United StatesDepartment ofAgriculture

Rural Business–CooperativeService

CooperativeInformationReport 60

AgriculturalCooperativesin the 21st Century

Preface This report identifies challenges and opportunities facing farmer cooperatives in theyears ahead and offers strategies to increase their chances for success. The externalforces besetting cooperatives are examined as are their internal strengths and weak-nesses. Priority issues are identified that cooperative members, leaders and advisersneed to address. No easy solutions are provided, because there are none. Hopefully,this report will serve as a catalyst for further thought and discussion on how farmercooperatives can enhance income and quality of life for their members.

1987 Study

In 1987, a USDA report, "Positioning Farmer Cooperatives for the Future," was pre-pared in response to a directive from the Senate Agricultural AppropriationsSubcommittee. It reflected the views of cooperative leaders from across the countrywho gathered in a series of focus panels to discuss the future of farmer-owned cooper-atives. While many different issues and strategies were discussed, panelists conclud-ed that cooperatives must continually adapt to the changing marketplace and needs offarmers and that nothing inherent in the cooperative form of business prevents thattype of evolution. The report affirmed the need and and capability of cooperatives tochange for the future.

2002 Methodology

This report examines the challenges producer-owned cooperatives face at the dawn ofthe 21st century. Several participants in the 1987 study revisited that report and com-mented on a range of topics regarding the continued relevance of its findings and newissues that have arisen since then. Then, prominent members of the cooperative com-munity across the country participated in six focus panels (Appendix B). A discussionoutline covering a range of conditions confronting agriculture in general and cooperativesin particular was sent to each participant before each focus group met (Appendix C).

The focus group panelists engaged in brainstorming sessions and free-form discus-sion, framed by the set of "contemporary" cooperative principles formulated in the1987 study.1 Commentary from each panel is reflected in this report. However, no com-ment is directly attributable to any panel member.

Goal

This report identifies challenges facing agricultural producers and their cooperatives asthey enter the 21st century and suggests a foundation for developing options andstrategies to meet those challenges.2

1 The three principles: member-owned, member-controlled, and member-benefits succinctly define theunique aspects of the cooperative form of business and provide a framework for evaluating cooperativeactions and practices.

2 This report refers to various structures used by members to form cooperatives. Scholars have classifiedthese structures and given them somewhat arbitrary labels. A summary of the meaning of various teamsused to describe cooperative strutures in this report is attached as Appendix A.

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November 2002

Contents Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Cooperative Principles and Assessment of Options . . . . . . . . . . . . . . . . . . . . . . . . . 1

Cooperative principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Inter-related principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Principles guide analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

When changes are considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Issues and Forces Shaping the External Environment of Cooperatives. . . . . . . . . . 3

Changing farm demographics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Technological innovation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Changing competitive environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Role of the consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Industrialization: Farm to retail via the supply chain . . . . . . . . . . . . . . . . . . . . . . 5

Structural change in food processing and marketing . . . . . . . . . . . . . . . . . . . . . 6

Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

The policy environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

The price-income anomaly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Environmental regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Issues and Forces Shaping the Internal Environment of Cooperatives . . . . . . . . . . 9

Limited ability to accumulate equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Diverging member characteristics and needs. . . . . . . . . . . . . . . . . . . . . . . . . . 10

Board effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Management lack of cooperative focus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Growing emphasis on value-added activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Pressures on the federated model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

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Contents Reshaping the federated system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

At the regional level. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Coordinated farm supply operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Grain marketing alliances with IOFs . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Food Processing growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

At the local level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Consolidation into super locals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Emphasis on getting the best deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Priorities for Shaping Future Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Strengthening cooperative leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Growth and consolidation among cooperatives . . . . . . . . . . . . . . . . . . . . . . . . 20

Foreign sourcing and functioning in a global market . . . . . . . . . . . . . . . . . . . . 20

Motivation and strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Legal questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Foreign memberships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Member relations issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Equity accumulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Improve member equity management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Outside equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Sell assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Structural alternatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

New generation cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Alliances and joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Bargaining associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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Contents Limited market innovations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Public Policy and Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Making member voices heard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Trade association cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Farm policy and farmer cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

USDA and farmer cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Defining cooperatives: Where is policy heading? . . . . . . . . . . . . . . . . . . . . . . . 31

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Accept and embrace change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Be guided by competent directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Maintain a solid equity base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Emphasize education. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Seek efficient structures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Forge a strong public policy presence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Make decisions based on cooperative principles. . . . . . . . . . . . . . . . . . . . . . . 34

Appendix A. Classifying Cooperatives By Structure . . . . . . . . . . . . . . . . . . . . . . . 36

Appendix B. Forum Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Appendix C. Discussion Outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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Introduction Facing the Challenges of the 21st Century for the Betterment of Rural America

The role of cooperatives as a critical dimension of market structure in agriculture mustperiodically be assessed to determine the future viability of the cooperative form ofbusiness. This report captures the ideas and observations of cooperative leaders andacademic specialists who gathered in focus groups to share their perspectives on a setof questions posed by USDA RBS-Cooperative Services.

The areas covered included the changing external and internal competitive environ-ment, cooperative principles, structure of cooperative systems, governance andfinance. Also addressed were issues associated with educational efforts and institu-tional mechanisms, such as public policy and government-sponsored support pro-grams.

Cooperatives are user-driven businesses that have contributed greatly to the develop-ment of one of the world’s most productive and scientific-based agricultural systems.They have played an important role in strengthening market access and competitivereturns for independent farm operators during the 20th century. They adapted theiroperations to agricultural technological innovations, such as the use of fertilizers, plantand livestock breeding, agricultural mechanization, electricity and other new sources ofenergy, and to new information systems.

Cooperatives have also played an important role in rural communities, where they arean integral part of the social fabric. They encourage democratic decision makingprocesses, leadership development and education. The public-private partnershipbetween farmers, land- grant universities and USDA programs has enhanced knowl-edge of the role cooperatives play as a tool for improving the economic well-being ofthe farming community and helping to boost the rural quality of life.

New forces are impacting the farm economy at the dawn of the 21st century thatrequire the attention of cooperative business leaders. Recognizing the resiliency ofself-help efforts directed to meeting member needs, focus group members addressedthe new forces impacting farmers, rural communities and changing characteristics ofmarkets. These forces, and suggestions about how to adjust to them, constitute amajor part of the dialogue that focus group members engaged in during their delibera-tions. The compilation of thoughts and ideas contained in this report provides animportant snapshot and reflection on cooperative principles, practices and structure bythose on the firing line who are engaged in day-to-day operations.

It is the intent of this report to focus attention on issues and lessons that can be cap-tured through the experiences of cooperative practitioners and service providers. Theaim is to identify steps for improving the practice of cooperation for the betterment ofrural America.

Randall E. TorgersonDeputy Administrator for Cooperative ServicesRural Business-Cooperative ServiceUSDA Rural DevelopmentNov. 15, 2002

v

Agricultural Cooperatives in the 21st Century

John R. Dunn,Anthony C. Crooks, Donald A. Frederick,Tracey L. Kennedy, James J. WadsworthRural Business-Cooperative Service

Agricultural cooperatives are part of a dynamic envi-ronment. The nature of production agriculture changesdaily. So do agricultural markets and public policy.Many changes occur outside the cooperative system,which has little, if any, ability to directly influencethem. Still, cooperatives have to recognize the changesand react to them.

Internally, cooperatives' mission, structure, andpractices not only set them apart from other forms ofbusiness, but also influence how they respond to exter-nal changes. Many of the issues and challenges dis-cussed here are interrelated and are not limited in theirimpact to farmers or cooperatives. But cooperatives, byvirtue of their particular attributes, are often uniquelyaffected. This report discusses both external and inter-nal issues facing cooperatives in the years ahead andpanelists' perceptions of how cooperatives will beorganized and operated in the 21st century.

The panel discussions emphasized marketingactivities of cooperatives. However, this report's gener-al recommendations and conclusions apply to all typesof farmer cooperatives: marketing, supply, or service.These conclusions point out the central role of direc-tors in cooperatives, the need for solid financing andorganizational flexibility, the requirement for coopera-tive education, and the need for cooperative leaders tounderstand the application of cooperative principles.

Cooperative Principles andAssessment Options

"No one plan of organization is to be labeled astruly cooperative to the exclusion of others...."Justice Louis Brandeis, Frost v. CorporationCommissioner, 278 U.S. 515, 546 (1929).

Basic cooperative principles define cooperativeorganizations, give them strength, and provide thecause and rationale for their public support, in termsof taxation, anti-trust considerations, public education,and promotion.

Cooperative principlesAny business organization can be defined in

terms of three basic interests: ownership, control, andbeneficiary. Only in the cooperative are all three inter-ests vested directly in the hands of the user. Theseinterests are commonly referred to as the contempo-rary cooperative principles. The 1987 USDA study,"Positioning Farmer Cooperatives for the Future," list-ed three basic principles that define the essence of acooperative enterprise and establish a framework forassessing cooperative actions:

The User-Owner Principle. The cooperative isowned by the people who use it.

The User-Control Principle. The cooperative iscontrolled by the people who use it.

The User-Benefits Principle. The benefits gener-ated by the cooperative accrue to its users on the basisof their use.

A cooperative is a business that is owned andcontrolled by the people who use its services andwhose benefits (services received and earnings alloca-tions) are shared by the users on the basis of use. Onlyan enterprise conforming to the spirit and intent of thisdefinition should be labeled a cooperative.

Inter-related principlesThese principles are inter-related. Tradeoffs can

occur among them. To be a true cooperative, an organi-

1

zation must adhere to both the letter and the spirit ofthe principles. In this case, none of the three principlescan be compromised.

Each principle can be viewed as one end of a con-tinuum or spectrum. Any movement away from thepure application of the principles places the organiza-tion in jeopardy of compromising its cooperative iden-tity. At the far end of the spectrums, all three princi-ples are abandoned and the organization no longerresembles a cooperative.

Along these spectrums lie many options withvarying degrees of adherence to cooperative princi-ples. It is difficult to identify precisely where the linesare crossed that move the organization from being acooperative to being another type of organization.

Ownership is expressed by equity investment inthe enterprise and a claim on its assets. Complete userownership requires a 100 percent equity investmentand exclusive claim on the assets (after debts are paid).Ownership by non-active or retired members creates aseparation of ownership and usership. Investment ofequity capital by persons who have never patronizedthe cooperative even further disrupts the ownership-usership connection.

Control is the ability to exert authority over deci-sion-making processes. Control takes many forms. Itcan be objective, such as allocating votes among mem-bers and deciding issues on the basis of the most votes.It can also be subjective, growing out of the subtlenuances of influence. People with strong personalitiesor other traits who are deferred to by their peers canexert influence that exceeds their voting rights.

Forces outside the cooperative can also exert con-trol through their ability to limit its decision making.For example, the choices available to a cooperative areconstrained by environmental regulations or tax laws.Likewise, a bank loan can include a covenant that con-stricts users' control. Control can also be forfeited if themembers and directors fail to exercise proper over-sight and review of hired management.

Benefits available to cooperative membersinclude both the right to receive services and to sharein the earnings. Sometimes, others indirectly receivecooperative benefits, such as non-members who get abetter price for their product because a cooperativeoperates in their area and line of business. But inter-nally, cooperatives must ensure that the benefits accrueto patrons on the basis of use and not to outsiders onthe basis of investment or some other standard thatundermines the value of the organization to its user-owners.

Principles guide analysisA non-cooperative business looking for solutions

to marketplace challenges asks basic questions: Willthe business be profitable? Will it thrive and grow? Ifthe answers are "yes," the rest is a matter of details.

A cooperative, too, must answer "yes" to thesequestions about profitability and growth. If it cannotsurvive as a business, other considerations becomemoot. But cooperative principles provide an additionalframework through which options for business strate-gies, organizational structures, and operations must beanalyzed. Cooperatives must also ask, how will thischoice affect the members' ownership interests? Whatinfluence will it exert on members' ability to controltheir cooperative? How will it affect the distribution ofbenefits flowing from the cooperative? And, most criti-cally, if the business is to remain a cooperative, howwill these user interests be protected?

Those who suggest that a cooperative can be runjust like any other business either do not understandor do not respect the significance of these differences.Successful leadership within a cooperative requires allthe skills and understanding required in an investor-owned firm, and more.

When changes are consideredWhen considering change, cooperatives leaders

must ask themselves: How does it affect the basicinterests in the cooperative? What steps, if they exist,might be taken to counter the net effect of movingaway from being a pure cooperative? How can cooper-atives guarantee that action taken won't adverselyaffect user interests?

Not only must cooperative leaders be pragmatic,but they are also responsible for evaluating therequirements and meaning of the basic principles. Anyconsideration that affects user ownership and control,or the distribution of benefits, should be discussed andevaluated in such terms. Members have a right todetermine the nature and direction of their cooperativebusiness. They must consider steps that change thecharacter of their cooperative with a full understand-ing of the implications. This "principles-impact-assess-ment" means that cooperative decision-makingincludes considerations that non-cooperative firms canignore. The possible responses to the conditions facedby cooperatives are discussed in the final section ofthis report.

2

Issues and Forces Shaping the External Environment of Cooperatives

The 1987 report, "Positioning FarmerCooperatives for the Future," said that, "...to be suc-cessful in fulfilling the needs of farmers, cooperativesmust be able to provide an appropriate economicresponse to marketplace situations faced by members.This response generally involves provision of competi-tive goods and services, or adoption of actions thatbalance or counter forces present in the business envi-ronment."

Both the domestic and international componentsof this environment have changed considerably since1987. Structural changes from the farm gate to retailshelves are impacting the markets in which coopera-tives and their members operate. Farmers and farmingare also evolving. Cooperatives can no longer take forgranted that the producers they served last year arethe same or the same kind of producers they servetoday, or will serve in the future.

The rapid pace of innovation in information tech-nology is making the world smaller and altering forev-er the way business is conducted. Consolidation ofagribusinesses, food manufacturers, and food retailerscontinues at an unprecedented rate, resulting in fewer,larger buyers that effectively control terms of trade.These businesses demand more from suppliers in spe-cific product attributes, volume, timing, and costs. Theneed to add value and differentiate products fromthose of competitors is now accepted by all levels ofagribusiness. The traditional roles of commodity han-dlers cease to exist. Layered among these changes arethe myriad regulatory and policy issues that imposeconstraints on farmers and the agricultural sector.

Changing farm demographicsEven a cursory look at the demographics of the

farm population poses the question, "Where will ournext generation of farmers come from?" The averageage of U.S. farm operators is in the mid-fifties. Asolder farmers retire, fewer new, younger farmers aretaking their place. In Iowa, for example, 40 percent offarmers are more than 55 years of age. The fastestgrowing category is those 65 and older. Only 15 per-cent of the state's producers are under 35 years of age.From this rapidly aging farm population, cooperativesmust identify the next generation of farmer-membersand leaders.

Another demographic issue affecting coopera-tives is the increasingly bimodal nature of farming.Fifty years ago, America's farms were predominatelyoperated by a traditional family farmer who relied pri-marily on farming for his or her income and farmedwith the assistance of family members, but little or nohired help. Since then, farm numbers have dropped bymore than two-thirds, while production has doubled.3

Today, farms with more than $250,000 in productsales generate 68 percent of all farm production(USDA). These "commercial" farms only compriseabout 8 percent of the farm population. At the otherend of the spectrum, farms owned by those who areretired or rely on other, off-farm sources of incomeaccount for 62 percent of the farm population, but gen-erate only 8 percent of farm production. Between thesetwo groups are what the USDA terms "intermediate"farms, which more closely resemble the traditionalfamily farm. Only 30 percent of farms fall into this cat-egory. And they provide about 24 percent of agricul-tural production. These farmers consider farming theirprimary occupation but frequently supplement theirincome through other activities.

Much of the cooperative system was built to sup-port traditional family farmers. Cooperatives nowmust adapt to a more diverse membership thatrequires different services, products, and structures.Setting priorities among competing and sometimesconflicting business objectives of their members is agrowing challenge for many farmer cooperatives.

Technological innovationImproved technology has been key to the growth

of commercial farms. Mechanical innovations increasecapacity and lower the cost of production. One pan-elist noted that a farmer with a 35-foot combine cannow harvest more grain in one week than he could inthe entire harvest season during his youth. Farmersuse Global Positioning Systems to guide their machin-ery to maximize efficiency in the field and computer-generated digital imagery to assess strengths andweaknesses of individual parcels of land.

Biologically based innovations hold the promiseof new products and new applications. Ethanol andbio-diesel are emerging as supplements and replace-ments for petroleum-based fuels. Soy-based ink is incommercial production. Plant-based adhesives, bio-polymers and films are being developed. So are "far-

3

3 USDA’s report, “Food and Agricultural Policy: Taking Stock for theNew Century,” (September 2001), p. 4.

macological" products that use tobacco and other cropswith special traits making them good sources of rawmaterial for beneficial drugs.

Biology-based innovations are not without con-troversy. The harvesting and marketing of herbicide-tolerant corn and soybeans, the so-called "Roundup-ready" varieties, are under attack for possible undis-covered adverse impacts on the health of people andanimals that eat products made from these grains. But,over time, it is expected that the best available geneticswill be combined with the best (i.e., most profitable)production processes to deliver products intended tomeet the needs of an increasingly discriminating mar-ket.

An important issue for producers and coopera-tives is the extent to which they will be able to partici-pate in future biotechnology growth. For example,farmers, through cooperatives, have been active inusing traditional crops to produce ethanol. Improvedvarieties of these crops have historically been devel-oped by land-grant universities and made available tothe public at large. Now, research and development isconducted by investor-owned firms and alliances ofseed corporations with pharmaceutical firms, formedwith the specific goal of developing genetically modi-fied seed stock. University researchers are participat-ing in some of these alliances and receiving a financialstake in the venture. Discoveries are being patentedand newer seed is frequently sold to selected farmersunder strict contracts that limit the farmers' legal rightto save seed from current production for use in futureyears.

Research and development is capital intensiveand financially risky. Cooperatives have limited accessto capital and are often adverse to assuming risk. Thisrestricts their participation in this arena. As a result,they have less access, for example, to newer and betterseed to sell to their members. In addition, cooperativesmay find that contracts between the alliances andfarmers for use of the latest seeds also deny coopera-tives access to the products farmers produce fromthose seeds. This could be a serious barrier to coopera-tive marketing efforts in the years ahead.

