Cooperatives in

Agribusiness

United States

Department of 

Agriculture

Rural Business–

Cooperative

Service

Cooperative

Information Report 5

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This publication is written for audiences at the secondary and postsecondary levels, or for anyone interested in agricultural cooperatives. It provides a description and brief history of cooperatives, and discusses their

relationship with agribusiness. This material describes the different types of

cooperatives as well as their structural and organizational characteristics,

and explains how they are governed and financed. It discusses career

opportunities in the cooperative field, and explores the future of cooperatives in a constantly changing business environment. Chapters 1-9 are

each followed by brief chapter review questions.

Keywords: cooperatives, agribusiness, principles, practices, organization,

structure, finance, careers.

Cooperatives in Agribusiness

Rural Business-Cooperative Service

U.S. Department of Agriculture

Cooperative Information Report 5

Slightly revised August 2011

This report was originally written by Irwin Rust in 1968 and published as

Education Circular 33. It was later superseded by Cooperative Information

Report 5 in 1978, written by Gene Ingalsbe. It has been revised several

times and prior to this latest revision by James Wadsworth, it was revised

by Katherine Hanson in 2002.

USDA’s Cooperative Program is contained in USDA’s Rural Development

mission area and housed in Rural Business-Cooperative Service (RBS).

For a listing of related publications see the RBS publication WEB site at:

http://www.rurdev.usda.gov/rbs/pub/NEWPUB.htm. To request publications

email coopinfo@wdc.usda.gov or write to USDA/RBS, 1400 Independence

Ave, SW, Stop 3254, Washington, DC 20250-3254.

Abstract

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CHAPTER 1. HOW AGRIBUSINESS AFFECTS OUR LIVES . . . . . . . . .1

CHAPTER 2. WAYS OF DOING BUSINESS . . . . . . . . . . . . . . . . . . . . . .5

Individually Owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Investor-owned Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Cooperative Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

Limited Liability Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

CHAPTER 3. WHAT IS A COOPERATIVE? . . . . . . . . . . . . . . . . . . . . . .12

Why Is a Cooperative Started? . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

What Is a Cooperative's Purpose? . . . . . . . . . . . . . . . . . . . . . . . . .13

How Is a Cooperative Different? . . . . . . . . . . . . . . . . . . . . . . . . . . .14

User-owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

User-controlled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

User-benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Limited Return on Equity Capital . . . . . . . . . . . . . . . . . . . . . .16

Important Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Open Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Continuing Member Education . . . . . . . . . . . . . . . . . . . . . . . .17

Cooperation Among Cooperatives . . . . . . . . . . . . . . . . . . . . .18

i

Contents

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CHAPTER 4. HOW COOPERATIVES ARE ORGANIZED . . . . . . . . . . .19

Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Marketing Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

CHAPTER 5. COOPERATIVE STRUCTURES . . . . . . . . . . . . . . . . . . . .22

Local Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..22

Regional Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

CHAPTER 6. WHO RUNS THE COOPERATIVE BUSINESS? . . . . . . .25

Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

Manager and Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

CHAPTER 7. HOW COOPERATIVES ARE FINANCED . . . . . . . . . . . .29

Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Capital Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Member Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

Facility Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Operating Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Commodity Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Special Services Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

ii

Contents (cont.)

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Revolving Capital Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

CHAPTER 8. TYPES OF COOPERATIVES . . . . . . . . . . . . . . . . . . . . . .36

Marketing Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

Bargaining Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

Purchasing Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Related Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

CHAPTER 9. FARM AND HOME SERVICE COOPERATIVES . . . . . . .46

Electric and Telephone Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

Rural Utilities Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Rural Telephone Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .49

Farm Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50

Health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

Food . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53

CHAPTER 10. COOPERATIVE CREDIT SERVICES . . . . . . . . . . . . . . .55

Farm Credit System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55

Credit Unions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Organizations Serving Cooperatives . . . . . . . . . . . . . . . . . . . . . . . .59

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CHAPTER 11. CANVASSING COOPERATIVES IN YOUR AREA . . . . .61

CHAPTER 12. A COOPERATIVE FOR YOUR GROUP . . . . . . . . . . . . .64

CHAPTER 13. CAREERS IN AGRIBUSINESS . . . . . . . . . . . . . . . . . . . .66

Variety of Careers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67

Education Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67

CHAPTER 14. COOPERATIVES IN THE YEARS AHEAD . . . . . . . . . . .69

GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71

RELATED PUBLICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73

iv

Contents (cont.)

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How Agribusiness Affects Our Lives

You might not be familiar with the terms "cooperative" or "agribusi‐

ness," but chances are you benefit on a daily basis from the prod‐

ucts and services they provide.

We all reap the benefits of agribusiness, from the food we eat to the

clothes we wear. Whether you are a student, executive, technology

expert, or farmer, you are first and foremost a consumer. America relies

upon agribusiness to feed, clothe, and house her 312 million citizens. The

efficient production, processing, and marketing of food and fiber is what

agribusiness is all about.

1

CHAPTER 1

From the farm gate to the dinner plate, farmer-owned cooperatives market a wide

array of produce and processed food products. USDA photo

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Agribusiness is just what the name implies...agriculture in business.

When you buy chicken, beef, pork, vegetables, fruit, juice, eggs, milk, or

similar products at your supermarket, you depend on agribusiness. In

addition to supplying us with these basic necessities, agribusiness also

provides jobs and income for nearly one‐fifth of America's workforce. In

one way or another, we all depend upon agribusiness to fulfill our needs.

Because of this interdependence, agribusiness is our business.

Cooperatives provide many services and products. Did you drink any

Florida's Natural orange juice or Ocean Spray cranberry juice today? You

might have spread Land O' Lakes butter or Welch's grape jelly on your

toast; or eaten some Cabot or Tillamook cheese, Birdseye vegetables, or

Norbest turkey. These well‐known foods and beverages all have one

thing in common: they are all produced by farmer cooperatives. You

might be surprised to discover how many of the brand‐name items that

you use or consume every day come from cooperatives.

What makes these products unique is that the farmers who produced

them are also the owners of the company that helped to bring them to

your table. A cooperative is simply a type of business that is owned and

controlled by the people who use its services.

But cooperatives don’t simply provide food and drinks for our tables and

markets for producers. Many cooperatives provide goods or services

such as utilities, savings and loans, insurance, health care, broadband

access, day care, industry supplies, and farm supplies to rural and urban

residents. You might recognize some of these cooperatives by name, such

as CoBank, CHS, Inc., Sunkist Oranges, Blue Diamond almonds, True

Value Hardware, Tree Top apple juice, Nationwide, or Southern States.

They are just a few of the 29,000 cooperatives in the United States that

generate more than $514 billion in annual economic activity for more

than 350 million members.

Cooperatives have a significant impact on the employment situations of

rural Americans as well. Although the number of farmer cooperatives

has declined in recent years to 2,389 (2009), they still accounted for more

than 180,000 full‐time, part‐time, and seasonal employees in 2009. The

decline in the overall number of cooperatives reflects the ongoing trend

of mergers, consolidations, and acquisitions. It is also interesting that

2

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there are as many memberships (2.2 million) of farmer cooperatives in

the United States as there are farmers (2.2 million). Many farmers belong

to more than one cooperative, so there are some farmers who are not

members of a cooperative. Farmers continue to depend on farmer cooper‐

atives as extensions of their farm operations. About 27 percent of total

farm marketings are attributed to cooperatives.

Consider that almost 17 million people in rural areas rely on 929 rural

electric cooperatives for their power, and 964 thousand subscriber/mem‐

bers received their telephone service from 255 rural telephone coopera‐

tives. Thousands of isolated homes access the Internet in this age of tech‐

nology, thanks in large part to the service provides by utility

cooperatives in rural areas. Thus, the contribution of cooperative busi‐

ness to rural America is immense, and cannot be measured by statistics

or dollars alone. And farmers are not the only ones who reap the rewards

of cooperative businesses.

3

Agribusiness and membership in cooperatives is a way of life that is often passed

from one generation to the next in rural families. Photo courtesy Cowiche Growers

Co-op

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Cooperative housing (nearly 9,500 housing co‐ops) helps people access

better living conditions while connecting them with a support network of

others with similar needs and interests. Both rural and urban residents

belong to group medical, hospital, or health associations (305 healthcare

cooperatives with 961,000 members). Many use cooperative child‐care

services (1,100 child‐care co‐ops), read Associated Press articles in their

newspapers or online, and belong to a state affiliate of the American

Automobile Association or local credit union (more than 8,300 credit

unions with 91.5 million members). These people are receiving the eco‐

nomic and service benefits of the cooperative, in proportion to their use

of it. Cooperatives help bring people together to acquire goods or ser‐

vices not otherwise available to individuals. By joining a cooperative and

taking advantage of economies of scale and combined buying power,

members realize greater savings and specialized services. Moreover,

members control the direction and growth of their business, with a vest‐

ed interest in each business decision made by that cooperative.

The cooperative form of business is useful to people regardless of where

they live or how they earn their living. As these examples illustrate, the

life of every American is touched at some time or another by cooperative

enterprise. For these reasons, it is important for each of us to better

understand what cooperatives are, how they operate, and how they relate

to agribusiness.

Chapter 1 Review Questions

1. Name three cooperatives that you read about or know.

2. How many farmer‐owned cooperatives are there in the United States?

3. How many cooperatives of all types are there in the United States?

For more data and information on different types of cooperatives in the United

States see: Research on the Economic Impact of Cooperatives by the

University of Wisconsin Center for Cooperatives: http://reic.uwcc.wisc.edu/

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Ways of Doing Business

Our private enterprise system

has three basic types of busi‐

ness organization: the indi‐

vidually owned business, the part‐

nership, and the corporation. An

increasingly popular type of business

ownership is called a limited liability

company (LLC). Cooperatives not

only have some things in common

with each of these business types,

but also differ greatly in some

respects. Each type of business orga‐

nization will be discussed in more detail later (table 1), but it is important

to note that although some cooperatives are operated informally, most

are classified as corporations.

Individually Owned

The individually owned business is more prevalent in farming than in

any other segment of our economy. As owner‐operators, farmers make

managerial decisions and assume the risks. A farmer may choose to plant

100 acres of wheat one season, but may also suffer the consequences if the

crop is damaged by drought. The farmer‐entrepreneur is not only the

employer but also contributes much of the physical labor required.

Farms are achieving ever‐higher levels of efficiency and production with

improved machinery and increasingly large acreage. Many other indus‐

tries typically benefit from additional employee resources and a division

of labor uncharacteristic in farming. A farmer is a combined owner, man‐

ager, and laborer. Although some farms are family‐owned corporations,

most are still individual operations.

There are distinct advantages and disadvantages to an individually

owned business that must be considered when weighing the business

structure options:

5

CHAPTER 2

Cooperative member-owners are

partners in the business.

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6

Table 1—Comparison of Methods of Doing Business

Corporation

Features Limited ——————————————————Compared Individual Partnership Liability Company Investor-Owned Cooperative

Who uses the Non-owner customers Generally non-owner Generally non-owner Generally non-owner Chiefly the owner services? customers customers customers patronsWho owns the The individual The partners The member-owners The stockholders The member-patronsbusiness?Who votes? None necessary The partners The member-owners Common stockholders The member-patronsHow is voting None necessary Usually by partners' Usually by member- By shares of Usually one member,done? share in capital owners’ share in capital common stock one-voteWho determines The individual The partners The member-owners Common stockholders The member-patronspolicies? and directors and directorsAre returns on No No No No Usually 8%ownership capital limited?Who gets the The individual The partners, based on The member-owners, The stockholders in The patrons on a operating mutual agreement based on mutual proportion to stock patronage basisproceeds? agreement held

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Pros Cons

1. It is easy to control— 1. Any losses are borne by

the owners’ judgement the owner—they cannot be

is final shared.

2. Any profits belong solely 2. Capital is limited by what the 

to the owner and need owner can provide or borrow.

not be share. This, in turn, can limit the size

of the business.

Partnership

A partnership business is jointly owned and operated by two or more

people. They provide or borrow the capital needed to start and operate

the business, make decisions by mutual agreement, and share the respon‐

sibility of repaying the debts. In essence, they divide the income and

share the losses.

Farming partnerships are common, especially between parents and their

children. When a child reaches a responsible age, the parent may furnish

the land and facilities and the son or daughter may provide much of the

manual labor. Each partner might own livestock separately or purchase

supplies individually, and yet still share other operating expenses.

The partnership has major advantages and disadvantages compared with

individual proprietorship:

Pros Cons

1. The amount of available capital 1. Each partner is liable for any 

is usually greater. all debts of the partnership

(this is known as limited 

liability).

2. Several partners may bring 2. If one of the partners dies or

special skills and training wishes to leave the

into the business. organization, it must be dis

solved and a new partnership

formed.

