United StatesDepartment ofAgriculture

Rural Business-CooperativeService

ResearchReport 157

USDA

Cooperatives in aChanging GlobalFood System

This study examines how U.S. agricultural cooperatives are responding to currenttrends toward the globalization of the agricultural and food sector. Information fromthree case studies illustrates the extent to which cooperatives’ organizational structuremay limit or enhance their ability to compete with investor-owned firms (IOFs) on aglobal scale. Concentration levels in key agricultural production, processing, and distri-bution markets are reviewed.

Next, the report examines new global strategies being employed by IOFs and theirimpact on farmer-owned cooperatives. The international activities of three regionalcooperatives are examined in detail and data are used to highlight advantages and dis-advantages that cooperatives may experience in global competition with IOFs.

Factors limiting international involvement by cooperatives include the diverse interestsof their members, ties to domestic resource bases and social groups, the high risk lev-els and long-term nature of international investment, and symbolic barriers, includinglanguage barriers and the different connotations of the term “cooperative” in othernations.

Potential advantages for cooperatives include their reputation as reliable, high-qualitysuppliers and ethical business partners and their ability to meet specialty, nichedemand created within a global food system. Cooperatives must seek opportunities inthe new global system that their organizational structure makes them uniquely quali-fied to fill. They must also seek member response to questions of international involve-ment and encourage a spirit of “permanent innovation” among cooperative membersand staff. Finally, cooperatives must enhance the potential social, cultural and econom-ic benefits from international cooperation for their membership.

Key words: agricultural cooperatives, concentration, globalization, agency theory

Cooperatives in a Changing Global Food System

United States Department of Agriculture

Rural Business-Cooperative Service

FIBS Research Report 157

Michael F. Seipel

William D. Heffernan

University of Missouri-Columbia

Department of Rural Sociology

October 1997

Preface Transnational corporations (TNCs), with little or no loyalty to any country, are currentlyredefining the way food is produced, processed, and consumed. These agribusinessfirms use the flexibility offered by their multiple-nation locations to source commoditiesfrom least-cost origins around the globe, reconstitute them into food products, anddeliver them to consumer markets throughout the world. They can also strategicallylocate processing plants in various countries based on raw material supply, infrastruc-ture, labor cost and availability, and regulatory considerations. Agricultural coopera-tives with ties to resource bases and social groups within particular nations may belimited in their ability to pursue such strategies. So, how can cooperatives compete inthis new global food system?

This report explores issues raised for cooperatives by the globalization of agricultureand food. Information from three case studies illustrates the extent to which coopera-tives’ organizational structure may limit or enhance their ability to compete withinvestor-owned firms (IOFs) on a global scale.

First, we examine the level of concentration in key agricultural production, processing,and distribution markets, the new global strategies being employed by IOFs, and howthese two related phenomena impact farmer-owned cooperatives. Next, we discuss theset of concepts known as agency theory and demonstrate how it can contribute to ourunderstanding of the dynamics of a decision by a cooperative to pursue internationalinvolvement.

Strategies of three regional cooperatives with significant international involvement areexamined. The decisions made and challenges faced by these three cooperatives pro-vide insight into globalization issues. Based on the three case studies, we discusssome general advantages and disadvantages that cooperatives may have relative toIOFs and global competition. Recommendations are made on how cooperatives mightposition themselves to take advantage of the strengths offered by their organizationalstructure.

Con tents Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..ii i

Implications of Globalization for Cooperatives ............................... 1

An Agency-Theory Approach ........................................... .5

Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International Programs of Three Regional Cooperatives .......................7

LandO’Lakes,Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Harvest States Cooperatives ....................................... .8

Farmland Industries, Inc. .......................................... 10

Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..ll

Limitations to International Involvement by Regional Cooperatives ......... 11

Cooperative Advantages in the Global Food System .................... 13

Conclusions and Recommendations ..................................... 14

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Highlights This report places the challenges currently confronting farmer cooperatives within thecontext of the growing globalization of agricultural and food markets. Cooperativeshave long been used by producers to address problems of market failure and balancethe unequal bargaining power encountered in the marketplace. However, the viability ofcooperatives as an organizational form, and the ability of farmers to retain a directpresence in agricultural markets, are currently being challenged by the emergence of aglobal food system.

Transnational agribusinesses are currently shifting capital and technology from nationto nation to capitalize on supply costs, labor availability, and favorable regulations. U.S.cooperatives, because of their close links to physical assets and member-owners in aparticular country, are less able to duplicate these strategies. So cooperatives mustfind ways to compete globally that do not compromise their commitment to memberservice. Their very survival may rest on their ability to do so.