Information technology, like biotechnology, offersboth opportunities and challenges to producers andtheir cooperatives. Computers make possible ever-faster collection, analysis, and dissemination of infor-mation among potential buyers and sellers of agricul-tural production and food products. This hasshortened the time period in which purchase, invento-ry, and pricing decisions are made. Farmers are adjust-ing to the new technology, including the Internet. In

2000, nearly 60 percent of farm households had accessto a computer and half of these used the Internet intheir farming business. Farmers reported making morethan $375 million in online business purchases in 2000and sold crops and livestock valued at nearly $300 mil-lion online.4

While these numbers are large, they are but aportion of the potential "e-commerce" market.Cooperatives have traditionally been product-han-dling entities, with local supply stores and grain eleva-tors symbolizing their presence in the local communityand the business world. Cooperatives developingstrategies for the 21st century must consider their rolein a marketplace that values nimbleness, flexibility,and information vs. stationary structures and physicalinventory.

Changing competitive environmentConsolidation of firms at the processing, whole-

sale, and retail levels of the U.S. food marketing sys-tem continues unabated. Market influence and bar-gaining strength of even the largest cooperatives arelimited as a consequence. Food retailers flex their mar-ket muscle by imposing coordination mechanisms thatdemand strict discipline and conformity from suppli-ers. Food processors exert greater control over distrib-ution channels by integrating back into the productionof raw materials through a variety of ownership andcontractual arrangements. Such arrangements rob pro-ducers of decision-making authority and market choic-es. Indeed, poultry industry-like integration in the hogand other industries and the pervasiveness of contractfarming are leading to what one panel participantcalled the "‘chickenization' of U.S. agriculture."

Role of the consumerThe consumer drives today's market. While

exceptions exist, typical consumers want wholesome,tasty, convenient, and safe food products at the lowestpossible price. They have the time, information, andmobility to identify stores that meet their criteria andpatronize them on a regular basis.

The competition among various elements of theretail food sector—grocery chains, discount merchan-disers, independent stores, and convenience stores—tosatisfy consumers is leading them to impose new busi-ness practices on cooperatives and other suppliers offood products. It is also encouraging consolidationamong food retailers to reduce costs and improve ser-

4

4 Id., pp. 33-34.

vice to consumers, while reducing consumer choicesand power by reducing the number of competitors in amarket.

The increasingly global market crosses nationalboundaries, exposing consumers to new products andchanging expectations for familiar products. It opensnew market segments and offers opportunities for sup-pliers to identify and meet the specific needs of agrowing number of demographic groupings. Keepingup with these changes requires continuous spendingon consumer research, new product development,innovative packaging, and advertising.

Many cooperatives are only beginning to recog-nize the idea of a consumer-driven marketplace. Somecooperatives—primarily engaged in marketing milk,fruits, vegetables, and nuts—have a proven record ofunderstanding and accommodating consumer prefer-ences. On the other hand, many commodity-orientedcooperatives have seemed satisfied to limit their rolesto first-handler functions. Today, identity-preservation,genetic modification, and other differentiation strate-gies threaten to virtually eliminate the commoditybusiness.

To gain consumer acceptance and loyalty, cooper-atives must "unlock" value in their commoditiesthrough differentiation. For example, this mightinvolve highlighting specific physical product attribut-es preferred by some consumers, such as organic, free-range, sustainable, fairly traded, humanely slaugh-tered, etc.

While consumers are sometimes willing to pay apremium for specific product attributes, suppliers findlittle evidence of general market acceptance of suchpremiums for providing food grown or processed tomeet special standards and expectations. For example,domestic consumers have generally neither requirednor been willing to pay extra for non-GMO products.Many foreign consumers insist on certain tolerancelevels and segregation of non-GMO products, but notat a premium.

Cooperatives may be able to exploit the naturaladvantage of their inherently close ties to producers tocreate a positive, marketable image in the minds ofconsumers. Debate continues on whether a coopera-tive's identity is a marketable attribute. Some coopera-tives, such as Blue Diamond and Florida's Natural,emphasize their farmer-owned cooperative status inadvertising and when promoting their products. Closeties to producers should allow cooperatives to assurebuyers of identity preservation and traceability to adegree not possible in other businesses.

Industrialization: farm to retailvia the supply chain

As part of their response to the growth of con-sumer power, food processors and retailers are extend-ing their influence over associated market channelactivities. Firms that control key elements of the distri-bution and marketing system are attempting to controleach level of the process, up to and including deliveryto the consumer. These firms strive to assure: a) prod-uct quality that satisfies their customers’ specific pref-erences; b) minimum costs subject to meeting the qual-ity specifications; and c) that the associated risks aremanaged within acceptable levels. Competition givesway to coordination, as large consolidated firms inter-nalize transactions through ownership or other coordi-nation mechanisms that give them greater control ofvariables affecting profitability. It also results in thin-ner markets where the disparity in bargaining poweramong the parties becomes even more pronounced.

A common term to describe the tools used to con-solidate this control is "supply chain management." Inagriculture, it begins with contract farming. The pro-duction of uniform food products requires relativelyuniform raw farm products. Drumsticks and porkchops won't be the same from week to week unless thechickens and hogs they come from are relatively alike.Supply chain management is a fact of life in the broilerindustry and becoming common in the pork industry.

Early biotechnology helped develop relativelyuniform chicks that produce consumer-preferred large-breasted chickens. Most chickens today are producedusing an "industrial" model. A vertically integratedfirm breeds and hatches the chicks, transfers them to afarmer who grows them to market size under a con-tract with the parent firm, and then transfers themback for processing and marketing. Every aspect of the"grow-out" process is controlled by the parent firm.Feed, veterinary services, and other supplies are pro-vided to the farmer. The result is a uniform, low-costpoultry product that generally meets consumerdemands. Integrated firms, seeking to ensure productquality and to reduce costs, negotiate directly withproducers for contracted product delivery according tospecific time, place, and performance standards.

Now genetics-based artificial insemination ofhogs is resulting in piglets that, if raised in a certainmanner, produce lean pork cuts that also meet con-sumer demands. The pork industry is developing anintegrator/contract farmer production system basedon the poultry industry model. Industrialization ofbeef and grain production is anticipated in the nearfuture.

5

The implications of this integration for producersinvolve loss of independence, shortened planninghorizons, and mounting cost/price pressures. Contractproducers accept restricted decision-making and lessautonomy for the relative security of a stable, albeitsomewhat lower at times, income stream.

Industrialization is also moving backward fromthe supermarkets toward the processor. Led by Wal-Mart, retailers are forcing food processors to stream-line their production and distribution systems.Retailers tell firms that want to be their supplierswhere, when, how, and how much product to deliver.This top-down dominance is being facilitated by theconcentration occurring in food retailing. Food pro-cessing and distribution firms that want these largeaccounts must develop internal supply managementsystems that satisfy the retailers and convince theirsuppliers to adjust to these systems.

Not long ago, retailers were like talent agents,vying for the privilege of carrying the best brands. Butwith their burgeoning size and market share, they arenow landlords who own the only prime real estate inthe area. They can collect slotting fees (rent for the useof shelf space within stores). The burden of carryinginventory is shifted to weaker links in the chain.Retailers reduce labor costs by compelling suppliers tostock shelves. Suppliers now bear more of the risksand costs of the marketplace.

Cooperatives are forced to evaluate where theystand in various supply chains from both the produc-tion and marketing standpoint. In the past, coopera-tives provided a public price, making them vulnerableto undercutting and blame for perceived low productprices. Today, while many cooperatives still find them-selves in that role, some of the larger ones emulate theintegrated-firm practices in livestock production forwhich they were once supposed to be the antidote.

Structural change in food processing and marketing

Producers and their cooperatives are selling intomarkets increasingly dominated by fewer, larger buy-ers. A variety of ownership and contractual arrange-ments intensifies concentration and creates a dramaticdisparity in market power. Even the largest agricultur-al cooperatives have much smaller sales and assetbases than many of their competitors and customers.

Economists suggest that if four firms have 40 per-cent of a market, that market is no longer competitive.5

In food manufacturing, this four-firm concentrationratio ranges from 49 percent to 80 percent in beef pack-ing, pork packing, broiler processing, flour milling,dry corn milling, wet corn milling, and soybean crush-ing.6

Consolidation among U.S. retail food marketersis continuous. It is augmented by the entry of foreignfirms into the U.S. market through aggressive acquisi-tion strategies. From 1991 to 2001, the four-firm shareof the retail food market increased from 23.3 percent to27.8 percent, while the eight- firm share has increasedfrom 35.2 percent to 43.6 percent.7 Retailers are posi-tioned to dictate product requirements, prices, andother terms of trade to suppliers. Purchasing is central-ized for logistical and pecuniary leverage as retailersseek to purchase as many products as possible fromthe fewest number of suppliers. Moreover, suppliersmust be substantial enough to carry not only a nation-wide presence, but also global networks of stores.

As traditional supermarkets expand in size andscope, volume discounters and warehouse clubs areentering food retailing and becoming dominant mar-ket participants. In 2002, Wal-Mart is the clear leaderin national food sales (but wasn't even on the list oflargest food retailers in 1990), while Costco is fifth andanother Wal-Mart unit, Sam's Clubs, is sixth.8

The remarkable success of Wal-Mart's supplychain model, which demands suppliers provide ser-vice, dependability, and quality assurance—and at thelowest possible price—is pressing retailers and suppli-ers alike to conform to a new standard. Wal-Mart's suc-cess is driven largely by its ability to compel suppliersto meet their demands for products while simultane-ously reducing delivery costs. In return, the retailerprovides access to shelf space on a nationwide basis,state-of-the-art information technology, and a largedata base on consumer demands and preferences.

Suppliers (including cooperatives) must conformto buyers' procurement systems by adopting specificinformation technology that both requires and facili-tates better up-front planning by suppliers in invento-ry, transactions and billing. Although suppliers bearmore risk and cost, these types of demands are consid-ered positive by many, because they impose a disci-pline that can be applied not only to other buyers butalso back to raw material suppliers as well. The ability

6

6 Id., at 17-19.7 Supermarket News, January 18, 1993, and the website

www.supermarketnews.com as of March 28, 2002.8 Supermarket news website, www.supermarketnews.com.

5 William Heffernan, “Consolidation in the Food and AgriculturalSystem,” National Farmers Union, (February 1999), p. 1.

to do business with Wal-Mart is considered a bench-mark of a supplier's ability to service other large retail-ers. Those cooperatives that can do business with Wal-Mart report that they are better, more efficientsuppliers to all of their customers as a result.

Cooperatives, as sellers of farm production sup-plies, also feel the effects of structural change withintheir industry. Serving both large and small producersremains a continuous challenge, as does their ability torespond to demands for "one-stop shopping" andbundling of products and services. As buyers of inputsand ingredients, cooperatives feel the cost-pricesqueeze. They, like their members, face fewer, largersuppliers. Under increasing pressure to be more effi-cient, some cooperatives are exploring alternative pur-chasing avenues through buyers' consortiums or free-market auctioning. However, simple solutions to theirchallenges are not readily apparent.

GlobalizationCooperatives are groping to find their place in

the 21st century's global, interdependent economy.Participation in the global economy is, in many ways,no longer an option. Slow U.S. population and incomegrowth have dampened demand at home, requiringU.S. producers to look to the 96 percent of the world'sconsumers outside the United States. Attendant is theneed to address the myriad demand-factors thatworld-consumers require—each in their own uniquecultural context. Other international market conditionsoften mirror domestic markets. For example, U.S. pro-ducers face the same need for countervailing power inhighly concentrated food industries both domesticallyand worldwide.

Producers are particularly hard hit by globaliza-tion. For decades, U.S. farmers were the most efficientand productive producers in the world. As we lookahead, U.S. producers may be extremely productivegiven their resource base. However, foreign producershave lower input costs. Labor costs are lower in otherparts of the world. U.S. production subsidies have dri-ven land prices to unprecedented heights. Internationalproduction grows increasingly competitive on a priceand quality basis. As less-developed countries becomebetter able to meet their basic food requirements, theywill be less dependent on for U.S. surplus productionand may even become competitors in both our ownand other countries' markets.

One book on the subject of globalization wasmentioned repeatedly during the panel discussions.Steven C. Blank's The End of Agriculture in the AmericanPortfolio looks at the economic realities of globalization

and concludes that we are approaching a time whenall agricultural production will cease in the U.S.9 Noneof the panelists dismissed the book out-of-hand.Although many said Blank may have overstated hiscase by suggesting that all agricultural production inthe U.S. would cease, they take seriously his basicpremise that farmers (and by implication, their cooper-atives) will never again make money consistently sell-ing basic commodities such as corn, soybeans, wheat,and cotton.

Increasingly, commodity suppliers take advan-tage of opportunities to source from multiple locationsand reduce transactions costs. This is a challenge forU.S. cooperatives, which are tied to their domesticgrower bases. Cooperatives may no longer be able toprovide a home for all member product and be themarket of last resort. Instead, cooperative marketersmust identify ways to insulate themselves fromvolatile commodity markets by adding value and dif-ferentiating their products, if only by implementingand enforcing higher quality standards and terminat-ing their relationship with producers consistentlyunable to make the grade.

Both the rules of the game and the players arechanging. China's membership in the World TradeOrganization positions it to displace U.S. agriculturalproducts in both domestic and export markets. Thereaction to these kinds of changes, added to the cyclicand unstable nature of the global economy, is oftengovernmental intervention to protect domestic produc-ers. Tariff and non-tariff barriers are used to protectdomestic production, but also distort trade and throwmarkets out of balance. This produces a continuouscycle of market-access issues and actions to "level theplaying field."

Panelists seemed unafraid of questioningwhether cooperatives can position themselves to helpU.S. producers compete globally under these condi-tions. They asked whether it is enough—as some graincooperative leaders have suggested—to look for waysto increase domestic demand through livestock andrenewable energy rather than rely on export marketgrowth. And they wondered what unique features ofthe cooperative form of business define the ability ofU.S. producers to influence policy and gain a footholdin international markets.

7

9 Steven C. Blank, “The End of Agriculture in the AmericanPortfolio” (Westport, CT: Quorum Books, 1998).

The policy environmentFew deny the impact public policy has on agri-

cultural producers and their cooperatives. Panelistswere generally critical of how policy affected theirmembers and cooperatives. And they were willing toshare some of the blame for not being effective enoughin educating legislators on the problems they face.

At the producer level, some panelists questioneda "cheap food" policy, chiding lawmakers for mollify-ing voters by perpetuating programs that dampenmarkets for producers. Others noted the results offighting basic economics—encouraging productionthat exceeds demand and then providing subsidies,which keep land in production.

Government programs also influence the struc-ture and success of cooperatives. This section reviewstwo policy issues discussed during the workshops. Asubsequent section examines how cooperatives can bemore effective in shaping policy in the years ahead.

The price-income anomalyEntering the 21st century, market prices for basic

farm commodities—wheat, corn, cotton, soybeans,rice—were at cyclical lows, the result of unrestraineddomestic production, worldwide surpluses, anddepressed demand in a weakened global economy. Yet,net cash farm income in the U.S. reached a record highof $59.5 billion in 2001. The value of U.S. farm realestate rose 12 percent from 1999 to 2001, to more than$1 trillion. The farm debt-to-asset ratio hovers between15 and 16 percent, well below the level reached duringthe period of farm financial stress in the 1980s.

This anomaly is made possible by Governmenttransfer payments. Of the $59.5 billion in net cash farmincome in 2001, $21.1 billion came from Governmentpayments to farmers. The 1996 farm bill was intendedto wean agricultural producers from the financial sup-port of the Federal Government and to provide aframework for a "market-oriented" production econo-my. But a series of natural disasters and related cir-cumstances resulted in a less aggressive approach incongressional efforts to shape a more rational agricul-ture. As a consequence, farm land prices rose to recordlevels, putting U.S. producers at a disadvantage rela-tive to those in other countries where land and othersupplies are cheaper and technology has boosted prod-uct quality.

Environmental regulationAnother growing challenge to producers and

their cooperatives in the 21st century is dealing withthe production and business restraints brought about

by environmental concerns. Producers are caught upin a myriad of regulations that seek to constrainactions that may harm the environment. Areas of likelyconflict include nutrient runoff, access to scarce watersupplies, and protecting open space.

Cooperatives, like farmers, must deal withincreasingly complex environmental regulations.Runoff from food processing facilities, disposition ofchemicals, access to water, and noise and odor com-plaints from neighbors are some of the issues con-fronting cooperatives and other businesses.

Well-intended environmental rules can some-times harshly affect cooperatives. One example is theEnvironmental Protection Agency (EPA) rule to sub-stantially reduce the sulfur in diesel fuel and gasoline.This poses a serious threat to cooperatives that ownpetroleum refineries. Management estimates that itwill cost at least $200 million to bring their facilitiesinto compliance with these standards. Investor-ownedpetroleum firms can raise the funds to upgrade theirrefineries in public capital markets. Cooperatives areconcerned that their members don't have the money todo the same for their facilities. EPA's refusal to grantcooperatives an exemption from the rules, or moretime to comply, places them in a difficult position. Oneor more refineries may have to be sold, reducing fuelavailability and competition among sellers in ruralareas.

Another concern for cooperatives involved infood marketing is the ever-present possibility of deliv-ering products that are considered adulterated orunsafe into the marketplace. This issue is amplified byrecent questions about possible long-term harm fromthe use of genetically modified farm products.Conflicts may arise between the technologies availableto farmer-members and their impact on the integrity ofthe food delivery system, with cooperative marketingmanagers caught in the middle.

Some environmental programs may be perceivedas beneficial by producers but impediments by cooper-ative managers. Agricultural-based conservationbegan in earnest after the "dust-bowl" days of the1930s. The overriding objective has been to keep top-soil in place, reducing pollution and enhancing farmproductivity. Significant strides have been made inachieving that goal. Ninety-two cents out of every dol-lar spent on direct conservation payments to farmerspays to idle land and for the management practicesthat enhance the environmental benefits of retiredland.10 But this means reduced farm supply sales andproducts to market for cooperatives.