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Corporation

There are two kinds of corporations in the United States: investor‐owned

firms (IOFs) and cooperatives. Both business organizations are state‐char‐

tered and are usually organized under the laws of the state in which they

have their main office.

Investor-owned Firm

An investor‐owned firm (IOF) is operated as a for‐profit business. Capital

funds are obtained by issuing shares of stock that can be purchased by

investors for their profit‐making potential. The price of such stocks can

fluctuate from day to day, depending on the current stock exchange

activity.

Stock shares of many IOFs are bought and sold daily, or "traded," on

stock exchanges, such as the New York Stock Exchange. A stock

exchange is actually a form of cooperative. Members are stockbrokers ‐‐

people or businesses who buy and sell stock for their customers, who

may be corporations, partnerships, or individuals.

Because stock prices can climb or fall so rapidly, stockbrokers must close‐

ly monitor the activity of their customers' stock shares. In fact, most daily 

8

Cooperatives often process their members crops and livestock into value- added

products, as occurs at this sugarbeet processing facility in Minnesota. Photo

courtesy American Crystal Sugar

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newspapers in major cities throughout the world publish stock market

share prices and number of shares sold. Most television news channels

feature a stock market segment in their daily programs and some contin‐

uous news programs such as CNN Headline News also display a constant

stock market "window" on their viewing screen.

IOFs supplement the capital they derive from the sale of stock shares by

borrowing—either from banks or other financial institutions, or from

individuals.

Corporations have several advantages over partnerships. They have per‐

petual existence, limited liability for individual shareholders, and trans‐

ferability of shares.

An IOF is a legal entity—an artificial person created when the state issues

the corporation a charter to do business. Therefore, if one or more of the

investors wants to withdraw from the business, it can still exist and oper‐

ate. This is called "perpetual existence." Because stockholders have limit‐

ed liability, if the corporation fails, they only lose the amount of their

investment.

Shares of a business can be bought and sold or transferred. Any individ‐

ual or business can buy or sell shares of an IOF without approval from

other investors. The capital base of a corporation can be very broad.

Thousands of stockholders may have invested in the corporation by pur‐

chasing shares of stock.

Cooperative Corporation

A cooperative corporation is also a state‐chartered business, like an IOF.

It closely resembles any other firm that does the same type of things or

performs similar services. Structurally, the cooperative corporation looks

about the same as any other corporation. It employs the same kind of per‐

sonnel in similar jobs. It usually charges the same price for production

supplies, and may pay the same price for products marketed through it

such as grain, dairy products, cotton, fruit, vegetables, honey, or live‐

stock.

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However, unlike an IOF, cooperatives exist to provide economic services

to their member‐users, rather than just to generate a return on invest‐

ment. Cooperatives, like other businesses, rely on profits to sustain the

organization and ensure that it is able to provide necessary programs and

services to its members. Part or all of its capital comes from members

rather than from outside investors. This capital is obtained in one of three

ways: (1) through membership fees or sale of stock, (2) by agreement

with members to withhold a portion of net income based on patronage,

or (3) through assessments such as per‐unit of product sold or purchased,

per‐acre, per‐cow, and so on.

Cooperative stock is not created for speculative gain purposes, and there‐

fore is not generally traded on stock exchanges. In typical open‐member‐

ship cooperatives, there is little or no prospect for an increase in the mar‐

ket value of cooperative stock as a reflection of corporate earnings. This is

because net income is distributed on the basis of patronage, rather than

on the amount of stock owned. Although cooperative stock signifies own‐

ership, it usually only represents one vote per member, regardless of the

amount of stock that owner holds. Further, the stock usually carries a

fixed rate of return not to exceed 8 percent.

The stock purchases of new generation cooperative members are associat‐

ed with delivery rights that represent a commitment to deliver raw prod‐

ucts to the cooperative. These cooperatives often have an internal market

for trading of these shares which may appreciate or depreciate in value

depending upon performance in value‐added activity.

Member‐owners in both open and closed membership cooperatives are

also the patrons or users of the cooperative, and are largely responsible

for financing their business. However, like other businesses, cooperatives

also rely on various forms of borrowed capital in addition to the capital

obtained from the member‐patrons. The Farm Credit System is a major

source of that outside capital.

Like IOFs, cooperatives are mostly incorporated to provide their mem‐

ber‐patrons the shelter of limited liability if the business should fail. In

rare instances, small cooperatives that provide a limited number of ser‐

vices may choose to operate as an unincorporated business. Under such

circumstances, the cooperative's legal status is similar to a partnership.

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Liability is unlimited, and the death, entry, or withdrawal of a member

makes it necessary to restate (usually in writing) the nature of the rela‐

tionship between members.

Limited Liability Company

The limited liability company (LLC) is a hybrid business structure that

combines characteristics of both a partnership and a corporation. It com‐

bines the single‐tax treatment of a partnership with the limited personal

liability of a corporation. As in a cooperative, LLC owners are called

members.

It takes at least two members to form an LLC. Its owners have no restric‐

tions concerning their role in the business. Contrary to common coopera‐

tive practice, they are free to become involved in the management of the

company. They usually provide the equity capital, but their voting rights

are determined by an operating agreement, and not necessarily based on

patronage.

In an LLC, members share the profits and losses according to the estab‐

lished operating agreement. However, this percentage of responsibility is

usually based on the amount of capital invested and the nature of the

work performed by each member. The operating agreement also affords

members the freedom to determine how the income is to be divided.

Perhaps one disadvantage of an LLC is the significant expense incurred

at startup. A substantial amount of legal work, including the filing of two

documents with the Secretary of State, is required to get an LLC estab‐

lished and operating. These required documents consist of the articles of

organization and the operating agreement.

Chapter 2 Review Questions

1. What are the four methods of doing business in the United States?

2. Where do cooperatives fit within those four methods?

3. Who provides capital to a cooperative?

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What Is A Cooperative?

Cooperatives are a

different approach

to reaching a com‐

mon goal. Members work

together to achieve goals

that they would not be

able to achieve individual‐

ly. Some of the differences

of cooperatives are in

overall purpose, how they

operate, in their gover‐

nance, and how they are

controlled.

There are other differ‐

ences and distinctive characteristics that set cooperatives apart from

other types of businesses. These differences become apparent when

attempting to define a cooperative.

Any definition of a cooperative requires two key ingredients: it must be

broadly applicable and yet sufficiently concise to be easily understood

and remembered by the typical cooperative member. A simple, workable

definition is:

"A cooperative is a user‐owned and democratically controlled business in

which benefits are received in proportion to use."

Such a definition captures the essence of what a cooperative is, but even

this widely accepted definition requires elaboration to meet a wide array

of legal requirements, while still describing the diversity of cooperatives.

This basic definition, for example, does not answer three fundamental

questions: (1) why is a cooperative started; (2) what is its purpose; and (3)

how is it different from other forms of business?

12

CHAPTER 3

Cooperative board members conduct regular

meetings.

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Why Is a Cooperative Started?

Every cooperative has been started for one or more of the following rea‐

sons:

1. to improve bargaining power when dealing with other 

businesses;

2. to reduce costs;

3. to obtain products or services not otherwise attainable as an

individual;

4. to gain market access or enhance marketing opportunities;

5. to improve product or service quality; and

6. to increase income.

Of course, the underlying rationale for a farmer’s use of cooperatives is to

increase income. Initially, cooperatives sought to increase farmers’ bar‐

gaining power with the much larger businesses that sold them supplies

and marketed their products. More recently, cooperatives have expanded

their activities to fulfill the needs of a changing agricultural environment,

and are trying to help their members take advantage of additional oppor‐

tunities to increase their income.

What Is a Cooperative’s Purpose?

A cooperative’s sole purpose is to serve members’ needs. Whether those

needs reflect some or all six reasons, cooperative member‐owners have

the freedom to tailor their business to fit those needs. This requires a con‐

tinuing, fluid dialog between members and management, and flexibility

in the functions and operations of the cooperative. Just as in any busi‐

ness, member needs and requirements change based on both external

market factors and personal choices.

Although the purpose allows for a certain amount of flexibility in direc‐

tion, it does not permit a cooperative to strike off "on its own," seeking to

perpetuate itself as a business entity or to fulfill the personal ambitions of

its management. Members must understand the cooperative's purpose of

meeting their needs cannot be in conflict with serving in the public inter‐

est. To do so would go against the cooperative's basic mission. The coop‐

erative's purpose must remain compatible with the characteristics that

make it a unique business.

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How Is a Cooperative Different?

Understanding a cooperative requires one to clearly distinguish between

the principles that create its uniqueness and other characteristics that

may be desired "principles," but are based on common sense. For exam‐

ple, "give full weight and measure" and "duty to educate" have been

described as cooperative principles, because honesty and education are

so critical to success. But these principles (better called practices) don't

distinguish cooperatives from other businesses.

Discussion of cooperative principles and practices, therefore, should be

prefaced with a definition of terms. Understanding comes easiest by

defining a cooperative principle:

"A cooperative principle is an underlying doctrine or tenet that defines or

identifies a distinctive characteristic."

Various writers over the last century or so have observed and analyzed

the application of cooperative principles. Three key principles emerge as

being recognized and widely practiced for more than 150 years. These

principles are more than good practices, policies, or common sense. They

distinguish a cooperative from another kind of business. More important‐

ly, they are recognized in federal and state statutes as criteria for a busi‐

ness to qualify as a cooperative.

The three contemporary cooperative principles are:

l user‐owned;

l user‐controlled; and

l user‐benefits.

User-owned

The people who use the cooperatives own it, and are responsible for pro‐

viding the necessary financial backing to keep it operating.

User-controlled

The first principle characterizes how a cooperative fulfills its purpose.

User‐controlled is a governance principle, an important distinction.

14

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Because they own the cooperative, members also control its activities

through voting privileges. In most instances, cooperatives have a "one

member, one vote" policy, regardless of how much equity members own

or how much they patronize the organization. Assigning each member

only one vote ensures the democratic control of the cooperative, although

there are exceptions to this policy that still allow for equitable voting. A

few cooperatives have experienced such a shift to heterogeneous mem‐

bership and resulting disparity of use that voting proportional to use has

been adopted with established limits. The number of additional votes is

usually limited, for example, thus protecting the interests of the member‐

ship as a whole. Such a departure from equal voting rights recognizes

that the glue binding members to the concept of unity remains mutually

beneficial. Voting according to volume at the secondary (regional) coop‐

erative level is often necessary to support equitable service at the primary

level.

User-benefits

Members unite in a cooperative to get services otherwise not available, to

get quality supplies on a timely basis, to have access to markets, or for

other mutually beneficial reasons. Acting together gives members the

advantages of economies of size and bargaining power, and allows them

to share the cooperative's earnings on a basis proportionate to their use.

These profits are returned in the form of patronage refunds. The coopera‐

tive attempts to fulfill member needs at the least possible cost. However,

determining true costs at the point of transaction is practically impossi‐

ble. Like other businesses, cooperatives charge competitive market prices

and seek to generate sufficient income to cover costs and meet continuing

operating capital needs. Year‐end profits are distributed to members as

patronage returns (cash and stock).

Members gain both directly and indirectly from belonging to a coopera‐

tive. They get an assured source of supplies and market for their prod‐

ucts, which can directly increase their income. They also get a less tangi‐

ble benefit because cooperatives serve as competitive yardsticks in the

market by which the performances of other businesses are measured.

Some members gain valuable leadership experience, business knowledge,

and social recognition by serving on the board of directors. All of these 

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benefits accrue in proportion to how much members take advantage of

what their cooperative offers. It is logical, therefore, that members are

obligated to provide financing in proportion to the use of the cooperative

that produced those benefits. As a business, the cooperative has ordinary

costs that member‐owners are obligated to pay.

All of these principles focus on the user‐member and set cooperatives

apart from other types of businesses. Another aspect unique to coopera‐

tives that defines how the member‐owners (investors) receive returns on

their capital investments is referred to as "limited return on equity capi‐

tal."

Limited Return on Equity Capital

Members form a cooperative to get a service such as a source of produc‐

tion supplies, a market for their products, or a specialized service.

Regardless of the service provided by the cooperative, members seek to

get service and not a monetary return on their capital investment.

Limiting the payment, if any, for members' capital used to operate the

cooperative supports the principle of distributing benefits proportional to

use. Returns to capital are subservient to the value of services received.

Cooperatives limiting returns on capital is recognized in both federal and

state laws. They specify the maximum returns that may be paid on

invested capital. Cooperatives may choose to pay any amount less than

the maximum. In most state statutes, the limit on capital returns is fixed

at 8 percent. The basic federal cooperative law, the Capper‐Volstead Act,

recognizes this principle by setting a maximum dividend rate of 8 per‐

cent per year if members vote on any basis other than one‐member, one‐

vote.

