United States

Department of

Agriculture

Rural Business–

and Cooperative

Programs

Research

Report 224

The Nature of the

Cooperative

A Dairy Cooperative Case Study
Abstract The nature of the cooperative is viewed as a composite picture of three facets: (1) the

unique structure, organization, governance, equity financing, and operation of cooperatives; (2) the market performance of cooperatives; and (3) the relations of cooperatives to other market participants through their roles in transaction governance. The

third facet is the focus of this study, through the lens of transaction cost economics.

The results complement the first two facets to present a clearer picture of the nature of

the cooperative. Cooperatives adapt to transaction governance structures for economizing on transaction costs, just as other types of businesses do. The unique nature of

the cooperative is also reaffirmed. Dairy cooperatives are used as an example. Other

kinds of cooperatives are briefly assessed as “variations on a theme.”

Key Words: Cooperatives, transaction cost economics, governance, milk, dairy, cooperative theory.

The Nature of the Cooperative: A Dairy Cooperative Case Study

K. Charles Ling

Agricultural Economist

USDA Rural Development

Research Report 224

April 2012
Preface A review of landmark economic literature on cooperatives (Emelianoff; Nourse) was

recently completed to explain the economic structure of cooperatives and their market

performance. This work offered a set of cooperative basics that were shown to be still

very relevant today in a dairy cooperative case study (Ling, 2011).

The inspiration for this current study is found in Oliver Williamson’s attempt to explain

the nature of the firm through the development of transaction cost economics. His

“simple contractual schema” is adopted to shed new light on cooperatives. The findings complement the earlier work and push the envelope of our understanding of the

nature of the cooperative.

A clear view of the nature of the cooperative would: (1) help the public better understand the cooperative form of business; (2) help policymakers reach informed decisions relating to cooperatives; and (3) contribute to research on cooperatives by helping to ensure the work stays relevant to cooperatives.

The report uses dairy cooperatives as a case example of transaction cost economics

analysis. All dairy cooperative statistics cited in this report are 2007 data, the year of

USDA’s latest dairy cooperative survey (Ling, 2009; Liebrand).

Comments by Ronald Cotterill, Eldon Eversull, Carolyn Liebrand, Bruce Reynolds,

Randall Torgerson, James Wadsworth, and John Wells are gratefully acknowledged

and appreciated.

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Contents Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iv

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Facet I. The Economic Structure of Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . .2

Facet II. Market Performance of Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Cooperatives for Market Access and Other Functions . . . . . . . . . . . . . . . . . . .3

Countervailing Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Pro-Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

Competitive Yardstick . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Facet III. Cooperatives’ Roles in Transaction Governance . . . . . . . . . . . . . . . . . . . .4

The Firm and the Modes of Transaction Governance . . . . . . . . . . . . . . . . . . .4

The Cooperative and the Modes of Transaction Governance . . . . . . . . . . . . .5

Inferences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

The Unique Cooperative Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Unique Cooperative Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Unique Cooperative Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Unique Cooperative Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Unique Cooperative Equity Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Unique Cooperative Operation—Unique Economics . . . . . . . . . . . . . . . . . . . 10

The Economics of Cooperative Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

A Model Dairy Farm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Milk Price Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Milk Production Input Cost Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Seasonal Production Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Seasonal Demand Variation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Balancing Seasonal Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Summary of the Economics of Cooperative Operation . . . . . . . . . . . . . . . . . .13

Variations on a Theme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Marketing Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

New-generation Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Purchasing Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Local-Food Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Multi-Stakeholder Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Farming Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Cooperatives With Non-Patronage Members . . . . . . . . . . . . . . . . . . . . . . . . .17

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

List of Tables

Table 1—Transaction governance modes and attributes . . . . . . . . . . . . . . . . .6

Table 2—Category of dairy cooperatives by marketing function(s) and

their transaction governance roles . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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Table 3—Indices of seasonality of producer milk deliveries and

fluid demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Table 4—An example of a cooperatives milk in excess of demand by

fluid plants and manufacturing customers . . . . . . . . . . . . . . . . . . . 14

Table 5—Variations on the uniqueness of the cooperative business model . . 18

List of Figures

Figure 1—The simple contractual schema . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Figure 2—A dairy farm’s milk production volume when expected pay

price changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Figure 3—A dairy cooperative’s aggregate milk volume . . . . . . . . . . . . . . . . . 22

Figure 4—A dairy farm’s milk production volume when input cost changes . . 22

Figure 5—Seasonality of milk production changes a farm’s capacity and

shifts its cost curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

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Highlights The nature of the cooperative is viewed as a composite picture of three facets:

1. The economic structure of cooperatives—their unique structure, organization, governance, equity financing, and operation.

2. Market performance of cooperatives, i.e., cooperatives’ place in the market

economy.

3. Cooperatives’ relations to other market participants through their roles in

transaction governance (or “in aligning incentives and crafting governance

structures that are better attuned to their exchange needs” (Williamson,

2002, p. 172)).

Cooperative organizations represent the aggregates of economic units, as defined by

Emelianoff. In the agricultural sector, cooperative associations are aggregates of member-farms and have the following attributes:

● A cooperative is an agency owned and controlled by members through which

they conduct their business.

● Each member-farm fully retains its economic individuality and independence.

● The board of directors is elected from among member-farmers.

● Proportionality and service at-cost are two basic operating principles.

● Members provide advances (i.e., equity capital) for financing the cooperative.

● The surplus or deficit of a cooperative is the account payable to, or receivable

from, the member-patrons.

● Patronage refunds are the money returned to members who have been

under paid or overcharged.

● Dividend on capital, if any, is interest payment for using members’ capital.

● Being an aggregate of member-farms, the cooperative is neither a horizontal

integration of its members nor a vertical integration between the members

and the cooperative. The cooperative is a third mode of organizing coordination.

Farmers organize cooperatives to perform various functions jointly in various market

situations — functions that cannot be satisfactorily carried out alone by individual farmers. Based on Nourse’s postulations, market performance of cooperatives may be

described by the following:

● Cooperatives make it feasible for farmers who otherwise may not have out

lets for their products to join together to gain greater market access.

● Cooperatives can be of any size and are organized for carrying out specific

business functions for member-producers.

● Cooperatives afford farmers the organizational sizes that are necessary for

exercising countervailing power to effectively deal with other market partici

pants.

● Cooperatives are pro-market; they let the market supply-and-demand price

be the guidance for producers.

● Cooperatives are a means for farmers to promote and maintain competition;

they serve as a “competitive yardstick.”

The nature of the cooperative as it relates to transaction governance is explored by following Williamson’s explanation of the nature of the firm that constitutes the core of

transaction cost economics. His simple contractual schema is useful for explaining the

essence of transaction cost economics (figure 1 and table 1, respectively, pages 21

and 6).

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The starting point is Node A (unassisted market). This is the mode where transactions

between numerous suppliers and buyers are for an undifferentiated product. The product is made with a general-purpose technology and does not require assets that are

specific for its production (asset specificity is zero, or k=0). Transaction governance is

accomplished through competition.

If the product uses special-purpose technology that requires specific assets for its production, then asset specificity is greater than zero (k>0). Asset specificity causes

uncertainty and poses hazards to the investments of the suppliers and the buyers as

they haggle for transactions. Contracts that spell out the terms of trade as legal rules

may be formulated in an effort to relieve the hazard. However, it is impossible to foresee and encompass all contingencies in the contract due to human limitations, and

relying on courts for relief is time-consuming and costly. This is the Node B (unrelieved

hazard) mode in the schema that denotes the situation where the transaction does not

have safeguards (s=0) to relieve the hazard and protect the investment.

Over time, some firms will seek out reputable and trustworthy counterparts to reduce

the hazard. Such transactions give rise to bilateral dependencies and the parties have

incentives to promote a continuous long-term relationship and thus safeguard specific

investments. At Node C (hybrid) in the schema, transactions are supported by interfirm contractual safeguards (s>0). Instead of a set of legal rules with court enforcement, the contract here is a framework or a set of guidelines for interactions between

the firms. Discrepancies in performance are resolved through amicable consultation or

negotiations or by arbitration. The court is only used as a last-resort remedy.

If costly breakdowns and transaction hazards continue despite the safeguards at Node

C, the supplier and the buyer may be brought under unified ownership and vertically

integrated and controlled. This Node D (hierarchy) mode occurs when a higher degree

of asset specificity and added uncertainty pose greater needs for cooperation in mutual adaptation.

Each node in the simple contractual schema represents a generic mode of governance. And each generic mode of governance embodies its own internally consistent

attributes of incentive intensity (reward for effort), administrative control, and contract

law regime and therefore has its own strengths and weaknesses. At Node A, the governance structure is the unassisted market. The governance structure at Node B is

also the market, where asset specificity exposes transacting parties to uncertainties

and, without safeguards, to unrelieved hazards to their investments. Node C is where

the market is assisted with credible contracting. All successive production stages are

integrated under hierarchical control at Node D. The attributes of a market mode are

high incentive intensity, little administrative control, and a legal rules contract regime.

