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Agricultural Cooperatives 3211

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1 Agricultural Cooperatives 3211
Michael Thomsen, PhD Associate Professor Department of Agricultural Economics University of Arkansas

2 Objectives Describe main principles that characterize cooperative organizations Explain the difference between use benefits and ownership benefits Distinguish between the roles of “Sapiro type” and “Nourse type” cooperatives Describe common organizational structures for regional cooperatives Outline advantages and disadvantages of equity redemption alternatives Explain organizational challenges inherent in the cooperative model Identify managerial roles for decision makers in cooperatives

3 Cooperatives in Agriculture:
49 % of farm level grain and oilseed marketings Input Supplies 44 % of fertilizers 47 % of petroleum products 32 % of crop protectants 21% of feeds

4 Some Coop. Brands Land O’ Lakes Bird’s Eye Blue Diamond Ocean Spray
Sunkist Riceland

5 Main Cooperative Principles
Voting by member-users on a democratic or proportional basis User control principle Equity provided by patrons User ownership principle Net income distributed to patrons as patronage refunds on a cost basis User benefits principle

6 What is a Cooperative? A cooperative is a user owned, user controlled organization established to provide benefits to users. These benefits are distributed on the basis of use.

7 How cooperatives can increase returns
Use benefits Increased returns from your farm assets Allows you access to goods/services/markets Ownership benefits (returns from your investment in the cooperative)

8 Extend Ownership to Other Levels of the Marketing System
Input Supplier Support Services Lenders Utilities First handler/Processor

9 Roles for cooperatives
Aaron Sapiro Single commodity cooperatives Long term producer contracts Dominant market share Sound merchandising and orderly marketing

10 Roles for cooperatives
Edwin Nourse Integral part of existing free market system (compete with investor oriented firms) Control modest share of the market Disciplinary role

11 Competitive Yardstick
IOF Cooperative Cooperatives compete with IOF’s Presence of cooperatives discipline the market place What happens if cooperatives go out of business? lower prices for farm products higher prices for farm inputs

12 Capper-Volstead 1922 Enabled farmers to legally form associations for their mutual benefit Specified requirements that such associations must meet Gives cooperatives special status with respect to antitrust laws but does not mean cooperatives are exempt from such laws

13 Organizational Structure
Independent local associations Federated associations Centralized associations Mixed associations

14 Cooperative Members physical flow, products or services
voting, ownership, patronage refunds

15 Federated Regional Cooperative

16 Centralized Regional Cooperative

17 Simplified Balance Sheet

18 Equity Redemption Alternatives
Revolving fund plan Base capital plan Special situations plan



21 Cooperative Challenges
Increasingly segmented membership base Equity capital Member and public relations Management (broader scope for optimization)

22 Cooperative Problems Horizon Problem Portfolio Problem
Occurs when the useful life of a coop. asset exceeds the planning horizon of members Result: under investment in term assets Portfolio Problem Depending on the coops. equity redemption policy, members are unable to adjust their own asset portfolios to match their risk preferences. Result: higher true cost of capital, coops. under funded

23 Cooperative Problems (cont.)
Control Problem One member - one vote policy reduces the likelihood that a controlling block of the membership will find it in their interest to expend resources to monitor hired management Result: more severe agency problems Free Rider Problem Members have an incentive to let others patronize, fund, and govern coops. Result: coop. investments under funded.

24 New Generation Cooperatives
Substantial “up front” capital investment Closed membership Stock carries delivery rights and obligations Stock is tradable (within limits)

25 Management Challenges
Key difference: owners = customers must balance “use benefits” with returns on invested capital broader interpersonal relations skills (cannot separate communications with stock holders and customers) often manager must maintain a higher degree of visibility

26 The Management Team: Who is Involved?



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