A cooperative generally does not retain the surplus of gross income over

expenses—called "profit" in an IOF. Instead, organization papers estab‐

lish the obligation of the cooperative to return net margins to its patrons.

With this obligation or legally binding contract in effect before any trans‐

action with patrons takes place, the amounts involved never become cor‐

porate income. The net income, instead, belongs to patrons. This reduces

the cooperative's operations to an at‐cost basis. With no corporate

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income, the cooperative has no corporate income tax liability. However,

federal income tax laws set up criteria a cooperative must follow so that

tax obligations are met at either the cooperative or patron level.

Some cooperatives may distribute patronage refunds only to members. In

this case, the earnings generated from nonmembers are treated as corpo‐

rate income by the cooperative and are subject to corporate income tax.

The Internal Revenue Code requires that 20 percent of the patronage

refund be paid in cash, and that patrons consent to the cooperative treat‐

ing the noncash portion as ordinary income. Under certain circum‐

stances, some patrons are unwilling to recognize noncash allocations as

part of their current income. In these cases, the cooperative pays the taxes

at the corporate rate but can recover the tax payments when it later

redeems its noncash allocations.

Important Practices

Beyond the three basic principles, cooperatives adhere to many other

important generic practices that are also followed by other businesses

and organizations. Among these are:

Open Membership

This policy is considered a key practice of food, health, housing, and

other types of consumer cooperatives. Yet, this practice alone does not

distinguish cooperatives from public stock corporations that allow any‐

one to buy stock. Agricultural cooperatives are limited to bona fide farm‐

ers or producers. Some of these have closed membership. The type and

purpose of a cooperative will largely determine whether it can practice

open membership.

Continuing Member Education

Keeping owners educated and informed about their business is an impor‐

tant practice for any organization, but it is particularly vital to a coopera‐

tive for at least three reasons:

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1. The democratic control principle, exercised through majority

rule, requires that the entire membership be well informed to

assure enlightened decisions;

2. The cooperative can be responsive to members' needs only if the

members express those needs and recognize that they must bear

the financial burden to fulfill those needs; and 

3. Our public education system doesn't give much instruction on

cooperatives in business and economic courses, so cooperatives

must become their own educational institutions.

Cooperation Among Cooperatives

The statement "Cooperation Among Cooperatives" was adopted by the

International Cooperative Alliance in 1966, updated in 1995, and is still

emphasized today as a "principle" that cooperatives should pursue to

advance the concept of cooperation worldwide. In reality, it is also a

good policy wherever members' resources can be used more effectively

and the public interest served more efficiently. The International

Cooperative Alliance recognizes seven cooperative principles. They can

be found here: http://www.ica.coop/coop/principles.htm

It can be solidly argued that other generic principles, practices, and "good

ideas" are necessary guiding forces for cooperatives. These recognized

guidelines will undoubtedly change over time, reflecting efforts to adapt

the cooperative structure to an ever‐changing business environment.

Chapter 3 Review Questions

1. Give three reasons why cooperatives are started.

2. What are the three contemporary cooperative principles?

3. Why is education in a cooperative important?

18

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How Cooperatives Are Organized

Cooperative businesses are

usually incorporated. The

firm prepares a set of

papers called Articles of

Incorporation. These papers are

then sent to the appropriate state

office (usually the Secretary of

State) for review, approval, and fil‐

ing.

Articles of Incorporation

The articles specify the name of the

organization, its purpose, the scope

of its authority, its place of busi‐

ness or headquarters, the number

of directors, and whether the cor‐

poration's capital is stock or non‐

stock. The articles define what the cooperative is going to do and how it

is structured and governed.

An incorporated cooperative possesses the legal characteristics of an

investor‐oriented corporation. It differs primarily in the nature of the

relationship between the organization and its owners and in how benefits

are distributed.

Bylaws

All corporations, including cooperatives, must also have a set of bylaws

that tell how the corporation is going to operate. They are normally pre‐

pared concurrently with the articles of incorporation, because the two

legal documents are interrelated. Both are prepared by an attorney or

other legal counsel.

Bylaws are more descriptive and detailed than the articles of incorpora‐

tion. They typically contain provisions for membership eligibility, elec‐

19

CHAPTER 4

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tion of directors, annual meetings, officers' duties, voting rights, dues and

assessments, and rate of dividends (if any) to be paid on member capital

invested.

The exact nature of services to be provided by the cooperative for its

members is not generally spelled out in the bylaws. Periodic changes

may be made to accommodate altering needs. Some flexibility in bylaw

provisions is needed because amending them is a lengthy, time‐consum‐

ing process.

Marketing Agreements

In a marketing cooperative, a marketing or membership agreement may

be referred to in the bylaws as a separate document or included in a spe‐

cial section. A marketing agreement is a contract between the cooperative

20

Co-op board members must carefully review all new and revised bylaws, and

should enlist the guidance of an attorney or qualified expert to help draft or review

them. 

CIR 5:Layout 4 (rev) @@ 8/12/2011 12:18 PM Page 20
and a member. It may require the member to deliver and market all pro‐

duction through the cooperative, produce a specific commodity on spe‐

cific blocks of land, and follow production provisions.

The marketing agreement might also stipulate that the cooperative is

obligated to receive and market the entire commodity delivered by the

member under the terms of the contract.

Membership

The relationship between a cooperative and its members often depends

on the type of service performed.

Marketing associations, for instance, require a formal application and

issue a membership certificate. In some instances, the application must be

accompanied by payment of a membership fee, usually refundable if the

member withdraws. In purchasing cooperatives, for instance, member‐

ship is identified with patronage. A patron making a purchase becomes

eligible for membership by qualifying as a producer. A nonmember

patron ordinarily is not affected by a cooperative's bylaws.

Chapter 4 Review Questions

1. What two legal documents are required in a cooperative?

2. What is the purpose of each of the legal documents?

3. Describe two areas that a marketing agreement may cover.

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Cooperative Structures

The geographic areas a

cooperative serves and the

makeup of its membership

are elements that contribute to

how it is classified by structure.

For instance, they may be differ‐

entiated as local or regional coop‐

eratives.

Local Cooperative

A local association serves indi‐

vidual members in a community,

county, or even several counties.

These associations usually per‐

form a limited number of the first

steps involved in marketing.

Farm supply cooperatives sales

are at the retail level. Local asso‐

ciations often affiliate with other

locals in a regional cooperative.

Regional Cooperative

A regional cooperative usually

serves an area of multiple counties, an entire state, or a number of states.

Two important classifications of regional cooperatives are based entirely

on the makeup of their membership: federated or centralized.

A federated regional serves smaller local cooperatives that are operated by

local managers appointed by and responsible to local boards of directors.

Each local is a separate corporate entity that owns a membership share

that entitles it to vote on matters pertaining to the regional.

22

CHAPTER 5

Cooperatives operate sophisticated

processing and handling facilities

throughout the United States. Photo

courtesy CHS

CIR 5:Layout 4 (rev) @@ 8/12/2011 12:18 PM Page 22
The federated cooperative (a federation) has its own chief executive offi‐

cer and staff, and a board of directors elected by and representing the

local associations.

While autonomous, local cooperatives depend by varying degree on the

federation for a variety of services. In purchasing federations, the services

may include research, procurement, and manufacturing. In marketing

federations, the locals often want services such as federated advertising

and product promotion, marketing, processing, handling surpluses,

maintenance of product standards, and overall market contracts. Locals

often look to their federations, for example, to arrange and coordinate

shipments.

A regional centralized association is structurally similar to a small‐scale

local cooperative and has individual members. A centralized regional

serves patrons in a large geographic area, such as a major portion of a

state, an entire state, or all or parts of several states. A centralized region‐

al has a central office, board of directors, and chief executive officer who

supervises the entire operation. It may even have several branch offices.

However, a centralized cooperative usually serves patrons within the rel‐

atively restricted membership area of a single state or region.

Both centralized and local associations obtain much of their capital from

members who are investing as individuals. The federation is financed in

part by its local member associations.

Federated cooperatives are often thought to be more practical for larger

membership areas because of the distances involved. Problems of plant

supervision, decisionmaking, and communication are augmented when

locations are widely scattered.

Usually the local cooperative is small enough to permit frequent direct

contact and the exchange of ideas, impressions, and information between

members and employees. However, definitions vary and it is difficult to

assign any single appropriate label in reference to size. A local coopera‐

tive may serve as few as 5 or 10 members or as many as several thousand.

Regardless of size, federated, centralized, and local cooperatives share

the premise of democratic control. For example, each of several locals in

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an area may have a director who also serves on the federated board. On

the other hand, a centralized cooperative may elect its board of directors

under a districting arrangement that assures a broad representation.

Other centralized associations may use advisory committees that provide

channels of communication to management directly or through branch

operations. No matter what governance structure is adopted, elected

individuals who are representative of the membership population repre‐

sent each cooperative democratically.

Classification of cooperatives into federated, centralized, and local cate‐

gories is largely for descriptive purposes. There are exceptions to the

accepted classifications. For example, some regionals may have "mixed"

membership comprised of individuals as well as local associations. In

practice, the federation may have so many responsibilities and activities

that it is essentially a centralized operation. Examples of these are man‐

agement contracts with local affiliates, credit arrangements, and systems

for distributing supplies directly from the federation to the member. In

turn, branch associations in centralized cooperatives may have consider‐

able freedom in their operations.

Chapter 5 Review Questions

1. List three ways that cooperatives are sometimes classified.

2. What is a federated cooperative?

3. What is the one characteristic regarding control that all cooperative

structures have in common?

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Who Runs the Cooperative Business?

Cooperatives follow

accepted business proce‐

dures similar to those of

other firms. They strive for effi‐

ciency, aim to meet or exceed

competition, seek innovations,

and are acutely cost‐conscious.

Furthermore, cooperatives

endeavor to maximize net

income, minimize costs of acqui‐

sition and operation, and pro‐

vide their services economically.

All successful cooperatives stress quality of products marketed,

processed, purchased, and manufactured (such as feeds and fertilizers),

as well as service.

Three groups of people are involved in the operation of a cooperative:

l members;

l directors; and

l managers and staff.

Members

Members are the backbone of a cooperative. They organized it to serve

their needs. Their support, through patronage and capital investment,

keeps it economically healthy. Their expanding requirements shape the

cooperative's future.

Because the cooperative is organized to provide for the needs of its mem‐

bers, channels must be established so that the cooperative can be

informed of those needs. Several communication channels exist in a coop‐

erative, the most important being the annual member meeting. This is

where the members learn how their cooperative has performed during

the year, via reports by the board chairman, the manager, and other key

25

CHAPTER 6

Successful cooperatives operate on sound

business principles, just like any successful

business.

CIR 5:Layout 4 (rev) @@ 8/12/2011 12:18 PM Page 25
officials. Members have the opportunity to ask questions, make sugges‐

tions, and request changes or new services. Members also elect new

directors to replace those whose terms of office have expired or may re‐

elect existing directors for another term.

In addition to their rights, member‐patrons also have responsibilities.

Because patronage keeps the cooperative alive, members must use its ser‐

vices. Growth can improve a cooperative's efficiency, so ideally members

encourage neighbors and friends to patronize the cooperative. And

because growth calls for new capital, members must provide at least part

of it.

Members participate in the cooperative in other ways, such as choosing

directors. While being selected as a director is an honor, it is also a seri‐

ous responsibility. Cooperatives own assets worth thousands, even mil‐

lions of dollars. Sales can even amount to millions of dollars each year.

Those who serve as directors are responsible for administering funds

placed in their care by the members who elected them to office.

Members participate in their cooperative in still other ways. They may

serve on committees, call on prospective new members, or represent the

cooperative in various community activities. However small the role they

play, it is essential that members get involved in their association.

Directors

Members elect directors at the annual member meeting. The board repre‐

sents the members in all matters, sets policy, and is responsible to the

members for the cooperative's efficiency.

Directors hire the manager, determine the salary, and outline the duties

and authority of that position. The directors must also formally review

the performance of the manager at least annually.

Directors decide how the cooperative will accomplish the purpose(s) for

which it was created, and how its operations will be financed. For exam‐

ple, directors approve borrowing for fixed capital projects such as con‐

struction and land acquisition as well as for day‐to‐day operating expens‐

es. Directors determine the patronage refund allocation, weighing legal

26

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requirements against the need for reinvesting refunds to provide money

for retiring old equities and still meet current capital needs. Directors

ensure the cooperative maintains its character and they develop and

adopt long‐range business strategies.

Typically, directors receive nominal compensation for serving on the

board, plus an allowance to cover out‐of‐pocket expenses incurred while

conducting those duties.

Manager and Staff

Directors decide the cooperative's general direction but the manager and

immediate staff carry it out. The manager and staff make decisions, sub‐

ject to board review, that realize the basic objective of serving members

effectively.