8

In the years ahead, producers, cooperatives, andGovernment will have to work to improve manage-ment practices on farms, in forests, and factories.Government dollars may have to be reallocatedtoward sustainable practices and a wider range ofissues, such as incentives to conserve scarce water andenergy resources on the farm and at cooperative facili-ties. As with all agricultural firms, farmer cooperativeswill have to find ways to meet the cost of complyingwith various regulations or exit certain lines of busi-ness.

Issues and Forces Shaping the Internal

Environment of Cooperatives

Internal challenges as daunting as the externalones confront cooperatives. The internal issues arelargely related to the external ones, particularly as theycomplicate efforts to respond to outside forces. Someinternal issues are inherent in the structure of coopera-tives, others result from the attitudes of the people incooperatives. All must be addressed for cooperativesto remain a viable business structure in the 21st centu-ry.

This section addresses issues common among alltypes of farmer cooperatives and special problemsconfronting the federated farm supply and grain mar-keting system.

Limited ability to accumulate equityOne of the stiffest challenges facing cooperatives

in the years ahead will be accumulating sufficient capi-tal, particularly equity, to finance improvements andexpansion of services. Cooperative principles dictatethat cooperatives are owned and controlled by the per-sons who use their services, and benefits flow to user-owners on the basis of use, not investment. This makesinvestment in a cooperative unattractive to "outsiders,"even those who support what the cooperative is tryingto accomplish.

Equity accumulation is further complicated bythe related axiom that the burden of financing theassociation should fall on current users. A cooperativeis the only form of business that is expected to system-atically return equity to owners.

Another hurdle is the common practice ofencouraging membership by requiring only a mini-mum initial investment to acquire an ownership inter-est in a cooperative. Cooperatives are often expected toprovide low-cost services to members and still gener-ate sufficient earnings to redeem old equity, returnsubstantial cash patronage refunds to members, andgenerate all the new equity the association needs.

Another impediment is farmer reluctance tofinance new initiatives, especially unfamiliar and riskyactivities, such as vertical integration and value-addedprocessing. Cooperative managers, particularly man-agers of regional cooperatives who want to enter newventures, believe that many farmers have the resourcesto finance cooperative expansion but prefer to spendthe money on their own farm or other investmentopportunities.

Retained patronage refund financing is creatingfissures within the system. Cooperative managersassert they need these retained earnings to sustain thebusiness. Producers and local members of regionalfederated cooperatives want large cash patronagerefunds and question the value of non-cash patronagerefunds. They become frustrated with a cooperativethat says patronage refunds are members’ money butfails to redeem equity as rapidly as these member-patrons would like.

The environmental compliance problems facingcooperative refineries discussed in the previous sectionillustrate the equity accumulation problems for coop-eratives. Some believe that if cooperatives that ownpetroleum refineries could simply sell stock on theopen market as their investor-owned competitors do, itwould be much easier for them to meet EPA edictsconcerning reduced sulfur content in their products.But this conflicts with operating their business on acooperative basis. So cooperatives must developstrategies to attract sufficient capital without subvert-ing their cooperative character if they wish to remainin the petroleum refining business.

Some farmers are willing and able to finance theircooperatives. The development of numerous "newgeneration" cooperatives shows that if farmers areoffered the proper incentive, such as a chance to partic-ipate in value-added processing and to realize a gainwhen they sell their investment in the cooperative,they will provide up-front equity.

However, in several instances, the farmer-ownersof a "new generation" have determined that theycouldn't raise adequate equity from the membership toseize important market opportunities. They voted toconvert to an investor-owned firm to gain access to

9

10 USDA’s report, “Food and Agricultural Policy: Taking Stock forthe New Century,” (September 2001), p. 10.

outside investment. The original farmer-members maystill benefit from the company. However, those benefitswill no longer be protected by user ownership andcontrol.

Diverging member characteristics and needsThe growing diversity among producers is

reflected in cooperative membership. Cooperatives inthe 21st century will be expected to meet the variousneeds of an increasingly heterogeneous membership.

Some issues arise because of the diverging sizeand motivation among producers. For example, com-mercial-scale producers may expect discounts on sup-ply purchases and special services to remain coopera-tive patrons because such benefits are offered by otherbusinesses. Small producers sometimes resist whatthey see as efforts by larger producer-members to con-trol the organization.

Cooperatives have always had members of vari-ous ages. But when children were raised on the farm,received all of their formal education in the local area,and became farmers like their parents, the generationgap was fairly narrow. Today, farm children are goingaway to college, acquiring technical skills and experi-ences that match their urban counterparts, and beingoffered opportunities not available to previous genera-tions. While some older farmers scoff at technologicaladvances and global opportunities, younger farmersaccept them and expect their cooperatives to do thesame.

A single cooperative may have at least one mem-ber, if not a representative group of members, with thefollowing characteristics:

● A small-volume producer who enjoys living ina rural area and doesn't particularly care if the farmmakes money (hobby farmer);

● A small-volume producer who wants to growand will seek the best deal available for needed goodsand services;

● A small-volume producer living in an area ofless economic opportunity for whom farming is a nec-essary supplement to limited non-farm income;

● A large-volume producer-member who runsthe farm as a business with a clear focus on profit;

● A new producer who is highly leveraged; and● An older, long-time producer who is approach-

ing retirement and has everything paid for.

Each of these members brings a specific set ofinterests and demands to the cooperative. Leaders and

advisers must find ways to blend this increasinglydiverse base of farmers into a membership with acohesive business interest in their cooperative.

Board effectivenessEffective boards of directors are critical to cooper-

ative success. Their position as the link between mem-bers and management makes them responsible formeeting member needs while maintaining the viabilityand cooperative character of the association. Given thecomplex and fast-changing circumstances facing coop-eratives today, developing strong leadership at theboard level will be a continuing challenge in the 21stcentury.

Cooperatives are organized as corporationsunder State law and have a general governance systembased on the corporate model, but modified to reflectthe cooperative system of user representation.Member-owners elect a board of directors to set corpo-rate policy and oversee operations. The board selectsthe chief executive officer, usually referred to as themanager, who administers the board policies, hiresother staff, and is responsible for the day-to-day opera-tions of the cooperative.

Participants in the focus groups raised severalissues about director effectiveness in cooperatives. Oneconcern was that producer-directors too often makedecisions based on internal politics rather than soundeconomic principles. Decisions made to curry popular-ity (e.g., to keep an unprofitable facility open) may getthe directors re-elected but the decisions may be badfor the business. Good directors, it was suggested, votefor what makes the most business sense and let theperformance of the cooperative determine whether ornot they are re-elected.

A second concern is that some directors nevergrow, in a leadership sense, beyond being a producermember. For example, they resist equity accumulationthrough retained earnings because, as a grower, theywant a high cash patronage refund each and everyyear. They are viewed as too willing to mortgage thecooperative's future for more cash today. Far-sighteddirectors will ensure that money invested in theircooperative protects and enhances their income overthe long term.11

10

11 This also reflects the board’s policy-making role where membersmay have divergent interests. If members want more cash, dodirectors have an obligation to respond accordindly? This mayalso be a member-education issue.

Panelists were also wary about the inability ofmany grower-directors to deal with contemporaryissues. Farmer-directors may be outstanding produc-ers, but often lack the experience and training to ana-lyze options for dealing with supply chains, technolog-ical innovations, complex business arrangements, orglobalization. They might not fully understand finan-cial statements and might have trouble grasping com-plex business plans. Managers of regional marketingcooperatives in particular question whether theirgrower-directors are equipped to guide processed foodcompanies in today's economic environment. Somebelieve grower-directors should limit their oversight tobroad policy areas while turning over full responsibili-ty for operational decisions to management.

Concerns about board effectiveness will beexplored in more detail in the subsequent section onthe changing federated farm supply and grain market-ing systems. Ways to improve board performance willbe addressed later.

Management lack of cooperative focusSome aspects of managing a cooperative are simi-

lar to other comparable businesses. These tend to bethe physical operations. A cooperative-owned dairyplant, feed mill, or farm supply store looks and oper-ates much like a non-cooperative one. So do the trucks,warehouses, and fork lifts. Both types of businessesdevelop distribution channels, deal with unions, com-ply with government rules and regulations, etc.

But some management issues are unique to coop-eratives. Managing one requires a clear understandingof cooperative principles, structure, and operations.Cooperative managers must be doubly qualified. Theyneed to be well versed in the fundamentals of coopera-tion as well as the specific operations of the business.

In an investor-owned firm (IOF), the chief execu-tive officer (CEO) often has a large, if not dominantvoice, in selecting the board of directors. Strong CEOslook for persons who share their vision for the futureof the company and respect their managerial ability inselecting directors. When a new CEO takes over, direc-tors who don't share his or her views are often encour-aged to relinquish their seats on the board. This placesthe manager in a position of strong control over bothsetting and implementing company policy.

In a cooperative, the CEO usually has significant-ly less influence over who sits on the board. Incumbentdirectors may have outlasted several managerialchanges. When a board seat opens up, the influence ofthe CEO in the selection of the new director variesgreatly depending on the culture of the association.

Some cooperatives look for guidance from the manag-er, others deeply resent any involvement by the man-ager. As a result, directors often don't feel beholden tothe manager for their position and have the indepen-dence, if they choose to exercise it, to question man-agement decisions and reject its recommendations.

Another difference is the daily relationshipbetween the shareholders and the directors of an IOFand a cooperative. An IOF investor-owner may haveno relationship with the business other than as aninvestor. Directors attend a quarterly board meeting,but they may also have limited additional contact withthe firm.

In a cooperative however, user-owners and direc-tors invest in and guide the firm specifically to obtainservices for themselves and the other members. Theyoften have regular contact with employees and otherproducer-owners. Their livelihood depends on thecooperative doing a good job. They know when theythink it isn't meeting their needs and frequently tellmanagement when they are displeased about even thesmallest imperfection in goods or services received.

Thus, cooperative managers must be able toaccept shareholders walking into their office with com-ments, often critical, while, in an IOF, the shareholdersmay not even know where the headquarters is located.They must also work with a board they didn't selectand that may have very different ideas from their ownas to how the association should operate.

When hiring a new CEO, a cooperative needs toconsider how that person is likely to do in the close,personal environment that is part of working for acooperative. This suggests that one good source ofpeople with the appropriate skills for leadership infarmer cooperatives is managers whose careers devel-oped in the cooperative system.

Growing emphasis on value-added activityA final internal issue confronting cooperatives is

the growing emphasis on value-added handling andfood processing. Many panelists view value-addedprocessing as the growth area for cooperatives in the21st century. This raises serious questions about howother business segments that historically have beenimportant to producer members will be treated andthe extent to which cooperatives should invest limitedresources in trying to be effective in markets dominat-ed by powerful global food and retail firms.

Pressures on the federated modelOne major theme to emerge from the focus group

discussions is that the traditional federated grain mar-

11

keting and farm supply system is under intense pres-sures. It has already begun to change in response tothose pressures and may be vastly different in theyears ahead. All cooperatives are affected by majorchanges in the agricultural environment such as glob-alization and concentration. Yet, panel participantsfocused their expressions of concern on the traditionalnetwork of local grain elevators and farm supplystores and their federated regional grain marketingand supply buying cooperatives.

This focus is not surprising for at least two rea-sons. In 2000, nearly two out of every three U.S. farmercooperatives marketed grain and/or provided sup-plies to grain producers. More than 75 percent of the 3million producer-memberships held in farmer cooper-atives were in these associations.12 While most of theseassociations are local, centralized cooperatives, manyare members of one or more regional, federated sys-tems.

A basic cultural conflict exists between localcooperatives and their federated regional. Some localswill not recognize change. Federated managers believethe realities of the business world are demanding thatthey do. Panelists offered numerous explanations for,and examples of, this conflict.

The planning horizon of a local cooperative isoften constrained by its older farmer-members, manyof whom are nearing retirement. They want their coop-erative to just keep doing what it has been doing anduse any cash on hand to redeem their equity. This wasdescribed as older members wanting to "slide by" foranother 5 to 10 years until they retire.

Younger producers are more likely to urge theirassociation to invest in operations that will help themremain viable into the future. However, the older farm-ers control most of the board seats on many locals andhave the authority to thwart change. For example,panelists suggested farmer-directors' limited vision iskeeping cooperatives from making the necessaryinvestments to become leaders in the hog processingindustry. They asserted that these elders are relegatingfuture hog farmers to "contract producer" status.

Many federated managers believe that localsembrace the cooperative culture of service over profitto such an extent that they are unwilling to take stepsnecessary to maintain profitability. This leads thelocals to make unreasonable demands on their federat-ed regionals to keep them in business. Locals expect

federateds to be the low-cost source of farm supplies,pay a premium for product delivered for resale, andissue a hefty patronage refund each year. Often, eco-nomic circumstances make this impossible.

Federated cooperatives could offer locals theopportunity to be more profitable by selling them sup-plies for less and/or paying more for farm productsdelivered for marketing. However, such activity wouldimpair the federateds' ability to finance operations andpay the patronage refunds that command the loyaltyof local cooperatives. Some federated managers don'ttrust their locals to use the funds wisely. Regionalcooperatives want to enhance their own economicposition rather than to further underwrite what theyperceive as losing activities at the local level.

Many locals operate at a deficit and depend onfederated association cash patronage refunds andredemption of retained patronage refunds of earlieryears to stay in business. Rotan reports that in 2000,more than 40 percent of the locals surveyed had losseson their own operations and needed patronagerefunds from federated cooperatives to show a profit.13

Regional federated managers are also frustratedby what they see as perception problems among localproducer members. Because patronage refunds areoften used to cover the losses of inefficient locals, pro-ducers seldom recognize the extent of the support theyreceive from federated cooperatives.

Federated cooperatives consider this anunhealthy situation. They question the ability of theiraffiliates to survive when they are unable to paypatronage for a period of time. Federated cooperativeswant locals to be profitable on their own, instead ofdiluting regional assets to cover their inefficiencies.

Locals often encourage competition among coop-eratives and fail to emphasize cooperation amongcooperatives. Federated cooperatives are formingalliances with each other that create new, nationwideventures focusing on single lines of business. They seethis as a way to "take costs out of the market" whilelocals see it as a way to "take competition out of themarket."

Hogeland observed that locals want, and areaccustomed to, several bids for their business. Theymay belong to multiple marketing and supply federat-

12

12 Charles A. Kraenzle et al., “Farmer Cooperative Statistics, 2000,”U.S. Department of Agriculture, RBS Service Report 60, p. 2

13 Beverly L. Rotan, Sales Climb, Net Income Declines in LocalCooperatives in 2000, “Rural Cooperatives,” USDA/RuralDevelopment, (Nov/Dec 2001), pp. 25-26.

ed cooperatives to cherry pick the best bids availablewithin the system. When the system only offers onebid, they look to IOFs for competitive bids.14

Federated cooperatives see the locals as ungrate-ful and somewhat disloyal when they look for the bestshort-term deal instead of supporting regional coordi-nation aimed at capturing economies of scale thatincrease market power and reduce costs to the localsover time. The friction makes it difficult for federatedcooperatives to achieve their business objectives.

Locals are seen as adverse to business alliances,either with other cooperatives or IOFs. Federated man-agement, on the other hand, moves easily in a worldwhere they compete with a firm on one front and part-ner with them on the next. The alignments of regionalswith firms that some local leaders consider rivals cre-ates considerable tension among regionals, their localaffiliates, and their producer-members.

Communication is necessary to educate memberson the need for joint ventures that appear to reducecompetition and for ventures with "the enemy." Anexample of this is uproar over a federated coopera-tive's decision to sell grain through an IOF competitor.The cooperative’s management saw no problem withthis because the cooperative regularly does businesswith the IOF. Many producer-members, however, wereupset because they perceive the IOF as "the competi-tion." A larger investment in a member education cam-paign might have helped the cooperative limit the ten-sion with its producer-members. The importance ofthoroughly explaining pending partnerships with acompetitor before the venture is approved cannot beoveremphasized.

Federated managers view local members as lessconcerned with the value of their equity investment intheir federated than in keeping their local cooperativealive. Federated cooperatives see the locals' penchantfor service over profit manifesting itself as a justifica-tion for insisting inefficient local facilities remain openwhen economics demand that they be closed.

The evolution of transportation services, especial-ly trucking and the interstate highway system, negatesthe need for a grain elevator and farm supply storeevery 8 to 10 miles. Grains, cotton, and even milk canbe hauled hundreds of miles or more when it is eco-nomically advantageous to do so.

Several panelists viewed local grain elevators asdinosaurs bound for extinction. Their farmer- owners

will have to absorb the loss. They also cautionedagainst farmers investing in new sub-terminal eleva-tors to get back on railroad main lines. Marketing com-modity grain, they said, is not profitable now, nor is itlikely to be in the future.

Investor-owned processors and exporters are per-fectly willing to let farmers tie up their capital in basiccommodity handling facilities, with their low returnon investment. However, as the IOFs require grain,they are also somewhat willing to share the costthrough joint ventures. The grain firms regard theseelevators as costs and not profit centers, while manyfarmers still expect them to generate patronagerefunds.

Farmers must recognize the additional costs asso-ciated with keeping a conveniently located but ineffi-cient local in business. For example, two small cottongins resisted merging because both sets of memberswanted a cooperative in their town. It cost theirregional cooperative an extra $20/bale to serve bothgins. When the situation was explained to the produc-ers that they could decide either to merge or receive$20/bale less for their cotton, the merger was quicklyapproved. Farmers have every right to place a "social"value on retaining their local facilities. But they mustunderstand the economic cost of that choice.

Sometimes the cost of operating what appear tobe inefficient locals may be justified. In anotherinstance, two local cooperatives serving producers of aperishable crop would save $200,000 per year by merg-ing. However, the members are in a hurricane area andwish to minimize the risk of significant losses due to aharvest-time storm. Closed roads could prevent deliv-eries by some patrons to a single location, resulting ina substantial crop loss. As their potential loss might begreater than the extra cost of maintaining two locals,they decided to bear the additional cost—a form ofmarket insurance.

Rural sociologists add a new perspective on theissue of closing locals. They suggest that the closure ofa local cooperative tears at the social fabric of the com-munity, just as when a school, church, or hospital clos-es. The reasoning is always the same: "The communitycan't support the facility." But the social damagecaused by such closures is difficult to measure.