U.S. agricultural markets are quite concentrated at the national level. In every staplecommodity sector except turkey production and processing, four firms control 40 per-cent or more of the market. Many firms, such as Cargill, ConAgra, and Archer DanielsMidland (ADM), are among the top four firms in multiple sectors. In the last decade,these firms have moved to open strategic production and processing operations inother countries. The three major beef-packing firms in the United States now dominateall of North America and are moving aggressively into Australia and South America.Cargill has demonstrated the mobility of modern livestock production technology byduplicating a U.S. broiler production system first in Thailand and then in China to takeadvantage of low-wage labor.

Some large regional cooperatives are attempting to compete with these investor-owned firms (IOFs) at the international level. Land 0’ Lakes is active both in interna-tional development in lesser-developed countries, and in international marketing of itsdairy foods and feed products. The cooperative has recently been very active in theexpanding manufactured feed market in Eastern Europe.

Harvest States Cooperatives is a long-time exporter of U.S. grain and grain products.In recent years, it has attempted to strengthen its competitive position through jointventures with investor-owned agribusiness firms for the marketing and processing ofmembers commodities. The cooperative is currently establishing stronger ties inMexico and seeking to build relationships with end-users of export commodities inother nations.

Farmland Industries also has expressed a strong commitment to becoming a globalcompany. The cooperative currently exports grains and oilseeds, pet food, feedstuffs,fresh and processed beef and pork, lubricants, and fertilizer. Farmland recentlyincreased its international presence by purchasing a Swiss-based grain trading firm.These cases highlight the limitations and advantages of international activity by coop-eratives.

The diverse interests of the membership in a regional multi-commodity cooperativemay present a constraint to international involvement because of the often commodity-specific nature of international ventures. Agricultural cooperatives’ ties to domesticresource bases, both facilities owned by the cooperative and the assets of farmer-members, may also inhibit international investment which might be perceived to deval-ue these domestic assets. The risk level and long-term nature of international invest-

ments may also deter members of agricultural cooperatives. Different meanings asso-ciated with cooperative business forms in formerly centrally-planned economies maycreate additional obstacles for cooperatives attempting to become established in thesenations. Finally, language and other cultural barriers may limit true international coop-eration.

Cooperatives also enjoy several potential advantages in the global food system. Theyare perceived to be reliable, quality suppliers and ethical business partners. Thismakes it easier to establish working relationships with end-users in other nations. Themacro-level trend toward globalization is also creating many localized niches in thefood system, and cooperatives may be uniquely positioned to fill these by capitalizingon their decentralized operating structure.

For cooperatives to successfully compete in the emergent global food system, theymust take advantage of the unique opportunities offered by their organizational struc-ture instead of attempting to compete directly with transnational agribusiness firms.The first step is to seek suggestions from members so that international strategies canbe designed to fulfill the multiplicity of goals that members may have for their coopera-tive.

International activities can then be pursued to enhance member service as well asearnings. Cooperatives can also help their members compete internationally by devel-oping alternative products and markets, and looking for innovative ways to add value totraditional commodities. Designing products to fit the demand niches created within aglobal food system will require decentralization of decisionmaking and a spirit of inno-vation from both members and management. Finally, cooperatives must evaluate inter-national opportunities on their potential social and cultural merits, as well as on thelevel of economic return they offer in order to fully realize the potential benefits of inter-national cooperation. The globalization of the agricultural and food sector entails creat-ing many intricately intertwined local, regional, and international food production, distri-bution, and consumption networks. Within this system, there will be many roles forcooperatives to fill.

iv

Cooperatives in a ChangingGlobal Food System

Michael F. Seipel and William D. Heffernan,

Department of Rural Sociology,

University of Missouri-Columbia

A griculture in the United States has historicallybeen one of the best examples of an economi-cally competitive system. Millions of farmers

purchased limited supplies from thousands of relative-ly small farm supply firms. The farmers sold theirproducts through hundreds of markets to a vast num-ber of processors. Within a given geographic area,however, transportation capabilities limited the num-ber of markets to which any group of farmers hadaccess. Ironically, as time went on and farmers beganto rely more heavily on purchased supplies anddepend on commercial markets, competition at thelocal and national levels declined.

Farmers sometimes responded to this lack ofcompetition or “market failure” by mobilizing inprotest. These farmers often blamed their economicwoes on the “cost-price squeeze” brought about bymiddlemen who obtained a disproportionate amountof the economic benefit of agricultural supply andcommodity marketing at the expense of farmers.