As cooperatives grow in size, variety of services offered, and number of

patrons served, they must expand their management team to include spe‐

cialists in various fields such as member relations, communications, gov‐

ernmental and public affairs, legal services, personnel relations, account‐

ing, and transportation. Cooperatives may hire employees with special

knowledge of the various commodities marketed, purchased, or provid‐

ed for members such as milk, butter, eggs, fruit, feed, seed, fertilizer, or

electricity. Under ideal conditions, the manager's principal tasks are plan‐

ning, reporting to the board of directors, conferring with key supervisors,

maintaining good organizational relations, and controlling the coopera‐

tive's operations.

A major problem of large cooperatives is communication with members.

Often in a large cooperative, the manager and key staff are known per‐

sonally by relatively few patrons. The only time management is seen by

many members is at the annual meeting. But this large affair allows little

time for conversation with members. In an effort to stay in more frequent

contact with members, these cooperatives often conduct regional or dis‐

trict meetings during the year.

In a relatively small or local cooperative, it can be fairly easy to maintain

good relations between the cooperative and its members. The manager

often maintains personal contact, keeping members informed of their

27

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cooperative's progress and activities. The manager can personally

encourage members to communicate their problems, needs, and evalua‐

tion of the cooperative services they receive.

As the intermediary between staff and the board of directors, the manag‐

er must deliver reports at board meetings on the activities of the associa‐

tion, outlining any special problems, operational changes, and pertinent

financial matters.

Each year, the manager presents an operating plan and budget for the

coming year. It is subject to approval by the board of directors and is

often a joint product of the manager and the board. Periodically, the man‐

ager reviews actual performance with the board against budget projec‐

tions, and explains variations in performance.

At staff meetings, the manager discusses operating procedures and prob‐

lems with key employees and helps familiarize them with cooperative

policies and objectives, interdepartmental relationships, and individual

responsibilities.

Quite often, the only cooperative employee a member encounters over a

period of months is a billing clerk, cashier, truck driver, field representa‐

tive, or a warehouse employee who loads supplies into the member's

vehicle. Therefore, many cooperatives have regular training programs to

help employees learn how their cooperative works as well as general

principles and practices. Actually, these workers are the employees of

members, because members own the cooperative. Through their efficien‐

cy and friendliness, well‐trained employees attract patronage and build

favorable attitudes toward the cooperative, both as a business and as a

desirable institution.

Chapter 6 Review Questions

1. Describe the three groups of people involved in a cooperative, and dis‐

cuss their respective roles.

2. When and how are directors selected?

3. Name two responsibilities that members have to their cooperative.

28

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How Cooperatives Are Financed

Cooperative owner‐mem‐

bers in the United States

finance these businesses

by using all the standard meth‐

ods employed by other corpora‐

tions, plus a few unique to coop‐

eratives.

Capital Structure

If the association is a capital stock

organization, members receive

stock certificates as evidence of their ownership interest. More than one

type of stock may be issued, but usually no more than two are necessary.

Most stock cooperatives issue one share of common membership stock

per member. Preferred stock may be issued to show additional capital

contributions.

Common stock is usually the voting stock, while preferred stock is gener‐

ally nonvoting.

Noncapital stock associations issue some kind of certificate (sometimes a

certificate of equity) to show capital contributions of members. Many

nonstock cooperatives raise some or most of their original member capi‐

tal via a membership fee.

The capital structure is usually kept simple. If stock is issued, par value is

kept low at $5, $10, or $20, for example. Shares of this size are easier to

sell, transfer, or pay off than shares of higher value.

Capital Needs

The total amount of capital needed by a cooperative depends on many

different factors. Some influencing factors include: the business volume,

services provided, physical facilities required, the nature of its competi‐

tion, seasonality of the commodities handled, and degree of risk required

29

CHAPTER 7

Credit Unions are cooperatives.

CIR 5:Layout 4 (rev) @@ 8/12/2011 12:18 PM Page 29
in the day‐to‐day business. Whether the total amount of capital required

is minimal or substantial, it is normally related to the number of mem‐

bers and volume of business conducted.

Two kinds of capital are used to sustain a cooperative—fixed and operat‐

ing. Fixed capital is money used to buy such things as land, buildings,

and equipment (fixed, tangible assets). Operating capital keeps the busi‐

ness going on a daily basis. Some operating expenses may include:

advancing members money on products marketed for them, buying farm

production supplies, paying utility bills, paying employees, and buying

operating supplies such as packing cartons and office supplies.

There are three important sources of obtaining capital:

l Members, who invest in the cooperative to obtain needed ser‐

vices.

l Nonmember patrons, other cooperatives, marketing and supply

companies, and individuals that invest in the cooperative to earn

dividends or because they are interested in the welfare of the

cooperative.

l Loans from such lending agencies as a CoBank (part of the Farm

Credit System), a commercial bank, or one of a number of gov‐

ernment agencies.

Some cooperatives also obtain financing from their wholesale suppliers

and other creditors, based on the amount of their purchases. Marketing

cooperatives obtain interim financing that corresponds with the time lag

between receipt of the commodity from member‐patrons and actual set‐

tlement with them.

Member Capital

Cooperative members must realize that launching a business requires

substantial startup money. Because they are the owners and expect to

reap the benefits of the business, they are obligated to finance a major

portion of the startup costs. Hopefully once the cooperative is operating,

it will generate sufficient funds to perpetuate itself. But occasionally,

members may have to contribute additional capital because of unforeseen

circumstances, such as a major disaster or a major expansion.

30

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Initial capital is needed to buy land, buildings, equipment, and other

facilities, as well as to operate the business the first year.

Investing initial capital is a basic member responsibility, and evidence of

good faith, or their "earnest money." The members' share of initial capital

should be large enough to make them realize they have a financial stake

in the business to protect. In the case of many closed‐membership coop‐

eratives that require a greater amount of initial investment, the belief is

that the members' commitment to the cooperative increases in direct pro‐

portion to their level of investment.

Members' investments are used as a credit base when applying for a loan.

It should be a sizable proportion of total need because no credit source

would likely take financial risks in a cooperative if its members don’t

demonstrate a willingness to do so.

As a general rule, each member's share is proportionate to his or her

anticipated use of the cooperative. This contribution is usually made in

the form of cash. Often a few members may contribute more than their

share, but this won’t entitle them to any special privileges.

Under certain conditions, if members of a cooperative do not have

enough funds or credit to subscribe their share of initial capital, the coop‐

erative may be eligible to obtain financial assistance (e.g., government‐

backed loans) from the U.S. Department of Agriculture, through the

Rural Business‐Cooperative Service (RBS). (Additional information on

these financial programs is available from state Rural Development

offices or online at: http://www.rurdev.usda.gov/rbs/busp/bprogs.htm.)

Facility Loans

Cooperatives usually obtain long‐term financing from CoBank or other

outside sources to cover the cost of constructing new buildings and buy‐

ing equipment or plant sites. The main sources of facility loans are

CoBank, commercial banks, and insurance companies.

Cooperatives serving rural patrons may also obtain facility loans jointly

from RBS and CoBank, under feasible conditions.

31

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USDA's Rural Utilities Service (RUS), through rural electric cooperatives,

may lend funds to a cooperative to purchase electrical equipment and

related items.

Operating Loans

Operating capital loans generally are for short‐ or medium‐term uses.

The medium‐term loans supplement the cooperative's own capital funds.

Short‐term loans are generally seasonal, and are used to finance such

expenses as seasonal increases in inventory, or accounts receivable.

Cooperatives may obtain operating loans from CoBank, USDA’s RBS,

commercial banks, and other lenders.

Commodity Loans

Marketing cooperatives must often store their products such as grain,

cheeses, fruits, or frozen citrus concentrate for long and short periods of

time. In some cases, a commodity loan is necessary to pay an advance to

the member before a product is sold. Such loans come from CoBank,

USDA’s Commodity Credit Corporation (CCC), a commercial bank, or

other sources, and are secured by warehouse receipts.

Special Services Loans

A number of Federal Government agencies lend money to cooperatives

providing special services. An important source for rural electric and

telephone cooperatives is USDA’s Rural Utilities Service (RUS). Loans are

made to construct rural infrastructure for electric power distribution,

transmission, and general capacity. Modern telecommunications services

are financed by RUS for fiber optic cable, digital switching, and broad‐

band service to rural America.

National Rural Utilities Cooperative Finance Corporation (CFC) is an

independent, self‐help credit institution created by its member rural elec‐

tric systems to provide supplemental financing for rural electric coopera‐

tives.

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USDA's Rural Telephone Service was established as an agency by amend‐

ment to the Rural Electrification Act to provide supplemental financing

for rural telephone systems.

The National Cooperative Bank (NCB), although oriented largely to con‐

sumer cooperatives, also makes loans to producer cooperatives. NCB

financing includes term loans for major capital expenditures, lines of

credit, and construction and real estate loans.

In addition to these loan sources, several "special interest" organizations

lend funds to certain groups. The Bureau of Fisheries in the Department

of the Interior lends to fish marketing cooperatives; the Bureau of Indian

Affairs, to cooperatives of Native Americans, Eskimos, and Aleuts; and

the Bureau of Reclamation, to small cooperative reclamation projects, pri‐

marily for irrigation in 17 western states.

Revolving Capital Finance

Revolving‐capital financing is widely used by and well suited to coopera‐

tive operations. Here is how it works.

As a member does business through a cooperative, he or she authorizes it

to use a portion of the money accumulated or saved through patronage.

Or, the member may furnish capital based on the dollar value or physical

volume of products sold or bought through the cooperative. In either

case, this money is identified as a capital investment of the member and

is used for capital purposes only.

The money thus collected by the cooperative from patronage is credited

to the member on the cooperative's books. At the end of the fiscal year,

the member is issued a statement of the total amount invested in coopera‐

tive capital for the year.

This capital may be treated as a revolving fund and used for repayment

of debt, expansion, or for such other capital purposes as authorized by

the board of directors. As such funds continue to accumulate, the board

authorizes repayment to those members who contributed.

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Repayment first goes to members whose contributions are the oldest in

the revolving fund. Normally, each year's contributions are issued in a

numerical series. Thus, the oldest of the numbered series are repaid first.

As a general rule, the member's evidence of revolving fund contributions

does not have a specified repayment date (due date). Rather, the board

establishes revolving fund periods after considering the association's

financial requirements. Some cooperatives revolve funds at intervals of 5,

7, or 10 years. Others, such as local farm supply cooperatives, revolve on

a lengthier schedule such as 20 years. These time periods are not legal

requirements but they are considered to be moral commitments by the

cooperative.

The revolving‐capital plan allows members to build up equity in their

association in proportion to the amount of business they transact. It

ensures that current investment in the cooperative is largely in the hands

of current patrons. It provides an orderly process for returning or with‐

drawing a member's investment without impairing the total capital struc‐

ture. Perhaps more importantly, the revolving‐capital plan gives the busi‐

ness flexibility to meet changing conditions and accompanying financial

needs.

On the down side, the revolving‐capital plan creates some membership

problems. Under some circumstances, the revolving period may have to

be lengthened, thus postponing the member's return on investment. The

longer period may place a financial burden on some members. In some

instances, a return on investment is not paid until the member dies, and

the benefits are distributed to the member's estate. Older individuals

often prefer to recoup their investment sooner.

In situations of merging cooperatives, members inevitably inherit some

amount of accrued patronage refund debt that was not accumulated by

their home cooperative. Repayment must begin with the "oldest" debt.

This can foster resentment among member‐owners who must wait for

their own dividends, until the inherited dividends are paid. Only when

the numerical series of the contributions in the revolving fund have

evened out can other dividends be paid.

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Considering the intricacies of the revolving‐capital plan, members must

fully understand and agree to their financial obligations for this plan to

be successful.

Reserves

Like any other business, a cooperative builds up two types of reserves,

valuation and capital. Reserves for such items as depreciation are called

valuation reserves and are accumulated by a charge to operations. From

an accounting standpoint, they are handled as an operating expense as a

way to charge a pro rata share of the initial cost of a fixed asset over the

estimated life of the asset.

The second type is called a capital reserve, which is usually built up from

net operating margins.

There are two general types of capital reserves: (1) those reserved to meet

an unexpected crisis, such as a poor business year; and (2) those for a

large planned outlay.

The latter type of reserve might be a building fund for new or expanded

facilities, adding new services, or a modernization program where the

costs exceed the current financial capacity of the cooperative. When such

a need arises, the cooperative can use its reserves instead of borrowing

money, curtailing its services, or impairing its capital.

Thus, reserves protect the capital investments of members. When a coop‐

erative operates on a strictly nonprofit basis, it allocates capital reserves

to all of its patrons on the basis of their use of the cooperative's services.

