroleum. One conducts research on livestock and

poultry feeds, and another does plant breeding or seed research. Few

local and regional purchasing cooperatives handle only one or two types

of supplies.

Diversified-Most supply purchasing cooperatives now handle

several types of supplies and equipment such as feed, fertilizer, building

materials, hardware, farmstead equipment, automotive supplies,

containers, and home supplies and equipment. Some distribute liquefied

petroleum (LP) gas, home heating oils, liquid fertilizers, and animal health

products. Some are called farm service centers.

Many diversified farm supply cooperatives serve other rural and

suburban patrons by adding lawn and garden supplies and equipment,

car care services, home heating fuels and appliances, and riding horse

equipment and other recreational merchandise.

37
These types are described in more detail in a later section on vertical

integrated functions. They consist of the following with many performing

two or more functions:

Retailing-Local and regional centralized cooperatives that sell,

and often deliver, supplies directly to farmers perform a retailing function.

Wholesaling-Regional federated cooperatives that warehouse, sell,

and deliver supplies to local retail cooperatives perform a wholesaling

function.

Manufacturing-These are local and regional centralized supply

cooperatives that manufacture feed, blend fertilizer, or process seed; and

regional federated cooperatives that manufacture feed and fertilizer and

other supplies, formulate pesticides, fabricate containers and steel

buildings, and refine crude oil. Very few only manufacture, but many

are of the multifunction type.

Producing-A few cooperatives produce raw or basic materials

such as drilling for crude oil and mining phosphate rock.

Multifinction- These are purchasing cooperatives that are

combinations of all the foregoing types. For example, a local or a regional

centralized cooperative may manufacture and retail feed. A

federated cooperative may manufacture and wholesale feed, or

and refine crude oil and wholesale the refined produc ts

regional

produce

to retail

cooperatives.

Operating Practices

Purchasing Methods

Most local cooperatives obtain the greater part of their major supply

items, such as feed, fertilizer, and petroleum products, from affiliated

cooperative wholesale associations. Miscellaneous supplies not handled

by cooperative wholesalers are purchased from noncooperative dealers.

Managers and boards of directors determine the types of supplies

to purchase, with any proposed new lines usually discussed first at

membership meetings.

Wholesale cooperatives encourage local managers to order fertilizer

and seed well before the seasons when they will be needed and to take

early delivery on fertilizer so more space will be available at mixing plants

and storage facilities.

Regional cooperatives, either individually or cooperatively,

manufacture most requirements of member locals. Such items, however,

38
as steel products, tires, batteries, poultry and dairy equipment, and

miscellaneous supplies generally are obtained through an area or national

supply cooperative owned by regional associations. It, in turn, contracts

with manufacturers for quantity purchases of supplies that meet its

specifications. Some regionals also purchase part of their needs directly

from manufacturers.

Inventory Management

Warehousing, materials handling, and stock control are important

operations of farm supply purchasing associations. Inventories may be

carried at their manufacturing plants, wholesale warehouses and terminals,

and retail warehouses, stores, and bulk plants.

Some local cooperatives haul many supplies in their own trucks

from regional warehouses. Others depend on regional cooperatives ’

transportation services.

With the rapid increase in bulk delivery of feed and bulk application

of fertilizer, warehousing of sacked goods at wholesale and retail points

has been reduced. And, as local cooperatives increase in size, more are

taking carloads of fencing and roofing, individually or with a nearby

association, directly from manufacturers.

The frequency of taking a physical count of inventories varies by

commodity. Petroleum, for example, may be inventoried daily, weekly,

or monthly; feed weekly; and general farm supplies monthly, quarterly,

or semiannually. Some associations keep perpetual or daily running

inventory records of farm machinery parts and hardware.

Computing the percent of shrink or loss and taking steps to keep

it within acceptable standards, depending on the type of product, is an

important part of inventory management.