On the other hand, attributes of hierarchy are low incentive intensity (where pricing for

the successive stages is cost-plus), considerable administrative control (by fiat), and

forbearance is the implicit contract law of internal organization (the parties must

resolve their differences internally).

Using dairy cooperatives as an example, several conclusions may be drawn from the

analysis of the roles of cooperatives in transaction governance:

● Cooperatives’ roles in transaction governance are exactly the same as those of

the firm in Williamson’s analysis of transaction cost economics—their transactions are under all possible governance modes, depending on the lines of business they engage in. As is the case with other types of business, cooperatives

v
adapt to various transaction governance structures for economizing on transaction costs.

● Cooperatives do not own the assets that are employed by members to produce

milk; the assets and the investment hazard associated with asset specificity

belong to members. This reveals the cooperative’s unique structure of being an

aggregate of its member-farms—the relation between the member-farms and

the cooperative is not that of an integration of successive technologically separable production stages or that of a horizontal integration of like businesses

under the cooperative’s administrative control.

● By pooling milk and marketing it collectively through the cooperative, memberfarms also pool and share the investment hazard associated with the assets

specifically used for producing the milk. Individual member-farm’s share of the

hazard should be less than if each member markets the milk by itself and faces

the uncertainty alone.

● The countervailing power of the cooperative may be helpful in entering into

credible contractual relationships with processors, because such relationships

may be more attainable and stable between counterparts that are on a relatively more equal footing.

● Being an aggregate of its member-farms, the cooperative serves as a focal

transaction entity for its members and simplifies members’ relations with milk

buyers (processors). The cooperative infuses order among member-farmers,

thereby eliminating conflicts that arise from individuals competing for customers, thus realizing transaction cost savings.

The transaction governance analysis reaffirms the unique structure of the cooperative

being an aggregate of member-farms that entails the cooperative’s other unique features:

Unique Cooperative Organization: Cooperatives are business organizations of member-patrons. They can be of any size and can be local, regional, or national in scope;

they may be centralized organizations with direct members, federations of cooperatives or hybrids of the two.

Unique Cooperative Governance: Members of cooperatives exercise ownership and

business controls through a board of directors that is elected from among memberfarmers. The separation of the responsibility of the board (governance) and the role of

management (managing operations) is emphasized.

Unique Cooperative Equity Financing: Equities of cooperatives are supplied by members. By obtaining equity financing internally, cooperatives do not incur the cost of

soliciting investment capital in the capital market.

Unique Cooperative Operation—Unique Economics: This results from the cooperative’s structure of being an aggregate of member-farms as well as from its being the

exclusive marketing agent of members’ milk production. Members’ farming operations

are not under the cooperative’s administrative control, and the cooperative cannot dictate how members operate their dairy farms. This operating mode entails its own

unique economics that comprises the following elements:

● When milk price goes up or down, the milk volume a farm may produce

depends on the financial objective of the farm: whether it wants to attain maximum total profit (minimum loss in a loss situation), maximum total revenue

(up to the break-even point), or minimum average cost.

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● Production input cost changes do not change a farm’s rated capacity but shift

the farm’s cost curves straight up or down. The milk volume that the farm produces, again, depends on the financial objective of the farm.

● Depending on how farmers respond to milk price and input cost changes, the

milk volume the cooperative has to handle may continually fluctuate.

● The cooperative markets the aggregate milk volume produced by members;

therefore, it does not have its own milk production functions, milk production

cost curves, or milk supply curves.

● Milk production is a biological process and is subject to daily and seasonal

fluctuations. The seasonality of milk production shifts a farm’s cost curves

downward and to the right during a seasonally high production month or

upward and to the left during a seasonally low production month (figure 5,

page 23).

● The seasonality of milk production generally does not match the seasonality

of fluid milk demand. This mismatch requires cooperatives that supply milk to

the fluid market to balance seasonal supply with seasonal demand and handle the inevitable seasonal surplus milk volume at a substantial supply-balancing cost.

Different commodities have their own characteristics and different types of cooperatives have their own special features; they represent variations on a theme (table 5,

page 18).

This study shows how cooperatives relate to other market participants through their

roles in transaction governance. This broadens our understanding of the cooperative’s

place in the market economy beyond the postulations made by Nourse. The fact that

asset specificity and the associated investment hazard belong to individual members

reaffirms the cooperative’s unique economic structure of being an aggregate of its

member-farms, as posited by Emelianoff. Thus, the perspective gained through the

lens of transaction cost economics complements the earlier work on cooperative

basics (Nourse; Emelianoff). Together, they present a clearer picture of the nature of

the cooperative.

vii
The Nature of the Cooperative:

A Dairy Cooperative Case Study

K. Charles Ling

Agricultural Economist

USDA Rural Development

Introduction

The first work in economic literature to give the

cooperative its precise economic definition was Ivan

Emelianoff’s Economic Theory of Cooperation: Economic

Structure of Cooperative Organizations, published in

1942. This book marked the beginning of a new era in

the development and evolution of cooperative theory.

Emelianoff carefully reviewed the worldwide literature on cooperative theory from the late 19th century until 1939. He concluded that for economic analysis

of cooperatives, the economic structure of cooperative

organizations should be clearly defined and that the

definition should be free from the encumbrance of

sociological, legal, technical, social-philosophical, and

ethical considerations.

Against this backdrop, Emelianoff established

this definition: “Cooperative organizations represent

the aggregates of economic units.” This clear economic

definition liberated economists to analyze cooperatives

as economic entities, in the paradigm of orthodox

microeconomic theory or what is called neoclassical

economics.

Neoclassical economic theory treats the firm as a

production function, where, given the available technology, an optimal amount of inputs is transformed

into an optimal amount of outputs at the least cost

when “marginals” (e.g. marginal cost and marginal

revenue) equate. The price system thus optimally allocates resources among various uses in the economy

and, by implication, the competitive market does not

incur transaction cost. This orthodox paradigm analyzes economic activities of the firm through “the lens

of choice.”

However, the firm in neoclassical economic theory is an abstract construct and does not manifest the

inner workings of real firms or explain the firm’s

behaviors and activities in the real world. The search

for alternatives to explain the nature of the firm started

as early as in the 1930s (Coase; Hall, et al.).

Then, in a 1971 paper, “The Vertical Integration

of Production: Market Failure Considerations,” Oliver

Williamson raised questions about using the competitive market norm for judging market performance of

the firm. His work spurred follow-up research that has

come to be referred to as transaction cost economics.

Concurrently, theories for studying organizations

(such as agency theory, property rights theory, game

theory, etc.) were also further developed. The results

of these research efforts constitute a new paradigm for

analyzing economic activities of the firm through “the

lens of contract” (Williamson 2010).

Research on cooperatives prior to the 1980s used

microeconomic models of vertically or horizontally

integrated firms to optimize cooperative operations

(e.g., Phillips; Helmberger, et al.). This was because the

cooperative was interpreted to be a form of vertical or

horizontal integration of its members. However, cooperatives usually have to accept whatever product volumes delivered by members to them for marketing

and cannot dictate how or how much members should

produce.

This is unlike a vertically integrated firm that

brings successive technologically separable stages

under one central management and control, or a horizontally integrated firm that “lords it over” its subunits. It is worth noting that: because member-farms

are independent entities, represent independent profit

centers, and act independently, the cooperative association is neither a horizontal integration of its memberfarms nor a vertical integration between memberfarms and the cooperative—it is a third mode of

organizing coordination (Shaffer).

1
With the advent of the alternative (lens of contract) paradigm for analyzing economic activities of the

firm, research on cooperatives has followed along to

focus on cooperative governance, management, membership, and related issues (Royer; Staatz; Cook, et al.).

These efforts have contributed substantially to understanding the organizational and institutional aspects of

cooperatives. Further research advances would benefit

from a clear understanding of the nature of the cooperative.

The nature of the cooperative may be viewed as a

composite picture of these three facets:

I. The economic structure of cooperatives—

their unique structure, organization, governance, equity financing, and operation.

II. Market performance of cooperatives, i.e.,

cooperatives’ place in the market economy.

III. Cooperatives’ relations to other market participants through their roles in transaction

governance (or “in aligning incentives and

crafting governance structures that are better

attuned to their exchange needs”

(Williamson, 2002, p. 172)).

This report explores the third facet through the

lens of transaction cost economics to analyze cooperatives’ roles in transaction governance and the related

subjects. The first two facets were fully explained in a

recent report (Ling, 2011); the inclusion of their concise

versions here is for the composite picture to be complete.

Facet I. The Economic Structure of

Cooperatives

Following Emelianoff, the economic structure of

cooperatives is defined as: “Cooperative organizations

represent the aggregates of economic units.”

In agriculture, farms are such economic units. The

nature of cooperative associations as aggregates of

member-farms is clearly discernible in the embryonic

forms of such associations. For example, a buying club

of farmers may want to purchase certain goods together, such as fertilizer.

The buying club would have someone take orders

from member-farmers and place orders with a vendor,

as well as perform other related chores. If the vendor

requires a deposit, members may advance money to the

buying club for the deposit requirement in proportion

to their respective buying volume.

There may be an elected committee to facilitate

decisionmaking if the number of members is large.