Chapter 7 Review Questions

1. What are three important sources of capital available to a cooperative?

2. Explain the practice of revolving capital finance.

3. For what two purposes are capital reserves most often used?

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Types of Cooperatives

At one time, it was

fairly easy to catego‐

rize cooperatives

according to the service they

provided. In today’s more

complex economic environ‐

ment, however, cooperatives

have had to evolve into

organizations that often per‐

form myriad different ser‐

vices that they would not

have traditionally offered. In

fact, many cooperatives

"overlap" traditional cate‐

gories, and serve multiple

functions characteristic of

more than one type of coop‐

erative.

For example, marketing cooperatives no longer simply market their

members’ products. Now, most also purchase supplies for their mem‐

bers. Many cooperatives extend some kind of credit, and in some cases

even operate a credit corporation, for the convenience of members.

Cooperatives have been serving as economic tools providing a wide vari‐

ety of services since Colonial times. When early American settlers had a

large task to accomplish, they pooled their talents and resources to get it

done more quickly and efficiently. The time‐honored threshing bee, the

neighborly barn raising, and the "cheese rings" of the early 1800s are all

examples of informal but true cooperative activity. The same concept

holds true in many rural communities and school districts.

All cooperatives have the same objectives: to provide services not other‐

wise available (marketing, insurance, or electric power); to provide them

at the lowest possible cost (cotton gins or grain elevators); or to upgrade

36

CHAPTER 8

Marketing cooperatives help ensure that

members receive the most competitive prices

for their quality products.

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productivity (mutual irrigation companies and artificial breeding cooper‐

atives). In fact, early settlement in much of the arid Southwest United

States was made possible, in large part, by mutual irrigation companies.

Many marketing and purchasing cooperatives are household names in

rural communities. But aside from the services these organizations pro‐

vide, probably the most widely known are the three types of cooperative

credit made available through the Farm Credit System and rural electric

cooperatives.

Cooperative leadership has been provided by specialists in several

fields—experts on marketing, farm supplies, insurance, dairy cattle

bloodlines and breeding, or electric utilities. The availability of such tech‐

nical knowledge and expertise is valuable in itself.

Marketing Cooperatives

Over the years, American farmers have learned many new techniques for

increasing yields and reducing manual labor. At the same time, finding

satisfactory markets for their products has become an increasing prob‐

lem.

Most farmers are more effective in production than in marketing. They

focus their time and efforts on the efficient operation of their farm in

order to produce high‐quality, high yields of their crops or products.

Most frequently lack the time or resources necessary to determine the

demands of a constantly changing public market. Cooperatives help fill

that marketing void by providing members with the marketing tools they

need to get the most return for their investment.

One way they do this is by furnishing a variety of off‐farm marketing ser‐

vices. In response to the market demand for high‐quality and standard‐

ized products, cooperatives can efficiently assemble products from many

producers and carefully and accurately grade the products to meet buyer

specifications concerning size, quality, color, or other terms. One such

example of differentiating products based on quality can be found in fruit

cooperatives. If orange growers bring superior oranges to the cooperative

for storage and sale, they do not want their products mixed with oranges

of a lesser quality, thus reducing the overall value of the oranges.

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Additionally, separating the oranges according to established standards

of excellence ensures that consumers get the quality of orange that they

expect—in short, they get what they pay for.

By paying producers on the basis of grade and quality, cooperatives

encourage farmers to produce the kind of quality of product most in

demand, while fulfilling consumer demands for standardized products.

Another marketing improvement cooperatives offer involves the process‐

ing, or packing of members’ goods. Processing includes such activities as

canning, pasteurizing, concentrating, churning, cheese making, drying,

extracting, freezing, and ginning. By putting products in a form accept‐

able to large‐volume buyers, cooperatives add value to those products,

which, in turn, increases the profit margin for their members. Many coop‐

eratives that provide these services are referred to as value‐added, or

new generation cooperatives.

Cooperatives transport, store, advertise, and promote products for their

members. They explore and develop new domestic and foreign trade

channels. Through research they develop new products or find new uses

for what they produce.

In addition to these obvious marketing benefits, cooperatives have

become a valuable bargaining tool for farmers. Agricultural producers

typically lack bargaining power, even though their crops and livestock

are essential for the nation’s food chain. Individual farmers produce rela‐

tively small volumes and have little product differentiation (distinctive

characteristics that can be emphasized in advertising and give special

desirability for users who value them). They lack the bargaining power

associated with those factors. The importance of their profession is

unquestioned, yet they must combine forces to achieve strength and

leverage in the marketing world.

Businesses that buy agricultural products have become larger and more

plentiful in recent years. For example, many food processors and packers

are large corporations with great bargaining strength that supply whole‐

sale distributors and massive chain food retailers. Similarly, as demand

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increases and these retailers buy in large amounts, their bargaining

power also increases. Cooperatives help farmers gain market power to

match the bargaining strength of other firms.

Marketing cooperatives benefit both consumers and producers. Because

they emphasize grade and quality, they have made producers more qual‐

ity and market‐conscious. For instance, food products from cooperatives

follow industry trends toward standardized packaging that enable the

consumers to shop more efficiently.

Cooperatives strive to minimize costs associated with marketing. These

efforts have served to build cost‐consciousness among all in the food and

fiber market. In essence, cooperatives often serve as the benchmark by

which others gauge their own operations. This awareness, in turn, helps

to hold down costs to consumers.

Marketing cooperatives teach producers about markets. Through cooper‐

ative meetings and publications, farmers gain valuable insight about such

matters as marketing costs, consumer preferences, and the need for

advertising and brand promotion.

Through marketing cooperatives, farmers extend control over their prod‐

ucts beyond the farm gate as they travel to the consumer. As in the case

of new generation or value‐added cooperatives, members retain more of

the profits associated with product marketing than if they simply sell

their product as a bulk commodity. As long as the cooperative retains

either physical possession or legal title to a commodity, members have a

greater voice in its distribution and sale.

This control may be limited to bargaining on grower price and terms of

delivery, as in the case of a product to be canned. In some new generation

cooperatives, facilities have been created and expanded to allow for such

processing by the cooperative, which can lead to a larger portion of the

ultimate profit. In the case of milk, for instance, the negotiations may

include the manufacture of dairy products and delivery of the packaged

or cartoned products by the cooperative to consumer stores and super‐

markets.

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40

Perhaps the most important contribution of these cooperatives is that

they can develop broader markets for the producer in terms of geograph‐

ic dispersion as well as variety of uses. Consequently, in times of abun‐

dant supply, the price‐depressing effect of small surpluses is diminished,

and prices stabilize.

Membership in most marketing cooperatives is open to all producers

who fully meet membership and production requirements. Exceptions

are cooperatives with seasonally limited capacity or outlets, and the new

generation cooperatives discussed earlier, which use closed memberships

to control the amount of product being marketed at any given time.

A member may withdraw from membership, but only during specified

dates annually. Although some cooperatives require a minimum 2‐year

initial membership, some marketing cooperatives close their membership

for a brief season each year to make a preliminary estimate of the

approaching crop volume. When that volume has been determined, the

cooperative learns how many new members/producers it can support.

A corporation farm actually engaged in growing agricultural products

may choose to become a member of a farm cooperative. Further, under

special circumstances, a marketing cooperative may hold membership in

another larger cooperative handling the same commodity, and market

some of its volume through that cooperative.

Bargaining Cooperatives

A cooperative bargaining association is a special type of marketing coop‐

erative. In instances where the number of agricultural product processors

has declined but survivors have grown in size, bargaining cooperatives

serve as an effective marketing tool for farmers. They negotiate with can‐

ners, packers, or processors on matters such as price, quality, and time of

harvest or delivery.

Bargaining cooperatives generally do not take physical possession of the

product, but rather establish the terms and conditions of the sale and

transfer of that product. The actual sale of the product may be made

directly by the farmer to the buyer. Milk producers and fruit and veg‐

etable growers often use this type of marketing cooperative.

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Purchasing Cooperatives

Traditionally, farmers have sold their commodities at wholesale prices,

while paying retail prices for their production supplies. This imbalance

obviously decreased their profit margin, but they had little choice. They

gained little advantage from product differentiation. They purchased in

relatively small amounts and often paid extra for products with brand

names in feed, farm equipment, and petroleum.

To overcome these disadvantages, farmers turned to the cooperative as

an economic tool. In some cases, entirely new cooperatives were orga‐

nized to manufacture ready‐mixed feeds, fertilizer and fuels; to purchase,

clean, and distribute high‐quality seed; or to provide other production‐

related services. Thus, these cooperatives supplied farmers with superior

products, without the higher costs associated with brand‐name purchas‐

es.

Initially, cooperative purchasing was quite informal. A group of farmers

pooled their orders to gain the advantage of bulk‐purchase prices on

major farm production supplies such as feed and fertilizer. The demon‐

strated benefits to producers encouraged them to organize more formal

or incorporated cooperatives. These cooperatives hired full‐time man‐

agers and built warehouses to handle a variety of other production sup‐

plies.

Cooperative purchasing, initiated by farmer clubs in Wisconsin and

Illinois, really began around 1850. After the Civil War, local and state

Granges acted as agents to pool orders and buy needed supplies for

direct shipment to farmers. By the early 1900s, the number of purchasing

cooperatives was growing steadily, but the real expansion in cooperative

purchasing occurred after 1930. The Depression made it necessary for the

farmer to cut costs to survive. Subsequently, World War II created short‐

ages of needed materials.

This same period witnessed the rise of strong and progressive regional

cooperatives—mostly federations of locals. The regionals had the volume

and the financial strength to own and operate such large‐scale facilities as

oil refineries, fertilizer manufacturing plants, and feed mills that could

give members more assured supply sources.

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Consequently, today’s farmers can share via local supply cooperatives in

the ownership and benefits from such large‐scale activities.

Farmers obtain membership in most purchasing cooperatives by acquir‐

ing a share of common stock (the par value is often between $1 and $50)

and by agreeing to abide by the cooperative’s bylaws. In other purchas‐

ing cooperatives, patronage (by the producer) is the sole requirement for

membership.

Purchasing cooperatives do not usually require members to sign a writ‐

ten agreement, so members are free to buy farm supplies whenever they

choose. However, a few purchasing cooperatives stipulate a minimum

annual patronage requirement. Non‐producers can be patrons, but not

voting members of farmer cooperatives.

Three major objectives of purchasing cooperatives are:

1. to effect savings for member‐patrons through quantity purchasing and

manufacturing and efficient distribution methods;

2. to buy the type and quality of supplies best adapted to the members’

farms and farming needs; and

3. to provide the related services suited to the needs of member‐patrons.

The savings generated by increased efficiency and reduced per‐unit costs

associated with large‐volume purchasing and manufacturing are passed

on to the member‐patrons at the end of the fiscal year in the form of

patronage refunds. Refunds are distributed according to the amount of

business members conducted with the cooperative – either on a dollar

basis or on a per‐ton, per‐gallon, or some other unit basis. If the coopera‐

tive needs more capital, it may defer or retain some of the refunds for a

determined number of years, and then start redeeming or revolving the

oldest amounts.

Purchasing cooperatives can usually adapt more easily to changes in

environment and agriculture than marketing associations. For example,

when rural Southern California areas with large concentrations of citrus 

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orchards were urbanized and replaced by housing developments and

shopping malls, many citrus marketing cooperatives were forced to sell

their facilities and discontinue their operations.

Faced with similar changes, some purchasing cooperatives have expand‐

ed their product line to offer supplies to suburban customers on a patron‐

age basis such as lawn and garden seed and fertilizer, sprays, bedding

plants, lawnmowers, hand tools, petroleum products, and auto supplies.

Meanwhile, business with their farmer‐members continues. This flexibili‐

ty has helped many purchasing cooperatives to prosper and flourish,

even as the number of farmer‐members declines.

Services provided by the typical purchasing or farm supply cooperative

vary somewhat according to the area it serves. Some carry a relatively

limited line of supplies related to member needs. Petroleum cooperatives,

for example, may purchase and distribute only petroleum and related

supplies—gasoline, heating oil, propane, lubricants, tires, batteries, and

automotive supplies.

However, most local purchasing cooperatives carry a wide variety of

supplies and services related to farm commodity production. They may

mix feed, blend fertilizer, clean and shell seed, supply automotive needs

such as gasoline or tires, and carry a full line of building supplies and

tools. Many cooperatives have evolved and developed more adequate

farm service centers—one‐stop shopping for members.

One basic service provided by most purchasing cooperatives is on‐farm

delivery. Feed is delivered in bulk to farmers’ bins and bulk tank trucks

deliver fuel oil directly to farm home storage tanks or refill propane fuel

tanks. The value and convenience of such a service are immeasurable.