Cooperatives usually compute rates of inventory turnover for each

major type of supply. This is valuable in measuring efficiency in use

of inventory capital.

Credit Policies and Practices

Most supply purchasing cooperatives operate on a limited or

accommodation credit basis. Under this method, credit is allowed up to

a specified amount or extended for a specified period-usually 30 to 60

days-after which no more credit is allowed until the account is paid.

Some associations give a discount for cash; others add an interest charge

for extended and delinquent accounts. Applications for credit usually are

approved by the manager or an assistant but sometimes by an officer

or board committee in small associations.

39
Credit for fertilizer, building supplies, farm machinery, and farm

and home equipment may be granted on a deferred or installment basis

with interest-bearing notes used. In recent years, large amounts of feed

have been financed on a secured or term basis with some under contract

production programs.

Cooperatives must follow businesslike policies in extending credit

and collecting receivables to avoid bad-debt losses, collection costs, tying

up working capital, management concerns, and dissatisfaction among

members.

Pricing Practices

Cooperatives generally price supplies at prevailing market prices

for items of comparable quality. This is considered good practice because

it reduces friction with competitors and enables the cooperative to realize

reasonable net margins and to distribute some of them annually to memberpatrons as patronage refunds. It also enables them to retain some as

reserves to cushion the effects of price declines, price wars, and possible

operating losses.

Cooperatives generally follow industry practices in their areas in

giving quantity or volume discounts and cash discounts. Some also give

discounts for early booking of orders and for accepting early delivery

of supplies.

Distribution Methods

Cooperatives distribute supplies in much the same way as other

concerns in the same line of business. In some areas, cooperatives make

a price allowance to compensate farmers for hauling their own supplies.

In other cases, cooperatives may set a flat price for supplies at the

warehouse, and if farmers desire delivery, they pay an extra charge to

cover the cost. In other cooperatives, mileage zones are used in setting

delivery charges. For petroleum products, delivery service to the farm

is customary.

Many cooperatives now provide bulk delivery of feed to large users,

and bulk delivery and spreading of fertilizer has become an important

service. To do this, cooperatives have developed farm service centers

in areas close to their patrons.

Wholesale cooperatives and those manufacturing supplies usually

follow customary distribution practices for the various products they

handle or manufacture. Some sell free on board (f.o.b.) their own plant

or warehouse, while others sell on a delivered basis.

40
Many cooperatives use common merchandising methods, such as

displays, advertising, and volume-building contests or campaigns, in

distributing supplies. However, they generally do not spend as much on

advertising and selling as other firms, because most patrons are members

who own the cooperative.

Purchasing cooperatives devote considerable attention to

educational activities-pointing out that they purchase supplies specified

to fit farmers’ needs, and that farmers will receive supplies at cost after

final settlements or refunds. They also provide information on proper

use of various supplies and on good farm management practices.

Operating Policies

Patronage Refund Policies

Most supply cooperatives distribute net margins at the end of each

fiscal year. A few distribute them quarterly or semiannually.

The general practice is to (1) pay a rate of dividend-which cannot

exceed 8 percent a year in most States-on outstanding capital stock or

on other certificates of equity capital, especially if they represent direct

investments by members; (2) transfer a specified percent of total net

margins to an unallocated or allocated reserve account; and (3) declare

the remainder of net margins as patronage refunds on purchases of each

member-patron or patron. Under Federal tax laws, however, at least 20

percent of such refunds must be paid in cash. The remainder may be

placed in a revolving fund or patrons’ equity fund.

Many cooperatives declare patronage refunds only to members or

stockholders, and some declare such refunds to all patrons. Others limit

refunds to farmer-patrons. If refunds are declared to nonmember patrons

and they are eligible for membership, often their refunds are credited

first toward purchase of a share of common capital stock or to payment

of a membership fee.