Early in the history of farmer movements, rail-roads, lending agencies, equipment manufacturers, andothers were the focus of attention. Shortly after theCivil War, the Patrons of Husbandry (Grange) wasstarted as a collective effort by farmers to address someof their concerns. The Grange and other farmer organi-zations were closely linked to broader social move-ments of the time, especially the Populist movement.

Farmers also responded to market failure byforming local cooperative associations to purchasesupplies and provide services to a few members. In1922, the Capper-Volstead Act provided legitimacy tofarmer attempts to level the playing field in agricultur-al supply and commodity markets. Cooperatives soonfound that to ensure continued service to members,

they must ensure their own survival through growthand profitability. As investor-owned firms (IOFs) con-solidated control of agricultural markets at the region-al and national levels, local cooperatives responded byforming regional federations to provide a “competitiveyardstick.“

In the intervening years, cooperatives and IOFsand the markets in which they compete have contin-ued to grow in size and complexity. Farmers in the late20th century continue to seek ways to work together,often through cooperative associations, to collectivelycounter the economic efficiency and power of largeIOFs. However, the ability of cooperatives to continueto provide their traditional “competitive yardstick”function in this new “global food system” is beingchallenged not only by the sheer size of their competi-tors, but by the flexibility offered by their multiple-nation locations.

Globalization and Concentration ImplicationsConcerns about the unequal distribution of eco-

nomic power in agriculture voiced by farmers morethan a century ago still ring true today. Table 1 indi-cates that many food processing firms achieve greaterthan a 20 percent return on their investments. By con-trast, farm management data from many MidwestStates suggests that most farmers receive only a 2 per-cent to 4 percent return on their investments.

A century ago, farmers facing a local monopolyor monopsony joined to purchase supplies or marketproducts with a relatively small investment and limit-ed organizational complexity. Today, however, theincreasing concentration of food processing and mar-keting in the hands of a few transnational corporations(TN&) is bringing about the possibility of market fail-

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ure for farmers and consumers, not just locally, but ona regional, national, or global scale. The levels of capi-tal and human resources necessary to avoid such mas-sive market failure are much greater. Therefore, farmercooperatives are taking on much higher risks inattempting to compete in this global food system.

Today, most of the major farm commodities pro-duced in the Midwest move into an oligopolistic mar-ket system at the national level. Table 2 indicates thatwithin every commodity sector except turkeys, 40 per-cent or more of processing is controlled by four firms.Although debate continues on what constitutes an oli-gopolistic market, much of the economic literaturesuggests that when four firms control 40 percent of themarket, they can exert influence on the market unlikethat in competitive systems.

Table 2 also indicates that many of the same firmsare involved in the processing of multiple commodi-ties. Firms like ConAgra, Cargill, and Archer DanielsMidland (ADM) rank among the top four in severalcommodities. Some observers of change in the foodsystem argue that for certain activities, like porkslaughter, one set of firms has simply replaced anotherset like Swift, Armour, Wilson, and Cudahay, thatexisted half a century ago. But in fact, the movement ofIOFs into the processing of several commodities repre-sents a qualitative difference. It allows such firms tocross-subsidize. Firms operating in multiple commodi-

ties can survive a major loss in one commodity area ifthey are making significant profits in other areas.

In the past decade, two major catfish coopera-tives (Southern Pride and Delta Pride) had problemscompeting against firms which were able to cross-sub-sidize. The cooperatives survived despite the fact thattheir IOF competitor’s annual reports showed a lossfor at least 2 years in the catfish division.

The third change evident from the table is thevertical integration in the food system. Although verti-cal integration began receiving considerable attentionby farmers 30 to 40 years ago in the poultry industry,the complete integration from “seed to shelf” hasoccurred quite recently.

In its annual report, ConAgra claims to be thelargest distributor of agricultural chemicals in NorthAmerica and one of the largest fertilizer producers. Itentered the seed business in 1990. ConAgra owns 100elevators, 2,000 railroad cars, and 1,100 barges. It is thelargest turkey producer and second largest broiler pro-ducer. It produces its own poultry feed and other live-stock feed. It also owns and operates hatcheries.ConAgra hires growers to raise its birds and processesthem in its own facilities. This broiler meat can then bepurchased as fryers under the name of Country Skilletor in further processed foods such as TV dinners andpot pies under the Banquet and Beatrice Food labels.

