United States

Department of

Agriculture

Rural

Development

Administration

Cooperative

Services

October 1994

developed by

Tamm y M, Meyer

Cooperative

Education

Specialist

Cooperatives exist in nearly

every business sector and are

organized in a variety of ways.

Like other businesses in our

economy, they range in size from

organizations with only a few

member-owners to massive and

complex organizations with thousands.of member-owners. The

way a cooperative is organized

determines how it is operated,

managed, and controlled by its

members, and the types of benefits offered.

Cooperative structure can be classified

into five types as follows: geographic,

governance, functions, financial, and

other arrangements. Each will be defined

and discussed in this circular.

Geographic Territory Served

Cooperatives can differ in structure,

depending on the size of the area served:

local, super local, regional, interregional

or national, and international,

Local cooperatives operate in a relatively small geographic area, typically within a

radius of 10 to 30 miles. Individuals are

the members of these local cooperatives.

Super local cooperatives operate over

two or more counties, with several

branch facilities.

A regional cooperative usually serves

an area comprising a number of counties,

an entire State, or a number of States.

Interregional or national cooperatives

are organized, owned, and controlled by

regional cooperatives, usually to provide

specific services. They may serve a major

portion or virtually all of the United States.

International cooperatives operate on

an international basis, with headquarters

in the United States or other countries.

Governance or Control

Structures

Based on membership structure, cooperatives can be classified as centralized,

federated, or mixed.

A local cooperative is a centralized

cooperative - individual producers make

up the membership. A centralized regional may serve members in a large

geographical area, such as a major portion of all of an entire State or all or parts

of several States. A centralized regional

has one central office, one board of directors, and a manager (chief executive officer) who supervises the entire operations,

which may be conducted through several

or many branch offices.

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. . . . . . . . . . . .

A federated cooperative is a cooperaBased on member- tive of cooperatives. The members of a

ship structure, federated cooperative are local cooperatives, operated by a manager hired by and

cooperatives can be responsible to local boards of directors.

classified as central- Each local association in a federated cooperative is a separate business entity that

ized, federated, or owns a membership share entitling it to

mixed. voting rights in the affairs of the regional.

The federated cooperative has its own

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . hired management and staff, and a board

of directors elected by and representing

the local associations.

A mixed cooperative is a combination

of the two -their members may be

individual producers as well as local

cooperatives.

Functions Performed

Cooperatives may perform one or more

of these functions for members:

Centralized

+ marketing products,

+ purchasing supplies, and

+ providing services.

mpJ@

Federated

COOPERATIVE

Mixed

Marketing

The need to meet consumer demands

and expand markets for products

presents an increasing problem for farmers acting independently. Few farmers

produce in quantities needed to deal

directly with large wholesalers or retailers. The marketing cooperatives as quantity assemblers provide an increasing

variety of off-farm processing and marketing services for about one-fourth of all

products that farmers produce.

Marketing cooperatives help farmers

produce and process quality products to

market specification. Cooperative marketing includes the operation of grain elevators, milk plants, wool pools, cotton gins,

livestock markets, vegetable markets, and

fruit packing plants. Some marketing

cooperatives include the coordination of

processing, canning, drying, blending,

concentrating, extracting, freezing, or

consumer packaging of animal and animal products, such as dairy, fish, meat,

and poultry and the same for fruit, nut,

and vegetable products, and many other

products in integrated organizations.

Marketing cooperatives enable farmermembers to extend control of their products as long as the cooperative retains

physical or legal title to a commodity

handled through processing, distribution,

and sale.

Some marketing cooperatives also can

be called bargaining associations, which

may not handle the actual product but

rather act as the selling agent on behalf

of the member.

Purchasing

Farmers first turned to cooperatives as

economic tools to gain advantage of

quality and quantity of farm production

supplies such as feed, fuel, fertilizer, and

seed. These early efforts often became
. . . .

The cooperative can

be most effective by

serving its members

needs.

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

businesses having full-time managers

and warehouses to handle other production supplies and services such as farm

chemicals, animal health products, fencing, building supplies, construction contracting, automotive accessories, etc.

Most cooperatives have affiliated with

other cooperatives, often through regional and interregional cooperatives. These

efforts reduce farmer costs and strengthen purchasing power through owning

large-scale facilities such as petroleum

refineries; phosphate, potash, and nitrogen manufacturing plants; feed mills;

research farms; and laboratories.