Many cooperatives not only deliver bulk fertilizer but also offer custom

fertilizer spreading services using specialized equipment. Some petrole‐

um cooperatives even operate special trucks to deliver, repair, and mount

tires on farmers’ field equipment. These services save members the

expense of buying or renting such specialized equipment and valuable

time for farm operations.

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Related Services

Since the days of the earliest settlers, Americans have been using cooper‐

atives to solve mutual problems and to provide specialized services. The

early fire departments operated like cooperatives. Neighbors passed

water buckets from hand to hand to put out the fire on a neighbor’s prop‐

erty. More recently, cooperatives have been providing an ever‐widening

variety of specialized services.

In Florida and California, fruit growers have formed pest control and

grove care cooperatives to own and operate highly specialized, expensive

equipment. Midwest regional cooperatives provide agronomic services,

such as soil testing and fertilizer recommendations.

Regionals have formed interregional cooperatives to develop improved

varieties of seed and to carry out research and demonstration projects

related to crop and livestock production.

In Wisconsin, dairy farmers have formed a highly technical data process‐

ing center. Through the use of sophisticated computers and programs,

the cooperative processes, analyzes, and reports results of periodic tests

performed by dairy herd improvement associations. Data is analyzed

quickly and accurately, and the results are made available to the dairy

members almost immediately.

Animal breeds are improved by the use of artificial insemination cooper‐

atives. Some of these cooperatives operate on an international basis, thus

widening the knowledge resource base.

Much of the western United States could not have developed, agricultur‐

ally or otherwise, without the construction of irrigation systems. Farmers’

irrigation cooperatives played an important role in the development of

these systems. Mutual irrigation companies still exist and are most

numerous in Colorado, Utah, California, Montana, Wyoming, Idaho, and

Oregon. They acquire or develop water and distribute it directly or indi‐

rectly to the land users.

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Since the early 1900s, livestock producers have teamed up with the

Federal Government to use and improve certain public and private land.

This teamwork has often been accomplished through cooperatives. In

1934, Congress passed the Taylor Grazing Act that authorized the

Secretary of the Interior to establish districts for grazing livestock or rais‐

ing forage crops.

The machinery for setting up grazing districts was fairly simple. They

usually included both publicly and privately held land. Public hearings

were conducted about the feasibility of the proposed districts. If feasible,

the Secretary of the Interior issued rules and regulations designed to

ensure that the objectives of the act, respecting the districts, would be

met.

These objectives are:

1. to regulate occupancy and use;

2. to preserve the land from abuse;

3. to develop the range in an orderly manner; 

4. to protect and rehabilitate the grazing areas; and 

5. to stabilize the livestock industry dependent on the use of public

land when the act was passed.

Since the turn of the 20th century, grazing associations and other organi‐

zations have been using certain areas of our national forests. The authori‐

ty of the Secretary of Agriculture to permit, regulate, and prohibit graz‐

ing in the national forests emanates from the Organic Administration Act

of 1897 and the Granger‐Thye Act of 1950. This authority has in turn been

delegated to the chief of the Forest Service. Livestock grazing in the

national forests is administered under a permit system. Permits may be

issued to individuals, partnerships, corporations, or grazing associations,

and are usually valid for 10 years.

Chapter 8 Review Questions

1. Name three types of cooperatives and discuss the purpose of each.

2. What type of cooperative enables producers to capture more profits

from the sale of commodities by extending control past the farm gate?

3. Name a service that a cooperative might perform.

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Farm and Home Service Cooperatives

I

n discussing cooperatives,

most attention is usually

focused on ways to contribute

to members' incomes. But some

cooperatives also provide ser‐

vices that make our lives a little

more comfortable.

Electric and Telephone

Utilities

Today, nearly every rural family

in America enjoys electric light

and power, thanks in large part

to the Rural Electrification

Administration (REA) of the

1930s and today's member‐

owned rural electric coopera‐

tives. REA and telephone cooper‐

atives also provided much of the

original rural telephone service.

These services continue today through such cooperatives and are sup‐

ported by USDA's Rural Utilities Service.

Electric and telephone cooperatives, like others, are democratically con‐

trolled, provide services at cost, and exist to provide services exclusively

for their member‐owners. But they differ from other cooperatives in two

major respects. Because both electric and telephone cooperatives have

exclusive rights to serve specified rural areas in most states, anyone liv‐

ing in those areas who wants electric or telephone service must join those

cooperatives. That exclusivity of service is unique to utility cooperatives.

These cooperatives differ in their use of government financing. They bor‐

row money from the Federal Government through the Rural Utilities

Service (RUS), which succeeded the REA in 1994.

46

CHAPTER 9

Utility Co-ops have traditionally provided

much of the electric and telephone service

to America’s rural communities and farms.

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Rural Utilities Service

The REA was created in 1935 to help farm families and other rural resi‐

dents get electricity on a continuing basis. At the time, 90 percent of

farms were without electricity. The Rural Electrification Act of 1936

authorized REA to make long‐term, self‐liquidating loans in an amount

determined annually by Congress, for the construction of facilities to

serve persons in previously unserved or under‐served rural areas.

In 1973, the act was amended to expand the resources available for

financing rural electric and telephone systems, to provide for insured and

guaranteed loans at reasonable interest rates, and to reduce the impact of

the REA program on the federal budget. A revolving fund was estab‐

lished through collections on outstanding and future REA loans, and

from the sale of borrowers’ notes to the Secretary of the Treasury or the

private money market. Congress also imposes annual limits on the

amounts of these loans.

Significantly, 99 percent of farms had electricity by 1990, largely due REA

programs. In a 1994 USDA reorganization, Congress combined the loan

programs for electric, telephone, water, and sewer under the RUS admin‐

istrative umbrella. Since the inception of the electric program, loans

exceeding $57 billion have been approved to support electric infrastruc‐

ture in rural areas. There are about 700 rural electric systems in 46 States

that are RUS borrowers. Of these, about 95 percent are electric coopera‐

tives. Each is an independent, locally owned business enterprise, incorpo‐

rated under the laws of the state in which it operates.

Rural electric cooperatives have also established their own lending insti‐

tution, the National Rural Utilities Cooperative Finance Corporation

(CFC), to provide supplementary financing. Members have invested

more than $4.5 billion in CFC’s securities. The loan and guarantee pro‐

gram exceeds $20 billion. Under a form of common mortgage agreement,

RUS gives loans made by CFC and other non‐governmental lenders equal

status with those of RUS, on a pro rata basis. RUS also offers its borrow‐

ers technical assistance in engineering, accounting, and management

development.

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Most of the 32 million consumers served by electric cooperatives are

members who share ownership of the electric system and have a voice in

its operation. Each member has one vote in the election of the board of

directors and in any other decisions brought up at the organization’s

annual meeting.

Members of rural electric cooperatives pay a nominal membership fee

that is usually refundable if the member leaves the area. In other words,

they share in operational profits just like members of other cooperatives,

through patronage dividends.

The fee for electric service charged by an electric cooperative covers the

cost of the service, an amount to repay RUS or similar debt on a schedule,

and a small margin to ensure continued operating capital and reserves.

48

Utility cooperatives can link rural areas to medical facilities via advanced

telecommunications technology.

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Most bylaws specify how to treat margins that remain after all expenses

are covered. Some organizations return the margins in the form of rate

reductions and others pay cash patronage refunds. Most electric coopera‐

tives refer to this return as "capital credits." Other types of cooperatives

identify it as "deferred patronage refund."

Members are invited to attend annual meetings of electric cooperatives,

when the officers and the manager report to the membership on progress

and problems. The members vote to fill vacancies on the board of direc‐

tors, which subsequently elects officers from its own ranks.

Rural Telephone Service

Rural telephone and electric cooperatives operate under the same general

principles. They came into being as part of President Franklin Roosevelt's

Depression‐era "New Deal" initiatives. However, despite sincere efforts

to create telecommunications equity among citizens regardless of where

they lived, by World War II the state of telephone systems in rural

America had deteriorated. By 1940, fewer farmers had phones than had

them in 1920.

As a result of this disparity, in 1944 the Rural Telephone Administration

was established, modeled after the successful Rural Electrification

Administration (REA). In 1949, the Rural Electrification Act was amend‐

ed and expanded to provide long‐term, low‐interest loans to rural tele‐

phone systems. This sparked tremendous growth in the number of rural

residents receiving telephone service. Currently, over 95 percent of

American farmers reap the benefits of the 255 rural telephone coopera‐

tives that serve them.

These cooperatives obtain funds from RUS and from the Rural Telephone

Bank. This bank was established in 1971 in the USDA to provide supple‐

mental financing for telephone systems. Bank loans are made for the

same purpose as those made by RUS, but bear interest at a rate consistent

with the bank's cost of money. The stockholders elect 6 of the bank's 13‐

member board of directors.

The National Telephone Cooperative Association (NTCA) in Washington,

D.C., is the trade association for rural telephone cooperatives.

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Farm Insurance

Cooperatives organized to offer fire insurance protection to farmers are

called mutual fire insurance companies. They have served rural America

for more than 200 years. In 1752, Benjamin Franklin formed what is

believed to be the first such cooperative in North America, called

"Philadelphia Contributionship for the Insurance of Houses from Loss of

Fire." An imposing title for such a small organization, but the concept

caught on, and mutual fire insurance companies expanded rapidly.

When mutual fire insurance companies were small, assessments were

made after each loss. Most mutuals today operate on an advance assess‐

ment basis, similar to other types of insurance companies.

Many mutual fire insurance companies operate in rural areas and

respond to the needs of local farmers and community residents. One

drawback is that the company can suffer devastating losses if a natural

disaster, such as a tornado, strikes the entire community. Consequently,

these companies have more recently begun to spread their risk by rein‐

suring with similar companies in other areas or with specialized mutual

reinsurance companies. Not only does this protect the company from fail‐

ure in the event of a disaster, but it also enables the company to write

large policies. This increases the amount of available protection to farm‐

ers.

These companies are true cooperatives. The policyholder‐members own

the company and control it through a board of directors. At one time,

directors acted as representatives and actually wrote insurance applica‐

tions. Today, this responsibility is delegated to professional employees.

Mutual fire insurance companies also serve as leaders in fire prevention

education and awareness. They may make periodic inspections of

insured property, and check for the presence of potential fire hazards

prior to issuing a policy. They increase community awareness and pro‐

mote safety via the educational materials they publish and distribute.

50

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Health

In sparsley populated areas it has often been difficult to attract and retain

competent medical personnel and facilities. As public awareness of the

importance of good health and skilled physicians has increased, rural res‐

idents have responded by forming rural health cooperatives. By pooling

members' resources, these associations have been able to build clinics,

attract top‐notch medical professionals, and devise medical programs

centered on the needs of their members. In short, these cooperatives pro‐

vide their members with affordable, high‐quality health care.

Group health cooperatives are no longer limited to rural areas. Urban

areas have experienced a surge in the growth of cooperative health main‐

tenance organizations (HMOs) and non‐profit community health centers.

Members rely on these organizations to provide general or specialized

medical services and facilities at reasonable prices.

Health cooperatives are formally incorporated and democratically owned

and controlled. Members elect a board of directors to establish policy and

hire a manager to operate the business. Due to the specialized nature of

their services, doctors on the staff control the medical aspects of the asso‐

ciation. They may consult with the board occasionally on policy matters,

but generally manage the medical issues independently.

This symbiotic relationship between the cooperative and the medical staff

benefits both groups. Doctors are freed from administrative problems,

finances, housekeeping details, and other distractions normally associat‐

ed with professional practice. They can devote more time to medical

issues and even patient appointments. In some instances, these doctors

gain access to highly specialized, expensive equipment, ordinarily

beyond the financial grasp of individual practitioners.

Another type of health cooperative gaining attention in the U.S. is the

home health care cooperative. These cooperatives have workers as mem‐

bers and serve the elderly in their homes. 

51

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Housing

More than 1.5 million American fam‐

ilies live in homes owned and main‐

tained by cooperative associations.

These families represent all socioeco‐

nomic levels, nationalities, religions,

ages, and interests. They live in

townhouses, mobile homes, condo‐

miniums, single‐family homes, and

apartment buildings. Many have spe‐

cial needs. Their housing cooperative

provides them independent living

opportunities and a support network

of people with similar needs. There

are cooperatives for student housing,

seniors, and even for artists which

offer the benefit of combined work‐

space. Irrespective of physical charac‐

teristics, all of these housing cooperatives share the same cooperative

philosophy of democratic control.

Although housing cooperatives are abundant, the concept is not new. The

first known housing cooperative was organized in New York City in the

late 1800s. The city now has thousands of housing cooperatives, attesting

to the great need for affordable, reliable housing. The majority of cooper‐

ative housing is concentrated in major cities such as New York,

Washington, Chicago, Miami, Detroit, Atlanta, and San Francisco.