Each member may have one vote if the member’s purchasing volumes are about the same. Otherwise, some

forms of proportional voting may be adopted to conciliate large-volume members.

When the fertilizer (for example) is delivered,

members pay the balance of their obligations. After the

transactions have been completed, payment to the vendor and other expenses are subtracted from the sum of

money paid by members. Any surplus is returned to

members in proportion to the volume of fertilizer they

have purchased.

This buying service is conducted at cost; every

aspect of a member’s transaction through the buying

club is in proportion to the member’s patronage (buying) volume. The buying club may be disbanded after

fulfilling its joint-buying purpose.

This scenario shows that the buying club represents the aggregate of its member-farms, through which

they purchase fertilizer. If the buying club metamorphoses into a permanent purchasing cooperative association, the picture may look more complicated.

However, the underlying nature of the cooperative as

an aggregate of member-farms remains the same.

In this new scenario (i.e., a permanent purchasing

cooperative), the person who manages buying orders

and other chores will be the manager of the cooperative

(usually a hired professional). The committee of members becomes the board of directors. Advanced payments by members to the cooperative become equity

capital for financing the operation and for carrying

inventories and owning facilities.

Year-end surplus is returned to members as

refunds in proportion to patronage volume, but a portion may be retained as revolving capital. The principles of proportionality and service at-cost remain intact,

but their practices may be less evident because the

operation has become more complex.

Although the above example is based on purchasing cooperatives, the same line of reasoning also applies

to marketing cooperatives. The difference between purchasing and marketing cooperatives is: instead of

procuring goods for members, a marketing cooperative

markets products produced by member-farms.

In either case, the member-farms coordinate their

activities through the cooperative, but each fully retains

its economic individuality and independence.

In summary, the definition that cooperative organizations represent the aggregates of associated economic units provides a clear insight into how cooperatives organize and function. Being aggregates of

member-farms in the agricultural context, cooperative

associations have the following attributes:

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● A cooperative is an agency owned and controlled by members through which they conduct their business.

● Each member-farm fully retains its economic

individuality and independence.

● The board of directors is elected from among

member-farmers.

● Proportionality and service at-cost are two

basic operating principles.

● Members provide advances (i.e., equity capital) for financing the cooperative.

● The surplus or deficit of a cooperative is the

account payable to, or receivable from, the

member-patrons.

● Patronage refunds are the money returned to

members who have been underpaid or overcharged.

● Dividend on capital, if any, is interest payment

for using members’ capital.

● The cooperative is neither a horizontal integration of its members nor a vertical integration

between the members and the cooperative. It is

a third mode of organizing coordination.

Facet II. Market Performance of

Cooperatives

The first academic paper on the theory of cooperation, published in the American Economic Review, was

“Economic Philosophy of Co-operation” by E. G.

Nourse (Nourse, 1922; Hess). This piece, supplemented

by his later brief remarks (Nourse, 1945), primarily

focused on the roles agricultural cooperatives played in

the marketplace that are still valid today: providing

market access for producers, exerting countervailing

power, being pro-market, and serving as a competitive

yardstick.

Cooperatives for Market Access and Other

Functions

The following examples are taken from Nourse’s

paper to illustrate how farmers organize cooperatives

to perform various functions jointly and efficiently in

various market situations — functions that cannot be

satisfactorily carried out alone by individual farmers:

1. Cooperatives for market access — an example

is a small fruit-producing area far from any

large market. The product is perishable; hence,

both risk and marketing expense are high.

Total product volume is not large enough to

attract a private distributor. Facing this situation, producers have the option of organizing a

cooperative association to market their products. These

cooperatives have frequently demonstrated the ability

to achieve successful results where private, outside

entrepreneurship fails to perform.

2. Local to regional coordination — a local cooperative creamery may initially be effective in

meeting the competition of other small, private

creamery operations. However, when competing creameries have grown to be entities of

great size, the competition must be met by a

distributing organization of equal scope. This

will often be achieved through a federation of

the cooperative creameries across a region

which may embrace an entire State, several

States or parts of a State.

3. Region-wide associations — in many

instances, growers in horticultural regions

have organized and integrated highly efficient

businesses that serve producers across an

entire production region by assembling, processing, and distributing their products. These

agencies have eliminated wasteful competition

both at the local shipping point and at the central markets. Furthermore, they are the instruments of the producer and owner of the goods,

and hence are likely to be more aggressive in

the effort to reduce expense and wastage in the

handling process and to improve quality and

enlarge outlets.

Countervailing Power

The above examples show how cooperatives are

organized and grow to enable farmers to exercise countervailing power in dealing with other market participants. (The term “countervailing power” was coined by

economist John Kenneth Galbraith in the 1950s.)

Pro-Market

Cooperatives enable farmers to effectively compete in the marketplace and garner market signals that

put them in a position of prompt and sensitive response

to the reaction of the consuming public and guide their

farming business decisions. According to Nourse, the

cooperative objective is twofold (Nourse, 1945):

1. “It is to make the most economical and efficient market channel by which whatever volume of product farmers see fit to produce

gains access to the attention and the purchasing power of all who might use such a product...Thus, a true supply-and-demand price is

allowed (and aided) to express itself for the

guidance of producers.”

3
2. “It aims to reflect these market conditions back

most promptly and fully to producers in ways

that will both guide and, so far as possible,

assist them in changing their methods so as to

continue production and to prosper or to shift

to more suitable lines of production.”

Competitive Yardstick

The presence of the cooperative challenges other

market participants to operate efficiently and thus

strengthens the competitive market mechanism. In this

way, the cooperative serves as a competitive yardstick

for the market.

In summary, market performance of cooperatives

may be described by the following:

● Cooperatives make it feasible for farmers who

otherwise may not have outlets for their products to join together and have market access.

● Cooperatives can be of any size and are organized for carrying out specific business functions for member-producers.

● Cooperatives afford farmers the organizational

sizes that are necessary for exercising countervailing power to effectively deal with other

market participants.

● Cooperatives are pro-market; they let the market supply-and-demand price be the guidance

for producers.

● Cooperatives are a means for farmers to promote and maintain competition—as the competitive yardstick.

Facet III. Cooperatives’ Roles in

Transaction Governance

The nature of the cooperative as it relates to transaction governance is explored by following

Williamson’s explanation of the nature of the firm that

constitutes the core of transaction cost economics

(Williamson, 2010, 2007, 2005, and 2002).

The Firm and the Modes of Transaction

Governance

The premise of transaction cost economics is that

“the mission of economics is to understand the organization of economic activity...(Then) firms must be

described in relation to other modes of governance, all

of which have internal structure...The governance

approach maintains that structure arises mainly in the

service of economizing on transaction costs”

(Williamson, 2002, p. 178). “The transaction incorporates

the three aspects of conflict, mutuality and order— governance is the means by which to infuse order, thereby

to mitigate conflict and to realize... mutual gain from

voluntary exchange” (Williamson, 2002, p. 182).

A simple contractual schema used by Williamson

(2005) to explain the essence of transaction cost economics is adopted here (figure 1, page 21). The starting

point is Node A (unassisted market). This is the mode

where transactions between numerous suppliers and

buyers are for an undifferentiated product. The product

is made with a general-purpose technology and does

not require assets that are specific for its production. If

“k” is used as a measure of asset specificity, then k is

zero (k=0) in this case. Transaction governance is

accomplished through competition (the competitive

norm of neoclassical economics).

If the product uses special-purpose technology

that requires specific assets for its production, then

asset specificity is greater than zero (k > 0). Asset specificity is also greater than zero for the buyers if they use

the product for next-stage processing/marketing that

requires specific assets. An asset is less valuable and the

investment is at risk if it is not employed in the production of the specific product as originally intended.

Asset specificity causes uncertainty and poses hazards to the investments of the suppliers and the buyers

as they haggle for transactions. Contracts that spell out

the terms of trade as legal rules may be formulated in

an effort to relieve the hazard.

However, it is impossible to foresee and encompass all contingencies in the contract due to human limitations (what is called bounded rationality), and relying on courts for relief is time-consuming and costly.

This is the Node B (unrelieved hazard) mode in figure 1

that denotes the situation where the transaction does

not have safeguards (indicated by s=0) to relieve the

hazard and protect the investment.

Over time, some firms will seek out reputable and

trustworthy counterparts to reduce the hazard. Such

transactions give rise to bilateral dependencies and the

parties have incentives to promote a continuous longterm relationship and thus safeguard specific investments. The safeguards refer to provisions such as

penalties for poor or non-performance, information disclosure and verification procedures, and specialized

dispute resolution (such as arbitration).

At Node C (hybrid) in figure 1, transactions are

supported by inter-firm contractual safeguards (s>0).

Instead of a set of legal rules with court enforcement (as

at Node B), the contract here is a framework or a set of

guidelines for interactions between the firms.

Discrepancies in performance are resolved through

amicable consultation or negotiations, or by arbitration.

The court is only used as a last resort remedy.