From the basic raw materials for agricultural pro-

Table I- The World’s Dominant Food Companies

United States 1993 Sales’ Rate of Return**

(bil 8 percent

Philip Morris 50.6 36.7ConAgra 21.5 18.7RJR Nabisco 15.1 1.6Sara Lee 14.6 21 .lIBP 11.7 8.2ADM 9.8 13.2General Mills 8.1 42.8Ralston Purina 7.9 27.6H.J. Heinz 7.1 25.4CPC International 6.7 23.9Borden 6.7 5.8Campbell Soup 6.6 16.5Kellogg 6.3 31.8Quaker Oats 5.7 24.6Farmland Industries 4.7 naTyson Foods 4.7 20.9

Sources:“Fonune, April 18, 1994“Forbes, January 3, 1994 (annual average return on equity)l ‘*Chilton’s Food Engineering International, June, 1994

European**’

Nestle S.A.Nestle FranceNestle DeutschlandNestle UKUnileverDeutsche UnileverUnilever FranceGrand MetropolitanGroupe BSNKraft Jacobs SuchardEridania Beghin-SayAllied LyonsDalgetyAssoc. British FoodsHillsdown HoldingsTate & Lyle

(Swz)(Fra)(Ger)(UK)

(UlVNeth)(Ger)(Fra)(UK)(Fra)(Swz)(Fra)(UK)(UK)(UK)

(UK)(UK)

1993 Sales

(bil $1

36.34.34.02.5

21.64.12.9

12.110.7

9.18.67.76.76.56.05.7

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Table 2- Largest Four Firms and Combined Market Share in Agricultural Commodity Markets

Broiler Production and ProcessingLargest four control 46% of production

TysonConAgraGold KistPerdue Farms

Beef SlaughterLargest four control 72% of slaughter

IBPConAgraCargillFarmland Industries

Beef Feedlots20 feedlots market over 50% of fed beef

Continental GrainCactus FeedersConAgra (Monfort)Cargill (Caprock)

Pork SlaughterLargest four control 45% of slaughter

IBPConAgraCargill (Excel)Sara Lee

Sheep SlaughterLargest four control 70% of slaughter

ConAgraSuperior PackingHigh CountryDenver Lamb

Turkey Production and ProcessingLargest four control 35% of production

ConAgraRocco TurkeysHormel (Jennie-0)Carolina Turkeys

Flour MillingLargest four control 71% of milling

ConAgraArcher Daniels MidlandCargillGeneral Mills

Soybean CrushingLargest four control 76% of processing

Archer Daniels MidlandCargillBungeAg Processing (AGP)

Dry Corn MillingLargest four control 57% of milling

BungeIllinois Cereal MillsArcher Daniels MidlandConAgra (Lincoln Grain)

Wet Corn MillingLargest four control 74% of milling

Archer Daniels MidlandCargillTate and LyleCPC

Source: Concentration of Agricultural Markets, Fall 1994

duction to the retail store, a major proportion of thetotal system is owned and controlled by ConAgra, thesecond largest U.S. food processor (behind PhilipMorris), and the fourth largest in the world.

Some large, regional cooperatives have alsoremained competitive at the national level by in partfollowing the example of IOFs. Gold Kist is the thirdlargest producer of broilers, Farmland Industries ranksfourth among beef processors, and Ag Processing(AGE’) is the fourth largest U.S. soybean processor.However, in the last decade, the most meaningfulchanges in the concentration of agricultural marketshave occurred at the global level.

global grain market became so critical to the economicwell-being of U.S. grain and oil crop farmers. As thesefarmers became more dependent on the global marketto establish the price of their commodities, they againrealized the unequal nature of the power relationshipbetween themselves and the large IOFs. Althoughfarmer-owned cooperatives originate much of thegrain from the farm level, this grain frequently mustpass through the facilities of their competitors toaccess the export market. In the process, cooperativesand their farmer-members begin to lose their ownidentity and increasingly come under the control of theIOFs.

Concentration of control in some sectors of the Recent trade journals report that TNCs likeglobal food system is not new. At the turn of the centu- Cargill and Continental each control about 25 percentry, seven closely held family firms controlled the glob- of the international grain market. ADM, which hasal grain trade. But it was not until the 1970s that the recently acquired the U.S. operations of Louis Dreyfus

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and portions of Ferruzzi, controls another quarter ofthe U.S. grain that moves in global markets. TheseTNCs often are involved in more than just deliveringthe products to a country. They own grain handlingand processing facilities in many countries.

For example, Cargill has operations in 60 coun-tries. Its chief financial officer reports it generatedmore than $2 billion in revenue per year, most ofwhich will be reinvested someplace in the world.Often, profits generated from the U.S. food sector willbe reinvested in other countries, leading to direct com-petition with food products produced in this country.

Qualitative changes in the food system, broughtabout by horizontal and vertical integration at theglobal level during the past decade, continue to chal-lenge the ability of farmers to retain an independentidentity as an essential component in the food system.Three examples will demonstrate the nature of thischallenge.