Panelists spent little time on supply cooperativeissues. One executive of a farm supply regional point-ed out that the costs of doing business through amulti-level supply cooperative come under real scruti-ny when a farmer can order chemicals, for example,directly from the manufacturer and have them deliv-ered for less total cost. While some farmers are willing

13

14 Julie A. Hogeland, “The Changing Federated RelationshipBetween Local and Regional Cooperatives,” U.S. Department ofAgriculture, RBS Research Report 190 (August 2002), p. 5.

to pay more for technical support provided throughtheir cooperative, others simply use the Internet andbypass the cooperative system.

The many pressures on the federated system areplacing managers of local cooperatives in an untenableposition. When a local isn't profitable on its own, thesurvival of both the manager and the cooperativedepends on something beyond their control: the suc-cess of their regional.

Managers at all levels within the system arerewarded for how well their unit does on a short-termbasis. Perhaps, because of system inter-dependencies,a new approach to incentives should be developed thatrewards performance of the entire system.

Reshaping the federated systemAs cooperatives adapt to the 21st century busi-

ness climate, producer-owners must recognize the fun-damental shifts that are occurring and initiate policiesand programs designed to succeed in the new environ-ment. This includes adapting to globalization, techno-logical innovation, and industrialization within agri-culture.

Perhaps even more important is an underlyingcurrent drawing the economy in a new direction.Throughout the 20th century, the cornerstone of oureconomic thinking was free and open competition.However, as the 21st century begins, coordination isnow a driving force. Cooperatives will have to positionthemselves and their producer-members to deal withthis basic shift in business operations and marketstructure.

The focus groups discussed several inter-relatedissues including: streamlined decision-making, coordi-nation among cooperatives, and capital accumulation.They concluded that the successful agricultural coop-erative of the future is likely to be relatively large, cen-tralized, and market driven. Important changes arealready occurring within the federated system of grainmarketing and farm supply associations. Regionals arespinning off their previously competing farm supplyoperations into product-line LLCs, turning grain mar-keting over to the multinational IOFs, and evolvinginto food processing firms. At the local level, changesinclude consolidation of local cooperatives, some largeenough to be considered a so-called "super-local."

Not all restructuring needs to result in substantialincreases to margins. Restructuring is also successful ifit prevents a deterioration that would have otherwiseoccurred without the change.

At the regional levelThe federated regional cooperative traditionally

was a single-source supplier of all the important goodsand services to local affiliates. Each federated pur-chased the major farm supplies in bulk for resale to itslocals, who then resold them to their farmer-members.Regionals also maintained large facilities where storedgrain was gathered, sold, or transported for eitherdomestic processing by other firms or for exportthrough port facilities.

These cooperatives are now openly questioningwhether, as structured, they can compete with thelarge multinational firms in either of their two keyfunctions: providing supplies to their farmer- membersor marketing their production. They have initiatednew business strategies. While it is too early to predicttheir success, these changes offer opportunities notlikely to arise under the traditional mode of operation.

Coordinated farm supply operations. In recentyears, Midwestern federated farm supply cooperativesmade major changes in their delivery systems by orga-nizing joint cooperative ventures to coordinate a singlemarket presence.

Agronomy. On February 3, 2000, CHSCooperatives, Farmland Industries,15 and LandO'Lakes formed Agriliance LLC. This firm providescrop nutrients, crop protection products, and seed tocooperatives and producer-members in all 50 states,Canada, and Mexico. The venture allows participantsto use the fertilizer manufacturing capacity ofFarmland and CF Industries more efficiently. It isdeveloping a branded marketing program for cropprotection products under the AgriSolutions label.

Feed. Land O'Lakes and Farmland also formedLand O'Lakes Farmland Feed LLC to manufacture anddistribute feed. The venture has eliminated duplicatefacilities, entered growing specialty markets, andthrough Land O'Lakes, purchased Purina Mills and itsbranded feed marketing program.

Energy. In September 1998, CHS and Farmlandformed Country Energy LLC to deliver petroleum

14

15 This alliance (along with others) was viewed by many as way forFarmland to alleviate the pressure it was under to provide anarray of services to its local affiliates despite the financial burdenimposed by those services. In June 2002, Farmalnd Industries wasgranted bankruptcy protection under Chapter 11 to continue itsbusiness operations. According to the petition, this filing wasspurred by “continued adverse market condition in the nitrogenfertilizer business and recent increases in cash demands.”

products, propane, and lubricants to rural residents.However, energy coordination appears headed towardconsolidation within CHS.

Farmland sold its interest in Country Energy toCHS, which owns 75 percent of National CooperativeRefinery Association (NCRA). If Farmland sells itspetroleum refinery in Coffeyville, KS, the only twolarger refineries in cooperative hands—the CHS refin-ery in Laurel, MT, and the NCRA facility inMcPherson, KS—will be under CHS control. The onlyother refinery owned by a farmer cooperative is a rela-tively small unit operated by Countrymark in Mt.Vernon, IN.

A similar coordination in farm supply operationshas occurred on the East Coast. In October 1998, GoldKist sold its farm supply operations to Southern StatesCooperative. In July 2000, Southern States began pro-viding product distribution and marketing services toa network of farm supply stores in the Northeast pre-viously served by Agway. Agway has announcedplans to exit the agronomy, equipment leasing, seed,and insurance businesses. It will focus on lines of busi-ness where it has a strong market position in its tradeterritory (animal feed, energy product distribution) orsees a brighter future (fresh produce, food industrytechnology).16

These examples of joint ventures and restructur-ings reflect a growing realization among the federatedcooperatives that they can no longer afford to aggres-sively compete against each other for farmer loyaltyand business.

Grain marketing alliances with IOFs.Cooperative grain marketers have created joint ven-tures with some of the largest grain merchandisingand food processing firms in the world that are wellpositioned to participate in the global market.

In 1985, GROWMARK sold its river grain-mar-keting terminals to ADM for ADM stock. These eleva-tors are operated by ADM/GROWMARK, a subsidiaryof ADM. GROWMARK locals are encouraged to deliv-

er their grain to ADM/GROWMARK; ADM paysGROWMARK an origination fee for grain supplied byits members. Indiana Grain also formed a similar ven-ture with ADM.

In May 2001, Farmland placed its domestic grainoperations into a similar grain marketing joint venturewith ADM, called ADM-Farmland, Inc. The new com-pany leases and manages Farmland's 24 grain eleva-tors in North America. In a related development, onMarch 5, 2002, Farmland announced plans to exit theinternational grain trading business by selling or liqui-dating its Tradigrain operations. Both agreementsplace ADM in the forefront of marketing the graingrown by farmer-members of local associations affiliat-ed with these federated regional cooperatives.

In September 2002, Southern States Cooperativeentered into a long-term lease agreement turning con-trol of its 13 grain facilities over to Perdue Farms,which will operate the facilities. Southern Statesemphasized the need to reduce companies in the mar-ket and provide growers with more marketing optionsthan Southern States could make available.17

Not all cooperative-originated grain is subject toa marketing arrangement with an investor-ownedfirm. For example, CHS markets substantial amountsof member-produced grain. But the trend over recentyears has been toward affiliation with a global grainmarketing company.

Food processing growth. Midwestern federatedcooperatives have reduced their direct involvement infarm supply and grain marketing and redirected theirresources to become food processing cooperatives.Farmland Industries and CHS Cooperatives are mov-ing toward the model created many decades ago byLand O'Lakes (LOL). LOL members have enjoyedreturns produced by the cooperative's prominent posi-tion in the branded butter and dairy foods markets formany years. This provided the financial strength andpositive exposure to develop a farm supply line thatsupports dairy production and allows the cooperativeto diversify its business without diluting its focus. Onepanelist suggested cooperatives that wish to succeedin the 21st century may need to follow this model: picka product line where they can be successful on anational/international scale; build a structure (includ-ing joint ventures) to accomplish that objective, andconvince growers to finance it (not pay half the earn-ings out as cash patronage refunds every year).

15

16 Agway News Release, “Agway Announces Plan to Strengthen,Refocus the Cooperative,” March 6, 2002. Agway has, likeFarmland Industries (see note 15), filed voluntary petitions toreorganize under Chapter 11 of the U.S. Bankruptcy Code. Agwaycited insufficiet cash flow to support the level of its debt as thereason for its action. At the time this paper was written, Agwayhad sold its insurance business and was negotiating to sell itsseed, agronomy, and equipment leasing assets to reduce its debtload. Agway News Release, “Agway, Inc., Intends to File forChapter 11 Reorganization to Restructure Finances andReduceDebt,” September 30, 2002.

17 Southern States news release, “Southern States Announces GrainFacilities Agreement with Perdue Farms Inc.,” Sept. 17, 2002.

Farmland Industries chose to enter the processedmeats business. Its affiliate, Farmland Foods, producesa full line of pork products. Funds are being investedin research and development and on advertising tobuild the Farmland CaseReady Brand. Food serviceagreements are in place with restaurant chains, hotels,Kroger, and Wal-Mart Super-centers.

Farmland National Beef, owned by Farmland andU.S. Premium Beef, is already the fourth largest beefprocessor in the United States. The venture's"CaseReady" beef is sold nationally through Wal- Mart.This unit is also looking overseas and has captured 20percent of the market for chilled beef in Japan.

CHS is building a foundation as a processor andmarketer of grain-based consumer products. CHSowns a 50 percent ownership interest in VenturaFoods, LLC, which generates $1 billion annually insales of margarine, salad dressings, and related prod-ucts. This investment links back to CHS's soybeancrushing and refining operations in Mankato, MN.Ventura Foods owns established brand names inHidden Valley salad dressings and Saffola edible oilproducts.

In June 2000, CHS purchased Sparta Foods, Inc., amajor manufacturer of tortillas and related products,opening new opportunities for its wheat, corn, andoilseeds producing members. CHS also entered theorganic foods sector by purchasing an interest inRocky Mountain Milling, LLC, a small organic flourmill in Platteville, CO.

On January 11, 2001, CHS and Cargill, Inc.,announced a wheat milling joint venture known asHorizon Milling, LLC. It combines five CHS mills with16 Cargill mills into a nationwide network that willretain the flour brand names of both companies andexplore new branded product opportunities. Cargillmanages the joint venture company.

CHS has also launched Oilseed Partners, LLC, ajoint venture with 450 North Dakota producers. Itcrushes and markets crambe.18

In 1998, Gold Kist, Inc., sold its farm supply busi-ness to Southern States. Currently, Gold Kist's onlymajor line of business is processing and marketingpoultry products, although it also has a unit that mar-kets pork products.

Gold Kist is now the second largest poultryprocessor in the United States. It markets a completeline of chicken products, Cornish hens, and processed

poultry products under its Gold Kist Farms brandname. An unanswered question is whether other full-service cooperatives will, or should, follow the exam-ple of Gold Kist and jettison all farm supply operationsin favor of a total commitment to food marketing.

At the local levelSome local associations are bolstering their grain

marketing and supply distribution business by trans-forming themselves into larger, centralized coopera-tives. They have the strength to finance and manageinvestments in facility and service upgrades. In turn,they are becoming less dependent on the federatedsystem for products and services.

Consolidation into super locals. Local coopera-tives need the capacity to serve tomorrow's producer.When a commercial farmer has a large harvest of grainto be stored and marketed, the local cooperative facili-ty must be able to handle it or that business will goelsewhere.

Like other elements of agri-business, local grainmarketing and farm supply cooperatives are consoli-dating to form centralized "super locals." They cover amulti-county area and often accumulate sufficient cap-ital to construct modern, high-volume grain elevatorsalong a railroad main line. They can also provide alarge enough market to attract favorable bids fromproviders of farm supplies.

In Iowa, as with other states, the rate of concen-tration is accelerating. Twenty percent of all grain andfarm supply business is conducted by the largest 5cooperatives. The largest 10 cooperatives conduct upto 35 percent of the grain and farm supply business.

The trend to create super-locals with a central-ized structure will continue. Some may approach thesize of existing regionals, but will have a single boardand management team.

Some consolidation will be voluntary to takeadvantage of economies of scale, access to betterfinancing options, and increased market power. Somewill be involuntary, as floundering locals are mergedinto stronger associations. Some locals will simplycease to exist. Because alternative uses for a grain ele-vator are limited, the producer-owners of associationsmay lose most or all of their equity.

Super-locals will have fewer but larger physicalfacilities. They will purchase supplies for memberswherever they can be obtained at the lowest cost con-sistent with good delivery service. Often, they won'ttake delivery of the product but will simply processorders with the supplies being sent directly from themanufacturer to the farm. Likewise, they will market

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18 Crambe is a member of the mustard family, grown primarily inNorth Dakota. When crushed, its seeds produce an oil suitable fornon-food, industrial uses.

member grain wherever they can get the best overallterms. A growing portion may be sold under contractssigned with private grain companies. These contractsmay be part of a joint venture or alliance arrangement.The grain-marketing firm may help finance the cooper-ative elevator(s) in return for an assured supply ofproduct at a reasonable price.

The business environment surrounding super-locals that only market grain and provide farm sup-plies will likely limit them to modest margins.Multinational grain companies prefer not to tie uptheir capital in rural storage facilities and will continueto support the origination role of cooperatives.Therefore, grain-marketing contracts will provideenough of a spread over cost for the association tocover business expenses. But the cooperatives won't beable to negotiate highly favorable contracts becausethey face so much competition from other growersthroughout the country and around the world.

Emphasis on getting the best deal. Super-localsare considered a mixed blessing by federated coopera-tives. They eliminate redundant facilities and staff andare generally more efficient than the locals that preced-ed them. They are also large enough to hire staff exper-tise and negotiate contracts with other firms. Thisgives them a measure of independence not enjoyed bytheir predecessors.

Super-locals have a full share of responsibility fora loss of some of the social or personal relationshipsassociated with local cooperatives. Farmer loyalty, tothe extent it still exists, is often based on a personalrelationship with a local cooperative official, often themanager or a director. The emergence of super-localsdiminishes those personal relationships.

The evolution of the cooperative grain marketingand farm supply system can be expected to continue ina rapid manner. The outcome is uncertain. There isnear-unanimous agreement that small, isolated localsface a bleak future. And some recent mergers are con-sidered simply a step toward an inevitable liquidation.Beyond that, the only certainty is that farmers andtheir elected leadership face difficult decisions as theyguide their cooperatives in the years ahead.

Priorities for ShapingFuture Cooperatives

Two themes permeate strategies for cooperativesto succeed in the 21st century. The first is that greaterinvestment is needed in the people who make upcooperatives. Members, directors, managers, andadvisers must receive the training required to dealwith 21st century issues. Otherwise, they will neithercompletely understand the options available nor havethe ability to analyze them and make sound businessdecisions.

The second is that an emphasis must be placedon pragmatism and profitability. Cooperatives arebusinesses and in the years ahead they must focus onsolving business problems and providing value totheir members. If they don't, members will stoppatronizing them and they will just fade away.

Strengthening cooperative leadershipLittle positive can happen for cooperatives unless

they have leadership able to meet the challenges of the21st century. Skills required to lead cooperatives mustbe identified and developed in directors and man-agers.

DirectorsThe board of directors is the central element of

producer control in a cooperative. Directors are electedby the members to set policy and oversee its imple-mentation. Most directors are cooperative members.Today's cooperative board is likely to be composed ofolder producers with a great deal of knowledge aboutproduction agriculture but limited experience andskills needed to deal with the external business forcesbearing on cooperatives.

As the business environment evolves, farmersfind it more difficult to manage their enlarging enter-prises and keep abreast of marketplace changes. Asone educator suggested in the extreme, trying to talkresearch and development, advertising, marketing,and supply chain management with a board of pro-ducers "is like examining Shakespeare." It is simply aforeign language to them. They just see short-termcosts.

To broaden the experiences represented on theirboards, cooperatives might pursue greater involve-ment of their absentee landlord members in the gover-nance process. Off-farm owners are frequently treatedwith indifference, if not contempt. Yet, they may be

17

very knowledgeable about farming and cooperatives.Many are children of full-time farmers who wereraised on the farm but left to pursue other opportuni-ties. They are often still active in farm management. Ifthey will serve on the board, they may be excellentdirectors because they bring experience not otherwiseavailable to full-time farmers.

Outside directors. Panelists repeatedly urged theinclusion of one or more outside directors on coopera-tive boards. Outside directors are typically non-mem-bers who are experts in areas vital to the associationbut normally outside the experience of producers, suchas finance and marketing. Preferably, the outside direc-tors are given a genuine role in the cooperative's lead-ership by making them voting directors, not just advi-sors. Grower control is maintained by giving thempower to remove outside directors that fail to meettheir approval. If the cooperative's State incorporationlaw restricts board membership exclusively to mem-bers, non-voting advisers can provide some of thesame outside assistance.19

Panelists said that board meetings involving out-side directors tend to stay on topic and run smootherthan producer-only boards. They also said outsidedirectors bring objectivity to a board that has problemswith conflict-of-interest issues, as occurs when the bestinterests of some directors may not be the same as thebest interests of the association or the membership as awhole.

While outside directors may offer many benefits,the choice of who to bring in is extremely important.To be effective, an outside director must understandcooperative principles and practices and the specialburdens inherent in managing a cooperative. An out-side director must be compatible with the farmer-directors and understand the issues that producersand the cooperative face in the marketplace.

Outside directors cannot be too closely alignedwith the manager. A strength of cooperatives is thatdirectors are chosen by the membership, not manage-ment. While management may recommend people tofill outside director seats, producer control over theselection and retention of outside directorships isessential.

Producer directors must avoid being over-awedby the outsiders. The outsiders may have a polish thatentices the farmers to just accept their word withoutreal challenge. If that happens, the purpose of the out-

side directors is subverted. They aren't adding theirknowledge to that of the producer directors, but rathereliminating the element of control the farmer directorswere elected to exercise.

One governance system used in a limited numberof instances is the two-board structure exemplified bythe Welch's grape growers. Thirteen grower-membersserve as directors for the National GrapeCooperative.20 This board is responsible for the opera-tion of the cooperative, such as membership and rawproduct issues.

The National Grape board controls Welch's, itswholly owned cooperative subsidiary, by electingWelch's board of directors. But Welch's is governed bya separate board consisting of four National Grapedirectors, two executive officers of Welch's, and fouroutside professional people.