These associations are governed much like other cooperatives—by the

members who own them. Members elect the board of directors and hire a

manager to perform management functions. Some smaller cooperatives

forgo this option and instead choose to handle all maintenance and oper‐

ations responsibilities.

Housing cooperative residents realize many benefits from their member‐

ship, such as personal and real estate tax advantages, reduced mainte‐

nance costs, the advantage of home ownership, and the resulting equity

52

Quality, affordable housing has been

provided through housing

cooperatives since the late 1800s.

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accumulation. As members, residents own a share in the corporation that

owns the building in which they live. There is no landlord and residents

are secure in the knowledge that they can remain in their home indefi‐

nitely, as long as they are able to fulfill the obligations stated in the

bylaws.

The National Association of Housing Cooperatives (NAHC), based in

Washington, D.C., is the only nationwide cooperative housing trade

organization.

Food

Grocery cooperatives, owned by consumers, have been around for a long

time in the United States, going back to the mid 1800s. Their numbers

have fluctuated over time, but as today’s consumers yearn for more fresh,

natural, and local foods, there appears to be a renewed interest in con‐

sumer‐ or producer‐ owned food co‐ops, buyers clubs, and farmers mar‐

kets. Today, in a highly competitive retail food market, there are 290 food

cooperatives in the U.S. with 487 thousand members. 

53

Some housing cooperatives employ the self-help concept, in which members

invest “sweat equity,” helping supply construction labor. Photo courtesy RenoGazette Journal

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Many grocery co‐ops operate much like the larger chain groceries, but on

a smaller scale. Most work to procure their food goods from local farmers

as much as possible. Farmers markets are proliferating in rural and urban

areas, where local farmers can cooperate in selling their produce and

agricultural products. Buying clubs have been developed where mem‐

bers pre‐order and purchase goods from local producers and venders and

pick up their purchases at a common market spot. 

These types of food cooperatives help consumers better know their food

and where it comes from. And they greatly aid local producers with a

known market mechanism to reach end users.

Chapter 9 Review Questions

1. What Federal Government agency helped to make electricity available

in nearly every rural American household?

2. Who formed what is believed to be the first mutual fire insurance

company in the United States? What year was it developed?

3. Name three kinds of cooperative housing.

For more data and information on different types of cooperatives in the United

States see: Research on the Economic Impact of Cooperatives by the

University of Wisconsin Center for Cooperatives: http://reic.uwcc.wisc.edu/

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Cooperative Credit Services

There are four Farm

Credit Banks with the

Farm Credit System

(FCS), and one Agricultural

Credit Bank, called CoBank.

Combined, these banks pro‐

vide funds and support ser‐

vices to 89 locally owned

Farm Credit associations and

numerous cooperatives. The

FCS provides more than $90

billion in loans to 500,000

borrowers. Congress created

the system in 1916 to provide

Americans in agriculture

with a reliable source of credit. The purpose of that system has remained

virtually unchanged over the last century.

Farm Credit System

There are six regional Farm Credit Banks within the Farm Credit System

(FCS), and one Agricultural Credit Bank, called CoBank. Combined, these

banks provide funds and support services to nearly 200 locally owned

Farm Credit associations and numerous cooperatives. The FCS provides

more than $62 billion in loans to 500,000 borrowers. About one‐fourth of

the country's agricultural credit needs are met by these institutions.

Loans cover farm real estate loans, farm operations, rural home mort‐

gages, credit‐related life insurance, crop insurance, and various financial‐

ly related services such as farm record keeping and financial planning.

Farm Credit System banks raise their loanable funds differently than

commercial banks. Rather than securing deposits, the FCS sells sys‐

temwide bonds and notes in capital markets. These proceeds are then

channeled back to rural America through the vast nationwide network of

farm credit lending institutions.

55

CHAPTER 10

Cooperative financial institutions exist solely for

the purpose of serving the needs of members.

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The structure of local credit associations varies across the country. These

different structures serve unique purposes. Federal Land Credit

Associations (FLCAs) originate and service long‐term loans for the pur‐

chase, improvement, or refinancing of debt on real estate. Production

Credit Associations (PCAs), on the other hand, provide short‐ and imme‐

diate‐term loans. Lastly, Agricultural Credit Associations (ACAs) pro‐

vide both short‐ and long‐term loans. Both PCAs and ACAs provide

financing for expenses associated with the production, processing, and

marketing of our nation's food and fiber, as well as for equipment, facili‐

ties, and livestock.

CoBank, the only Agricultural Credit Bank in the FCS, finances agricul‐

tural cooperatives, rural utility systems, and other rural businesses

throughout the United States. CoBank also provides credit to the Farm

Credit associations serving agricultural producers across the country.

With banking centers throughout the United States and representatives

in Argentina, Mexico, and Singapore, CoBank can also finance agricultur‐

al exports and provide international banking services for the benefit of

farmer‐owned cooperatives and American agriculture.

There are several national service entities that serve the FCS. For exam‐

ple, Farm Credit Leasing Services Corporation based in Minneapolis,

Minnesota, provides equipment leasing services to eligible agricultural

producers, cooperatives, and rural utilities across the nation.

The Federal Farm Credit Banks Funding Corporation manages the sale of

systemwide bonds and notes in capital markets, and provides financial

advisory services to system banks. Governed by a 10‐member board and

owned by FCS banks, this service entity is located in Jersey City, NJ.

Lastly, Farm Credit Financial Partners, Inc., provides many critical busi‐

ness services, including information technology, marketing, training, and

human resource and legal services for ACAs from Maine to California.

True to cooperative principles in general, all FCS banks and associations

are governed as cooperatives, with boards of directors elected by mem‐

ber‐borrowers/stockholders.

56

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The Farm Credit Council is the Farm Credit System's national trade associ‐

ation, with offices in Washington, D.C., and Denver, CO. It represents the

system's legislative and regulatory interests and provides a wide range of

business services.

The independent federal regulatory agency responsible for ensuring the

soundness of all Farm Credit System institutions is the Farm Credit

Administration (FCA), located in McLean, Va. A three‐member board

nominated by the President and confirmed by the Senate directs the FCA.

Operating expenses for the FCA are paid by the institutions it regulates.

Credit Unions

Credit unions are cooperatives that operate on a not‐for‐profit basis. They

exist to provide members with lower loan rates and higher rates on sav‐

ings. Credit unions encourage systematic savings and teach the wise use

of money. Credit unions are chartered and supervised either by a state or

by the Federal Government. Most are federally insured by the National

Credit Union Administration.

Originating in Europe, credit unions began in the United States in 1909

when Massachusetts passed the first state credit union law. Congress

passed the Federal Credit Union Act in 1934 establishing the federal cred‐

it unions system. Similar laws now exist in all states.

Today, there are about 8,334 credit unions in the United States with com‐

bined assets of $761 billion and serving more than 91 million members.

Nearly 700 of those credit unions serve 4.5 million members in rural com‐

munities.

Whether representing a small group or a large federal organization, cred‐

it unions are all formed around people with something in common.

Membership is typically limited to persons who belong to the same orga‐

nization, employer, community, or religious affiliation. Many credit

unions permit family members to join, or allow individuals to remain

members even if they leave the association through which they originally

joined.

57

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Members own the credit union and control it through the board of direc‐

tors and a supervisory committee. These elected positions are all filled

voluntarily and the members who serve in these roles receive no compen‐

sation.

Members' savings are called shares. Share deposits may be made in small

amounts and may be withdrawn at will under most circumstances. In

addition to savings opportunities, many credit unions also offer a wide

variety of financial services such as checking accounts, ATM cards, and

all forms of consumer loans.

Using the funds saved by members, credit unions in turn make loans to

members. Rates paid on deposits or charged on loans are typically more

58

Credit Union House, located two blocks from the U.S. Capitol in Washington, was

opened in 2001. State credit union leagues across the nation operate the facility

for a wide variety of functions, all intended to give credit unions a greater visibility

with Congress. Photo courtesy Credit Union House LLC

CIR 5:Layout 4 (rev) @@ 8/12/2011 12:19 PM Page 58
favorable than those at comparable for‐profit financial institutions. Net

income from these lending operations is usually distributed to members

in the form of share dividends, after reserves have been set aside.

Credit unions, by nature, promote morale and a sense of self‐help among

members. The credit union philosophy emphasizes financial indepen‐

dence and empowerment.

Organizations Serving Cooperatives

Members of cooperatives have established organizations to serve func‐

tions both specific to individual cooperatives, and functions that are com‐

mon among them. Several government agencies also perform activities in

support of cooperatives.

Thirty‐two state cooperative councils state councils, representing both

consumer and producer cooperatives, provide primary legislative and

educational services. These organizations work both alone and hand‐in‐

hand with government agencies to promote and sustain cooperative

activities of all kinds, and to educate young people who are the future of

cooperatives. They also provide education to cooperative management,

employees, directors, and members. Some provide development and

operational assistance as well.

Some governmental agencies serve regulatory functions, such as Farm

Credit Administration and the National Credit Union Administration,

while others support cooperatives in other ways. For example, USDA’s

Rural Business‐Cooperative Service (RBS) provides economic, education‐

al, and development assistance. USDA’s Rural Utilities Service (RUS)

helps rural utility cooperatives expand and enhance their technologies.

Cooperative development centers scattered across the country provide

cooperative development assistance to rural residents. These centers help

in the development of all types of rural cooperatives, from agricultural to

worker‐owned to food to housing to health care, etc. There are also some

academically‐oriented cooperative centers such as the Wisconsin Center

for Cooperatives and the Quentin Burdick Center for Cooperatives

(North Dakota) that conduct research and provide education and techni‐

cal assistance services to cooperatives.

59

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National trade associations may serve a specific type of cooperative, such

as the National Rural Electric Cooperative Association (NRECA), the

National Milk Producers Federation, or the Credit Union National

Association. Others may serve a broad range of cooperatives, such as the

National Council of Farmer Cooperatives and the National Cooperative

Business Association. Although they focus mainly on legislative activi‐

ties, they also provide important sources of education, insurance, and

management services.

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Canvassing Cooperatives In Your Area

The best way to learn

more about today's

cooperative agribusi‐

ness firms is to see them

firsthand. Take some time to

visit those serving your area.

Inquire about their policies

and operations. Whether you

live in a city, a small town, or

on a farm, chances are there

are cooperatives serving the

needs of your neighbors.

Some cooperatives are head‐

quartered in large cities, but

most have plants or offices in

smaller rural communities.

Find out how many coopera‐

tives there are within a 10‐

mile radius of your home, and decide what you would like to learn about

them. Some questions can be asked of members. A member of a coopera‐

tive's board of directors, who might live in your vicinity, would be an

ideal resource. For specific information, contact a cooperative field repre‐

sentative, an office manager of a local cooperative, or a public relations

director of a regional organization.

Look at the Web sites of the cooperatives in your area if they have them.

You can learn even more by reading past issues of a cooperative’s maga‐

zine, newsletter, or newspaper. You might even be invited to attend a

membership meeting held in your area. Explore as many different

aspects of the cooperative as possible, but be sure to have a grasp of the

kinds of things you want to learn before you begin.

For starters, here are a few important things to learn about a cooperative

as you begin your survey:

1. What primary products/services does it provide?

2. What other businesses provide similar services?

61

CHAPTER 11

Many cooperative resources in your community

possess a wealth of knowledge and information

about the benefits of cooperatives.

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3. What led to the organization of the cooperative?

4. What types of patrons comprise the membership? Do they regu‐

larly patronize the cooperative?

5. What are the requirements for membership?

6. Is there a membership agreement or a marketing agreement if it

is a marketing association? If it exists, how is it enforced?

Successfully?

7. Is the cooperative's structure centralized or federated?

8. How are patronage refunds distributed?

9. How are patrons informed of their contributions to the coopera‐

tive's capital fund or revolving fund credits?

10. Are dividends paid on capital stock? If so, at what rate?

11. How long is the revolving fund cycle?

12. If it provides a marketing or purchasing service, how do total

returns to patrons or operating costs compare with those paid

by competitors? If it provides other services, how do costs or

charges compare with those of other firms?

13. Is the cooperative expanding in volume of business or services

performed?

14. Is membership increasing or decreasing? Why?

15. Are directors respected in their communities as reliable,

responsible, and public‐spirited people?

16. Is the cooperative progressive or does it just "follow the leader"

or accept the status quo?

17. Are members loyal patrons of the cooperative? Do they speak

highly of it?

18. Does the cooperative allow members to buy supplies on credit?

19. If it is a marketing association, does the cooperative sell primar‐

ily to wholesalers, retailers, or both? Does it export to other

countries?