The first underscores the movement of foreign-based TNCs into the United States. Sometimes thesefirms compete vigorously with one another in certainparts of the world and in certain products, but atother times and in other places form joint ventures.Ferruzzi from Italy joined forces with Mitsubishi fromJapan to establish Innovative Pork Concepts (IndianaPacking), and constructed a state-of-the-art hogslaughtering facility. They then signed an agreementwith Cotswold Pig Development Company, one ofEngland’s primary breeding companies, to providethe genetic stock for this highly controlled pork pro-duction and processing system.

The second example focuses on the beef industry.In the past decade, the Canadian beef industry hasbeen restructured as the result of the activities ofTNCs. In 1987, ConAgra acquired Monfort beef opera-tions, the dominant beef facility in the northern GreatPlains. Soon after that action, Cargill moved across theborder into Alberta, Canada, and set up that country’slargest beef slaughtering operation. At the time,Canada Packers was Canada’s largest manufacturer oflivestock and poultry feeds, largest cattle slaughterer,only national poultry processor, and Ontario’s largesthog slaughterer.

Shortly thereafter, Canada Packers began experi-encing very serious financial problems. Eventually, itwas bought by Hillsdown of England and “exited thefresh beef market.” In the past few years, much of thecattle from northern Alberta has moved into theMonfort feed lots and then to slaughter, or directly toslaughter from Canada. In recent months, IBP pur-chased Lakeside Packers to give the three major beef

slaughter firms in the United States dominance in allof North America.

In the late 198Os, ConAgra purchased half interestin Elders, the dominant beef slaughtering operation inAustralia. It is the largest exporter of beef and lamb inthe world. Shortly after the Conagra-Elders purchase,Mitsubishi began constructing new beef slaughteringfacilities in Australia. Most recently, Cargill purchasedbeef slaughter facilities in Australia. Cargill also hasoperations in Brazil, Honduras, and Mexico. ConAgrahas recently shown interest in the largest beef slaugh-ter facilities in New Zealand. Although these firmspresently control only a small proportion of the beefthat is consumed worldwide, they control the majorportion of beef that is traded in the global market.

A third example comes from Thailand and repre-sents, perhaps, the best example of how the TNCsoperate across national borders. Fifteen years ago,Thailand was not considered an important commercialproducer of poultry. A local agribusiness firm, the G-PGroup, formed a joint venture with Arbor Acres toobtain access to the best genetic stock in the world anda joint venture with Continental to gain access to feedgrain and nutritional information. Months later, the G-P Group began to duplicate the U.S. poultry produc-tion system in Thailand. Within a couple of years,Cargill also duplicated the U.S. poultry productionsystem in Thailand. Cargill formed a joint venturewith Nippon Meat Packers, the largest meatpacker inJapan, to gain access to the marketing and distributionsystem in the Far East. Today, Thailand ranks seventhin the world as a poultry exporter.

In Thailand, the firms found both farmers andprocessing plant workers who were willing to workfor much lower wages than their U.S. counterparts.Processing plant wage rates were well under $5 perday in rural Thailand. As economic growth led to adoubling of the wages in Thailand (still under $10 perday), both firms began similar operations in China andother countries in the region where workers still workfor less than $5 per day.

Thailand is an excellent example of the emergingorganization of the new global food system. Thisexample underscores the fact that in the global foodsystem, both capital and technology are highly mobile.Capital and technology can be transferred to any coun-try in the world, almost instantaneously. The questionglobal firms then face is that of how to combine theother factors of production most effectively.

Under the name of Sun Valley Thailand, Cargill,Nippon Meat Packers, and Thailand have developedorganizational arrangements to take advantage of

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each partner’s strength. Cargill supplies the produc-tion technology and social relations; Nippon MeatPackers supplies the access to markets; and Thailandprovides the low-cost feed and labor, plus a “friendlybusiness climate.”

Given that capital and technology are constants,the four major costs of producing meat are labor, feed,transportation, and government regulations (such asthose applied to the environment or the health andwell-being of farmers and other workers in the foodsystem). TNCs roam the world seeking production andprocessing sites that offer the most favorable combina-tion of these four classes of inputs, an activity knownas “global sourcing.” Because cooperatives have devel-oped within specific national contexts, and generallycontinue to be owned by producers within a particularnation, they lack the same freedom to shift productionand processing around the globe. This global sourcingpresents the strongest challenge to cooperatives abilityto compete in this new global food system.

For several years, researchers at the University ofMissouri have been documenting this globalization bytracking the international activities of TNCs active infood production, processing, and distribution(Bonanno, et al.; Heffernan; Heffernan, et al.). Theincreasing concentration of food processing and distri-bution in the hands of a relatively small number ofthese TNCs raises the question of whether coopera-tives will be able to continue to compete in this emerg-ing global food system.

