unit 1
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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). Basic Philosophy of Cooperatives. - PowerPoint PPT PresentationTRANSCRIPT
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Unit 1.
The Cooperative Form of Business
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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).
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Basic PhilosophyPhilosophy of Cooperatives
Through joint effort and collective action (cooperation) on the part of individuals with mutual interests, these individuals will be better off.
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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)
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Member Responsibilities/Obligations
1. Patronize Co-op2. Provide Equity Capital3. Keep Informed4. Accept Risks of Being a
Member
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PATRON =CUSTOMER =User of the business
(buyer of inputs or seller of products)
NOTE: Co-op patrons not always ‘members’.
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PATRONAGE
$ amount or
$ volume of business done with a cooperative
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Co-op Versus Coop
Co-op = abbreviation for cooperative
Coop = place for chickens
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Business Firm Interest Groups
1. Users (customers)
2. Owners (investors)
3. Controllers (decision makers)
4. Employees
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Concerns and/or Characteristics of Corporations
Survival/Perpetual LifeCustomer Needs (purpose)EfficiencyProfitabilityLimited LiabilityInterest Groups/Stakeholders
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Dual Objectives of Co-ops
= Serving Dual Interests of Owners as:
1. Investors (return on investment)
2. Patrons (services and return on use)
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Types of Co-ops
Based on Function Performed
1. Marketing2. Supply3. Service
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Types of Co-ops
Based on Area Served1. Local – local community to
multiple counties2. Regional – multiple states3. National4. International
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Types of Co-opsBased on Organizational Features
1. Interregional- mbrs = other regionals
2. FederatedFarmers = mbrs of localsLocals = mbrs of regionals
3. CentralizedFarmers = mbrs of regionalLocal businesses run by regional
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Steps in Starting a Co-op
Deter. Preliminary Mbr. InterestFurther Research/Analysis
Producer surveyFeasibility study (mkt, cost, …)
OrganizationReconfirm mbr interestGet mbrs to commit/agreeLegal documentsStaffing (directors, mgmt)Acquire facilities and financing
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Recommendations in Starting a Co-op1. Use Specialists
AttorneysUniversity staffUSDA staffFinancial Experts
2. Consider Alternatives to Starting a Co-op3. Easier to Later Expand than Contract4. Be Conservative in Projections5. Require Producer Commitment6. Make sure good management is available
and that members are willing to pay for it.
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Co-op Justification?
1. Economic NEED2. Economic NEED3. Economic NEED
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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
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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.
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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.
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Cooperative Principles
1. User Ownership
2. User Control
3. User Benefits
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User Ownership =
Users own (at least partially) the co-op
Users provide equity capital (invest $)
(Creditors provide debt capital)
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User Control =
The ability to influence co-op decisionsMay or may not mean active involvement in the decision making process; instead, it implies the opportunity to do so if desiredUsers normally exert their influence thru an elected group of representatives known as the board of directors
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Forms of USER Control
1. One Member, One Vote
2. Voting in Proportion to Patronage
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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 Iowab. Used more often by regional co-ops than by
local co-ops
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The user benefit principle is related to the operation at cost practice.
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Operation at Cost =>
Cooperative earnings (savings, surplus, profits) are to be returned to the memberPATRONS.
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Operation at cost≠
Nonprofit
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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
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Limits on Co-op Earnings Distribution
Patronage refundsNo limitUsually ≥ 20% cash (for tax reasons)
Dividends- ≤ 8%
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Patronage Refund Example
CO-OPSales: $200,000Expenses: $180,000Earnings: $ 20,000MEMBER APurchases: $ 8,000% of total for co-op 4%(8,000/200,000 = 4%)
Patronage Refund: $ 800(4% x 20,000 = 800)
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Patronage Refund
Total: $800Cash (> or = 20%) $160Noncash $640
The noncash patronage refund is also called a retained or deferred patronage refund.
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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 warsb. To avoid passing savings on to
nonmembers
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Evaluation of Co-ops as a Marketing Alternative:1. Level of prices initially paid (or charged)2. Patronage refund
a. Level b. % cashc. When noncash will be paid
3. Price and quality of services4. Dependability as a market outlet (or input
supplier)5. Economic effects without the co-op
(competitive yardstick)6. Value of owning your own business