Cooperatives in the Food Industry

1. Cooperatives in the Food Industry • Intro: Farmers complain of selling cheap as producers, buy high as consumers, & receive smaller share of the consumer price. • Slutn:Coops were set up by farmers as one possible solution to these problems. • Most US coops are farmer coops,thus called ‘Off-farm Arm‘ of farmers. • Coops were set up to provide a wide range of services to help sell farmers pdts &purchase their needed inputs. Today, most farmers belong to more than 1 coops.

2. A. What is Cooperative • Definiton: It’s “ a business voluntarily owned & controlled by its member-patrons & operated for them on a nonprofit or cost basis”. This implies: • 1. A coop is legal, institutionalized entity that permits group action & can compete as any other type of business. • 2.Coops are voluntary orgs. set up to serve & benefit those who are going to use them.

3. B. Legal Concept of Cooperatives: • The Capper Volstead Act of 1922 set the legal concept of agric coops. The Act set up 5 legal concepts for coop operation. • 1. Ownership & Control: Ownership must be in hands of those who utilize its services. Owners are patrons who control & own the coop rather than as investors who do not have any control. • This law stipulates one-person, one-vote regardless of amount a patron invests. • Coop goal to min cost with max satisftn for its owner-patrons. But a firm’s goal is to maxreturns for its investors

4. 2.Concept of Non Profit & Equitable Distbn of Returns Over Cost:Operations shall be done near cost basis & any returns above cost shall be returned to owners on an equitable basis. • i.e. must distribute its net income (net savings) back to producers based on amount of business done with the coop. Principle ensures that coops operate for mutual benefit of farmers since most income above costs is returned to the members. • 3. Concept of Ltd Returns on Owners Capital: Return on owners capital shall be ltd.- i.e. return on capital invested cannot exceed 8% or legal rate of interest in a state. Owners invest in coops to benefit from services but not to expect profit on their investment.

5. 4. The Voting Right Concept: Voting limited to one vote/member regardless of amount of money invested or business done with coop. Principle ensures all users are treated fairly by coop & that large investors or users do not dominate or control coop. • 5. Concept of Business with Members: At least 50% of coop's business must be done with members. Principle helps keep benefits in the hands of the producers. • In addition to the above principles, coops also endorse the ideas of open membership, neutrality in politics, & constant education. These concepts indicate that the owners of coops are also customers and users.

6. These 3 concepts indicate that coop owners are also customers & users. • C. Kinds of Cooperatives • Coops can be divided into 4 main forms according to their functions. These are: • 1. Marketing Cooperatives • 2. Purchase Cooperatives • 3. Service Cooperatives • 4. Processing Cooperatives

7. 1. Mktg Coops:Those thro which farmers sell their pdt. They may collect member pdts forsale, grade, package & perform other mkg functions. • e.g. - Cooperative Livestock Commission Orgzs, Producers Milk Asstns, & Coop Elevators, Land O’Lakes, Ocean Spray, Sun Diamond Growers. • Goal: Their objective is to secure greatest possible amount for the pdts of farmer-owners

8. 2. Purchasing Coops: Coops thro which members buy farms supplies. Some of these coops are engaged only in either wholesaling or retailing. • e.g.: Some like Fertilizer & Petroleum coops manufacture the pdts they sell. • Goal:Effect savings for member farmer on inputs bought. Principal savings come from lower prices or from higher-quality,better-adapted supplies, & equipment.

9. 3. Service Coops:Provide members with improved services or services that members cannot obtain from their areas. • Services provide include credit, electric power, insurance, irrigation, drainage, gas • e.g. Production Credit Associations, Federal Land Bank Associations & Rural Electric Associations.

10. 4. Processing Coops: Organized to pack or process farmer’s pdt -e.g. cheese & butter manfctng, fruit packing, & vegetable canning associations. It is also common for processing coops to engage in mktg service of wholesaling the finished pdts. • e.g. Sunkist oranges, Ocean Spray Cranberries, Sun-Maid Raisins, Sunsweet Prunes, Welch Grape Juice are successful processing coops.

11. D. Types Of Coops Orgnzns by Affilliations • Coops can also be classified on the basis of membership affiliation & control as: • 1. Independent Local Associations • 2. Federal Associations • 3. Centralized Associations • 4. Mixed or Combination Associations

12. 1. Independent Local Asstns : Simplest coop type.People hold direct membership & participate in coops affairs. • Adv: Cos of small area of coverage & small membership numbers, the opinion & action of each member has influence. • Disadv:Their small sizes, has limit in what they can do, but they often join with others to form larger orgzns to conduct mass mktg, purchasing, or manufacturing operations.

13. 2. Federated Associations: Composed of several local associations that operate together as integrated unit – local coop members are farmers, & local coop is a member of regional association. Objective of banding together is to secure greater business power & efficiency. Usually the local associations have a high degree of autonomy, & savings made from the operations of the overall association are allocated back to member local associations who in turn distribute them to patron members.

14. 3.Centralized Cooperative Associations: Patron is a direct member of the central organization & exercises control through delegates sent from different areas to its annual meetings. Central orgzn controls the local branch coops that serve the members. Advantage is the centralized control that makes possible prompt & uniform decisions for all local outlets. Disadvantage is that it lacks the direct membership participation possible in federated coops. The local units also have a limited amount of autonomy.