This arrangement separates direct control of deci-sion-making for the processed foods operation fromthe parochial politics and general reluctance to act thatis commonly associated with grower-dominatedboards. The decisions of the Welch's board are consis-tently unanimous because the outside directors havelearned to appreciate grower needs and can explain tothem why some services they may want can't be pro-vided because of business reasons.

One specific advantage of this system is that itfrees the cooperative to make arrangements with otherfirms without securing approval from the farmerboard. A panelist used this example. Suppose a mar-keting cooperative was participating in a joint venturethat needed an artificial substitute for a member prod-uct in a processed product. Under this system of con-trol, it wouldn't have to deal with farmer directorswho would likely say "you can't do that." This struc-ture allows the cooperative to base decisions on eco-nomics, with a minimum concern for politics.

This section is not intended to suggest thatfarmer directors aren't doing, or can't do, a good job.Many large and successful agricultural cooperativesare governed entirely by farmer members. Many pro-ducers have acquired the skills necessary to be effec-tive cooperative directors. And it is the level of compe-tency, not one's status as a farmer or outside director,that matters.

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19 Some question the use of outside directors for expertise that mightbe available from management or advisory consultants.

20 Welch’s was a family-controlled business for decades. In 1945,growers who sold grapes to Welch’s formed the National GrapeCooperative. In 1952, the Welch family sold its business to thegrower cooperative.

But when a cooperative integrates its marketingactivities forward into processing and marketing, theimpact of the external forces discussed earlier in thisreport increases. As the world in which cooperativesoperate becomes more complex and corporate strate-gies are further removed from the farmer's naturalcomfort zone of agricultural production, the learningcurve for farmer-directors becomes increasingly steep-er. It's not that farmers can't fulfill this role, but that aprocess of identifying, electing, and training the oneswho can is proving difficult. This is leading coopera-tives, who need a board with diverse expertise andexperience, to turn outside the membership.

Director training. Another step to improvedboard performance is for cooperatives and groups thatsupport them to place new emphasis on director train-ing. Too many cooperative leaders and advisers look ateducation as a cost, rather than an investment.Whenever times get tight, cooperatives, their tradeassociations, universities, and Government agenciestend to cut or eliminate training budgets.

Each cooperative must assess the skill deficien-cies of directors and develop programs to eliminateweakness. Training takes resources. But the benefits faroutweigh the expenses incurred if it helps directorsavoid making poor or uninformed decisions becausethey lack the ability to assess the implications of vari-ous courses of action.

Director compensation. Cooperatives should alsoconsider reasonable compensation for their directors.All cooperatives should, at a minimum, reimbursedirectors for any out-of-pocket costs incurred in theirofficial duties. As cooperatives come to expect more oftheir directors, being a good director will take moretime and expertise. Paying for that time and expertisewill encourage more members to run for the board,stimulate directors to attend board meetings, anddemonstrate that members appreciate the efforts of thedirectors. Experts may refuse to serve as outside direc-tors on a gratuitous basis and reasonable fees shouldbe included in a plan to add outside directors to theboard.

However, cooperatives must be cautious not toset payments or honorariums to directors too high.Directors who seek office because of its income poten-tial can be expected to make decisions based on howthey can stay on the board, rather than the best inter-ests of the membership.

Like training, director compensation should betreated as an investment, not a cost. It will help devel-op a leadership team that can successfully guide thecooperative over the hurdles of the 21st century.

ManagersA good manager knows both the business and

the special culture of the cooperative. Attracting andretaining good managers is not an exact science. Butcooperatives might focus on two areas in improvingthe performance of their management team.

Developing management from within. The man-ager arguably holds the most important position in acooperative, outside of the board of directors itself. Itis imperative that cooperative boards find and hire aperson who can effectively carry out the dutiesrequired. Many cooperatives find that promoting inter-nally, rather than hiring from outside the cooperativesystem, is the most beneficial way of picking a newCEO/manager. Some experts surmise that even with aprofessional CEO search, a cooperative is better offtaking the second candidate who is internal ratherthan the first selection if that candidate comes from aninvestor-owned firm (IOF) and lacks cooperative man-agement experience.

While there have been some successes, there havealso been some major failures of cooperatives thatbrought in managers from the non-cooperative sector.Managers from the IOF environment often try to pushcooperatives toward non-cooperative business prac-tices and principles. It is widely felt that a successfulcooperative manager must understand and embracethe unique principles and practices of cooperativesand be able to operate the business within that frame-work.

Successful managers, like successful athletes,have usually benefitted from natural ability and goodcoaching. As employees show the ability to becomegood, or better, managers, the cooperative should pro-vide training and experience that prepares them forincreased responsibility. When they are needed, theywill be ready to succeed in their new job and help thecooperative succeed as well.

Providing competitive compensation. Manycooperatives struggle with establishing suitable com-pensation for their manager. Most observers believethat cooperative compensation generally lags behindthat paid by comparable IOFs. This is especially truewhen deferred compensation and stock options fornon-cooperative managers are considered.

Some cooperative boards have the reputation ofchoosing the manager-applicant who will accept thelowest salary and ask for the least vacation time.Successful cooperatives will find it necessary to devel-op compensation packages that will attract the bestperson for the job, not the cheapest one. Many cooper-atives also struggle with evaluating the CEO/general

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manager and adjusting compensation to reflect perfor-mance evaluations. These cooperatives usually lackestablished performance measures and objective stan-dards to tie manager compensation to performance.These associations probably would benefit from theservices of a consultant who can develop an evaluationpackage tailored to their specific situation.

Growth and consolidation among cooperativesOne of the rational responses of producers and

cooperatives to the external changes they face is toconsolidate. Just 200,000 farmers now do essentiallywhat 7 million did 50 years ago: feed and clothe ournation and much of the rest of the world.

Cooperatives have also consolidated duringthose years. In 1950, USDA reported that 10,035 farmermarketing and farm supply cooperatives had $8.7 bil-lion in sales.21 By 2000, the number of farmer coopera-tives had fallen to 3,346 while total net business vol-ume jumped to nearly $100 billion.22 Some of thisincrease in business-volume is due to inflation. Butmuch resulted from increased product volume movingthrough cooperative associations. Panelists supportedcooperative consolidation as a natural and necessaryreaction to the consolidation occurring in productionagriculture and among their customers and competi-tors.

Less enthusiasm was expressed about coopera-tive growth through the acquisition of non-cooperativefirms. These are outside the scope of the antitrustimmunity under the Capper-Volstead Act. Panelistsexpressed concern that such moves attract the atten-tion of, and possible challenge from, Federal and Stateantitrust enforcement agencies.23

Concentration in production agriculture andamong producer associations has led some to askwhether one of the linchpins of public policy supportfor cooperatives is still valid. Is it still true that many,relatively small, farmers are selling into a market dom-inated by much larger and more concentrated buyers?

The General Accounting Office (GAO) hasaddressed this same question. In August, 1989, then

Senators Howard Metzenbaum and Bill Bradley askedGAO to study whether agricultural cooperatives, andparticularly dairy cooperatives, still needed the limitedantitrust exemption provided by the Capper-VolsteadAct. Dairy cooperatives had been under almost con-stant scrutiny since the period from 1967 to 1971, when170 predominantly local milk marketing associationscombined into 3 large multi-market regional coopera-tives—Associated Milk Producers, Inc.; Mid-AmericaDairymen; and Dairymen, Inc.—with nearly 64,000producer members.24 GAO concluded:

...dairy farms, in general, remain relatively smallcompared to the processing and distributionfirms that, in the absence of cooperatives, wouldpurchase milk directly from farmers. These firmshave...become more concentrated and thereforehave the potential for increased market strength.Without cooperatives, many dairy farmers,because of the size of their operations, wouldcontinue to be in a relatively weak bargainingposition. Therefore, to the extent that theincreased market strength of processing and dis-tribution firms and of dairy farmers offset eachother, the premise of the Capper-Volsteadantitrust exemption for cooperatives—that farm-ers cannot effectively bargain independentlybecause their operations are too small—remains.25

Thus, GAO substantiated the view of producerassociation leaders and advisers that consolidationamong producers and their cooperatives has been nec-essary for producers to protect even modest marketpower in the face on growing concentration among thebuyers of agricultural commodities and processedfood and fiber products.

Foreign sourcing and functioning in a global market

As competition in both domestic and foreignmarkets intensifies, and economic growth in develop-ing countries creates new opportunities, cooperativesmust formulate new strategies to protect traditionalmarkets and to capture new ones.

20

21 USDA/RBS/Cooperative Services, “Cooperative HistoricalStatistics,” Cooperative Information Report 1, Section 26 (revisedApril 1998), p. 7.

22 Charles A. Kraenzle et al., “Farmer Cooperative Statistics, 2000,”USDA/Rural Business-Cooperative Service, Service Report 60(December 2001), p. 2.

23 See, e.g., United States v. Dairy Farmers of America, 2001-1 TradeCases (CCH) 73, 136 (E.D. Pa. 2000) (Department of Justicechallenges purchase of branded butter business).

24 Donald A. Frederick, “Antitrust Status of Farmer Cooperatives:The Story of the Capper-Volstead Act,” USDA/Rural Business-Cooperative Service, Cooperative Information Report 59(September 2002), pp. 249-252.

25 United States General Accounting Office, “Dairy Cooperative:Role and Effects of the Capper-Volstead Antitrust Exemption,”GAO/RCED-90-186, (September 1990), p. 3.

Because they usually are not tied to a geographi-cally fixed resource base, IOFs are free to respond toglobalization by contracting for product from least-cost sources or by moving production or processingoperations to less-costly foreign locations.Cooperatives have also recognized that future growthrequires them to look beyond domestic borders andtraditional production and marketing systems.However, cooperatives' user-owner nature and ties to adomestic production base can limit the scope of theirinvolvement in foreign markets.

Because an important role of cooperatives is toensure a "home" for member products, cooperativesare not free to substitute lower cost imported goods orabandon domestic operations for more profitable over-seas locations. They must balance the interests of pro-ducer-members with their ability to compete in adynamic market. "Non-traditional" options can fosterlong-term viability by enhancing the market positionof the cooperative and the marketability of members'products. These options include tapping additionalproduct sources through imports, foreign members,and overseas investment.

Motivation and strategiesCooperatives share the same motivation as IOFs

for sourcing outside traditional channels: the need tocompete more effectively in today's rapidly changingmarkets. Price strategies based on reducing costs ornon-price strategies built on adding value to productsand services are the approaches most often employedfor meeting this need. While domestic member andnon-member products may fill some of these needs,foreign sources can offer significant cost savings or anarray of unique or seasonal products.

Strategies for enhancing competitiveness vary bytype of cooperative and by product handled. Forexample, supply cooperatives accrue cost savingsdirectly by purchasing from the lowest cost source.Marketing cooperatives cut costs indirectly by supple-menting member-grown products with imports.Cooperative marketers of fresh produce use imports tospread overhead costs over broader product lines, andcooperative processors import raw product to lowerper-unit processing costs by higher utilization of plantcapacity. When cooperatives are not able to positionthemselves as a low- cost producer, non-price strate-gies that add value to products or services becomeincreasingly important. Flexibility about sourcingoptions can facilitate these strategies.

For example, fresh fruit cooperatives can enhancethe marketability of member products by using

imports to extend marketing seasons. The ability to "bein the market" on a consistent basis protects carefullycultivated markets and market relationships. Use offoreign product to fill seasonal marketing windows isespecially critical now that consumers expect year-round availability of some products. Stable, consistentsupplies also help maintain consumer loyalty tobranded products.

Imports can be used by a cooperative to broadenits product line. Retailers and wholesalers increasinglyseek "one-stop" shopping—buying directly from sup-pliers who offer complete lines of related products.Purchasing decisions are often based on the supplier'sability to provide a group of products and the totalcost of a group of products, rather than the availabilityand cost of each item. Some cooperatives may have topurchase foreign items to complete a package of prod-ucts that will attract and retain customers for memberproduct(s).

Purchases of foreign products may also be neces-sary as a stopgap measure to fulfill marketing commit-ments when disaster-related member productionshortages occur. The need for longer term or perma-nent supplies can arise when urban expansion andother factors cause a cooperative's membership base toshrink.

Cooperatives must plan strategically for the inte-gration of foreign-sourced product and must commitsufficient resources to managing those sources. Due totheir distance from the cooperative's traditional tradearea and differences in language, customs, and laws,overseeing foreign providers may prove burdensomefor a cooperative.

Cooperatives must exercise caution in foreignsourcing to manage risks associated with transnationalmemberships or operations and food safety issues.Wholly owned subsidiaries can segregate a coopera-tive's core member business from non-member busi-ness and shield member equity from losses suffered bynon-core activities, while allowing the cooperative tomaintain full control of that aspect of the business.However, care is required to structure a foreign sub-sidiary in accordance with the tax and antitrust impli-cations for the parent cooperative.

Imported product can also be handled throughcontracts or joint ventures with other cooperatives orIOFs. Selection of a method depends on the coopera-tive's access to equity and operating capital, the levelof risk it can accept, desired degree of control, andwhat it has to offer to the venture.

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Legal questionsState and Federal statutes covering permissible

cooperative structures and operations do not specifi-cally address the issue of foreign sourcing. However,certain elements in laws affecting cooperatives, such asmembership eligibility requirements or allowable lev-els of non-member business, can influence the formand scope of foreign sourcing activities by coopera-tives.

Most State cooperative incorporation statuteslimit the proportion of business a cooperative mayconduct with non-members to 50 percent. The 50-per-cent rule is also used to qualify cooperatives for limit-ed antitrust protection under the Capper-Volstead Act,for tax treatment as an exempt cooperative underSection 521 of the Internal Revenue Code, and for bor-rowing from CoBank. Non-member business conduct-ed specifically with a foreign entity is not addressed.Therefore, the issues surrounding cooperative sourcingfrom non-members are usually assumed to be similar,regardless of whether the sources are foreign ordomestic.

Nor do Federal or State statutes involving coop-eratives address the issue of foreign members. Statestatutes, Capper-Volstead, and Section 521 limit coop-erative membership to producers of agricultural prod-ucts. Beyond that, most statutes allow cooperatives toestablish their own membership criteria. Some cooper-atives limit membership to a particular State or region.Others have admitted foreign members with noadverse legal consequences.

Taxation of foreign members' income derivedfrom the sale of product in the United States is anotherlegal issue to consider. Generally, it is taxed at thesame rates applicable to U.S. citizens and domesticcorporations. However, if the United States is party toa tax treaty with a country in which the memberresides, this income may be taxable at a lower rateestablished by treaty between the two countries. Taxtreaties prevent international double taxation by limit-ing the right of each treaty partner to tax incomeearned from its territory by residents of the othercountry, and by requiring that the country of residenceallow a credit for taxes paid to the source country. Acooperative with foreign members would also beaffected if it is required to withhold funds at the U.S.rate or the lower treaty rate for tax purposes, from dis-tributions to foreign members.

Foreign membershipsGlobal buyers learn to play growers in one coun-

try against those in other countries. One possible

grower response is to form international associationsto counter-balance the power of multinational buyersand suppliers.

Integrating foreign members into an existingcooperative may require adjustments to the gover-nance structure. For example, direct representation offoreign producer-members on the board of directorsmight be advisable. Foreign members might comprisea separate district and elect a director to a coopera-tive's board. The ease with which foreign growers areintegrated into a cooperative's membership will alsodepend on careful attention to managerial or logisticalmatters, as well as attention to relations with currentmembers.

One food-manufacturing cooperative just votedto admit Canadian members in hopes of acquiringcheaper raw product from across the border. The coop-erative expects to lower its selling prices and competemore effectively with other firms. Although the bylawamendment was adopted, cross-border purchases havenot begun. The impact of this decision on the coopera-tive and its grower-members remains an open ques-tion.

Member relations issuesFor better or worse, many growers have the same

adversarial view toward foreign producers as they dotoward other cooperatives and non-cooperative com-petitors. International joint ventures may be the closestmany U.S. cooperatives can come to an alliance withproducers outside our borders at this time.

One of the biggest concerns in introducing thesubject of foreign sourcing—either on a member ornon-member basis—is the perception that the coopera-tive is competing with its own current members.Marketing cooperatives must justify use of foreign-sourced product to their domestic members. Buyingoffshore member or non-member products for sec-ondary (ingredient) uses may go unchallenged becausethe members usually see this as an enhancement, not athreat, to marketing their production. In contrast,members may view any use of foreign product for pri-mary markets as threatening. This can occur even ifthe cooperative takes all of its members’ productionand the purchases are for legitimate business purpos-es, such as fulfilling contractual commitments follow-ing weather-related shortfalls or when member-prod-uct is not in season.

A cooperative's existing members may resist theadmission of foreign members for fear it will dilutetheir returns on operations or established brand namesbuilt with "old" member equity. The use of partitioning

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mechanisms—such as subsidiaries or even creation ofa separate cooperative—can limit new member partici-pation in activities to which they have not contributedequity capital. Members may also be concerned aboutpreservation of a regional identity for markets inwhich origin is a point of product differentiation.

Member opposition to the use of foreign productsand the admission of foreign growers can often betraced to conflicting views between management andmembers on the focus of the business and on the mis-sion of a cooperative. Members may view the coopera-tive primarily as a home for their product. Managersmay be striving to maximize earnings of the business.These goals can be totally compatible. Both partiesmust learn how this can happen and take steps tomake sure it does happen.

Cooperative managers are in the best position torecognize the strategic implications of using alterna-tive sources to facilitate better use of processing capac-ity, to extend fresh product into new markets, to offer ayear-round supply, or to offer a broader product line.The key to gaining member support for foreign sourc-ing alternatives is to effectively convey the rationalefor the venture and clearly communicate the benefitsthat will accrue to members.

Equity AccumulationPerhaps the most important challenge facing

cooperatives is accumulating equity capital. Withoutsufficient equity, cooperatives cannot meet the externalchallenges they face or continue to grow and offer ser-vices members and customers need.

The degree to which accumulating equity is aproblem is influenced by the types of services a coop-erative provides. A bargaining association, which lim-its its activity to negotiating prices and other terms ofsale for its members, has a minimal need for capital.The fact that producers can use bargaining to increasetheir income without a substantial equity investment isone of its advantages. The more an associationbecomes involved in manufacturing and distributionof either farm supplies or food products, the larger theequity base it is likely to need.