20. Does the cooperative own or operate assets such as refineries,

oil wells, fertilizer plants, feed mills, canneries, slaughterhous‐

es, processing plants, or research laboratories?

You may not be able to find all the answers to these questions at one time

or from one person. But any answers you do get will contribute to your

knowledge of the association and help you evaluate its contribution to

your community.

62

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Things you learn about one cooperative may not be true of another.

Cooperatives differ greatly in services performed, size and makeup of

membership, financial management and operations, size of staff, and

number of directors.

Regardless of their differences, all cooperatives share the same three dis‐

tinguishing principles—user‐owned, user‐controlled, and user‐benefits.

And they also share some common practices such as education, concern

for community, cooperation among cooperatives, limited return on equi‐

ty capital, and autonomy and independence. 

63

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A Cooperative For Your Group

I

f you are a member of

FFA, a 4‐H club, or other

group, you may find that

belonging to a cooperative

serving your area could ben‐

efit you or your organization.

That would give you a per‐

sonal and practical purpose

for your inquiry about local

cooperatives.

If this is the case, it would be

necessary to determine

whether the cooperative con‐

siders you, or your group as

a whole, eligible for member‐

ship. What type of coopera‐

tive service could your group

use?

The cooperative that best serves your needs might market crops or live‐

stock produced on a chapter farm, or purchase feed, seed, spray, or

petroleum products. It might provide an essential, specialized related ser‐

vice such as custom pest control.

If your group joins a cooperative, members must be aware of their

responsibility to provide capital to the business in proportion to patron‐

age of that business.

Membership carries both advantages and responsibilities. Members

should stay informed regarding the cooperative's policies and operations

and should attend membership meetings. Vote for directors, and in all

elections of the cooperative. Volunteer to serve in official capacities rep‐

resenting the cooperative membership. As a cooperative member, be

active, interested, supportive, and informed.

64

CHAPTER 12

Clubs and organizations such as FFA and 4-H

can explore the benefits of cooperatives. Photo

courtesy 4-H Council

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In some chapters or clubs, new members may pay a small membership

fee and purchase a revolving fund credit from a graduating member.

Some chapters with a farm belong to several cooperatives. For their mem‐

bers, cooperative activity is part of the learning process. Membership

unites individuals in a common effort and business interest, and may

yield savings to group members.

65

Young people in rural communities are often heavily involved in agribusiness and

sometimes rely on the income they earn from these efforts to pay for future

educational plans. Photo courtesy AMPI

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Careers In Agribusiness

Your interest in agribusiness

may be academic as a

prospective member‐owner.

You may even be a prospective

employee. Regardless of what draws

you to agribusiness, cooperatives

represent great opportunities for

young people with agricultural

interests or experience. For those

who wish to pursue the business

and management side of agriculture,

cooperatives can provide the ideal

career opportunity.

As farming becomes more technical

and large‐scale, farmers are faced

with the reality of a complex and

changing agricultural environment. They must gain new knowledge and

skills to meet the increased demand for food and fiber of our burgeoning

society. Because profitable farming now relies so heavily on increased

mechanization, and because farming costs are now so high, the capital

needs required to operate a successful agricultural operation are higher

than ever before.

Where will the people needed to manage agribusiness growth and expan‐

sion come from? Where will the next generation of agricultural leaders

come from, and where will they receive their training in this field?

Agribusiness offers job opportunities for tens of thousands of agricultural

college graduates each year. Degrees in this field are offered at every

level—associate's, bachelor's, master's, and doctorate.

By contrast, many agribusiness firms offer work opportunities for voca‐

tionally trained young people in positions where a farming background

is valuable. This is particularly true of farmer cooperatives.

66

CHAPTER 13

Career opportunities abound for young

people interested in agribusiness. Photo

courtesy GROWMARK

CIR 5:Layout 4 (rev) @@ 8/12/2011 12:19 PM Page 66
Variety of Careers

In addition to farming and ranching, job

opportunities in agribusiness include

careers in research, conservation, manage‐

ment, education, sales, communications,

finance, and a long list of technical occu‐

pations.

Related service or support careers include

agribusiness consulting, accounting,

information technology, financial analy‐

sis, legal consulting, and government

affairs. Career opportunities exist in a

variety of technical fields, such as chemi‐

cal and mechanical engineers, animal sci‐

entists, biologists, architects, agronomists, information technology spe‐

cialists, botanists, and economists.

Because agribusiness covers such a wide range of activities, career oppor‐

tunities for young people exist regardless of whether or not they have

lived on a farm. An increasing number of these opportunities are in the

nation's farmer‐owned cooperatives.

Education Requirements

In the great variety of agribusiness occupations, the necessary qualifica‐

tions are as varied as the positions available. There are places for high

school and business school graduates, people with specialized training,

and college or university graduates.

As in all other types of businesses, the salary paid, responsibilities

assigned, and authority given are roughly commensurate with the extent

of the employee's education. While many successful agribusiness

employees do not hold college degrees, many who serve in administra‐

tive roles are college graduates. Directors of research or research analysts

usually hold a doctorate.

67

Many careers in agribusiness

require technical expertise and

specific training.

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People with business college training are needed on accounting staffs, as

secretaries, and as office managers. College graduates with some knowl‐

edge of the commodities being handled by a cooperative are generally

preferred as field representatives. In addition to formal training, experi‐

ence is desirable for those who serve as department heads in such areas

as sales, production, transportation, and procurement of supplies.

College training in journalism is an advantage to an editor or publica‐

tions director.

Usually, the manager of a cooperative or other agribusiness firm handles

public relations through published materials, contacts, meetings, articles,

and entertainment of guests and visitors. Larger firms and many cooper‐

atives often employ a public relations director.

Many agribusiness firms employ a credit manager, who should have a

thorough knowledge of members' monetary needs and earnings, and of

sound financial procedures.

A few firms maintain a research department that is concerned with eco‐

nomic research, product research, consumer preferences, or operating

practices and problems.

These are just a few of the multitude of talents and skill sets needed to

sustain a successful agribusiness firm. It takes a broad mix of educational

backgrounds and interests to fulfill all the different employment needs in

an agribusiness organization.

Above all, the most promising agribusiness employees must have a gen‐

uine affinity for people, an understanding of differences in attitudes and

needs, a willingness to work diligently, and an enthusiasm for the field of

business or service in which their firm is engaged. Dedicated agribusi‐

ness employees realize that the business will prosper only if it serves

patrons efficiently and effectively.

68

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Cooperatives In The Years Ahead

Cooperatives are

already in the fore‐

front in bringing tech‐

nological changes to

agribusiness. As indicated by

the growing number of

value‐added and new gener‐

ation cooperatives, these

organizations are becoming

increasingly important to the

production of agricultural

products, and in getting

these products to consumers.

Requirements in processing

and marketing farm products

are constantly changing, and

the cooperative model is one

way that farmers can meet

them while still maintaining

control of their products.

In the years ahead, there will

be an urgent need for agricultural producers to stay abreast of the con‐

stant advances in science. To do so, these producers will have to tap the

reservoir of available skills and knowledge, and share these resources

freely with one another.

Producers attempting to go it alone will have to be their own financial

and management analysts; soils, crop, and livestock scientists; cultivating

and harvesting experts; marketers; mechanics; and technical experts.

Individuals will find it difficult to keep up with the speed at which new

information arrives on the agricultural scene. Just as with other business

owners, individuals increasingly must hire professional advisors in many

different fields, at least on a part‐time basis.

69

CHAPTER 14

Cooperatives of the future will enlist

unprecedented technological and scientific

advances.

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Few farmers can afford their own individual sets of experts, so they form

a cooperative to do that. Some cooperatives provide links to headquarter

offices or central locations to gain technology and information for mem‐

bers. Farmers often get immediate answers to specific questions or prob‐

lems.

In many cases, farmers need cooperatives for enhanced financial benefit.

Cooperatives provide them with business structures that allow them to

extend their farm businesses for further gain. They provide them with

information and scientific knowledge from which to draw. Cooperatives

provide farmers an ownership apparatus for buying and selling their

products at reasonable rates, and also often provide them with further

value‐added returns by processing their raw products. 

In all aspects of agribusiness, the farmer of tomorrow faces many exciting

challenges. Will these farmers be priced out of their own businesses? Or

will they find ways to survive—by adapting cooperatives to their needs

or by other innovative efforts? One farmer alone could be a weak voice

lost in today's vast marketplace. But the voices of many, speaking in uni‐

son, can be an important force to be reckoned with.

70

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agribusiness any aspect of business that involves the produc‐

tion, processing, or distribution of agricultural

products.

capital financial assets in the form of money or physical

property.

centralized regional

cooperative similar to a local cooperative in that membership is

comprised of individuals, but it usually serves

patrons in the relatively restricted area of a single

state or region.

cooperative a user‐owned and democratically controlled busi‐

ness in which benefits are received in proportion

to use.

cooperative 

corporation a form of business that exists to provide economic

services to its members, and sells shares of stock to

obtain capital rather than for speculative gain pur‐

poses.

differentiated 

product a product with unique or special characteristics

that make it more marketable to some purchasers.

federated 

cooperative a "cooperative of cooperatives" whose membership

is comprised of local cooperative associations.

fixed capital money used to buy such tangible assets as land,

buildings, and equipment.

investor‐oriented 

corporation a form of business that is operated on a for‐profit

basis and obtains capital funds through sales of

stock shares.

71

Glossary

CIR 5:Layout 4 (rev) @@ 8/12/2011 12:19 PM Page 71
limited liability 

company a form of business that is jointly owned by two

or more people; provides the tax advantages of

a partnership; is a separate legal entity, like a

corporation; and allows the member‐owners to

control the all aspects of the business.

local cooperative a cooperative that provides services for a com‐

munity or area, whose membership is com‐

prised of individuals.

operating capital money required to operate the business on a

daily basis, such as paying employees, paying

utilities, and buying necessary supplies.

partnership a form of business that is jointly owned by two

or more people who agree to operate on a part‐

nership basis.

regional cooperative a cooperative that serves a number of counties,

a state, or a number of states. Membership can

be comprised of individuals, cooperatives, or a

combination of both.

72

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73

Related Publications

Cooperatives 101, CIR 55

http://www.rurdev.usda.gov/rbs/pub/cir55/c55text.pdf

Cooperatives: What They Are and the Role of Members, Directors, Managers,

and Employees, CIR 11

http://www.rurdev.usda.gov/rbs/pub/cir11‐ppt.pdf

Do Yourself a Favor: Join a Cooperative, CIR 54

http://www.rurdev.usda.gov/rbs/pub/cir54.pdf

How to Start a Cooperative, CIR 7

http://www.rurdev.usda.gov/rbs/pub/cir7/cir7.pdf

Understanding Cooperatives, Education Series, CIR 45, Sections 1‐16

http://www.rurdev.usda.gov/rbs/pub/cooprpts.htm

Farmer Cooperative Statistics (annual statistical reports)

http://www.rurdev.usda.gov/rbs/pub/service.htm

To request hard copies of select reports, contact:

USDA/Rural Development/Rural Business‐Cooperative Service (RBS)

STOP 3257

Washington, DC 20250‐3257

Email: coopinfo@wdc.usda.gov

Website: http://www.rurdev.usda.gov/rbs/pub/newpub.htm

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U.S. Department of Agriculture

Rural Business–Cooperative Service

Stop 3250

Washington, D.C. 20250-3250

Rural Business–Cooperative Service (RBS) provides research, management, and

educational assistance to cooperatives to strengthen the economic position of

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

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

cooperatives and to give guidance to further development.

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

develop cooperatives to obtain supplies and services at lower cost and to get

better prices for products they sell; (2) advises rural residents on developing

existing resources through cooperative action to enhance rural living; (3) helps

cooperatives improve services and operating efficiency; (4) informs members,

directors, employees, and the public on how cooperatives work and benefit their

members and their communities; and (5) encourages international cooperative

programs. RBS also publishes research and educational materials and issues

Rural Cooperatives magazine.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all of its

programs and activities on the basis of race, color, national origin, age,

disability, and where applicable, sex, marital status, familial status, parental

status, religion, sexual orientation, political beliefs, genetic information, reprisal,

or because all or part of an individual's income is derived from any public

assistance program. (Not all prohibited bases apply to all programs.) Persons

with disabilities who require alternative means for communication of program

information (Braille, large print, audiotape, etc.) should contact USDA's

TARGET Center at (202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write to USDA, Assistant Secretary for

Civil Rights, Office of the Assistant Secretary for Civil Rights, 1400

Independence Avenue, S.W., Stop 9410, Washington, DC 20250-9410, or call tollfree at (866) 632-9992 (English) or (800) 877-8339 (TDD) or (866) 377-8642

(English Federal-relay) or (800) 845-6136 (Spanish Federal-relay). USDA is an

equal opportunity provider and employer. 

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