The purpose of this report is to examine theextent to which agricultural cooperatives are currentlycompeting internationally with the food TNCs, thechallenges cooperatives face, and the strategies beingemployed by the most active and successful coopera-tives. Previous cooperative research and the agency-theory literature suggests that cooperatives uniqueorganizational structure might generate conflictsbetween members and management over internationalinvolvement.

Agency-Theory ApproachThe small size and informal organizational struc-

ture of early cooperatives often allowed for consensus-based decisionmaking with participation from allactive members. This form of governance, based on themodel of participatory democracy, was in keepingwith their concept as voluntary organizations. Theydepend on a high level of participation from theirmembership that is often based on a personal commit-ment by the member to the goals of the organization(Garkovich and Bokemeier). However, the attempt to

provide reliable, efficient service to their members ledto what Paul Lasley (Iowa State) has described as a“dual objective” for cooperatives: the need, as volun-tary organizations, to maintain a high level of memberinvolvement, coupled with the business organizationmandate to generate a profit and survive in a competi-tive marketplace.

These two objectives often proved inherently con-tradictory. However, cooperative leaders realized thatto have the opportunity to achieve the first objective,member participation, they must meet the secondobjective, economic survival, and over time the eco-nomic function came to dominate cooperative deci-sionmaking. For cooperatives competing in relativelyconcentrated agricultural markets, survival normallyentailed growth, which often lead to reduced memberparticipation.

As cooperatives grew in size and complexity, itbecame necessary to delegate authority for operationaldecisions to a hired staff familiar with the coopera-tive’s specialized operations. The model of governanceshifted from participatory democracy to representativedemocracy. Members maintained control through vot-ing in the election of a board of directors which wasresponsible for selecting a manager, making strategicdecisions for the cooperative, and representing mem-bers interests to the manager.

In this type of organization, the manager is seenas an agent, hired to act on behalf of, and in the bestinterests of the principals-the cooperative member-ship. However, the assumption that the manager willalways follow the directives of the principals has beenchallenged by organizational theorists. The set of con-cepts known as agency theory has been most fullydeveloped by authors Jensen, Meckling, and Fama,and has previously been applied to agricultural coop-era tives by Vitaliano and Condon.

Agency theory suggests that a manager’s inter-ests may be quite distinct from members, and as suchthe manager attempts to operate the cooperative basedon goals other than those of maximizing member ser-vice or member profitability. To prevent the managerfrom actively pursuing these alternative goals, mem-bers must monitor the manager’s behavior. Theexpenses associated with such oversight are known asagency costs. The elected directors on the cooperative’sboard can be analyzed as agents, rather than princi-pals, if they advocate policies of personal benefit tothem if unmonitored.

The principals of any organization must struc-ture a set of controls and incentives to obtain perfor-mance by agents, and be able to monitor results. For

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many IOFs, increased value of the firm is the goal,and the stock market provides a monitoring mecha-nism. In a cooperative, members do not have anequivalent monitoring mechanism. Cooperatives areservice organizations rather than investment entities.Members usually take a customer approach by moni-toring performance in relation to what the competi-tion offers. Unlike a customer, a member is a princi-pal, with equity in a cooperative and a greater stake inits success as a business. Determining appropriateagent rewards and obtaining effective performance isa complex challenge for cooperatives. They are con-cerned with many aspects of performance and haveno reference to a stock market for evaluating theworth of the cooperative.

The managerial labor market also plays a role increating incentives for manager behavior in both coop-eratives and IOFs. Managers realize their compensa-tion and the subsequent demand for their services arebased on the current performance of the company, asreflected by sales growth or earnings. This may leadthe manager to focus efforts on those activities thatincrease margins and enhance the manager‘s ownmarketability.

Members may perceive that this single-mindedfocus on earnings or sales growth results in the neglectof other activities that could enhance member serviceor meet other member goals. Ironically, as some stu-dents of agricultural cooperatives have noted, manage-ment’s desire for long-term growth may actually serveto protect the cooperative as a “going concern” fromthe behavior of members who are mainly concernedwith immediate and tangible benefits to be gainedfrom the market and often have an incentive to under-invest in their cooperative (Murray; Staatz).

The creation of a “division of labor” betweenmanagement and board of directors regarding deci-sionmaking also plays an important monitoring role.Decision management, the initiation and implementa-tion of operating strategies, rests with hired managers.Decision control, the ratification of strategic decisions,rests with the directors. It is meant to set the parame-ters within which management operates on a day-to-day basis.