As the demands for equity increase, farmers maybe more reluctant or unable to provide the necessaryfunds. Cooperative leaders must either coax it fromthem or turn to external sources. In the years ahead,cooperatives will need to employ better equity man-agement strategies and consider structural changesthat will make more equity available.

Improve member equity managementThrough the years, many cooperatives have suc-

cessfully used the traditional equity management pro-gram—accumulate equity through retained patronagerefunds and revolve equity by redeeming the oldestoutstanding year's paper each year at face value. Aslong as redemption is kept on schedule, membersrarely question leaving their patronage refunds withthe cooperative as they have a reasonable expectationof having them paid out in cash at a definite time. Thissystem may continue to work well for establishedcooperatives that are comfortable with the marketsthey serve and new cooperatives with modest capitalrequirements.

But in the coming years, farmers may seek morerewarding places to invest their financial assets than incooperative paper that pays no direct return. If a coop-erative's equity redemption timetable begins to slip,members may become reluctant to finance it. The factthat the money is used to provide services that aug-ment farm income isn't always enough to convinceproducers to provide the funding. Cooperativesshould examine options to improve the way they man-age their member equity.

Marketing cooperatives can also accumulateequity from members through the use of per-unit capi-tal retains. Per-unit retains, which are based on salesrather than earnings, provide a more dependable andpredictable equity stream. They also allow for equityaccumulation (and redemption) in years when thecooperative's earnings are minimal or it suffers a loss.

Cooperatives may want to consider paying a div-idend on retained member equity. These dividends,like interest on debt, would be deducted from marginsbefore patronage refunds are calculated. They are amild diversion from the user-benefit principle. Butdividends would compensate members for the use oftheir money and reinforce their allegiance to the user-ownership principle. Of course, any money paid asdividends would not be available for patronagerefunds.

Cooperatives may also consider adopting a basecapital plan. It helps bring investment in line withpatronage or, in terms of cooperative principles, bal-ance member-ownership with member-use. A mem-ber's capital obligation is determined on the basis ofpatronage over a base period, say the last 5 years.Newer members, who usually have a small investmentin the cooperative but may make great use of its ser-vices, leave most of their earnings in the associationuntil they have invested their fair share. Long-timemembers who have met their equity obligation receive

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primarily cash patronage refunds. This usually tem-pers the resentment of older members toward thosenew ones taking advantage of the facilities and ser-vices developed by the long-time patrons.

Outside equitySome cooperatives are soliciting outside equity

investors. This is another step along the continuumfrom member-ownership. If the outside investors alsoacquire a voting interest in the association, both legalissues and conflicts with the user-control principlearise.

Non-voting preferred stock taps the outside equi-ty market while raising only modest concerns over thecooperative status of the association. It can earn a mar-ket return and be offered to both members and non-members. Non-voting preferred with a modest divi-dend has some appeal at the local level, where thepurchasers are often other local businesses who canconsider it more of a contribution than an investment.Non-voting preferred stock must pay a solid dividendto appeal to disinterested outsiders who have largesums to invest and numerous parties bidding for theirattention and funds. Any dividends, of course, reducenet margins available for patronage refunds.

In most instances, cooperatives have not allowedoutside investors to acquire a voting interest in theassociation. Such voting rights would violate the termsof most cooperative incorporation laws. SeveralFederal policies that support cooperatives, such as thelimited antitrust exemption for cooperative marketingunder the Capper-Volstead Act, only apply to associa-tions that limit voting to producer-members. And,depending on the extent of the voting power ceded tothe outside investors, this also diminishes true mem-ber control.

Some experts suggest cooperatives are impru-dently rushing to solicit outside equity investors. Theyrecommend other strategies to secure necessary capi-tal. One would be to maximize debt, another to leasefacilities and equipment to better leverage existingcapital. Either alternative would be less expensive andless divergent from the principles of user- ownershipand owner-control.

A number of sources for cooperative fundingexist, including private and government grants. Forexample, USDA's Value Added Development Grantscan be used to fund new cooperative value-added ven-tures. Another option might be to develop a revolvingloan program that provides sums similar to thosemade available to utility cooperatives through USDA'sRural Utilities Service.

Sell assetsAnother way for cooperatives to raise equity

would be to sell under-performing assets, or those thatsupport services that don't fit into the association’slong range strategic plan. For example, as some largefederated cooperatives continue to place more empha-sis on their value-added food marketing programs,they could begin reducing their direct role in basicfarm supply manufacturing. If the move to becomefood companies is successful, the federated coopera-tives may seek infusions of cash to purchase existingprocesses and brands or to develop new ones them-selves. If the strategy fails, they may need infusions ofcash to regroup and start over.

Redundant and underperforming assets are mostlikely to be sold. For example, cooperatives are com-bining their separate assets for each major farm supplyproduct line into new nationwide structures. Thesenew entities, with their expansive networks of cus-tomers and streamlined management structure, willlikely be worth more than the separate and competingunits within the various federated cooperatives wouldhave been and conceivably could be sold in the rightmarket and for the right price. Panelists identifiedgrain elevators as another class of assets that might besold, if buyers can be found.

Management initiatives in this direction mightmeet surprisingly little resistance from the local coop-erative owners of the federated regionals. Locals arebecoming less dependent on federateds for suppliesand outlets for member grain. Panelists suggested thatlocals' reduced dependence on regionals may leadthem to decisions that could greatly change the "coop-erative system" as we know it. The locals could votethemselves a portion of the cash realized from assetssales and still have an ownership interest in a value-added food manufacturing cooperative. If they wantedto generate additional cash through the sale of thatasset as well, their options might include conveyingthat interest to the producers providing raw farmproducts to the food manufacturing units (for a price);converting it to a non-cooperative structure so eachcould sell its ownership interest whenever it chose; orselling the firm in a single transaction.

Persons interested in maintaining a diversifiedcooperative presence in agriculture must be aware thatthese options have great appeal as a way to reduceredundant and underperforming assets to free up andredirect existing value tied up in traditional coopera-tives. They may have the burden of proof to demon-strate that farm supply manufacturing, for example, isa preferential use of farmer-assets.

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Structural alternativesSome producers are looking at new ways to orga-

nize. These new structures offer alternative approachesto meeting the challenges of the 21st century.

New generation cooperativesFarmers starting new cooperatives sometimes use

the so-called "new generation" model. Thus far, thismodel has only been used to form agricultural market-ing cooperatives engaged in value-added processing.These cooperatives may offer an alternative to over-come the problems confronting more traditional coop-erative models without abandoning the principles thatdistinguish a true cooperative from other forms ofbusiness organization.

Similarities to traditional cooperatives. New genera-tion cooperatives are similar to traditional marketingcooperatives in several ways:

A. Only farmers can be voting members.B. Members reach decisions on the basis of one-

member, one-vote.or

Dividends on stock may not exceed 8 percentper year.

C. The value of products handled for membersexceeds that handled for nonmembers.

D. Earnings are allocated to patrons on the basisof patronage.

Differences Between New Generation and TraditionalCooperatives. New generation cooperatives also differfrom the traditional cooperative model in severalimportant ways:

A. Focus1. Traditional agricultural marketing asso-

ciations usually seek to maximize the volume ofproduct handled to secure economies of scale andmarket power.

2. New generation cooperatives seek to identify and obtain the volume of farm produc-tion that can be processed and sold consistentlyat a profit.

B. Membership1. Traditional cooperatives usually have an

"open" membership. They seek to sign up thelargest possible number of eligible producers tomaximize the volume of product handled.

2. New generation cooperatives have a

limited or"closed membership. Once eligible producers have contracted to deliver the desired level of product, membership is closed.

C. Member Delivery Obligations1. Traditional cooperatives usually either

accept (a) whatever production the memberschoose to deliver or (b) require the members todeliver all they produce or whatever is grown ondesignated land. Under any of these scenarios,the cooperative receives an uncertain and varyingamount of product each year that it is expected to"move" before the next crop arrives.

2. In a new generation cooperative, each member has the right to and is obligated to deliv-er a fixed quantity of product each year. This istrue whether the member produces more or lessof that product in a given year. Meeting a produc-tion shortfall or "moving" surplus production isthe responsibility of the producer-member, notthe cooperative.

D. Member Equity Investment1. Traditional cooperatives usually require

a minimal, uniform investment to join. This isconsistent with recruiting the largest possiblemembership base and volume of production.Equity is accumulated over time through retainedearnings and per-unit retains.

2. New generation cooperatives usually require a substantial up-front investment. Theindividual investments are not uniform but differin proportion to the amount of product the mem-ber agrees to deliver to the association each year.

E. Equity Transferability1. In a traditional cooperative, both the up-

front investment and member equity accumulat-ed through retained patronage refunds and per-unit retains can only be redeemed by selling itback to the cooperative at face value.

2. In a new generation cooperative, equity tied to the right to deliver product can only beresold to other producers eligible to use the ser-vice of the cooperative. Subject to approval fromthe board of directors, the transfer can take placeat whatever price the parties can agree to,whether it is more or less than the price paid bythe seller.

If a traditional marketing cooperative is success-ful, the farmer-members receive two principal benefits:

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1. A home at a fair price for their production.

2. Patronage refunds.

In a new generation cooperative, farmer-mem-bers can realize additional benefits:

3. The option of cashing out their equity investment when they want to reduce or ceasetheir dealings with the cooperative.

4. The opportunity to make a capital gain on their equity investment in their cooperative.

Several panelists touted new-generation coopera-tives as well suited to solve many of the problems con-fronting traditional cooperatives. Members may havelimited loyalty to traditional cooperatives because theydon't have to make a meaningful investment to be amember. And they can cease doing business with acooperative and then return again as a patron at nocost. This isn't possible in a new generation coopera-tive. The members' patronage obligations are tieddirectly to their level of up-front investment, which isoften substantial.

Panelists said one of the allures of new genera-tion cooperatives is that they create a new base ofhomogeneous members. Because they require a sub-stantial up-front investment and an obligation to deliv-er a block of product each year, the members tend tobe younger, better educated, and larger commercialfarmers who focus on profitability and, more specifi-cally, the value of their transferable delivery rights.

The manager of a new generation cooperativereported that at member solicitation meetings theolder farmers sat in the back and showed no interestwhile the next generation, their sons and daughters,listened intently. Another said that at one organiza-tional meeting a wife, who was a banker and support-ing the family, literally grabbed her farmer-husbandand made him sign up.

Traditionally, cooperatives have usually beenorganized to sell whatever product(s) the memberswanted to produce. Many new generation coopera-tives are developed on the basis of a marketing planfrom a different perspective. The founders identifyproducts consumers want that can be made from whatlocal farmers produce and work with members to helpthem grow commodities that can be processed intoproducts that satisfy consumer demands.

Quality control can be a sticking point with newgeneration cooperatives. Left to their own devices,farmers will continue to produce what they havealways produced and expect the cooperative to turn it

into a quality product. A new generation cooperativemanager said that the hardest thing he had to do earlyon was tell many of the members that the product theywere delivering simply wasn't good enough. In anassociation started from the bottom-up, he probablywould have been told to make it work or leave. But ina top-down situation, he had time to educate them onthe need to meet quality standards and how to do it.

A manager of a multi-function cooperative ques-tioned whether a weakness in new generation coopera-tives might be their lack of product diversity. Theyfocus on one commodity and one product. If that mar-ket deteriorates, so will the cooperative. NorthAmerican Bison Cooperative was offered as an exam-ple. A panelist said it was doing quite well in Europeuntil the Mad Cow scare drove people away frommeat. New generation supporters counter that theycan focus on what they do best and aren't forced tobalance conflicting interests.

One panelist suggested that if new generationcooperatives become a major force in various foodproduct lines, they will need an effective communica-tions program to educate consumers on their role. Onepoint to emphasize is that cooperatives don't increasethe grocery store price of food. They only reallocatemore of the consumer's dollar from middlemen tofarmers.

Alliances and joint venturesFor a long time, producers and smaller coopera-

tives that wanted to enter a business that requiredassets beyond their reach would affiliate with othercooperatives in the same position to form federatedassociations. Few new federated cooperatives arebeing formed today. As we enter the 21st century, thefavored strategy for combining the resources of coop-eratives, with each other and with non-cooperativefirms, is the joint venture.

A joint venture is a business entity, created andsupported by other businesses, that has a limitedobjective related to solving a problem facing each of itsowners. Cooperatives are, in this sense, a joint venture.They are formed by their members to provide qualitygoods and services the members need at the lowestpossible cost. The venture may be organized as anLimited Liability Company (LLC), partnership, corpo-ration, cooperative, unincorporated association, ormerely a contractual arrangement.

Cooperatives are part of successful joint venturesinvolving a variety of products and venture partners.A dairy cooperative formed a joint venture with thenumber one marketer of mozzarella cheese. The coop-

26

erative supplied the milk and most of the equity capi-tal. The cheese company provided management andmarketing. The cooperative received a modest premi-um for its milk and the two firms split the profits. Itbecame a "win-win" situation for both parties.

Another joint venture with an IOF allows a coop-erative to behave as a contract (custom) producingagent for a branded product. Agri-Mark purchased acheese plant from Kraft, which freed Kraft's assets formarket development. Agri-Mark sources member milkto make Kraft brand Cracker Barrel cheese. Kraft mar-kets the cheese and pays Agri-Mark a per-unit manu-facturing fee sufficient to assure that Agri-Mark hasminimal risk and a healthy profit margin.

In January 2002, USDA approved the use of aprotein found in dairy products on beef to protect itfrom E. coli, salmonella, and other harmful bacteria.The process was developed by LF Ventures in a jointpartnership with Farmland National Beef, the nation'sfourth largest beef company, and DMV International, aunit of Campina, a Netherlands-based dairy company.Farmland National Beef is itself a partnership betweenFarmland Industries, the nation's largest multi-func-tional cooperative, and U.S. Premium Beef, a youngnew generation cooperative of beef cattle producersand feeders. In this example, an important food-safetybreakthrough was developed by a research and devel-opment operation funded by a joint venture among aEuropean firm, a federated U.S. cooperative, and anew generation cooperative.

Late in 2001, Golden Oval Eggs, another newgeneration cooperative, announced a joint researchand development, processing, and marketing alliancewith Inovatech Egg Products, a world-wide marketerof value-added, specialty egg products based in BritishColumbia, but recently acquired by Michael Foods ofMinnetonka, MN. The two firms intend to build a newplant in Thompson, MN, to manufacture food ingredi-ents for food manufacturers throughout the world.

These ventures, and others like them, are notguaranteed successes. Raising the equity from farmersto even get off the ground can itself be a challenge. Butthey illustrate that cooperatives are looking in newdirections for opportunities and adopting suitable,innovative structures to take advantage of thoseopportunities.

Sometimes a venture needs to expand its owner-ship base to achieve its objective. ProGold started as ajoint venture of sugar beet marketing cooperatives andcorn growers to produce sweeteners. It faltered initial-ly, however, because the owners were too small to ade-quately finance and otherwise position their new ven-

ture in the marketplace. After the member coopera-tives recognized their inadequacies, they invitedCargill to participate. Cargill assumed plant manage-ment and product distribution responsibilities andcontinues as a partner in the venture.

One suggested approach to the consolidationtrend among grocery chains is for food product coop-eratives to form alliances with the other chains. Onesuch opportunity might be with the largely overlookedgrocery wholesale cooperatives. Several are substantialbusinesses with annual revenues in excess of $3 bil-lion. They are also dispersed around the country andnear major metropolitan centers.26 Some panelists sug-gested that a single, national food cooperative may bethe only way farmers and other smaller entities will beable to participate in the real profits of the food indus-try of the future.

Joint ventures allow cooperatives to poolresources—product, people, facilities, and financing—with any other entity it chooses to solve a problem orseize an opportunity, without disrupting the ongoingcooperative business organization or operations. Thesearrangements may provide a means to conduct duediligence and to build trust among two firms consider-ing merger.

Another advantage of growing through joint ven-tures is that, unlike a consolidation or acquisition, ajoint venture that doesn't meet its objectives may oftenbe disbanded without becoming a major disruption tothe participants. Joint ventures can be short-lived orcontinue for decades. Ventures tend to continue for aslong as they meet the objectives of the participants. Butbecause a joint venture is less stable than an integratedcompany, a cooperative should have an exit strategyfrom the beginning of the relationship.

The boards of larger cooperatives tend to acceptjoint venture failure (so long as it doesn't become ahabit) as a manageable risk of trying new approachesto solve problems and seizing opportunities. Joint ven-

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26 The National Cooperative Bank listing of the 100 largestcooperatives by sales for 2000 has agricultural cooperatives in thetop four slots (Farmland Industries, CHS Cooperatives, DairyFarmers of America, and Land O’Lakes). Four of the next 5associations listed are grogery wholesalers (Wakefern Foods,TOPCO Associates, Associated Wholesale Grocers, and UnifiedWestern Grocers).However, wholesale grocery cooperatives are also facingchallenges. Some of their bigger and more successful members arebeing acquired by larger chains, leaving the cooperatives with thesame fixed costs but must lower sales and income streams tosupport those costs. “How to Prevent Success from Ruining YourCooperative,” Cooperative Business Journal, (June 2002), p. 7.

tures are more risky for the manager of a local cooper-ative. When locals enter into joint ventures, especiallyones that the farmers don't really understand, and theventure doesn't meet expectations, the manager is fre-quently fired. Farmers remember every promise ofprosperity they were told the venture would bring,and feel betrayed by poor results.

Sometimes locals form joint ventures (feed mill,fertilizer plant) when they really should merge. This isoften viewed as a prudent first step in a sequence ofconsolidating events. It helps the two feel more com-fortable with each other, provides for friendlier duediligence, and if all goes well may lead to a merger.

The trend of cooperative involvement in jointventures is expected to continue in the 21st century. Solong as producers avoid the same pitfalls that can sub-vert the use of outside directors—having venture part-ners too closely aligned with management or beingoverawed by their venture partners— joint venturescan make it possible for producers to pursue otherwiseunreachable opportunities.

Bargaining associationsProducer associations that limit their cooperative

activity to negotiating prices and other terms of saleare called bargaining associations. They have beenused for decades by dairy farmers and growers offruits and vegetables used in processing. Producer-members of these associations have chosen to limit theextent of their joint marketing activity.