4
Under Node C mode, the price that a supplier

offers to supply the product will be lower than the offer

price at Node B, because the safeguards at Node C

reduce the hazard to the specific investment and thus

lower the risk premium. On the other hand, the bid

price that a buyer is willing to pay will be higher than

the bid price at Node B. In this case, the safeguards

serve to assure the buyer that the product is sourced

from a reliable supplier. Such assurance reduces the

risk discount incorporated in the bid price.

If costly breakdowns and transaction hazards continue despite the safeguards at Node C, the supplier

and the buyer may be brought under unified ownership

and vertically integrated. At Node D (hierarchy), transactions between the two successive stages of production

are under the administrative control of the vertically

integrated firm. This occurs when a higher degree of

asset specificity and added uncertainty pose greater

needs for cooperation in mutual adaptation. However,

internal administrative controls will incur higher

bureaucratic costs.

For production that involves multiple (more than

two) technologically separable stages, some successive

stages may be vertically integrated while other stages

may be under governance of market or credible contracting. There are potentially numerous combinations

in the whole spectrum between Node A and Node D—

the extreme case where all successive stages are vertically integrated under hierarchical administration.

In summary, each node in the simple contractual

schema represents a generic mode of governance. And

each generic mode of governance embodies its own

internally consistent attributes of incentive intensity

(reward for effort), administrative control, and contract

law regime and therefore has its own strengths and

weaknesses.

At Node A, the governance structure is the unassisted market (competitive market norm). The governance structure at Node B is also the market, where

asset specificity exposes transacting parties to uncertainties and, without safeguards, to unrelieved hazards

to their investments. Node C is where the market is

assisted with credible contracting.

All successive production stages are integrated

under hierarchical control at Node D. The attributes of

a market mode are high incentive intensity, little

administrative control, and a legal rules contract

regime. On the other hand, attributes of hierarchy are

low incentive intensity (where pricing for the successive stages is cost-plus), considerable administrative

control (by fiat), and forbearance is the implicit contract

law of internal organization (the parties must resolve

their differences internally).

As Williamson says, “try markets, try hybrids and

have recourse to the firm only when all else fails. Node

D, the unified firm, thus comes in only as higher

degrees of asset specificity and added uncertainty pose

greater needs for cooperative adaptation” (Williamson,

2002, p.183).

This summary may be fitted into a table for a comprehensive view (table 1).

The Cooperative and the Modes of Transaction

Governance

How do cooperatives fit in this simple contractual

schema? The analysis in this section uses the dairy

industry as its example. Extension to cooperatives of

other sectors is discussed later.

Transactions in the subsistence agricultural economy where farm production in excess of family consumption is sold off farm may be a Node A (unassisted

market) mode. For example, a farm family has one or

two cows for producing milk to satisfy the family’s

food needs. If there is surplus milk, it may be sold to

neighbors (if permitted by food safety regulations). The

transactions are incidental to subsistence farming and

do not require specific asset to effectuate. This mostly

represents a bygone era.

Commercial milk production requires substantial

capital investment in specialized assets: milk cows,

buildings such as barns and milking parlors, machinery

and equipment, and skilled labor (including milkers,

herdsmen), and management, etc. Most of these assets

are specifically for producing milk and cannot be easily

employed for alternative uses. Furthermore, milk is a

“flow product” and is highly perishable. Its market is

inherently volatile due to daily and seasonal variations

of milk production and milk demand—and the supply

and demand variations are not coordinated with each

other.

Asset specificity, high product perishability, and

market volatility make dairy farmers vulnerable when

dealing with milk buyers (processors of dairy products). Further, there are many dairy farmers but just a

small number of milk processors. Although processors

also encounter asset specificity due to their ownership

of dairy plants that are capital- and technology-intensive facilities and that require large size to take advantage of economies of scale, they are in a dominant bargaining position vis-a-vis individual dairy farmers.

Many farmers organized cooperatives to collectively have more bargaining and countervailing power.

Various government programs were also instituted in

the early decades of the 20th century to stabilize the

market (Manchester).

5
The form of government market intervention that

is most relevant today is the Federal Milk Marketing

Order Program promulgated under the Agricultural

Marketing Agreement Act of 1937, as amended. To stabilize market conditions and maintain orderly marketing, Federal Milk Marketing Orders regulate milk marketing in most regions of the country and ensure dairy

farmers a reasonable minimum price for their milk

throughout the year (California has similar regulations

under its State milk marketing order).

As long as a farmer’s milk is qualified to be

pooled under market orders through a regulated handler—either a cooperative or a processor—the milk

will receive at least the regulated minimum price. The

regulations frame a marketplace where orderly commerce can proceed. However, if there is no credibl contracting between farmers (or their cooperatives) and

processors to safeguard investments, transaction governance is still a Node B (unrelieved hazard) mode.

(Government intervention to frame an orderly

marketplace falls in what is called the public ordering

domain that focuses on the rules of the game, while

efforts by the immediate parties to a transaction to

align incentives and to craft governance structures that

are better attuned to their exchange needs are referred

to as private ordering or the play of the game (Williamson,

2002, p. 172).)

For a highly perishable commodity like milk, it is

vitally important for both producers and processors to

work together to make sure milk flow is smooth and

without interruption. Producers need to have an

ensured outlet for the milk once it is produced. Most

of them (84 percent of U.S. dairy farmers) work together through their cooperatives to better manage the

movement of the milk to the market.

On the other hand, processors require a steady

supply of fresh milk to manufacture high-quality dairy

products and efficiently utilize plant capacity. The

dairy industry has evolved in such a way that many

dairy cooperatives and processors have developed a

high degree of bilateral dependency. Because dairy

cooperatives are organizations of farmers, they have

the comparative advantages of working closely with

members for assembling milk, providing field services,

and performing farm-related functions.

Many processors rely on dairy cooperatives for

milk supplies that are tailored to their requirements

for volume, quality, composition and/or delivery

schedule, so they can focus their attention on processing and packaging dairy products. Here, the transactions between cooperatives and processors are assisted

with credible contracting and transaction governance

is a Node C (hybrid) mode.

Besides selling members’ milk to buyers-processors, a dairy cooperative may forward integrate into

processing some or all of its members’ milk into various dairy products. These processing enterprises are

therefore under the cooperative’s hierarchical administrative control, a Node D (hierarchy) mode.

Integration into making “hard products” (butter,

milk powders, cheese) is in most cases a necessity.

Being marketers of members’ milk, many cooperatives

6

Table 1—Transaction governance modes and attributes

Investment

Transaction governance Asset hazard Incentive Administrative Contract law

mode specificity safeguard intensity control regime

Competitive

A: Unassisted market 0 0 High Little norm

Legal rules

B: Unrelieved hazard >0 < > contract regime

C: Hybrid Credible

(Credible contracting) >> < > contracting

Low (Pricing for Internal implicit

D: Hierarchy successive stages Considerable contract law

(Administrative) > > is cost-plus) (by fiat) (Forbearance)

Source: Adopted from Williamson, 2005, Figure 1: Simple Contractual Schema.

Note: ">" indicates a mode having a higher intensity of the particular attribute than the mode above it.

"<" indicates a mode having a lower intensity of the particular attribute than the mode above it.
have to maintain plant capacity to balance milk supply

and manufacture reserve and surplus milk into storable products. Like a reservoir, these cooperative

plants absorb milk in excess of processors’ demand for

fluid milk and provide supplemental milk to the market when it is needed. Without the plant capacity to

forward integrate into making storable hard products,

surplus milk will be at the mercy of the market and

lead to depressed milk prices (a Node B mode).

On the other hand, integration into processing

fluid products or specialty dairy products, or further

processing hard products, is usually by a cooperative’s

strategic choice in its effort to generate higher margins

from the market for members’ milk.

Dairy cooperatives may be classified into one of

four categories based on the main marketing function(s) they perform (table 2). Their transaction governance roles depend on their lines of business.

All four categories of dairy cooperatives may

have joint ventures with other cooperatives or firms to

process and market certain dairy products. The cooperative supplies dairy inputs, and the partner(s) provide technical or marketing know-how to the joint

venture. This is one way of bringing product processing under the cooperative’s partial control. In this case,

transaction governance mode may be viewed to fall

somewhere between Node C and Node D.

Inferences

Several inferences may be drawn from the analysis of the roles of cooperatives and other firms (firms

other than cooperatives) in transaction governance:

1. Cooperatives’ roles in transaction governance

are exactly the same as those of the firm in

Williamson’s analysis of transaction cost economics—their transactions are under all possible governance modes, depending on the

lines of business they engage in. Some milk

and dairy products are sold in the spot market, a Node B mode. Most milk and dairy

products, however, are marketed by the cooperative to the buyers under credible contracting mode, at Node C. Cooperatives that bottle

fluid milk or make niche products bring the

processing stages under internal control, a

Node D mode. A diversified cooperative may

integrate into one or more processing stages

(Node D mode), depending on the kind of

finished products it makes. Just like other

firms, cooperatives adapt to various transaction governance structures for economizing

on transaction costs.

2. Cooperatives do not own the assets that are

employed by members to produce milk; the

assets and the investment hazard associated

with asset specificity belong to memberfarms. This reveals the cooperative’s unique

structure of being an aggregate of its member-farms—the relation between the memberfarms and the cooperative is not that of an

integration of successive technologically separable production stages or that of a horizontal integration of like businesses under the

cooperative’s management oversight and

administrative control.