In an IOF, the board often includes “outsideexperts” who are well versed in the firm’s primaryoperations. Cooperative boards are often composedlargely of farmers, whose expertise is in productionagriculture. As large, diverse cooperatives pursuebusiness activities that are increasingly removed fromtheir members’ and directors’ agricultural experience,oversight is weakened. In the extreme case, the board

may become merely a rubber stamp for managementdecisions.

The framework of agency theory helps highlightthe complexity of a decision by a cooperative to pur-sue international involvement. Like any investmentdecision, international involvement promises varyingpayoffs for different groups of members and managerswithin the cooperative. The decision to initiate aninternational investment is usually part of an overallgrowth and/or diversification strategy for the cooper-ative. This serves to fulfill management’s goal of con-tinued growth, a goal often shared by some groups ofmembers. Others may resist such investment due tothe actual or perceived higher risk level associatedwith international ventures. For them, foreign invest-ment also represents the delegation of operational con-trol to agents separated from them by both bureaucrat-ic hierarchy and great physical distance. This furtherincreases difficulty in monitoring. Overseas invest-ment, especially in processing facilities, also tends tobe commodity specific; it may enhance the market forone commodity produced by some members, but doeslittle for other members products. Those who don’tprofit from the overseas facility may pressure coopera-tive leadership to direct capital to other ventures, suchas domestic processing.

The theoretical framework of the agency theoryhelps in understanding the international investmentstrategies pursued by the three cooperatives analyzedhere, as well the potential conflicts that may arisebetween different groups of members and managers.

MethodologyInformation used in this research was gathered

from an analysis of secondary data and interviewswith key cooperative management personnel. Initialinformational requests were sent to 75 cooperativesperceived to have widely differing levels of interna-tional involvement.

Annual reports and other pertinent informationwere received from 25 of these cooperatives. Based onour prior knowledge of them, it appeared that most ofthe cooperatives that didn’t respond had little or nointernational involvement. This material, along withpreviously published research, provided an inkling ofinternational activity by these cooperatives. In somecases, followup contacts were made to clarify informa-tion. From these 25 cooperatives, three regional coop-eratives were selected for a more in-depth analysis.

The cases examined in this report were selectedbecause all were highly involved in global agriculturaland food markets. They are all diversified regionals

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involved in multi-commodity marketing and farm sup-plies. Large regional cooperatives are most likely to bein direct competition with the global food TNCs, bothby virtue of their size and the product markets inwhich they compete. They tend to be active in the basicgrain, oilseed, and livestock sectors that have becomeextensively globalized. The extent of the cooperatives’international activities suggested that they had beenrelatively successful in global competition, yet the het-erogeneity of their membership indicated the potentialfor conflict between groups of members and managers.They were selected for study, given that their behaviorsbest represented extensively both the challenges andthe potential rewards offered by globalization.

Data analysis was supplemented by interviewswith current and former management personnel.Those chosen for interviews were regarded the mostknowledgeable concerning their respective coopera-tive’s international activities. They provided informa-tion on specific activities considered by the coopera-tives, and were able to shed light on various uniqueproblems and/or successes the cooperative experi-enced. Such a research approach is based on “keyinformant” interview techniques proven effective inpast research on cooperatives (Gray, Butler andLasley).

International Involvement

Land 0’ LakesLand 0’ Lakes (LOL), of Minneapolis, the region-

al supply and marketing cooperative, has four corebusinesses - feed, seed, agronomy, and dairy foods. Ithas a long record of successful involvement in interna-tional markets. Its involvement has recently beenexpanded to include ownership of foreign assets. Theprimary activity has had a dual focus - internationalmarketing and international development.

International marketing seeks to expand overseasmarkets for dairy foods and feed through direct sales,licensing of cooperative products for foreign manufac-ture, and establishing foreign-based processing plantsthrough ownership or joint venture. Internationaldevelopment promotes rural development in under-developed nations, and also develops long-term mar-kets in these countries by establishing ties for thecooperative with local producers, distributors, andprocessors.

LOL is currently purchasing a feed manufactur-ing plant in Poland which will operate under the aus-pices of the international marketing division. This pur-chase was fostered from contacts initially through the

international development division’s work with Polishdairy processors. This allowed LOL to become familiarwith the structure of the dairy feed market and led toestablishing a small feed plant to manufacture calfstarter in 1991. This larger feed mill represents a sub-stantial expansion of the company’s product line. Theplant, originally built and operated by a group of statefarms in the region, will operate as a wholly ownedsubsidiary, distributing dairy and swine feed to inde-pendent producers throughout Poland.