A number of supply purchasing cooperatives declare one rate of

patronage refund on total supply sales. Different rates on sales of different

supplies are declared, depending on the extent to which operations are

departmentalized and on variations in gross and net margins on different

supplies. Some cooperatives declare specified rates on quantities of

supplies sold such as tons of feed or fertilizer and gallons of refined fuels.

Informing Members

Purchasing cooperatives are unique in that their member-owners

41
are also their patrons. However, this can make it difficult to attain and

maintain an informed membership that will elect competent directors,

demand sound financial and business policies, follow cooperative

principles, and insist that their cooperatives operate for the benefit of

farmer-members rather than for the cooperative.

Most purchasing cooperatives have numerous small-volume

members, with some being part-time farmers, and thus have a greater

member relations problem than marketing cooperatives.

Continuous information is needed to educate new members and

maintain the loyalty of old members. Sometimes this means members

foregoing short-term gains to ensure the long-range stability and viability

of the cooperative.

Cooperatives thus use various communication methods to keep

members informed and to get feedback from them. They must budget

for special and annual meetings and for newsletters or membership

publications. Their directors, managers, and employees play an important

part in communicating directly with current and prospective members.

Obtaining New Members and Member Capital

and Redeeming Member Equities

Cooperatives must develop ways of gaining new members to

replace those that leave or otherwise cease to support the cooperatives.

Membership drives require well-developed recruitment programs and

participation of existing members.

Many purchasing cooperatives require a small ($1 to $25)

membership fee or share of common stock for membership. And as

mentioned, a majority credit patronage refunds to all or regular

nonmember patrons with the initial amount credited toward the purchase

of a membership. Some members who organized the cooperative may

believe this method gives undue benefits to nonmembers. Others believe

the benefits of the additional volume and the tax savings outweigh the

disadvantages.

Changes in membership are continual, so cooperatives need to

adopt definite plans for obtaining capital from new members and from

existing ones, especially when funds are needed for expanding or adding

new supplies or services.

Cooperatives also need to adopt specific policies for redeeming

capital or equities. The revolving capital plan, discussed later, provides

an excellent method for accomplishing this. Cooperatives not using

revolving capital need to set aside reserves from net savings and use them

plus the capital acquired from new members each year to redeem equities

42
of inactive members on a regular or scheduled basis, if possible. Failure

to do this can cause serious member and public relations problems for

the cooperative.

Vertical Integrated Functions

Cooperative purchasing of supplies over the past 100 years has

evolved from simple to complex and diversified operations. Cooperatives

have integrated horizontally by adding branch facilities and more products

and services. They also have made progress in integrating vertically by

performing more of the functions involved from the sources of raw

materials to distributing supplies to farms.

Several cooperatives have made significant progress in vertically

integrating their farm-production supply operations. An example of the

centralized type is Agway Inc., Syracuse, NY; federated type, Farmland

Industries, Inc., Kansas City, MO; and mixed type, Southern States

Cooperative, Richmond, VA.

Bargaining

The earliest cooperative activity consisted of neighborhood pooling

of orders for carlot purchases and bargaining for price concessions. A

few groups of hog producers in Illinois still use this method. A few groups

of egg producers in California also bargain with private feed mills to

manufacture feed according to their specifications.

Retailing

The next step was organizing local supply cooperatives with

warehouses and full-time managers and other employees. Local marketing

associations added supplies as a sideline. As mentioned, cooperatives

in several central States distribute supplies on a countywide basis. In other

areas, some locals grew into large, centralized regional cooperatives

serving farmers through branch stations.

Wholesaling

As local cooperatives saw advantages in pooling buying power,

they set up regional wholesale cooperatives. These regionals at first

confined activities to purchasing member locals’ requirements on a

brokerage or commission basis. Then they gradually began purchasing

supplies on contract or on the open market, and warehousing and

43


distributing them to locals. A few regionals in the East now wholesale

supplies to noncooperative dealers or agencies who maintain patronage

records, so the regionals can pay wholesale refunds to farmer-members.

