1 Cooperatives 3111 Ronald Rainey, Ph.D. Extension Economist

2 Cooperatives I.Cooperative: definitions, principles, structure, and benefits II.Steps to the development of a cooperative organization

3 I.Cooperative A state chartered business, organized and operated as a corporation. It is owned and democratically controlled by the people (members) who use its services and whose benefits are derived and distributed equitably on the basis of use.

4 Capper-Volstead Act of 1922 Federal legislation allowing farmers to “act together”. It provides: 1) It must be operated for the mutual benefit of its members. 2) It must not deal in the products of nonmembers in an amount greater than it handles for members.

5 Capper-Volstead Act (cont’d) 3) No member of an association is allowed more than one vote because of ownership. 4) The association does not pay dividends on stock or membership capital in excess of 8 percent per year.

6

7 Cooperative Principles Service at cost Service at cost Financial obligation and benefits proportional to use Financial obligation and benefits proportional to use Limited return on equity capital Limited return on equity capital Democratic control Democratic control Educating it’s members through meetings, training, etc. Educating it’s members through meetings, training, etc.

8 Service at Cost Acting together gives the advantage of economies of size and bargaining power Acting together gives the advantage of economies of size and bargaining power Cooperative attempts to fulfill member needs at lowest possible cost Cooperative attempts to fulfill member needs at lowest possible cost It is necessary to charge competitive market prices to cover costs and meet operating capital requirements It is necessary to charge competitive market prices to cover costs and meet operating capital requirements Operations are reduced to at cost basis at end of year when surpluses are returned to members Operations are reduced to at cost basis at end of year when surpluses are returned to members

9 Financial Obligation and Benefits Proportional to Use Members gain direct and indirect benefits Members gain direct and indirect benefits Direct benefits are an assured source of supply and markets for products Direct benefits are an assured source of supply and markets for products Indirect benefits include policing markets leadership development, business knowledge, and social recognition Indirect benefits include policing markets leadership development, business knowledge, and social recognition The amount of benefits received depends on the members level of participation The amount of benefits received depends on the members level of participation

10 Limited Return on Equity Capital The primary purpose of cooperatives is to get a needed service, not monetary return The primary purpose of cooperatives is to get a needed service, not monetary return Limiting payment for operating capital supports the principle of distributing benefits proportional to use Limiting payment for operating capital supports the principle of distributing benefits proportional to use The basic idea is that users finance the cooperative in proportion to use The basic idea is that users finance the cooperative in proportion to use

11 Democratic Control Voting is one method cooperative members use to exercise control Voting is one method cooperative members use to exercise control In most cases, Member-Owners have one vote regardless of their investment In most cases, Member-Owners have one vote regardless of their investment Proportional voting is based on the size of the patronage the member does with the cooperative. Examples are: dollar volume, acreage, units marketed, etc. Proportional voting is based on the size of the patronage the member does with the cooperative. Examples are: dollar volume, acreage, units marketed, etc.

12 Member Education Leadership Development Leadership Development Cooperative Organizational and Management Skills Cooperative Organizational and Management Skills Economic and Community Development Training Economic and Community Development Training Production techniques/practices Production techniques/practices Training for the cooperative board of directors, management and members Training for the cooperative board of directors, management and members

13 Cooperative’s Purpose The primary purpose for a cooperative’s existence is to provide services for it’s members. An underlying rational is to increase income, but this goal is attained through the specific services provided by the business model The primary purpose for a cooperative’s existence is to provide services for it’s members. An underlying rational is to increase income, but this goal is attained through the specific services provided by the business model Members are the cooperative’s foundation and the organization serves the members “planned economic need” Members are the cooperative’s foundation and the organization serves the members “planned economic need”

14 Cooperative Members Members are the primary users AND the owners of the business Members are the primary users AND the owners of the business Members elect a board of directors who set policies and run the business Members elect a board of directors who set policies and run the business Members benefit in two ways from the cooperative’s existence: 1) utilize the cooperative’s services 2) earnings are allocated proportional to use (patronage refund) Members benefit in two ways from the cooperative’s existence: 1) utilize the cooperative’s services 2) earnings are allocated proportional to use (patronage refund)

15 Cooperative Statistics Currently there are more than 48,000 coops serving over 120 million Americans Currently there are more than 48,000 coops serving over 120 million Americans Two out of every five people (40%) in the U.S. belong to a cooperative Two out of every five people (40%) in the U.S. belong to a cooperative Roughly 30% of farmers products are marketed through cooperatives Roughly 30% of farmers products are marketed through cooperatives There are more than 3,000 agricultural cooperatives in operation in U.S. There are more than 3,000 agricultural cooperatives in operation in U.S net business volume of agricultural cooperatives was $99.7 billion 2000 net business volume of agricultural cooperatives was $99.7 billion