15. 4. Mixed Associations: Many large coops today are neither totally centralized nor federated but are a mixture of the two.Most state have statewide coop organizations combining both marketing & purchasing operations. These in turn combine into regional & national associations. This may be done in order to operate manufacturing enterprise or to enhance bargaining power with non-cooperative concerns. Savings made from the operations are apportioned among their member associations

16. D. Purpose Of Cooperatives • Consolidating purchase & sales of numerous farmers into a single agency, coops permit farmers to operate as a single firm and to offer effective competition to private firms. Coops assist farmers achieve the ff. objectives: • 1.Greater Bargaining Power: Coops can assist farmers to enhance their returns and provide greater bargaining power to private firms. • 2. Cost Reduction: Reduce farmers cost of purchasing farm supplies

17. 3. Quality Product and Services: Provide farmers with more qty & quality pdts or services not available from private firms. • 4. Market Expansion: Stabilize & expand mkts • 5. Expansion into New Supply Mkts: Enabling farmers to move into supply, assembling and processing mkts.

18. These objectives add to improve economic being of the individual coops member. Apart from all these objectives, we must remember that coops operate in a competitive environment, as a result: • they cannot repeal laws of supply & demand • they cannot limit their own production levels • these limit their power to influence prices. Apart from these, coops have also failed cos of • 1. Lack of sufficient capital • 2. Inadequate membership support. • 3. ineffective management

19. E. Financing Cooperatives • Farmers finance their coops by using many of the methods employed by other businesses, plus others, such as per unit capital retention & revolving funds. The major sources of financing are equity & debt. • a. Equity capital is money invested by owners & is normally put into business & left there indefinitely. • b. Debt capital is money that is borrowed, usually from non-owners & periodic interest payments are made on it &t there is specific date to be repaid. • c. In addition to these 2 forms of capital, coops also use several others that fall somewhere in btwn.

20. 1. Equity Capital: Is money received from stock, or membership certificates. This is money invested by owner-patrons. Before patrons are permitted to use coops, they must purchase a membership certificate. • 2. In-Between Types of Capital: Some mktg coops, (e.g handling fruits & vegetables) on West Coast & in Florida issue equity certificates to validate per unit capital retains. Per unit capital retains are amounts that are invested in coops thro deductions made from sales on a physical unit basis, such as x cents per bushel. Although these per unit retains do serve as member capital, they are not permanent & thus are btwn equity & debt.

21. 2b. Revolving Fund: Is another in-btwn type of capital. Here, members' equities, originally from capital retains or deferred patronage refunds, are returned to members periodically in the order in which they were provided (oldest first). Length of the revolving period usually ranges from 3 to 15 yrs. • 3. Debt Capital:Coops may borrow from lending firms, members, non-members, insurance, coops etc. • Farmer coops also have access to a specialized coop credit agency, the Bank for Coop. Started in 1934 with capital from Federal Farm Board, the bank is now entirely owned by coops that are its borrowers. Member coops obtain much of their borrowed funds from the bank at or near cost by using patronage refunds as collateral.

22. E. Problems of Modern Cooperatives. • i. Voting Rights: One major problem of coops is the of one-man, one-vote provision in coops bylaws. Farmers are often dissatisfied with this law. As members of coops specialize, the coops tend to depend on few large patrons for most of its business. Thus the few large patrons become dissatisfied to beoutvoted by the more numerous, smaller patrons. In many instances, the one-man,, one-vote idea has been set aside in favor of cumulative voting on the basis of business volume.

23. 2. Financial: Coops require same capital as non-coops to perform similar functions. But with limitations placed on voting rights, on share transferability, & on returns paid on invested capital, coops cannot utilize the non-coops method of selling additional shares to the investing public to secure more funds. In modern large size of firms & complexity of manufacturing & distribution, huge amounts of capital are necessary to make effective & competitive entry into new fields. How to secure these amounts of needed capital is a major problem for coops.

24. iii. Management: 3groups of people are involved in the mgmt of a coop - the members,board of directors & hired manager. Directors are patrons elected by members. Theyformulate policies,hiremanagers who implement the policies & report the results to the members. To obtain excellent mgt, coops must be willing to pay a price competitive with other businesses & be willing to finance a staff that will furnish them with needed research & info. But without adequate capital these are problems.

25. Another problem is with the selection of board of directors. While private firms hire skilled board of directors from the business world, coops on the other hand rely on their patron-members for directors. But excellent farmers do not make excellent managers. • iv. Membership Relations: The success of coops depend on members patronage. But as coops become larger members often feel it is “the coop” instead of “my coop”. In many cases, only a small minority of the member-owners take an active interest in coop mgt.

26. 2. Financial: Coops require same capital as non-coops to perform similar functions. But with limitations placed on voting rights, on share transferability, & on returns paid on invested capital, coops cannot utilize the non-coops method of selling additional shares to the investing public to secure more funds. In modern large size of firms & complexity of manufacturing & distribution, huge amounts of capital are necessary to make effective & competitive entry into new fields. How to secure these amounts of needed capital is a major problem for coops.