One of a purchasing cooperative’s

objectives is to reduce production costs

for members through quantity purchasing, manufacturing, and distributing,

procuring quality products, and providing

related services as needed. Distribution

to producer members is a major concern

at the local level because added services

are needed. Another objective is to provide a dependable supply of quality products for members.

Many cooperatives now perform both

marketing and purchasing functions,

although they started as single-function

organizations.

Service

Agricultural service cooperatives provide

services related to the production and

marketing of farm commodities, or they

may provide general services.

Related service cooperatives offer

unlimited possibilities and are used in

ever-widening circles to solve mutual

problems and provide specialized

services that affect the location, form, or

quality of farm products or supplies for

members. Services may be part of the

operation, or they may be performed by

separate cooperatives. Examples of services related to handling farm supplies

are recommending and applying fertilizer,

lime, or pesticides; animal feed processing; and crop harvesting. General service

cooperatives provide a number of specialized services assisting farmers in their

business such as credit, electricity, and

telephone service.

Financial

Cooperatives are incorporated as either

stock or nonstock organizations. The type

of capital structure is specified in the articles of incorporation.

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

types are necessary. Most stock cooperatives issue one share of common stock

per member to show membership. Preferred stock is issued to show additional

capital contributions. (Common stock is

usually the voting stock; preferred stock

is generally nonvoting.)

If the association is a nonstock organization, it issues some kind of certificate to

show capital contributions of members.

Two types are usually used - a membership certificate as written proof of the

right to vote and capital certificates in a

manner similar to the way stock cooperatives use preferred stock.

Other Structural

Arrangements

Subsidiary

A corporation organized, owned, and

controlled either totally or partially by a

parent cooperative. Its purpose is to

assume certain duties and functions of

the parent cooperative.
Marketing Agency-in-Common

Organized by two or more marketing

cooperatives to market products or provide services for member cooperatives. It

does not physically handle products, and

it generally does not take title to them. Its

sole responsibility is to arrange for the

sale of its members’ products.

Joint Venture

An association of two or more

participants, persons, partnerships, corporations, or cooperatives to carry on a

specific economic operation, enterprise,

or venture. The identities of these participants remain separate from their ownership or participation in the venture.

Holding Company

A corporate entity with a controlling ownership in one or more operating companies. The degree of ownership can vary

widely, as long as the holding company

can exercise control through the operating company’s board of directors. Usually

the holding company generates no revenues from operations; income is limited

to returns from investments in the operating companies.

Contract Agent

A county or community cooperative may

organize, owning nothing but contracts

and paying only the money to hire an

agent to handle the goods and keep

patronage records. The cooperative then

pays patronage refunds on the basis of

the agent’s records.

Private Dealers

The dealer, as a franchise, keeps records.

If the franchiser cooperative makes

money and pays patronage refunds,

these go to the dealer’s customers and

the dealer is paid a commission on sales.

Conclusion

Cooperatives are classified as a way to

easily identify the nature of the business.

The classifications do not mean that one

type may necessarily be better or worse

than another. It simply means that there

are distinguishing differences among the

types, and shows the wide variety of

cooperatives and the differences in their

operations, management, control, etc.

What is important for cooperative members to understand about cooperative

structure and their own organization is:

+ what type of cooperative it is;

+ how it is structured; and

+ how the cooperative, whatever classification it might be, can be most effectively used by its members for serving

their needs and achieving objectives.

This circular is one in s continuing series that provides training information and presentations for education resource persons who may or

may not be familiar with the cooperative form of business. This series provides the basic background material they need, in s form that

csn be readily adapted, with limited preparation time, to s lecture or other presentation.

For s complete listing of the series, write to RDA-Cooperative Services, U. S. Department of Agriculture, Education and Member Relations Program Area, Ag Box 3253, Washington, DC 20250-3253.

The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of rsce, color, national origin,

sex, religion, age, disability, political beliefs and marital or familial status. (Not all prohibited bases apply to sll programs.) Persons with

disabilities who require alternative means for communication of program information (braille, large print, audiotape, etc.) should contact

the USDA Office of Communications at (202) 720-5881 (voice) or (202) 720-7808 (TDD).

To file s complaint, write the Secretary of Agriculture, U.S. Department of Agriculture, Washington, D.C., 20250, or call (202) 720-7327

(voice1 or (202) 720-1127 (TDD). USDA is sn equal employment opportunity employer.

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