Wholesale cooperatives also provide other services for affiliated

locals, such as insurance, bonds, credit, financing, auditing, facility layout

or engineering, economic research, and various forms of organizational,

informational, and training assistance.

Manufacturing

From time to time, wholesale cooperatives found it expedient to

manufacture supplies. They saw opportunities to improve net margins

and quality and to provide more dependable sources for their locals.

Shortages of certain supplies during World War II and in 1973 greatly

stimulated manufacturing by cooperatives.

Cooperatives manufacture large quantities of feed, fertilizer, and

petroleum products. They process large amounts of seed. They

manufacture some paint, batteries, and farmstead equipment; formulate

some pesticides; blend lubricating oil; and manufacture or fabricate

containers. Net margins from manufacturing often exceed those from

wholesale distribution.

” Most manufacturing, refining, processing, and blending is done

by regionals that wholesale supplies to member locals or retail them

directly to farmers. When individual regionals feel they do not have

adequate volume or capital to undertake manufacturing alone, they form

interregional associations.

Before 1933, cooperative manufacturing activities often were

limited by lack of capital. In 1933, capital became available to eligible

farmer cooperatives from the newly created Banks for Cooperatives

supervised by the Farm Credit Administration. This source of funds helped

many cooperatives acquire manufacturing as well as distribution facilities.

Producing

Regional cooperatives also produce some of their raw material

requirements. Many call this becoming basic in their supply sources. Some

contract with growers to produce seed stocks under specifications. A few

own poultry-breeding farms, and others contract with growers to produce

hatching eggs or other poultry products. Several regionals have gone into

oil exploration to help supply crude oil for refineries and spread risks

and opportunities for net margins.

Interregional cooperatives engaged in manufacturing also produce

46
some raw materials, such as crude oil, natural gas, and potash. Several

have acquired leases on phosphate deposits to help ensure future supplies.

One interregional performs plant-breeding research to develop improved

varieties of legume, corn, and soybean seed.

Transporting

Cooperatives have added transportation services for each integrated

level of operation. Locals operate thousands of retail petroleum tank trucks

and fertilizer-spreading trucks. Regionals have large dry-freight vans,

liquid-fuel highway transports, and crude oil and product pipelines.

A few regional cooperatives have research farms and arrangements

with farmers to test their products. Several make grants to experiment

stations of land-grant universities to assist with research on production

of crops and livestock, control of disease and insects, purchasing of farm

supplies, and marketing of farm products.

Two groups of regionals cooperate to conduct research.

Cooperative Research Farms, Charlotteville, NY, owned by 2 1 regionals ,

operates six farms for research on livestock, dairy, poultry, and other

feeds. FFR Cooperative, West Lafayette, IN, owned by 16 regionals,

operates a plant breeding farm to develop new and improved varieties

of legume, soybean, and other field seeds. A few regionals individually

conduct plant breeding and field testing of seeds.

Related Services

Many cooperatives find it advisable to provide various services

that complement the supplies they handle. Local associations often deliver

feed in bulk, grind and mix feed, clean and treat seed, test soil, blend

fertilizer in bulk, field spread fertilizer and lime, apply insecticides, spray

paint, rent out equipment, drill water wells, and counsel farmers on proper

use of production supplies. Some cooperatives also build fences, design

and erect farm buildings, and provide repair services if they sell farm

machinery. Cooperatives also operate car care centers in some areas.

Regional cooperatives now provide numerous services for local

associations, including auditing, store and plant layout and engineering,

commodity field service, trucking, assistance with organizational and

financial problems, membership and financial campaigns, distribution

47
of membership publications, and training of employees and directors

Regionals also sell insurance and bonds.

Of the 148 specialized service cooperatives in the U. S. in 1985

more than half engage in trucking, pesticide management, artificia

insemination, and other farm production services.

Marketing Operations

As farm supply purchasing cooperatives became successful,

members requested their help in marketing farm products such as grain,

seeds, poultry and eggs, and livestock.