3. By pooling milk and marketing it collectively

through the cooperative, member-farms also

pool and share the investment hazard associated with the assets specifically used for producing the milk. Individual member-farm’s

share of the hazard should be less than if each

member markets the milk by itself and faces

market uncertainty alone.

4. The countervailing power of the cooperative

may be helpful in entering into credible contractual relationships with processors,

because such relationships may be more

attainable and stable between counterparts

that are on a relatively more equal footing.

5. Being an aggregate of its member-farms, the

cooperative serves as a focal transaction entity for its members and simplifies members’

relations with milk buyers (processors). It is

far easier for processors to build credible contracting relations with a single entity (the

cooperative) than with many individual farmers. Without the cooperative, it would require

much more effort by processors to maintain

credible contracting relations with farmers,

i.e., there could be more transaction uncertainties, to the detriment of farmers and

processors as well as the ultimate consumers. So there is an extra dimension in

the cooperatives’ roles in transaction governance: Infuse order among member-farmers, thereby eliminating conflicts in which

individuals compete for customers, thus

realizing gains for all parties.

(The other 16 percent of milk producers are not

cooperative members. They market their milk in one of

several ways: making artisan, niche, or farmstead

dairy products, bottling their own milk as producerhandlers, or being direct shippers to processors—some

of the processors may be owned by farmers but are not

organized or operated as cooperatives.)

7
The Unique Cooperative Model

The transaction governance analysis reaffirms the

unique structure of the cooperative being an aggregate

of member-farms. The unique cooperative structure

entails the uniqueness of the cooperative’s organization, governance, equity financing, and operation.

Dairy cooperatives are again used as an example for

discussion.

Unique Cooperative Structure

Following what has been discussed thus far in

this report, a brief definition of the structure of dairy

cooperatives should suffice: The economic structure of

dairy cooperatives represents aggregates of dairy

farms, organized for the purpose of marketing milk

produced by members. The cooperative is neither a

horizontal integration of its member-farms nor a vertical integration between member-farms and the cooperative—it is a third mode of organizing coordination.

Unique Cooperative Organization

Cooperatives are business organizations of member-patrons. Dairy cooperatives can be of any size and

can be local, regional, or national in scope, depending

on whatever scale the membership considers to be the

most appropriate for marketing their milk.

A small local cooperative may have a few member-farms and market less than 1 million pounds of

8

Table 2—Category of dairy cooperatives by marketing function(s) and transaction governance roles

Category of

cooperatives Main function Dimension Transaction governance

Negotiate with milk 108 cooperatives (out of 155 Regular milk sale is

buyers (processors) U.S. total, or 70 percent). usually at Node C

for milk prices and Together handled 23 percent (hybrid); may be at

Bargaining terms of trade; a few of the 155.8 billion pounds of Node B (unrelieved

may operate milk U.S. cooperative milk hazard) for spot milk

handling facilities but volume, but few handled sales.

not milk plants. more than 1 billion pounds

of milk each.

Own or retain plant 19 cooperatives. Most Products processing

capacity to process handled less than 50 million stages are at Node D

members’ milk into pounds of milk each. (hierarchy); wholesale

Niche marketing specialty/niche Together handled less than distribution of products

products. 1 percent of U.S. cooperative is usually at Node C and

milk volume. may be at Node B; and

retail sales are usually at

Node B.

Own or retain plant 4 cooperatives. Milk Products processing

capacity to process volume processed was stages are at Node D;

Fluid processing members’ milk into moderate. Together handled wholesale distribution of

fluid products. May less than 1 percent of U.S. products is usually at

also process soft and cooperative milk volume. Node C.

cultured products.

Perform bargaining 24 cooperatives. Three out Bargaining function is

and all or most other of four cooperatives in this usually at Node C;

marketing functions. group handled 1 billion or products manufacturing

As a group, sold 53 more pounds of milk, and and further processing

Diversified percent of milk to none handled less than 50 stages are at Node D;

other handlers million pounds. Together, wholesale distribution of

(bargaining); handled 75 percent of the products is usually at

manufactured the U.S. cooperative milk Node C and may be at

remaining 47 percent volume. Node B; and spot milk

into various products. sales may be at Node B.

Source: All dairy cooperative statistics cited are 2007 data, the year of USDA Cooperative Programs’ most recent dairy survey.
milk a year. A regional one may have hundreds or

thousands of members in more than one State with

milk pounds in the millions or even billions. The

Nation’s largest dairy cooperative has about 10,000

member-farms in the 48 contiguous States; together,

they deliver tens of billions of pounds of milk.

All dairy cooperatives are known to be centralized organizations with direct membership. A limited

number may have other dairy cooperatives as association members, but the practice is usually for accommodating the fact that the cooperative is the marketing

agent of all or part of the milk, dairy products, or services of these association members.

Unique Cooperative Governance

Members of dairy cooperatives exercise ownership and business controls through a board of directors that is elected from among member-farmers.

Candidates for the board are typically nominated by a

committee of elected members who are not directors.

Elections of the directors are usually done at the annual membership meeting.

If a cooperative is large, in terms of membership

or geographical area, members may be grouped into

districts (or areas/regions/divisions/locals, as the case

may be). Then the directors may be nominated from

the district and elected at the cooperative’s annual

meeting. Voting at the district level is typically by one

member/one vote. The number of directors each district is entitled to may differ due to proportionality

considerations based on milk volume. Some boards

may have at-large members. (A limited number of

dairy cooperatives are known to have non-member

directors, typically in the States where they are

required by law. Non-member directors usually play

an advisory, non-voting role on the board.)

Also in a large cooperative, a delegate body elected by members may be needed to channel information

and make decisions on behalf of the membership. The

delegate body may be empowered to represent the

membership in all decisions, except for matters that

specifically require votes by the entire membership.

An executive committee of elected officers and

selected board members may be constituted to facilitate decisionmaking when the board is not in session.

The board may also appoint several committees to

carry out specific board functions, such as audits,

finance, membership, and marketing committees.

The board controls the cooperative’s business on

behalf of members, makes major decisions, sets the

policy, and determines the overall direction of the

cooperative for the management to follow in its dayto-day operations. The emphasis on the separation of

the responsibility of the board (governance) and the

role of management (managing) accentuates the difference between the function of a cooperative’s manager

and that of a chief executive of other firms. Another

very important function of cooperative board members is serving as a conduit of communication between

the cooperative and the rank-and-file members.

Being membership organizations, dairy cooperatives attach great importance to effective communication with their members to foster sound governance.

This requires transparency regarding the cooperative’s

policies, operations, finance, and issues and problems;

and awareness of members’ concerns, opinions, and

aspirations. Many people including board members,

delegates, management staff, and field personnel all

play a role in the information flow between the cooperative and the members. Various media of communication are used: routine contacts, membership meetings and functions, special mailings, newsletters, and

Web site postings, etc.

Unique Cooperative Equity Financing

Equities of dairy cooperatives are supplied by

members. They can be grouped into four categories:

common stock (0.1 percent of total equities), preferred

stock (7 percent), retained earnings (10.8 percent), and

allocated equities (82.1 percent) (Ling, 2009).

Common stock

Common stock only accounts for a miniscule portion of total equities. This is because common stock of

cooperatives is usually issued for witnessing membership and carries minimal nominal value.

Preferred stock

A small number of dairy cooperatives issue preferred stock for witnessing retained patronage refunds

or for witnessing members’ or farming community’s

investments in the cooperative.

Retained earnings

Retained earnings could be earnings derived

from non-member businesses, but may also include

net savings that have not been allocated. (In most

cases, non-member businesses of dairy cooperatives

are incidental to the dairy operation.)

Allocated equities

The overwhelming portion of dairy cooperative

equities is allocated equities. They are members’ capital from one or more of these sources:

9
● Retained patronage refunds: Retained patronage refunds are net savings that are allocated

to members based on patronage but are

retained to finance the cooperative’s operations. Members must treat the entire patronage refunds (retained as well as cash payment) as income for tax purposes. Dairy

cooperatives usually revolve retained patronage back to members after a certain period of

time (the shortest noted being 6.5 years).

● Capital retains: Some cooperatives use capital

retains to finance the operations or, more

often, for special projects, such as building

new plants. Money is withheld from milk

payment at a certain rate per hundredweight

of milk. Members must treat capital retains as

income for tax purposes. Capital retains are

also revolved back to members after a certain

period of time.

● Base capital plan: Some larger diversified

dairy cooperatives have adopted base capital

plans to establish a more stable equity pool.

Under such a plan, a target base capital level

is established at a rate per hundredweight of

milk marketed during a base period. The base

capital may be funded by retained patronage

and/or capital retains, or by other means of

member contribution. Once a member attains

the prescribed base capital level, future

patronage earnings allocated to the member

are paid in cash.

By obtaining equity financing internally from

members, cooperatives do not incur the cost of soliciting investment capital in the capital market.