Bargaining associations have worked best wheresupply can be controlled. Supplies may be limited indifferent ways. If a crop can only be grown commer-cially in a limited geographic area, then supply is lim-ited to what can be grown on those acres. If a productis highly perishable, supply is limited to what can besold or processed quickly. Supply can be controlled byGovernment regulation. Bargaining associations havebeen particularly effective in commodities with agri-cultural marketing orders in place.

An offshoot of an industrializing agriculture isthe trend toward fully integrated processors dominat-ing the entire production cycle for poultry and meatproducts, and to a lesser (but increasing) extent, basiccommodities. Growers in these systems contract toraise animals and crops owned by the processor. Yetthey continue to be land owners, owners of productionfacilities, and provide production management ofcrops and livestock under contract.

An organizational option for contract growers isto form cooperative bargaining associations or profes-sional associations for negotiating contract terms. This

type of association is relatively new and untested inindustrializing agriculture. However, the AmericanFarm Bureau Federation's American AgriculturalMarketing Association developed considerable experi-ence with its poultry grower division in the 1960-70time period.

More recently, the National Contract PoultryGrowers Association (NCPGA) has attempted to orga-nize broiler growers for negotiating contracts.Processor intimidation has been a continuing problemin organizing such associations. This makes organizingcontract growers more difficult and achieving a criticalmass of grower membership a major challenge.

Limited market innovationsSome producer groups are experimenting with

new uses for traditional cooperative structures orinteresting derivatives.

Small farmer cooperatives. Small-volume farm-ers will remain an important part of the social and eco-nomic infrastructure of rural America. The pushtoward greater efficiencies and scale within productionagriculture and cooperatives ignores the needs ofsmall farmers. It also ignores the benefits to smallfarmers that cooperatives can provide.

Cooperatives will not lower small farmer per-unit costs to the level of costs to larger farmers. Butcooperative buying can lower small farmer costs.Cooperatives might not be able to provide small farmswith access to Wal-Mart or other major market players,but may none-the-less improve their overall returns byservicing local and regional markets.

Cooperatives may not save the small farm as aninstitution, but can improve the returns achieved bysmall farmers. Small farmers must explore options forworking together. Existing cooperatives must work todevelop programs to provide services to small farmersin a manner that recognizes differential costs, but oth-erwise provides fair access to the power of cooperativebehavior.

Niche-market cooperatives. Some local coopera-tives are seeking to serve a specialized clientele. Thesecooperatives don't strive to become large because theirsmall customer base wants specialized productsand/or services. Others are small by nature of theproduct they handle and the territory where it can begrown. While some of these cooperatives may be verysuccessful, the opportunities they represent and theiroverall impact are both limited.

If a cooperative decides to be small, it must bevery good. A cooperative comprised of 10 dairy

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farmer-members, for example, does quite well becauseit makes award-winning cheese. Opportunities exist,but niche marketing isn't a guaranteed path to success.

One segment of food marketing that hopes tobecome more than a niche is organic foods.Cooperatives in this area are clearly responding to theenvironmental pressures on the food industry. So far,only a small number of consumers have been willingto pay higher prices to buy organic products.Cooperatives need to watch how the organic market,and other smaller markets such as various ethnicfoods, develop. Such specialties offer another opportu-nity to become successful in value-added processingwithout necessarily having to compete with the indus-try giants.

Production-service cooperatives. Cooperativesthat provide production services to their membersoffer a way for producers to become more productiveby lowering their costs. For example, six grain farmersformed an LLC that works as a production servicescooperative. Each member sold all his equipment andwith the proceeds they purchased new equipment,consolidated their land, and operate as a single farmenterprise. They believe they can survive as producersnow that their operating costs are significantly lower.

EducationCooperatives have a tradition of educating their

membership, leadership, and staff in both the princi-ples of cooperation and sound business practices.However, in recent years, national and regional pro-grams have been de-emphasized to redirect resourcesto meeting short-term profitability goals.

Educating employees and young members is animportant part of leadership development. Some coop-eratives do well in this area, sending employees to theGraduate Institute of Cooperative Leadership heldannually at the University of Missouri, Columbia, MO,and other workshops and conducting active youngfarmer/cooperator programs. Others need to do more.

Training is critically important for directors. Theymust have the ability to learn and the time to betrained in areas in which they lack experience andexpertise. Increasingly complex financial issues andbusiness arrangements of cooperatives require direc-tors to have substantial knowledge and/or experiencein related business matters. Cooperatives must createan opportunity for directors to gain knowledge inareas in which they lack understanding.

Directors especially need to understand their rolein the cooperative. Too many directors want to becomeinvolved in the day-to-day decision making, the realm

of the hired management. Directors need to learn moreabout their responsibilities in setting policy and over-seeing the manager and not to directly interfere withthe manager's handling of routine operations.

More attention is also needed to help directorsunderstand cooperative finance and related businessissues, so they can decipher complex financial reports,contracts, and proposals.

Continued structural change in cooperatives alsoimposes demands on directors to effectively assessvarious strategic options. Directors must learn how toevaluate restructuring proposals to determine whethera new organizational framework is necessary and, ifso, how it should be designed and operated.

Cooperative leaders must seriously re-evaluatewhether educational institutions are in place at univer-sities, trade associations, other support organizations,and USDA that will provide the meaningful educationeffort needed to handle the issues of the 21st century.In addition, cooperatives must also evaluate their owncommitment to education to improve the skills theirleaders will need to realize the potential of their orga-nization.

Public Policy and Cooperatives

Government has been, and will continue to be, amajor influence on both agricultural producers andtheir cooperatives. Some governmental policies sup-port cooperatives, while others present challenges. Asthe number of farmers continues to decline, it willbecome increasingly difficult to make the voices offarmers and their cooperatives heard in the public pol-icy process.

Cooperatives provide a vehicle for people toorganize for effective political action. They can gatherto develop priorities and strategies. They can send rep-resentatives to meet with legislators and regulators.These persons will have more influence because theywill be speaking for many, not just themselves.Cooperatives can also form coalitions with othergroups having similar views on issues. The larger thevoice calling for a specific action, the more likely thatthe system will respond with a favorable policy out-come.

But having the tools available is only one part ofthe equation creating favorable policies. The other isthe willingness and skill to use those tools effectively.

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Making member voices heardPanelists agreed that a key factor in the long-term

political support for farmer cooperative interests willbe the willingness of the farmer members to becomemore active in the public policy process. Cooperativelobbying organizations receive good marks for theireffectiveness, especially considering the reluctance offarmer-members to contact legislators and becomedirectly involved in the legislative process affectingcooperatives.

This reluctance has at least two sources. Farmersare sometimes adverse to having their cooperativesinvolved in any political activity. They view politics asa "dirty" business that will taint the organization if itbecomes involved in lobbying.

Many farmers also believe they are paying goodmoney to support numerous commodity and generalfarm organizations. Farmers rationalize that it's the jobof these associations to get the public policies needed.While these organizations may be supportive of coop-erative-specific initiatives, they generally place mostemphasis on broader farm-policy issues.

Cooperatives don't need to be involved in allpublic issues facing farmers. One panelist pointed outthat cooperatives with a high-profile identity may findit bad business to oppose certain popular policy posi-tions, even when members' farm interests are at stake.For example, a cooperative with a consumer productsbrand name may not want that brand portrayed asopposed to an environmental initiative, no matter howharmful it might be to grower members. In theseinstances, the cooperative may choose to take a lowprofile and let general farm trade associations carry onthe battle.

Members must recognize that there are timeswhen their cooperatives should stay out of public poli-cy deliberations, but other times when only coopera-tives can represent their public policy interests.Farmers must make sure their "cooperative interests"are appropriately expressed in public policy settings.

A related issue is the historic lack of "coopera-tive-oriented people" in high administration positions.While the doorway between the IOF world and publicadministrative/policy positions is two-way, it is rare tofind a person who left a cooperative to accept a politi-cal appointment with a Federal agency. When coopera-tive leaders complain about the lack of support for andunderstanding of cooperatives among policymakers,they must accept some of the blame for not showingan interest in placing people in positions inside theadministration's inner circles who set policy.

Political action skills should be a component ofthe education of cooperative leaders. An effectivepolitical action program requires a combination of lob-byists who can work within the complex structures ofthe legislative and administrative bodies and directors,members, and managers who will reinforce the mes-sage to their representatives that the issues being dis-cussed really are important to them. Cooperativemembers need to be trained in advocating their posi-tions. This will translate into support for specific coop-erative policy being communicated to legislators andother Government leaders by their trade associationleaders and spokespersons.

Trade association cooperationWhile cooperative trade associations have gener-

ally been effective, their overall impact is limited by atendency to concentrate on narrow issues that directlyaffect their membership. Unless an issue is of directimportance to their segment of the cooperative com-munity, they hesitate to get involved. Panelists viewedthis as a barrier to enacting legislation that might bene-fit both the various segments and the cooperative com-munity as a whole.

To increase their influence in the future, coopera-tive trade associations will need to work more closelytogether. For example, one State cooperative councilexecutive noted that he has a friend who manages alarge urban housing cooperative. When an issueimportant to his farmer cooperative members comesup before Congress, he calls his urban friend. If hous-ing cooperatives are neutral on the issue, his friendwill contact his delegation and urge a vote for thefarmer cooperative position. In return, on housingcooperatives matters, the cooperative council leaderwill put in a good word as long as no important inter-ests in his State are known to object to the proposal. Byworking together, the interests of both farmer andhousing cooperatives are better served.

Building alliances among cooperative associa-tions can be just as important to political success in the21st century as business alliances among cooperativeswill be to economic success.

Farm policy and farmer cooperativesThe future success of farmer cooperatives will be

heavily influenced by how they adapt to changes innational farm policy. The Farm Security and RuralInvestment Act of 2002 (2002 Farm Bill) reaffirms theFederal Government's direct involvement in farmincome protection. But the impact on individual coop-eratives will vary, depending on variables such as the

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crop(s) their members grow and the size and nature oftheir producer-members. Cooperatives will have tounderstand the law's provisions, foresee how it willaffect their business, and plan to respond to anychanges it stimulates.

For example, will the price protection provisionsencourage production, or will landowners decide theycan make more money under the conservation pro-grams, idle land, and reduce production? Will the actkeep relatively smaller producers in farming or will itcontinue the recent trend of smaller farmers selling outto large, commercial farmers? Will price protection dis-courage farmers from building effective market pres-ence through cooperatives? How these and otherissues play out on a national basis will not be asimportant to cooperatives as what happens in theareas they serve.

Another important aspect of the 2002 Farm Bill isits support for farmer-owned, rural-based value-added businesses. Cooperatives will want to investi-gate whether they can take advantage of these pro-grams. They will also want to keep track of whetherexisting competitors will be strengthened, or new com-petitors emerge, as a result of access to funds madeavailable through these programs.

The 2002 Farm Bill is only the first major farmpolicy pronouncement of the 21st century. In time,farm programs, like other forces affecting coopera-tives, will change. Cooperatives will need to keep alertso they know when change is being proposed, analyzeit, and be ready to shape it to their advantage.

USDA and farmer cooperativesFarmer cooperatives have long been a major ele-

ment of the farm policy and producer assistance strate-gy of the U.S. Department of Agriculture. USDAadministers numerous programs that support produc-ers and their cooperative associations. All of these pro-grams require legislative authorization and funding.So producer and cooperative advocacy beforeCongress and the Administration is crucial to theenactment and long-term viability of these activities.

Panelists noted that the difficulties of adapting tochanges in the marketplace are creating a growingneed for governmental assistance to cooperatives.They expressed strong support for USDA's cooperativeeducation, research, and technical assistance programs.These functions are assigned to USDA under theCooperative Marketing Act of 1926 and are presentlycarried out through USDA's Rural Business-Cooperative Service (RBS) and the Rural Developmentoffices in each State. In addition, RBS-funded coopera-

tive development centers are located at several institu-tions of higher learning or organized as non-profitdevelopment associations.

Cooperatives also benefit from several USDAfinancial assistance programs. As noted earlier, the2002 Farm Bill authorizes and funds RBS grants tofarmer-owned businesses engaged in processing andotherwise adding value to farm crops. RBS also pro-vides guarantees to banks that loan money to produc-ers to buy stock in cooperative value-added opera-tions. Other USDA programs make loans tocooperatives, underwrite export market developmentefforts, and purchase surplus products for distributionto schools and welfare recipients.

Cooperatives sometimes appear to take this sup-port for granted. Many other interests are activelyseeking the government dollars necessary to providethese services and fund this financial assistance.Cooperative leaders say they want USDA cooperativeservices expanded and financial assistance liberalizedand increased. But that will require a commitment tothe public policy process sufficient to pass legislationimplementing these objectives.

Defining cooperatives:Where is policy heading?

This report discusses how the tenets that distin-guish a cooperative from other forms of business canbe viewed as three inter-related continua. At one endis strict compliance with the user-ownership, user-con-trol, and user-benefit principles. At the other end, allthree principles are compromised to the extent that theorganization is clearly not a cooperative. An issue ofgrowing significance is determining where along thecontinua an entity crosses from a cooperative to a non-cooperative.

In the years ahead, State legislatures may play anincreasing role in this area. The State of Wyomingrecently enacted a statute that authorizes a structure,called a cooperative, that varies in many ways fromthe traditional perception of an agricultural marketingcooperative.27

● Under this law, a cooperative can have anunlimited number of investor "non- patron" members

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27 The Wyoming Processing Cooperative Law became effective onJuly 1, 2001. Wyoming Statutes $$ 17-01-201 to 17-10-253. For anexplanation of the Wyoming Processing Cooperative Law, seeMark J. Hanson, “A New Cooperative Structure for the 21stCentury: The Wyoming Processing Cooperative Law,” TheCooperative Accountant, Fall 2001, pp. 3-9.

who aren't required to do business with the associa-tion, but are entitled to vote and share in its earningsbased on their level of investment. Patron members arelimited to one vote each, while non-patron membersmay have unlimited votes.

● Only one of an unlimited number of directorsmust be elected by producer-patron members.Director(s) chosen by the producer patron membersare entitled to 50 percent of the voting power on theboard. But this may fall short of the level of producercontrol necessary to be operating as a farmer coopera-tive.

● No limit is imposed on the rate of return investor members can realize on their investment andup to 85 percent of each year's earnings may be distrib-uted to investor members based on investment.

This new law challenges the traditional conceptsof cooperatives. First, it is questionable whether anassociation organized to take full advantage of theflexibility offered by this law conforms with any of thethree core cooperative principles:

● User-Ownership — Non-patron outsideinvestors can own most of the firm.

● User-Control — Non-patron outside investorscan control up to 85 percent of the member votes, allbut one of the board seats, and up to 50 percent of thevoting power on the board.

● User-Benefit — Up to 85 percent of the earn-ings can be systematically returned to outsideinvestors based on their investments.

Second, it is doubtful that an association orga-nized to take full advantage of the flexibility offeredqualifies for the numerous laws enacted to supportcooperative activity, including the limited antitrustprotection of the Capper-Volstead Act, single tax treat-ment under Subchapter T of the Internal RevenueCode, and the exemption from the prospectus and reg-istration requirements of the Securities Act of 1933.

Cooperative leaders in other States, includingsome with a rich history of cooperation, may ask theirlegislatures to approve a new State law modeled onthe Wyoming statute. Before endorsing such legisla-tion, cooperative leaders need to ask themselves, "Is alaw that permits this much deviation from the cooper-ative norms of user-ownership and user-control, cou-pled with a provision that only 15 percent of earningsmust be returned to users based on patronage, really alaw authorizing the formation of cooperatives?" If the

answer is "yes," then a second question needs to beaddressed, "What, if anything, does the term ‘coopera-tive' mean?"

Unfortunately, simply suggesting the WyomingProcessing Cooperative Law goes too far in discardingcooperative tenets doesn't solve the bigger problemthat it was intended to address: How can flexibility bebuilt into the cooperative model without destroyingthe unique features that justify favorable public policytreatment?

Recommendations

An array of issues and potential strategies foraddressing those issues were considered within thefocus groups and further analysis for this report. It isneither the intent of this report nor within its scope topresent a list of detailed recommendations. But, thefollowing general recommendations are relevant to allfarmer cooperatives, regardless of size, commodityinvolvement, or business setting.

Accept and embrace changeThe business environment in which cooperatives

operate today is not the world of 1962 or 1982, or evenof 2000. Nor is it the world they will face in 2022 or2042, or even in 2004. Wishing markets had stoppedchanging at a certain time, or managing a cooperative asif they had, is a strategy for disaster. Industrialization,globalization, and technological innovation are here tostay. They are continuously evolving and presentingnew and different challenges and opportunities. And ascooperatives move through the 21st century, otherdevelopments will have an equal or greater impact.Cooperatives must accept and embrace change.

The recommendations that follow will not beimplemented if this one is ignored. Cooperative lead-ers who refuse to accept change can be expected totake the easy way out when confronted by it: do noth-ing and hope for the best. Directors, managers, andadvisers must reject this approach and implementstrategic planning programs that systematically look atyesterday, today, and tomorrow. Where we have beenand where we are should be viewed not as ends inthemselves but rather as foundations for buildingcooperatives that thrive in the years ahead.

Be guided by competent directorsDirectors are the single most critical component

of a cooperative. Most cooperative successes and alarge proportion of their failures may be attributed to

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the board's performance, or lack thereof. The complex-ities of the decisions directors must make have neverbeen more challenging. Directors who are not knowl-edgeable in finance and other business fundamentalswill be overwhelmed by the dilemmas they face.Cooperatives must establish the highest of expecta-tions for the performance of their directors and holdthem accountable for their performance.

The basic standard for director selection in the21st century should be business competency. Personschosen for board seats should either already have theskills necessary to meet their responsibilities, or becapable of acquiring them. Popularity and length ofservice on the board should be only minor considera-tions as selection criteria. If sitting directors either areunable or unwilling to do what is required of compe-tent directors—understand the business environment,identify what the cooperative is doing well and whatneeds to be improved, hire a CEO who can function ina cooperative setting, ask questions when somethingisn't clear, make decisions independent of the influenceof management and advisers—then the membershipneeds to take steps to replace them with people whocan do these things.

Whether through the use of outside expert direc-tors or advanced training of farmer board members,cooperatives must ensure that their boards possess theknowledge and business acumen needed to assess anddecide upon critical strategies. This involves both amethod of identifying and grooming future boardmembers and leaders and providing adequate trainingopportunities for existing directors.