For example, Southern States Cooperative, Inc., Richmond, VA,

now markets and processes eggs and grain. Indiana Farm Bureau

Cooperative Association, Inc., Indianapolis, and Countrymark, Columbus,

OH, market grain for county member associations and their farmermembers. Agway Inc., Syracuse, NY, markets eggs, beans, grains, hay,

and fruits and vegetables in parts of its operating territory in the Northeast.

About 25 percent of all associations that handle production supplies

as their major activity also market one or more farm products. The other

75 percent have higher marketing sales than supply sales.

Financing and Taxation

Supply purchasing cooperatives use many of the same methods

of financing employed by other firms. However, they differ in the way

they raise member equity capital and in the major source of their borrowed

funds.

Financing Methods

Most of these cooperatives obtain some capital from members by

sale of common and preferred stock. Others sell certificates of membership

or equity, which usually bear a nominal rate of dividend or interest.

Purchasing cooperatives acquire needed capital by retaining part of their

annual net margins in the business. In such cases, part of the patronage

refunds declared from current net margins may be distributed to members

in the form of capital stock or other types of equity capital. Some net

margins also may be placed in members’ equity reserve or retained

earnings accounts.

Associations also use the revolving capital plan of financing. Under

this plan, some or all the patronage refunds remaining after paying at

least the required 20 percent in cash are retained in the business until

the necessary equity capital is accumulated. Then, these deferred refunds

48
are revolved in order of retention, often on a 5- to 7-year basis, at the

discretion of the board of directors. Equities under such a plan may be

evidenced by certificates of capital stock or equity, or by allocated book

credits, allocated equity reserves, or statements of deferred patronage

refunds.

A revolving capital plan has these advantages: (1) It provides a

convenient means by which each member patron provides capital in

proportion to use of the association, and (2) it keeps the ownership and

financing of the association largely in the hands of active members by

redeeming the oldest outstanding equities.

Farm supply purchasing cooperatives obtain the major part of their

borrowed funds from Banks for Cooperatives. They borrow the remainder

from local banks and members or other individuals. They also obtain

operating credit on merchandise purchased from suppliers, including their

wholesaling/manufacturing cooperatives. A few regional cooperatives

also sell debentures to, or borrow funds from, insurance companies.

Supply purchasing cooperatives have built assets substantially in

recent years but have not increased member equity in the same proportion.

As a result, they are relying more on borrowed funds.

Financial data on 2,507 predominantly farm supply purchasing

cooperatives in 1979-the latest year data are available-show they had

$10.5 billion of assets. Current and long-term liabilities equaled $6.4

billion and net worth or members’ equity, $4.1 billion. Borrowings made

up an estimated 60 percent of liabilities. Fifty-four percent of the

cooperatives had assets of less than $1 million.

Equity capital of 2,164 farm supply purchasing cooperatives in

1976, the latest that data are available, consisted of the following:

Percent of

Percent of co-ops

Type total amount using each

Common stock 21.3 75.7

Preferred stock 31.7 44.9

Membership certificates 0.5 4.9

Certificates of equity and capital credits 29.0 89.2

Unallocated reserves or retained earnings 17.7 90.3

Total 100.0 -_-

The 1979 study showed the 2,507 farm supply purchasing cooperatives

generated net margins of $745.7 million-equal to about 3.3 percent of

gross sales. Distribution of these margins was as follows: About 2 percent

was used to pay dividends and interest on equity capital; 35 percent was

paid as cash patronage refunds; 51 percent went to deferred patronage

refunds; 7 percent was retained as unallocated reserves or retained

earnings; and 5 percent was used to pay income taxes.

49
Farm supply purchasing cooperatives are subject to various kinds

of taxes, such as property, sales, and income.