Unique Cooperative Operation—Unique

Economics

The uniqueness of dairy cooperatives results

from their structure as aggregates of member-farms, as

well as from being the exclusive marketing agent of

members’ milk production. The cooperative takes

whatever milk volume members produce and markets

it on their behalf. Members’ farming operations are not

under the cooperative’s administrative control and the

cooperative cannot dictate how members operate their

dairy farms. This operating mode entails its own

unique economics that deserves a fuller explanation.

The Economics of Cooperative

Operation

Dairy cooperatives, again, are used as an example. A model dairy farm is introduced here to facilitate

the discussion.

A Model Dairy Farm

A farm is constructed with its dairying infrastructure to accommodate a dairy herd of a certain

size. It has a rated capacity of producing “v” pounds

of milk per day at an average cost of “P” dollars per

hundredweight (cwt). This is pinpointed in figure 2

(Page 21) by the lowest point along the average cost

curve (AC), where marginal cost curve (MC) also intersects. If the expected milk pay price for the month is

the same as the minimum average cost P, then the

farm’s milk production for the month is v pounds per

day and the farm is said to be in “equilibrium.”

[Expected milk pay price is used in the discussion of a farmer’s milk production decision, because

actual pay price will not be known until after the end

of the current month—the trade practice is to calculate

milk pay price to farmers after the delivery month is

complete. In the meantime, farmers form their price

expectations based mainly on pay prices actually

received during the recent past and on price signals

revealed by the trading data from cash markets for

dairy products and from futures markets for milk and

dairy products. Depending on how the price expectation is formed, a given farmer’s expected milk pay

price may not be the same as those of other farmers.]

Milk Price Variation

If the expected milk pay price is P1, which is

lower than P, the farm will incur a loss of at least [P –

P1] for every cwt of milk it produces. According to

textbook optimization theorization, the farm would

minimize its total loss by producing v1 pounds of milk

a day, as determined by A, at which point marginal

cost equals P1 (marginal revenue). However, although

marginal cost is a useful concept, its real-life calculation has many complications and is, therefore, not

readily available for practical day-to-day operational

decisionmaking. (This also applies to other concepts

related to marginal productivity.) For such decisions,

the time-honored business practice is to use average

cost in the profit-and-loss estimation (e.g., Hall, et al.).

In the present case, it is very likely that the dairy farm

will strive to attain the lowest average cost P by producing up to v pounds of milk, even though doing so

10
would incur a higher loss. So, depending on which

cost concept a farmer uses, when the expected milk

pay price is P1, milk volume produced by the dairy

farm may be v1 pounds or v pounds, or somewhere

between the two amounts.

When the expected milk pay price is P2, which is

higher than P, then the farm will enjoy a profit of [P2 –

P] per cwt if the farmer decides to attain the lowest

average cost P by producing at its rated capacity of v

pounds of milk a day. Or, the farmer may strive for

maximum revenue and increase its production up to

the break-even point C and produce v2 pounds of milk

per day. Alternatively, the farmer may want to achieve

maximum profit by producing v3 pounds of milk as

determined by D, at which point P2 (marginal revenue)

equals marginal cost, if the latter is actually known.

Thus, when the expected milk pay price is P2, milk volume produced by the dairy farm may be somewhere

between v pounds and v2 pounds.

(To a limited extent, a dairy farm may be able to

adjust milk production by changing its feeding practice. Changing cow numbers to adjust the volume of

milk production will change the rated capacity of the

farm and will result in a new set of cost curves.)

Replicating the model dairy farm tens, hundreds

or thousands of times, depending on the size of a

cooperative, members together would deliver milk in

the volume as depicted in figure 3 (Page 22). The

aggregate volume of members’ rated capacity is V cwt

per day, which the cooperative may know with certainty. Less certain is the volume of members’ actual

deliveries. When the expected milk pay price is P1, the

aggregate volume of milk deliveries will be somewhere between V1 cwt and V cwt, depending on how

members make their production decisions.

In the same vein, if the expected milk pay price

increases to P2, then the aggregate volume will be

somewhere between V cwt and V2 cwt.

Logically, the cooperative would plan its milk

handling capacity based on the total volume of members’ rated capacity. However, the uncertain volume of

actual delivery means on some days the cooperative

will have slack capacity, while on other days it may

have to scramble to make sure every drop of milk has

a home. The logistics of hauling and shipping the fluctuating milk volume is another management challenge.

It should be noted that because a cooperative is

formed to market whatever the aggregate volume of

milk produced by its members, it does not have its

own milk production functions, milk production cost

curves, or milk supply curves.

Milk Production Input Cost Variation

Suppose the expected milk pay price remains at

P, but the cost of production input such as feed or fuel

has increased. Since the infrastructure and the size of

the dairy herd do not change, the rated capacity of the

farm will stay at v pounds of milk per day. However,

the average cost curve and its associated marginal cost

curve will shift upward to AC1 and MC1 (figure 4,

Page 22). The average cost curve is everywhere higher

than the expected milk pay price P and the farm will

suffer a loss. The farm may want to minimize its total

losses by producing v1 pounds of milk, identified by A,

at which point the expected milk pay price P (marginal

revenue) equals marginal cost. Short of knowing the

marginal cost, it is very likely that the dairy farm will

work to produce up to v pounds of milk in order to

attain the lowest average cost as indicated by B. So

when production input cost increases, milk volume

produced by the dairy farm may be somewhere

between v1 pounds and v pounds.

On the other hand, if production input cost

decreases, then the average cost curve and the associated marginal cost curve will shift downward to AC2

and MC2 and the farm will reap a profit. The farm may

decide to produce milk at its rated capacity of v

pounds of milk a day to attain the lowest average cost

as shown by C. Or it may increase its production up to

the break-even point D and produce v2 pounds of milk

per day that will return the highest total revenue.

Alternatively, the farm may want to achieve maximum

profit by producing v3 pounds of milk, as determined

by E, where P (marginal revenue) meets marginal cost.

So, when production input cost decreases, milk volume produced by the dairy farm may be somewhere

between v pounds and v2 pounds.

The milk situation faced by the cooperative is

similar to that depicted in figure 3. The aggregate volume of members’ rated capacity remains at V cwt per

day. When production input cost increases, members’

actual milk delivery will be somewhere between V1

cwt and V cwt, depending on how members make

their production decisions. Conversely, when the cost

of production input drops, the aggregate volume will

be somewhere between V cwt and V2 cwt.

The discussion thus far shows the challenges a

dairy cooperative faces in handling fluctuating milk

volume when either the expected milk pay price or

production input cost changes. When both price and

cost changes are considered at the same time, the picture is even more complicated. Still, this is just a highly simplified scenario. In real life, not every farm is

like the model dairy farm; in fact, no two farms are

11
alike. They are not likely to be of the same size and

make the same production decision. The volume variation may thus be even less predictable than in figure 3.

In addition, bovine milk production is a biological process and is subject to daily and seasonal fluctuations. Daily volume variation may be readily

addressed by “rolling” milk stocks to even out the

flow if the cooperative has sufficient milk holding

capacity. Seasonality of milk production requires more

effort to handle.

Seasonal Production Variation

Milk production is affected by a cow’s physiological condition that is subject to seasonal changes. The

seasonal nature of milk production is best portrayed

by the index of seasonality, such as in table 3, for

example, which is based on milk deliveries to the

Northeast regional market and documented in an earlier RBS research report (Ling, 2001). The table shows

that the first six months of the year is a period of higher-than-average milk deliveries, with May being the

peak. The index of 106 indicates that May is 6 percent

higher than the annual average daily deliveries.

Milk deliveries decline sharply from June to July

and stay relatively low throughout summer and fall.

Deliveries are usually lowest in November. With an

index of 95, November is 5 percent below annual average daily deliveries. Deliveries recover in December

and increase steadily through winter and spring. The

drop from May to November is 11 percentage points.

(Table 3 is used here as an example for discussion. It

should be noted that different regions of the country

may experience different seasonality, and seasonality

may change over time.)

Seasonality of milk production in essence shifts a

farm’s cost curves downward to the right during a seasonally high production month or upward to the left

during a seasonally low production month. To see this,

continue with the model dairy farm as an example.

The farm’s rated capacity, at the intersection of AC

and MC in figure 5 (Page 23), is v100 pounds per day

and reflects milk production at a seasonality index of

100 (annual average).

During a seasonally high production month (seasonality index is more than 100, for example, 105),

since the same infrastructure and the same herd size

will produce more milk, the farm’s capacity should be

higher than v100, shown in figure 5 to be at v105 pounds

per day. Also, because the same fixed cost is spread

over a higher milk volume, the average cost of producing milk should be lower. The combined effect would

shift the cost curves rightward and downward, as represented by AC1 and MC1.

On the other hand, during a seasonally low production month (seasonality index is less than 100, for

example, 95), since the same infrastructure and herd

size will produce less milk, the farm’s capacity should

be less than v100, shown in figure 5 to be at v95 pounds

per day, as an example. And because the same fixed

cost is spread over a smaller milk volume, the average

cost of producing milk should be higher. The combined effect would shift the cost curves leftward and

upward, as represented by AC2 and MC2.

