Unit 1. The Cooperative Form of Business

What is a Cooperative? A special type of business (usually corporate) owned and controlled by its member patrons. This is in contrast to ordinary corporations that are investor- owned firms (IOFs).

Philosophy Basic Philosophy of Cooperatives Through joint effort and collective action (cooperation) on the part of individuals with mutual interests, these individuals will be better off.

Requirements for Being a Member Owner of an Ag Co-op 1.Be an agricultural producer or other co-op 2.Provide equity capital (equity => from owners) 3.Be a customer (active)

Member Responsibilities/Obligations 1.Patronize Co-op 2.Provide Equity Capital 3.Keep Informed 4.Accept Risks of Being a Member

PATRON = CUSTOMER = User of the business (buyer of inputs or seller of products) NOTE: Co-op patrons not always ‘members’.

PATRONAGE $ amount or $ volume of business done with a cooperative

Co-op Versus Coop Co-op = abbreviation for cooperative Coop = place for chickens

Business Firm Interest Groups 1.Users (customers) 2.Owners (investors) 3.Controllers (decision makers) 4.Employees

Concerns and/or Characteristics of Corporations Survival/Perpetual Life Customer Needs (purpose) Efficiency Profitability Limited Liability Interest Groups/Stakeholders

Dual Objectives of Co-ops = Serving Dual Interests of Owners as: 1.Investors (return on investment) 2.Patrons (services and return on use)

Types of Co-ops Based on Function Performed 1.Marketing 2.Supply 3.Service

Types of Co-ops Based on Area Served 1.Local – local community to multiple counties 2.Regional – multiple states 3.National 4.International

Types of Co-ops Based on Organizational Features 1.Interregional - mbrs = other regionals 2.Federated Farmers = mbrs of locals Locals = mbrs of regionals 3.Centralized Farmers = mbrs of regional Local businesses run by regional

Steps in Starting a Co-op Deter. Preliminary Mbr. Interest Further Research/Analysis Producer survey Feasibility study (mkt, cost, …) Organization Reconfirm mbr interest Get mbrs to commit/agree Legal documents Staffing (directors, mgmt) Acquire facilities and financing

Recommendations in Starting a Co-op 1.Use Specialists Attorneys University staff USDA staff Financial Experts 2.Consider Alternatives to Starting a Co-op 3.Easier to Later Expand than Contract 4.Be Conservative in Projections 5.Require Producer Commitment 6.Make sure good management is available and that members are willing to pay for it.

Co-op Justification? 1.Economic NEED 2.Economic NEED 3.Economic NEED

Economic NEED? 1.Better Price (level or risk) by – A. Increasing competition (or offsetting mkt power) B. Developing own product (or capturing other-level profits) C. Taking advantage of economies of size 2.More Dependable Market (for outputs or inputs) 3.Better Services

The ROCHDALE Society A co-op retail store (i.e. consumer co- op) that sold food, clothing, and other household items to its patrons. The co-op was founded in 1844 in Rochdale, Lancaster, England by 28 craftsmen known as the Rochdale pioneers. This co-op has been recognized as the first such business organization which has served as a prototype for other co-ops.

Why Study Co-op Principles? 1.To understand unique or fundamental aspects of co-ops. 2.To guide the operation of a co-op. 3.To understand the basis for many co-op laws.

Cooperative Principles 1.User Ownership 2.User Control 3.User Benefits

User Ownership = Users own (at least partially) the co- op Users provide equity capital (invest $) (Creditors provide debt capital)

User Control = The ability to influence co-op decisions May or may not mean active involvement in the decision making process; instead, it implies the opportunity to do so if desired Users normally exert their influence thru an elected group of representatives known as the board of directors

Forms of USER Control 1.One Member, One Vote 2.Voting in Proportion to Patronage

Other Observations on ‘Control’ 1.User Control ≠ investor control although both are ‘democratic’ forms of control 2.Form of investor control is one share of stock, one vote 3.Co-op member voting in proportion to patronage is: a. Illegal for co-ops with headquarters in Iowa b. Used more often by regional co-ops than by local co-ops

The user benefit principle is related to the operation at cost practice.

Operation at Cost => Cooperative earnings (savings, surplus, profits) are to be returned to the member PATRONS.

Operation at cost ≠ Nonprofit

The Return or Distribution of Earnings to: 1.Customers in proportion to the amount of patronage done with the business (i.e. return on USE) =PATRONAGE REFUNDS 2.Investors in proportion to the amount of money invested in stock in the business (i.e. return on INVESTMENT) = DIVIDENDS

Limits on Co-op Earnings Distribution Patronage refunds No limit Usually ≥ 20% cash (for tax reasons) Dividends - ≤ 8%

Patronage Refund Example CO-OP Sales:$200,000 Expenses:$180,000 Earnings:$ 20,000 MEMBER A Purchases:$ 8,000 % of total for co-op4% (8,000/200,000 = 4%) Patronage Refund:$ 800 (4% x 20,000 = 800)

Patronage Refund Total:$800 Cash (> or = 20%)$160 Noncash$640 The noncash patronage refund is also called a retained or deferred patronage refund.

Why Co-ops May Have Earnings 1.Overcharges or underpayments because costs are unknown initially. 2.Co-ops charge going market prices which are above costs: a. To avoid price wars b. To avoid passing savings on to nonmembers

Evaluation of Co-ops as a Marketing Alternative: 1.Level of prices initially paid (or charged) 2.Patronage refund a. Level b. % cash c. When noncash will be paid 3.Price and quality of services 4.Dependability as a market outlet (or input supplier) 5.Economic effects without the co-op (competitive yardstick) 6.Value of owning your own business