Federal income tax laws provide for a single current tax at the

farmer-patron level on income produced through a farmer cooperative

if the cooperative adheres to certain requirements for the form in which

it distributes patronage refunds and makes distributions within a prescribed

time period. In conforming with tax laws, a cooperative has two major

alternatives :

1. It may shift its income tax liability to patrons by meeting the

strict requirements of Section 52 1 of the Internal Revenue Act of 1954.

This act requires that after paying up to 8 percent in dividends on member

capital and setting aside reasonable capital reserves, remaining net margins

must be distributed to all patrons, except government agencies, as

patronage refunds. The act further states that no more than 15 percent

of supply business can be done with nonmember nonfarmers, and that

more than 50 percent of such business must be done with members who

are producers of farm products.

The 1979 study of farm supply cooperatives showed that about

a third were operating under Section 52 1 of the Internal Revenue Code.

2. The cooperative may reduce its gross income for tax purposes

by distributing patronage refunds to member patrons and nonmember

patrons according to precise rules or procedures. Such cooperatives also

must conduct more than 50 percent of their supply business with members

who are agricultural producers.

The law states farmer cooperatives must pay at least 20 percent

of their patronage refunds in cash. Choices are available for form and

timing of patronage refunds, type of written notices of allocation used,

and ways to get patrons’ consent.

Farmers derive many benefits from using cooperatives to purchase

production supplies and equipment. The large number of producers

obtaining an increasing volume of farm supplies through cooperatives

over the years attests to this fact. It is difficult, however, to measure

exactly these benefits because some are intangible or indirect resulting

from cooperatives’ effects on price levels or gross margins, services,

quality, and business practices. Farmers generally believe indirect benefits

greatly exceed tangible or direct benefits.

Cooperative benefits vary by years, areas, and types of supplies

5 0
and equipment. Major benefits are as follows:

1. Cooperatives have lowered the cost of production supplies for

f

armers.

Net margins or savings have been substantial over the years. Most

retail cooperatives in the early years of operation realized large operating

net margins; for example, 10 to 12 cents on each dollar’s worth of

petroleum product handled from 1920 to 1940. In recent years, lower

gross margins and higher expenses have reduced net margins to 3 to 6

percent of petroleum sales, and 2 to 4 percent of sales of feed, seed,

fertilizer, and general farm supplies in many areas.

Net margins on wholesale operations of regional cooperatives have

averaged much lower, but those from manufacturing or processing usually

have been substantial. As noted earlier, net margins by predominantly

supply purchasing cooperatives averaged 3.3 percent of sales in 1979.

Reports of 20 major regional supply-handling cooperatives show

total net margins have averaged between 3 and 5 percent of sales, equal

to 10 to 20 percent of members’ equities, in recent years. These major

regionals do a considerable amount of manufacturing, individually and

with other regionals. Therefore, their net margins included dividends on

capital stock and patronage refunds from interregional associations.

In addition, cooperatives have lowered daily market price levels

in many trade areas. When local purchasing cooperatives were formed,

many caused some reduction in the general level of retail prices and gross

margins of competing firms, thus benefiting all farmers in the area.

Regional cooperatives, in some cases, have prevented general price

increases in fertilizer or feeds by not advancing billing prices; and some

cooperatives have had a salutary or regulative effect on business or trade

practices in their areas throughout the years. Supply purchasing

cooperatives with efficient operations thus have improved the buying

power of farmers and served as a “yardstick” on pricing and operating

practices.

2. High-quality supplies selected to give value-in-use have been

provided for farmer-members. Another important accomplishment of farm

supply purchasing cooperatives has been the improvement of quality in

feeds, seeds, and fertilizers. These cooperatives have selected supplies

that best met farmers’ needs in producing more yields per acre and gains

per pound.

Cooperatives have pioneered the use of open formulas for mixed

feeds and fertilizers and have led the field in supplying farmers with highanalysis fertilizers. Adding needed secondary and minor elements,

laboratory control, and granulation mare other ways they have provided

members with outstanding values in purchased plant foods.