The net effect of shifting seasonal capacity and

cost curves means that members’ milk volume the

cooperative has to handle will fluctuate seasonally

throughout the year. This further compounds the challenges of marketing members’ milk.

12

Table 3—Indices of seasonality of producer milk

deliveries and fluid demand

Producer milk

Month deliveries Fluid demand

Percent

January 100.1 101.9

February 101.8 100.6

March 103.7 100.9

April 105.4 98.2

May 106.0 98.1

June 103.4 94.0

July 97.8 94.2

August 97.0 98.1

September 96.3 105.2

October 95.4 104.6

November 95.0 102.8

December 98.1 101.4

Simple

average 100.0 100.0

Source: Ling, 2001.
Seasonal Demand Variation

On the milk demand side, seasonal variation is

mainly caused by fluid (beverage) uses. This is

because the milk volume required by fluid processing

plants is directly and instantaneously derived from

consumers’ demand of fluid products, which is highly

seasonal in nature. Manufacturing plants that make

storable products such as cheese are different. They

tend to maintain a constant throughput volume at or

near plant capacity in order to achieve least-cost operations.

The example in table 3 shows that fluid demand

is highest in September and maintains a higher-thanannual-average level, though declining, through fall

and winter and until March; fluid demand is lower

than annual average from April through August. The

peak in September (seasonality index=105) is 5 percent

above annual average daily consumption. The lowest

fluid consumption month is June, with an index of 94,

or 6 percent below the annual daily average. The June

low is a drop of 11 percentage points compared with

the September peak.

Thus, seasonality of fluid demand by and large

runs counter to the seasonality of milk production.

Fluid demand tends to be high during those months

when milk production is low, and tends to be low

when milk production is high. Handling this mismatch

of supply and demand is a major challenge to the

cooperative.

Balancing Seasonal Supply and Demand

Most diversified dairy cooperatives have plant

capacity to balance milk supply and demand and manufacture surplus milk into storable dairy products for

future marketing or further processing, as shown in

the following example.

Suppose, on an annual daily average basis, the

cooperative’s members together deliver 10 million

pounds of milk a day, and the cooperative markets 4

million pounds to fluid milk processing plants and 2.5

million pounds to dairy product manufacturing customers. Suppose further that milk production and

fluid demand follow the seasonal patterns given in

table 3. Then, in May, the cooperative’s members will

produce 10.6 million pounds of milk a day, while fluid

plants will use 3.9 million pounds and the manufacturing customers will use 2.5 million pounds. The cooperative will have 4.2 million pounds of milk a day that is

in excess of demand by fluid plants and manufacturing customers (table 4).

On the other extreme, the same calculation will

show that the daily excess volume will be 2.9 million

pounds in the fall months (September through

November); a reduction of 1.3 million pounds a day

from May. If the cooperative has its own manufacturing plants to use a constant volume of 2.9 million

pounds of milk a day, then the cooperative still needs

to have facilities to handle seasonal surplus of 1.3 million pounds of milk a day in May. During other

months, the seasonal surplus balancing facilities will

be under-utilized and will run dry in the fall months,

resulting in costly plant operations (Ling, 2001).

If a cooperative does not have enough surplus

balancing capacity, or in the case of bargaining cooperatives that do not have any plant capacity, there are

two ways for them to dispose of surplus milk. They

can sell the surplus milk in the spot market, usually at

a price discount. Or they can pay a “tolling fee” to

have the milk manufactured into storable dairy products at plants owned by others. The price discount and

the tolling fee are charges for defraying the costs of

owning and operating surplus handling plant facilities.

Summary of the Economics of Cooperative

Operation

A dairy cooperative is an aggregate of its member-farms for the purpose of marketing whatever milk

volume members produce. Because members’ milk

production is subject to variations caused by many factors, there are two main challenges the cooperative has

to manage in performing marketing functions: (1)

coordination of hauling a fluctuating milk volume and

shipping the milk to processors whose demands are

also subject to variations and (2) daily and seasonally

balancing milk supply with demand. The economics of

dairy cooperative operation considers the following

elements:

● When the expected milk pay price goes up or

down, the milk volume a farm may program

depends on the financial objective of the

farm: whether it wants to attain maximum

profit (minimum loss in a loss situation), minimum average cost, or maximum revenue (up

to the break-even point).

● Production input cost changes do not change

the farm’s rated capacity but shift the farm’s

cost curves straight up or down. What milk

volume the farm produces, again, depends on

the financial objective of the farm.

● When both price and input cost changes are

considered at the same time, the volume of

milk production the cooperative has to handle may be even less predictable.

13
● Farmers organize the cooperative to market

whatever the aggregate milk volume they

produce. Therefore, the cooperative does not

have its own milk production functions, milk

production cost curves, or milk supply

curves.

● Milk production is a biological process and is

subject to daily and seasonal fluctuations.

Daily volume variation may be readily taken

care of by rolling the milk stock. It is handling

seasonality of milk production that is more

problematic.

● Seasonality of milk shifts a farm’s cost curves

downward to the right during a seasonally

high production month or upward to the left

during a seasonally low production month.

● The seasonality of milk production generally

does not match the seasonality of fluid milk

demand. This mismatch requires the cooperative to balance seasonal supply with seasonal

demand and handle the inevitable seasonal

surplus milk volume at a substantial supply

balancing cost.

Variations on a Theme

Different commodities have their own characteristics and different types of cooperatives have their

own special features. They all represent variations on a

theme.

Marketing Cooperatives

The analysis using the simple contractual schema

shows that in transaction governance, dairy cooperatives are not different from non-cooperative firms.

However, the corollary of the analysis reveals the

uniqueness of dairy cooperatives in structure, organization, governance, equity financing and operation

that stems from their being aggregates of memberdairy farms. The unique economics of cooperative

14

Table 4—An example of a cooperative's milk in excess of demand by fluid plants and manufacturing

customers1

Member To fluid To

milk processing manufacturing Co-op milk in excess

Month deliveries plants customers of sales

---------------Million pounds/day---------------

January 10.0 4.1 2.5 3.4

February 10.2 4.0 2.5 3.7

March 10.4 4.0 2.5 3.8

April 10.5 3.9 2.5 4.1

May 10.6 3.9 2.5 4.2

June 10.3 3.8 2.5 4.1

July 9.8 3.8 2.5 3.5

August 9.7 3.9 2.5 3.3

September 9.6 4.2 2.5 2.9

October 9.5 4.2 2.5 2.9

November 9.5 4.1 2.5 2.9

December 9.8 4.1 2.5 3.3

Simple average 10.0 4.0 2.5 3.5

1 Items may not add to totals due to rounding.
operation is applicable in the situation where the cooperative is the exclusive marketing agent of the milk

produced by members.

Other agricultural commodities (such as fruits,

vegetables, nuts, poultry, sugar, etc.) that exclusively

rely on a cooperative to market members’ products

would have unique cooperative operations similar to

that of dairy cooperatives. However, they differ from

dairy cooperatives in some important aspects. The

main one is that milk is a flow product, day in and day

out, while other farm commodities are harvested in

lumps toward the end of the growing season of several

weeks or months. In the analysis of the economics of

cooperative marketing of milk, the unit of time used is

on a per-day basis (cwt/day). The same analysis of

other commodities has to use a unit of time that is

appropriate for a particular commodity.

Some producers of commodities that are storable

and have a long marketing season (such as grains and

oilseeds) may view the cooperative as but one of multiple outlets and market through it only if the cooperative offers the best terms and services among all alternatives. In such a case, the cooperative may still

maintain its uniqueness in its cooperative structure,

organization, governance and equity financing. Its

marketing operation, however, is not different from

other marketing firms.

New-Generation Cooperatives

Interest in new-generation cooperatives surged in

the 1980s and 1990s, largely in response to the market

conditions prevailing during that time period. It was

believed this form of cooperative organization would

solve the problem of depressed farm income by engaging in value-added processing and capturing processor

margins.

A distinct feature of the new-generation cooperative is its equity financing method. It is unique even

among cooperatives:

● It requires significant equity investment as a

prerequisite to membership and delivery

rights—to ensure that an adequate level of

capital is raised.

● The delivery right is in the form of equity

shares that can be sold to other eligible producers at prices agreed to by the buyer and

the seller, subject to the approval of the board

of directors—to satisfy members’ desire of

having the freedom to cash in on the hopedfor increases in the value of the cooperative.

A new-generation cooperative is organized to

market members’ commodities through its main function of value-added processing. By bringing processing functions under internal administrative control,

the cooperative’s transaction governance mode in the

simple contractual schema is at Node D. For wholesale

distribution of finished products, transaction governance is usually at Node C and may be at Node B.

The delivery right is instituted to ensure that the

capacity of the processing plant is fully utilized. A

member delivers to the cooperative according to the

volume conferred by such right, which may be more

or less than the volume the member produces. Under

such terms, the cooperative is not an exclusive marketing agent of members’ total production. Though the

cooperative is still an aggregate jointly owned and

operated by members to process and market their farm

production, the volume the cooperative handles is predetermined. This should minimize the cooperative’s

volume variation uncertainties.