Maintain a solid equity baseThe message that cooperatives must pay special

attention to building and protecting their equity basehas been repeated many times. Without adequate equi-ty, banks won't loan money to a cooperative and it willstarve for lack of funding. Some cooperatives, mostlythose with modest capital requirements, already haveadequate financing. But for others with substantialcapital needs—to either remain in farm supply manu-facturing or engage in value-added food product pro-cessing—the challenge just won't go away. If anything,it will be harder in the 21st century.

Reliance on retained earnings to generate equity,when coupled with a program of systematicallyredeeming equity issued in prior years, places cooper-atives in the position of decapitalizing themselves inyears of modest earnings or losses. For many coopera-tives, managing existing equity is as big a challenge asattracting new equity.

Many farmers have large asset bases, particularlythe land that they own. They could safely borrowagainst those assets to fund new cooperative ventures.But first they have to be convinced that mortgagingland and investing in off-farm enterprises will increasetheir income enough to cover the interest and rewardthem for their risk.

Some farmers are using new and creative financ-ing strategies compatible with cooperative principles.The new generation model cooperative gives farmer-owners the option to sell their equity to other produc-ers at a market price. This complies with the user-owner, user-control, or user-benefit tenets. In otherinstances, outsiders may purchase dividend bearingbut non-voting preferred stock. While this is a modestdeparture from strict user-ownership and user-benefit,it protects the key principle of user-control.

If cooperatives are to be adequately capitalized inthe years ahead, either members will need to provideadditional funding or cooperatives will have to turn toother sources. The pertinent questions then become,how much capital can farmers provide without jeopar-dizing their own financial health and how much cancooperatives accept from outsiders without jeopardiz-ing their cooperative character?

Emphasize educationCooperative education is an investment and

should be viewed as such by both public and coopera-tive decision makers. While the importance of coopera-tive education has not diminished over the past fewdecades, the resources devoted to it have been severelycurtailed. Cost cutting within individual cooperatives,in cooperative organizations, at educational institu-tions, and in Federal programs has been dispropor-tionately targeted at expenditures on education.

In the name of adjusting to a more competitivebusiness environment, cooperatives have, at times,focused on short-term returns, to the detriment of thelong-term success of the association. Institutions thatsupport cooperatives have also redirected resources toother initiatives. Ultimately, farmers will pay for thisshort sightedness. How, for example, can farmersacquire the skills to become competent directors ofcooperative food manufacturing companies if solidtraining in those attributes isn't available? Without theproper training, the pressure will mount on farmer-directors to abdicate their role as stewards of theirmembers' assets to outsiders with the expertise to runthe business but not the appreciation for the impor-tance of the member-user that makes a cooperativespecial.

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This report emphasizes director training as thenumber one priority in the cooperative education area.However, cooperative education is urgently needed forother audiences as well: employees, members, youth,young farmers, and the general public. Cooperativeleaders have allowed, even facilitated, an across-the-board erosion in cooperative education. In the longrun, this failure to invest in cooperative education canbe as damaging as any failure in financial oversight.

Seek efficient structuresFor decades, the picture of a cooperative was

pretty clear. It was a group of people who bandedtogether and furnished all of the required equity for acompany that provided a service they couldn't provideindividually for themselves. After a number of years,the cooperative paid off the longest outstanding equityinvestments with current year's earnings. When indi-vidual cooperatives weren't big enough to meet mem-ber needs, they pooled their resources and formed afederated cooperative.

As farmers and cooperatives enter the 21st centu-ry, that traditional structure is under severe pressure.Cooperatives are finding that when profit margins arethin, internal conflicts among the layers of decisionmakers in a federated system—as each strives to cap-ture what margins there are—can become debilitating.Cooperatives are also discovering that they lack boththe human and financial capital to deal with all thechange around them.

Cooperative leaders should consider whether theage of the large, federated cooperative has passed.Smaller, centralized associations, able to function withless capital and to make management decisions rela-tively quickly, may be the way to future success. Whenthese associations see an opportunity to enter a newmarket or grow in an existing one, they may be betteroff forming a joint venture with other cooperative andnon-cooperative firms than forming a federated coop-erative. This allows them access to people, funding,and markets not otherwise available while allowingthem to continue to function as an independent coop-erative organization.

Farmer-members must ask themselves some fun-damental questions: Do they have to own physicalassets they can see and touch? Can they operate in anenvironment of shared control and benefits? Can theyallow their cooperative businesses to evolve andchange?

Forge a strong public policy presenceSince enactment of the Capper-Volstead Act in

1922 and the Cooperative Marketing Act of 1926, coop-eratives have been a central part of public policy forthe agricultural sector. While the specific applicationsof the cooperative form of business have changed, thevalue, from a public policy perspective, of this private-sector solution to agricultural market conditions,remains highly significant today.

In the 21st century, cooperatives must enhancetheir role in protecting and advancing the economicinterests of farmers. This includes educating legislatorson how cooperatives might receive stronger support interms of access to and assistance from Federal andState programs. It also means collaborating with pub-lic program administrators to make sure producer-members receive the maximum benefit, or suffer theleast possible harm, from public sector initiatives.

Make decisions based on cooperative principlesThe core cooperative principles enunciated in the

1987 report (user-ownership, user-control, and user-benefit) are still valid and are likely to remain so in the21st century. This makes the cooperative a unique formof organization with distinct characteristics, strengths,and difficulties. As directors and managers weighoptions when addressing major business and organiza-tional decisions, they must consider how the outcomewill affect the association's status as a cooperative.

The earlier discussion of cooperative principlesused a continuum analogy to introduce the issue ofhow far an entity can move from strict compliancewith these tenets and still be a cooperative. While allthree principles are important, the concept of user-con-trol seems most critical to operating on a cooperativebasis. As farmers and other cooperative membersstruggle to adjust to the demands of the 21st century,they may find that some flexibility on the matters ofoutside ownership and allocating benefits, particularlyreturns on investment, are necessary to protect thecontinued availability of a cooperative presence in theindustries where they do business. But only throughcontinued user control can the members ensure thatthese deviations from the norm don't transform their"cooperative" into just another investor-owned firm. Itis through control that members ensure business out-comes consistent with their goals for their coopera-tives.

Control is the ability to make the decisions thatdetermine how the entity conducts itself. Member-users can have 100 percent of the voting rights and stillgive away control to management, lenders, outside

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equity holders, or advisors. Thus, this report concludesby re-emphasizing the single recommendation that ismost critical to cooperative success in the 21st century:Cooperatives must have highly competent directorswho understand how to exercise effective controlover their cooperatives and do so in a manner thatpromotes the best interests of the member-users.

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Appendix A. Classifying Cooperativesby Structure

Those with a background in cooperatives, includ-ing the focus group participants, frequently use vari-ous terms to describe different types of cooperatives. Abrief review of the more common ways cooperativesare classified should help clarify the following analysisfor readers with little experience with this topic. Themore important ways to categorize cooperatives are bythe geographical territory served, their governancesystem, and the functions they perform.

Geographic territory servedOne way of looking at cooperatives is the size of

the area served. Cooperatives are loosely categorizedas local, super local, regional, national, and interna-tional.

● Local cooperatives operate in a small geo-graphic area, typically a single county or two or threecontiguous counties. They usually have only one ortwo facilities to serve members.

● Super local cooperatives operate in severalcounties, often with several branch facilities.

● Regional cooperatives usually serve an entireState or a number of States.

● National cooperatives serve a major portion ormost of the United States.

● International cooperatives operate in morethan one country, with headquarters in the UnitedStates or another country.

Governance systemCooperatives can also be classified based on

membership structure, as centralized, federated ormixed.

● Centralized cooperatives have individuals andbusiness entities (partnerships, limited liability compa-nies, family corporations) engaged in agricultural pro-duction as members. Virtually all locals and superlocals are centralized. Regional, national, and interna-tional cooperatives may also be centralized.

A centralized cooperative has one central office,one board of directors elected by its members, and amanager (chief executive officer) who supervises alloperations. Business may be conducted throughnumerous branch stores or offices staffed by employ-ees responsible to the central management team.

● Federated cooperatives have other cooperativesas their members. Each member of a federated is a sep-

arate cooperative that owns a membership interestentitling it to voting rights in the affairs of the federat-ed. Local cooperatives commonly form federateds toperform activities too complex and expensive for themto do individually, such as manufacturing productionsupplies, tapping major financial markets, and market-ing on a national or worldwide scale. Each member ofa federated typically has its own board of directors,manager, employees and facilities to serve its mem-bers. The federated has its own hired manager andstaff and a board of directors elected by and represent-ing its member cooperatives.

● Mixed cooperatives have both individuals andother cooperatives as members. Cooperative membersare usually given voting rights representative of theirown membership.

Functions performedCooperatives may perform one or more of three

core functions: marketing products, purchasing sup-plies, and providing services.

● Marketing cooperatives sell products producedby their members, in either raw or processed form, topersons further along the food marketing chain. Somemarketing cooperatives limit their activity to negotiat-ing prices and terms of sale with buyers. Growers offruits and vegetables for processing and dairy farmersare primary users of these cooperatives, called bar-gaining associations.

Other marketing associations assemble memberproduction into large quantities for sale to furtherprocessors, wholesalers or retailers. This first-handlerrole is common for cooperatives of grain growers andproducers of fruits and vegetables for the fresh pro-duce market.

Other such associations add further value tomember production by processing or manufacturingmember products into other, more valuable products.These may serve as ingredients in further processedproducts or be sold to institutional buyers and restau-rants for their direct use, to grocery chains for resale asprivate label products, or to brand-name companiesfor resale under their brand. Cooperatives that processdairy products, fruits, vegetables, grains, livestock,and fish exemplify these value-added processing activ-ities. Still others put member products right on thegrocery store shelf under their own brand name. LandO'Lakes, Sunkist, Ocean Spray, Welch, Tree Top, andKnouse Foods are examples of cooperatives withestablished brands.

● Purchasing cooperatives are used by farmers togain access to affordable, quality production supplies

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such as feed, fuel, fertilizer, and seed. Many local pur-chasing cooperatives have affiliated with other suchorganizations, often through regional and national fed-erated cooperatives. The combined resources enhancebuying power to lower per-member costs of securingsupplies and make possible direct ownership of large-scale facilities such as petroleum refineries; phosphate,potash, and nitrogen manufacturing plants; feed mills;research facilities, and laboratories.

● Service cooperatives provide both farm-specificand general support to producers. Some farm-specificservices include recommending and applying fertiliz-er, lime, or pesticides; animal feed processing; andcrop harvesting. General services include creditthrough the Farm Credit System, electricity throughrural electric cooperatives and communications servicethrough rural telephone cooperatives.

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Appendix B. Forum Participants

St. Louis Panelists:Bruce Anderson, Facilitator, Cornell UniversityRobert Andersen, Nebraska Cooperative CouncilRichard Bell, Riceland Foods, Inc.Dennis Bolling, United Producers, Inc.Barry Flinchbaugh, Kansas State UniversityJoan Fulton, Purdue UniversityRoger Ginder, Iowa State UniversitySteve Hunt, U.S. Premium BeefPaul Lasley, Iowa State UniversityJoe Lieber, Kansas Cooperative CouncilFrank McDowell, New Vision CooperativeWilliam Patrie, North Dakota Association of Rural Electric CooperativesMaura Schwartz, Minnesota Association of Cooperatives

Atlanta Panelists:Robert Cropp, Facilitator, University of Wisconsin Center for CooperativesGene Anderson, Southern States CooperativesJim Baarda, The Ackerson GroupLarry Baumeister, University of KentuckyGlenn Glover, Gold Kist, Inc.Brian Henehan, Cornell UniversityFrank Hunt, Florida's Natural GrowersJames O'Shaughnessy, Ocean Spray Cranberries, Inc.Kathy Ruhf, New England Small Farm InstituteCarlyle Teague, Cooperative Council of North Carolina

Minneapolis Panelists:Robert Cropp, Facilitator, University of Wisconsin Center for CooperativesRodney Christianson, South Dakota Soybean ProcessorsMike Cook, University of MissouriMajid Dagher, Mississippi Small Farm Development CenterDan Dillon, Welch's Corp.Gary Hanman. Dairy Farmers of AmericaJohn Johnson, Cenex-Harvest StatesPhil Kenkel, Oklahoma State UniversityTom McKenna, United Sugars, LLCWilliam Nelson, The Cooperative FoundationAl Shively, American Pride Co-opEd Smith, Texas A & M UniversityCurt Stofferahn, University of North DakotaWalt Wosje, Michigan Milk Producers

Sacramento Panelists:Ken Farrell, Facilitator, California Center for CooperativesRoberta Cook-Canela, University of California-DavisEverett Dobrinski, CoBankRonald Giraridelli, Diamond Fruit Growers, Inc.

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Stan Gomes, Land O'LakesDonald Gordon, Agricultural Council of CaliforniaBill Heffernan, University of MissouriSue Hine, Colorado State UniversityLarry Kallem, Iowa Institute of CooperativesBarry Kriebel, Sun-Maid Growers of CaliforniaRichard Sexton, University of California-DavisTheresa C. Tuttle, Tuttle and Van KonyenburgFrank Van Konyenburg, Tuttle and Van KonyenburgJohn Welty, California Tomato GrowersDave Zollinger, Blue Diamond Growers

Washington, D.C. Panelists:Bruce Anderson, Facilitator, Cornell UniversityKen Auer, Farm Credit CouncilRon Gaskill, American Farm Bureau FoundationDavid Graves, National Council of Farmer CooperativesPaul Hazen, National Cooperative Business AssociationJulian Heron, Tuttle, Taylor and HeronGene Paul, National Farm OrganizationDon Schriver, Dairy Farmers of AmericaLee Swenson, National Farmers UnionLeroy Watson, National Grange

National Institute for Cooperative Education Panelists:Richard Subia, Center of Outreach, Langston UniversityStevin & Stephanie Armstrong, SE Arkansas Vegetable Growers CooperativeLewis Bruner & Rachel Bruner, Oklahoma Landowners & Tenants AssociationLaDonna McCowan, Oklahoma Landowners and Tenants AssociationDr. Marte Daniels, Family Farmers Cooperative, Mississippi Association of CooperativesFred Broughton, South Carolina State UniversityCanston Scott, Sr., Beat 4 CooperativeLarry & Shirley Blakley, Beat 4 CooperativeSotero Agoot, Kona Pacific Farmers CooperativeJoe Radford, Tyler, TXCharles J. Henry, Jr., Coastal Georgia Small Farmers CooperativeFaye Radyard, Department of Health Immunization, Tyler, TXLonnie John Johnson, Coastal Georgia Small Farmers CooperativeDavid Richardson, Coastal Georgia Small Farmer Cooperative

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Appendix C. Discussion Outline

Cooperative principles

Our focus today will be to build on the identity of cooperatives defined under the contemporary principles.● User ownership - A cooperative is owned by its members.● User control - A cooperative is controlled by its members.● User benefits - The benefits of the cooperative accrue to its members.

Core issues

Let's begin by identifying some core issues faced by rural Americans.● What do you see as the principal challenges confronting agricultural producers in the years ahead?● What do you see as the principal challenges confronting agricultural cooperatives in the years ahead?

Changing nature of markets

Let's discuss the changing nature of markets for food and fiber products.● How are cooperatives affected by changing competition?

As buyers?As sellers?

● How are cooperatives affected by changing distribution systems?● How are cooperatives affected by changing consumer characteristics?● How might these and other changes in the food and fiber sectors be addressed by cooperatives?

Changing nature of production

We finish setting the scene by discussing the changing nature of production agriculture.● How are cooperatives affected by the diffusion of farm characteristics (large corporate farms v. small part

time farms)?● How are cooperatives affected by the closure of agriculture through contracts and integrated production

systems?● How are cooperatives affected by the changing nature of farmers’ loyalties, attitudes, lifestyles, and com-

munity?● How might these and other changes in production agriculture be addressed by cooperatives?

Changing nature of cooperatives

Let’s direct our discussion toward the evolution of the cooperative system.● With regard for the evolving stresses in the local-regional cooperative system, describe the essential ele-

ments needed for cooperation among cooperatives. In other words, what enables cooperatives to workcooperatively?

● With regard to capitalization strategies, discuss the roles and implications of non-traditional alternativesto farmer cooperatives.

● With regard to inter-business relationships, discuss the roles and implications of alliances.

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Leadership challenges

Given these changes, pressures and demands,● What skills will cooperative leaders need in the years ahead?● What steps are needed to build these capacities in present and future cooperative leaders?

Public policy

Finally, discuss the roles that cooperatives play to set and implement public policy.● What larger roles can cooperatives play in the design and carrying-out of farm and agricultural policies?

● Are there any changes needed in existing laws and regulations that would strengthen cooperatives’ abili-ty to serve in the public interest?

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U.S. Department of AgricultureRural Business–Cooperative ServiceStop 3250

Washington, D.C. 20250-3250

Rural Business–Cooperative Service (RBS) provides research,

management, and educational assistance to cooperatives to

strengthen the economic position of farmers and other rural

residents. It works directly with cooperative leaders and

Federal and State agencies to improve organization,

leadership, and operation of cooperatives and to give guidance

to further development.

The cooperative segment of RBS (1) helps farmers and other

rural residents develop cooperatives to obtain supplies and

services at lower cost and to get better prices for products they

sell; (2) advises rural residents on developing existing

resources through cooperative action to enhance rural living;

(3) helps cooperatives improve services and operating

efficiency; (4) informs members, directors, employees, and the

public on how cooperatives work and benefit their members

and their communities; and (5) encourages international

cooperative programs. RBS also publishes research and

educational materials and issues Rural Cooperatives magazine.

The U.S. Department of Agriculture (USDA) prohibits

discrimination in all its programs and activities on the basis of

race, color, national origin, gender, religion, age, disability,

political beliefs, sexual orientation, and marital or family

status. (Not all prohibited bases apply to all programs.)

Persons with disabilities who require alternative means for

communication of program information (braille, large print,

audiotape, etc.) should contact USDA’s TARGET Center at

(202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director,

Office of Civil Rights, Room 326-W, Whitten Building, 14th and

Independence Avenue, SW, Washington, D.C. 20250-9410 or

call (202) 720-5964 (voice or TDD). USDA is an equal

opportunity provider and employer.