51
Because cooperatives now use many different ingredients in feeds

that change as improvements are made, they make available the current

formulas used rather than printing open formulas on tags as in earlier

years. Cooperatives have made much use of college conference feed

boards in developing formulas to give best results.

Cooperatives have been especially helpful in selecting seed of

adapted variety, high in germination and viability, and free of disease

and noxious weeds. They have worked closely with university experiment

stations, contracted with growers to produce seed with known heredity,

and built processing facilities to produce good-quality seed.

In procuring general farm supplies and equipment, many

cooperatives have emphasized selective buying. Through use of laboratory

tests, farmer advisory panels, market research surveys, and agricultural

engineering departments of State experiment stations, cooperatives have

determined specifications of supplies and equipment best suited to farmer

needs.

3. Services in obtaining and distributing supplies have been

improved or added. Many cooperatives have been alert in meeting requests

of members for types of supplies and services they want and have tried

to provide them equitably based on actual costs.

Cooperatives provide services that save time, labor, or money for

farmers. Examples are bulk delivery of feed to farms, bulk blending and

spreading of lime and fertilizer, mobile feed milling, tractor tire repairing,

custom spraying and dusting, and pool car ordering.

They also offer services that may not have been readily available

or convenient. Examples are feed grinding and mixing, equipment renting,

or petroleum deliveries to all farmers regardless of size or distance from

bulk plants. Development of routes covered at regular intervals has enabled

petroleum cooperatives to serve efficiently small as well as large farmers

in the East.

Other services include planning and contract construction of

buildings and installation of automated milking and feeding systems.

Cooperatives are leaders in offering services that improve farm

practices. These include soil testing; providing field specialists to advise

on use of supplies and good farm management practices; and operating

demonstration and testing farms. Many cooperatives have emphasized

services to aid members rather than practices to maximize net margins

for the business.

4. Dependable sources of supplies have been provided-especially

in emergencies. During and after World War II, cooperatives’ purchase

or construction of refineries and fertilizer plants enabled many farmers

to continue producing needed food and fiber for the Nation. A few

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cooperatives also acquired lumber and shingle mills and timber holdings

for supplying growers or fruit- and vegetable-packing associations.

Cooperatives have made special efforts to keep hay and supplies going

to members during snow storms, floods, and drought emergencies.

During shortages of petroleum and fertilizer in 1973, cooperatives

took many actions to make supplies available to farmer-members. They

expanded manufacturing capacity; added storage and transportation

equipment; made special purchases, often at extra costs; and restricted

available supplies of fuel to farmer-members, even though they could

have realized greater net margins by selling fertilizer abroad.

5. Success@1 purchasing cooperatives have provided a training

ground for the development of local farm leaders. And they have helped

members become more self-reliant and informed citizens in their

communities.

6. Cooperatives have beneBted rural communities. They have

provided payrolls, patronized local businesses, and often supported

community projects. And most of their net savings have remained in the

community.

In summary, many farm supply purchasing cooperatives have

benefited all farmers within their- trading territories by becoming

pacesetters in providing farmers with high-quality supplies at reasonable

cost. Their farmer ownership and competitive influence have helped

farmersespecially family-size operators-to do a better job of farming.

Challenges

Cooperatives handling production supplies will face many

problems-some old, some new-in the years ahead. Their importance

will vary among associations, areas, and supplies, but if cooperatives

can strengthen their boards of directors, managers and other employees,

and member relations they will be in a much better position to meet the

challenges that lie ahead. Some of the more common challenges are:

1. Electing and training competent and progressive boards of

directors. This includes improving methods of selecting directors who

are sound businessmen and who will adhere to cooperative principles

in setting policies; providing better training programs for directors,

emphasizing legal and operating responsibilities, authority, and limitations ;

and developing standards of performance and control for directors to use

in measuring the efficiency and effectiveness of cooperatives and the

performance of managers.