Purchasing Cooperatives

Farm supply cooperatives are organized to procure production supplies and services for sales (mainly) to members. Many also handle farm and home

items, such as heating oil, lawn and garden supplies

and equipment, and food. Most supply sales to farmers are at the retail level by local cooperatives that are

centralized organizations with direct members. Many

local cooperatives also federate with other cooperatives to form regional cooperatives to achieve

economies of scale in sourcing major supply items

such as seeds, feed, fertilizer, and petroleum products.

Some federated cooperatives also have individual

farmers as members and are, therefore, hybrid of centralized and federated forms. Many supply cooperatives also market members’ crop and livestock production, just as marketing cooperatives may also have

supply and service businesses.

Supply cooperatives share marketing cooperatives’ unique structure, organization, governance, and

equity financing. However, their operations are unique

in their own way, because supply cooperatives’ main

business of procuring supplies for members operates

on the buying side of market transaction. Transaction

governance mode for sourcing products is most likely

under credible contracting at Node C in the simple

contractual schema. Here, they serve as focal points for

credible contracting with suppliers and economizing

on transaction costs on behalf of individual members.

If they integrate upstream and bring the business of

15
processing supply items under the cooperative’s

administrative control, then the mode of transaction

governance for this part of the operation is at Node D.

Their transaction governance mode in selling

products to members depends on the degree of member loyalty. If members are loyal patrons, or if the

cooperative is the only store in the relevant market

area, the cooperative would resemble a buying club.

Utility cooperatives and many service cooperatives are

also in this category.

If member loyalty is low, then the cooperative

would operate as any other firm in selling supplies,

although it may still maintain its uniqueness in its

cooperative structure, organization, governance, and

equity financing.

Consumer cooperatives and credit unions are

similar to supply cooperatives, except consumer cooperatives’ main business is in consumer products,

foods, groceries, etc., while credit unions’ is in satisfying members’ credit needs.

Local-Food Cooperatives

In recent years, consumers have shown growing

interest in locally produced food. Because production

of locally marketed food is more likely to occur on

small farms located in rural areas near metropolitan

counties, this trend will help invigorate the rural economy by expanding market opportunities for local agricultural producers.

However, there are barriers to local food market

entry and expansion that include: capacity constraints

for small farms and lack of distribution systems for

moving local food into mainline markets; limited

research, education, and training for marketing local

food; and uncertainties related to regulations that may

affect local food production, such as food safety

requirements (Martinez, et al.).

Local food producers could be better equipped to

overcome these barriers if they are organized into entities such as cooperatives (or hubs, networks, etc.), that

can serve as focal points for addressing the issues:

● A cooperative can assemble the production of

small farms into a larger volume and become

viable to access mainline markets.

● A cooperative with a sufficiently large number of members who could complement each

other’s production and even out volume variation will be able to provide a more consistent supply to the market.

● A cooperative that can provide a large and

consistent volume will be able to enter into

credible contracting relations with mainline

market operators, who prefer to conduct

transactions with reliable business partners.

As the simple contractual schema shows,

buyers can relieve hazard to assets and

reduce transaction cost by entering into credible contracting relations with trustworthy

sellers (transaction governance at Node C).

● A cooperative with a sufficiently large membership can muster enough resources to partner with researchers, conduct member education and training programs, and provide

many other member services.

● A cooperative can better address regulatory

and food safety issues on behalf of its member-producers.

Multi-Stakeholder Cooperatives

Along with the local food trend, there have been

some limited recent attempts at organizing multistakeholder cooperatives that comprise everyone who

has a stake in the local food chain, including farmers,

processors, distributors, truckers, buyers, etc.

On the surface, this brings together the successive stages of the transaction into the organization and

appears to be a Node D transaction governance mode

in the simple contractual schema. In reality, members

are economic units that independently operate their

respective business. The importance of their stakes in

the cooperative to their economic well-being may vary

widely.

By organizing all stakeholders in the successive

stages of the supply chain under one roof, the cooperative becomes a framework for mutual adaptation and

for multi-party, multi-stage credible contracting

among members (Node C mode) only when they deal

with each other in attending to the cooperative’s business of moving products from farmer-members to

buyer-members. The durability of the cooperative is

dependent on the stability of the collective credible

contracting relationships.

Farming Cooperatives

In parts of the United States, there are a few

farms that are organized as cooperatives of producermembers. The farm enables members to pool resources

together and operate it at an economically beneficial

scale. This is one way of organizing and managing

inputs for production as a farm. Its structure, organization, governance, and financing may be the same as

a cooperative. Its operation, however, needs to have

overall coordination for it to be a coherent and efficient production entity, and some form of manage16
ment oversight and administrative control over members’ participation in the farming operation is necessary.

Members cannot make farming decisions independent of the farm, and they do not represent independent profit centers. In essence, the production

operation is a vertical integration between producermembers and the cooperative.

Cooperatives With Non-Patronage Members

Some States have enacted new cooperative laws

in recent years that allow cooperatives to have nonpatron members (investors) as well as patron members. These laws vary from reserving the voting power

to member-patrons only to setting a minimum level of

voting power for member-patrons. Requirements

regarding earning distribution between patron members and non-patron members also differ substantially.

Differences in governance and earning distribution

rules and the type of non-patron members involved

(for example, for-profit investors, non-profit economic

development organizations, community supporters,

etc.) will cause the cooperative’s structure, organization, governance, equity financing, and operation to

deviate in various ways from the uniqueness of the

cooperative model that was described earlier in the

report. These organizations have to be analyzed case

by case because of the variety of State laws.

Variations on the uniqueness of the cooperative

business model are summarized in table 5. Local-food

cooperatives are cooperatives organized to market

locally produced food and should be classified as marketing cooperatives. In addition to farm supply cooperatives, purchasing cooperatives may include utility

cooperatives, service cooperatives, consumer cooperatives, credit unions, and many more.

Conclusions

Transaction cost economics offers an approach to

further probe the nature of the cooperative.

Cooperatives are transaction governance structures,

just like other firms (firms other than cooperatives).

Depending on the lines of business that a cooperative

or a firm operates, the transactions are under all possible governance modes. Cooperatives adapt to various

governance modes for economizing on transaction

costs, just as other firms do.

For entering into credible contractual relationships with buyers (processors), the cooperative’s functions of providing market access and exercising countervailing power put its members, collectively through

the cooperative, on a relatively more equal footing

with buyers. This should make credible contractual

relationships with buyers more attainable and stable.

Furthermore, as its members’ collective marketing agency, the cooperative serves as a single transaction entity for credible contracting with buyers and

infuses order and eliminates conflicts among members

in individually competing for customers. This should

reduce the transaction cost.

These analyses show how cooperatives relate to

other market participants through their roles in transaction governance. This broadens our understanding

of the cooperative’s place in the market economy

beyond the postulations made by Nourse.

A cooperative does not own the assets that are

employed by members for farm production; the assets

and the investment hazard associated with asset specificity belong to member-farms. By pooling members’

products in its marketing efforts, the cooperative in

essence also pools the investment hazard. As a result,

each member’s share of the hazard conceivably is less

than if the member individually markets his or her

products. The fact that asset specificity and the associated investment hazard belong to individual members

reaffirms the cooperative’s unique economic structure

of being an aggregate of its member-farms. As posited

by Emelianoff, this unique economic structure entails

its uniqueness in organization, governance, equity

financing and operation—and unique economics of

operation for marketing cooperatives.

Thus, the perspective gained through the lens of

transaction cost economics complements the earlier

works on cooperative basics (Nourse; Emelianoff).

Together, they make clear the nature of the cooperative.

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17
1

8 Table 5—Variations on the uniqueness of the cooperative business model

Type of Source of

cooperatives Structure Organization Governance equity Operation

Member's exclusive

Aggregates of Centralized member Member- marketing agent—unique

Dairy cooperatives1 economic units organizations governed Members economics

Mostly centralized member Unique economics if

Marketing Aggregates of organizations; some are Member- exclusive marketing agent;

cooperatives2 economic units federated governed Members otherwise, like other firms

Members; tied

New-generation Aggregates of Centralized member Member- to delivery Business volume defined

cooperatives economic units organizations governed rights by delivery rights

Local (retail) cooperatives

are centralized; many

federated with other locals; Sourcing supplies or

Purchasing Aggregates of federated cooperatives may Member- services for sale to

cooperatives3 economic units have direct members governed Members members and patrons

A framework for multiparty, multi-stage credible

Multi-stakeholder Aggregates of Centralized member Member- contracting among

cooperatives4 economic units organization governed Members members

Aggregates of

economic units that A vertical integration

Farming are not independent in Centralized member Member- between members and the

cooperatives production operation organization governed Members cooperative in production

Cooperatives with Defined by State laws; most

non-patronage Mixture of patron and Defined by Defined by likely member-patrons’

members non-patron members Defined by State laws State laws State laws business

1 Separately listed due to dairy cooperatives’ role in explaining the cooperative business model.2 Include local-food cooperatives.3 Include farm supply cooperatives, utility cooperatives, service cooperatives, consumer cooperatives, credit unions, etc.4 As defined in this report.
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Stop 3250

Washington, D.C. 20250-3250

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