16 Arkansas Cooperatives In 2001 there were 53 agricultural related cooperatives within the state of Arkansas In 2001 there were 53 agricultural related cooperatives within the state of Arkansas 11 of the cooperatives were primarily involved in marketing 11 of the cooperatives were primarily involved in marketing 42 of the cooperatives were involved in farm supply and service 42 of the cooperatives were involved in farm supply and service

17 Cooperative Classification Geographic Territory Served (local, regional, and national) Geographic Territory Served (local, regional, and national) Governance System (centralized, federated, and mixed) Governance System (centralized, federated, and mixed) Functions (marketing, purchasing, and service) Functions (marketing, purchasing, and service)

18 Types of Cooperative MARKETING: enable members to realize additional services (and profits) through processing, distribution, and sale of products MARKETING: enable members to realize additional services (and profits) through processing, distribution, and sale of products PURCHASING: allow members to gain access to volume discounts and quality control for production supplies PURCHASING: allow members to gain access to volume discounts and quality control for production supplies SERVICE: developed to serve specific member (farmer) needs including credit, health insurance, electricity, etc. SERVICE: developed to serve specific member (farmer) needs including credit, health insurance, electricity, etc.

19 Marketing Services Negotiating prices and terms of sale with buyers Negotiating prices and terms of sale with buyers Assemble production into larger quantities for sale to further processors, wholesalers or retailers Assemble production into larger quantities for sale to further processors, wholesalers or retailers Add further value to member production by processing or manufacturing member products into other higher valued products Add further value to member production by processing or manufacturing member products into other higher valued products

20 Marketing Cooperatives Riceland Foods Riceland Foods Producers Rice Mill Producers Rice Mill Land O’ Lakes Land O’ Lakes

21 Purchasing Services Reduce member costs and strengthen their purchasing power through bulk purchases Reduce member costs and strengthen their purchasing power through bulk purchases Reduce costs through direct ownership of facilities and equipment that members utilize Reduce costs through direct ownership of facilities and equipment that members utilize

22 Purchasing Cooperatives Arkansas Electric Cooperative Corp. Arkansas Electric Cooperative Corp. Feed, seed, farm equipment, fertilizer companies, etc. Feed, seed, farm equipment, fertilizer companies, etc.

23 Services Provides specific, specialized services for members Provides specific, specialized services for members Services include insurance, financing, education, etc. Services include insurance, financing, education, etc.

24 Service Cooperatives Farm Credit Services Farm Credit Services Wilbur D. Mills Educational Services Cooperative (15 regional educational cooperatives in the state) Wilbur D. Mills Educational Services Cooperative (15 regional educational cooperatives in the state) Credit Unions Credit Unions

25 Benefits of Cooperatives Access to quality supplies and services at reasonable cost Access to quality supplies and services at reasonable cost Increased clout (bargaining power) in the marketplace Increased clout (bargaining power) in the marketplace Share in the earnings, gain access to larger markets Share in the earnings, gain access to larger markets Political action Political action Local economy enhanced and protected Local economy enhanced and protected

26 II.Steps to Developing a Cooperative Business

27 Steps to Developing a Cooperative Determine if there is an economic need. Determine if there is an economic need. Initial exploratory meeting Initial exploratory meeting Select a steering committee Select a steering committee Examine if the cooperative structure is a viable solution. Examine if the cooperative structure is a viable solution. Member survey Member survey Feasibility analysis Feasibility analysis Marketing research Marketing research

28 Steps to Developing a Cooperative Determine the level of potential member interest and commitment. Determine the level of potential member interest and commitment. Second exploratory meeting Second exploratory meeting Member capital, business volume, etc. Member capital, business volume, etc. Begin planning to evaluate the feasibility of the cooperative. Begin planning to evaluate the feasibility of the cooperative. Prepare a business plan Prepare a business plan Draft legal papers, bylaws and incorporate. Draft legal papers, bylaws and incorporate.

29 Steps to Developing a Cooperative Formally organize the cooperative. Formally organize the cooperative. Third exploratory meeting Third exploratory meeting Members finalize bylaws and articles of incorporation. Once membership has finalized the papers, file the papers with the Secretary of State’s Office Members finalize bylaws and articles of incorporation. Once membership has finalized the papers, file the papers with the Secretary of State’s Office Hold First Annual Meeting. Hold First Annual Meeting. Approve the bylaws Approve the bylaws Elect the Board of Directors Elect the Board of Directors

30 Resources  Rural Business and Cooperative Services (RBCS)  Agricultural Marketing Resource Center (AgMRC)  USDA Rural Development – Tim Smith Little Rock, Arkansas Ph: (501) or  U of A Cooperative Extension Service – Ronald Rainey Little Rock, Arkansas: Ph: or

31