2. Employing and keeping skilled managers and other employees

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to operate larger and more complex cooperatives. This involves improving

techniques for selecting managers and key personnel, improving training

programs for all employees, and developing compensation plans to provide

incentives for improving employee performance.

3. Informing members and prospective patrons and developing

better ways of improving member participation. Cooperatives must obtain

information from farmers on buying intentions, satisfaction, or problems

in using specific supplies, and types of services they want; provide

effective information to farmers on the cooperative’s objectives, principles,

products, services, capital requirements, problems, and accomplishments;

study ways of motivating people to patronize cooperatives and assume

responsibilities as members; and develop programs of interest and value

to young farmer couples and rural youth.

4. Adjusting to rapid changes in agriculture. This likely will require

meeting the needs of fewer and larger commercial farmers who are good

businessmen; serving more mechanized, scientific, and commercialized

farming; meeting greater demands from farmers for more servicesespecially those that save time and labor-and for information on proper

use of new supplies and modern production practices; adjusting to the

replacement of farms with suburban and industrial developments and still

maintaining efficient services for the remaining farmers in the area; and

adjusting to changes in farm programs and rural area development.

5. Adjusting to changes in the economy and agribusiness. These

may be fluctuations in business and government policies; increases in

labor and other operating costs; keen competition in merchandising

supplies and providing services, especially during supply surpluses; and

area standards for environmental protection, health, and safety.

6. Conducting research and long-range planning. This involves

developing long-range objectives and plans for services, facilities, and

finances; conducting economic and market research to determine market

potential and needed services, increase volume, and improve operating

efficiency; and conducting product research and development through

joint efforts of several regional associations.

7. Keeping policies and practices eficient and equitable. These

include pricing policies equitable for small, medium, and large patrons;

cost-based quantity discounts for individual purchases or deliveries and

volume discounts for annual purchases; equitable discounts for cash sales

and charges for accommodation credit, production credit, and term

financing; departmentalizing operations, accounting, and patronage

refunds; and developing practical procedures and equitable charges for

various custom services.

8. Adjusting organization structures and distribution systems. This

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challenge may require consolidating some retail stores or branches, adding

new branches or warehouses, and possibly using franchised private dealeragents in some areas; supplying local cooperatives in carlots directly from

factories; and providing management and financing services-for some

local cooperatives.

9. Merging and coordinating cooperative resources. Leaders of

some cooperatives will need to consider merging with other cooperatives,

both local and regional, to benefit members; and performing more joint

or cooperative activities with other cooperatives, especially in research

and manufacturing.

10. Obtaining capital to perjorm more diversified and integrated

services. This will require informing members of capital needs and benefits

of investing in cooperatives; developing more effective capital-raising

techniques, including feasibility of capital assessments added to supply

invoices (adapting the practice of per-unit capital retains used in marketing

farm products to supply operations); exploring possibilities of obtaining

more equity and debt capital from nonproducers and other business firms;

and at the same time developing systematic plans for redeeming member

equities.

11. Providing contract and integrated services on a sound and

equitable basis. This will challenge managers to determine the proportion

of available resources to use in contract production, where feasible;

evaluate how contract programs will affect other operations and extent

they will be subsidized, if necessary; determine how much risk

nonparticipating members should assume in a contract program that

benefits only a limited number of contract members; and decide on the

percentage of a regional cooperative’s supply volume that can be

manufactured, or produced as basic materials, on a relatively conservative

and safe basis, considering capital requirements, interest costs, and

alternative opportunities.

12. Exploring new ways of successfilly handling capital goods and

equipment. This entails studying ways of safely and beneficially handling

and assembling farm machinery or providing leasing and custom farm

machinery services; and successful ways to handle building supplies and

provide related planning and construction services.

Authors/Donald L. Vogelsang, John M. Bailey (retired), Lloyd C. Biser,

E. Eldon Eversull, and J. Warren Mather (deceased)/Agricultural

Economists.

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