Poland is unique among the former Soviet satel-lites. Most of its agricultural land has remained in pri-vate hands and agricultural production comes fromsmall, diversified farmers. This relatively stable situa-tion has attracted investment from western agribusi-nesses that expect current trends toward agriculturalconsolidation and specialization to lead Polish farmersto purchase a larger portion of their feed and otherproduction supplies. LOL and other western feed com-panies view Poland and much of Eastern Europe as apotential growth market for manufactured feed com-pared with the mature U.S. market.

The atomistic structure of Polish agriculture pre-sents feed companies with a problem of how to distrib-ute their feed to farmers. Most western feed companiesattempt to surmount this distribution bottleneck byusing local commission agents who are in contact witha large number of producers or by selling their feedthrough the privately owned local “farm stores” wherefarmers buy many of their supplies. LOL’s cooperativestructure gives it access to an additional distributionstrategy by working through existing Polish dairycooperatives to market feed to their farmer-members.

Although being organized as a cooperativeproved beneficial in establishing this initial contactwith Polish dairy cooperatives, LOL does not promoteits status as a cooperative as a strategy to attract feedcustomers. Polish farmers associate the term “coopera-tive” with the quasi-governmental organizations theywere forced to join during communist occupation andare generally not eager to form producer associations.Therefore, in the short term, the cooperative is contentto run its Polish feed mill as a limited corporation.However, LOL is grappling internally with the issue ofwhether or not the customers of the Polish feed millshould become members of the cooperative and thisquestion may culminate within the next 5 years. Theintegration of Polish producers as full members of thecooperative raises many complex issues, but, if carriedout successfully, would represent a large step towardtrue international farmer cooperation.

Drawing on the framework of agency theory, it is

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possible to conceptualize upper-level cooperativemanagement personnel as agents of the members.Expansion of cooperative milling operations in Polandor elsewhere in the world’ serves to meet manage-ment’s goal of continued cooperative growth. LOLofficials note that member and director support for thePolish feed mill has been strong to date because invest-ment levels are small and the operation shows signs ofproducing large net earnings.

However, despite financial success, this invest-ment does little to enhance member service or directlyexpand markets for members’ products. It is possibleto conceive of a situation where overseas investmentssuch as this would meet resistance from membersdesiring capital to be spent to expand domestic dairyprocessing operations or other such activities. Thismay represent a situation where the strategic vision ofmanagement is necessary to “protect” the cooperativeas a going concern from its members. The return pro-jected from foreign milling operations may be signifi-cantly higher than that available from other invest-ments which would more directly enhance memberservice. Therefore, it may be necessary to allocate capi-tal to this foreign enterprise to assure survival of thecooperative. Members and managers must worktogether to arrive at satisfactory tradeoffs between thetwin imperatives of member service and profitability.

The second thrust of LOL international involve-ment is in the development area. This division largelyuses funds available from the U.S. Agency forInternational Development (USAID) to provide man-agement and technical assistance as well as produc-tion, marketing, and processing training to personsand organizations in developing nations. As well asaiding in rural development, the program establishesimportant contacts for the cooperative within thesecountries and serves the goal of long-term marketdevelopment.

Since 1981, the program has provided a widearray of services to people in Latin America, the for-mer Soviet Union, Central and Eastern Europe, Africa,and Asia. Recent projects have focused on providingtechnical assistance and training geared toward priva-tization and establishing a market system of agricul-ture in Central and Eastern Europe and the formerSoviet Union, which are seen as rapid-growth marketsfor LOL core businesses.

’ In 1993, LOL purchased a Hawaii-based feed millingoperation in order to gain access to its distribution networkand, potentially, as a stepping-off point for further expansioninto Pacific feed markets.

For example, division personnel have beeninvolved in transforming the Bulgarian and Romaniandairy sectors into market-oriented systems by helpingorganize producer associations and providing techni-cal expertise to processors. The division is placing vol-unteer agricultural specialists in Russia and Ukraine toassist private and privatizing agricultural businessesin the areas of processing, storage, distribution, andmarketing. Technical assistance has also been providedto aid in the establishment of market-based agriculturein Poland and the establishment of an agribusinesscenter in the Tula region of Russia which will providetechnical expertise to developing agribusinesses.

LOL’s investment and marketing strategies indi-cate a clear recognition of the importance of globalmarkets for the cooperative’s survival. The coopera-tive’s overall strategy seems to be to use its interna-tional development activities both for long-term mar-ket development and to identify potentially profitableareas for investment. When a geographical areaappears to offer a growth market in one of LOL’s corebusinesses, the cooperative may move quickly toestablish a presence in that market.

The criteria of growth and profitability of theinternational activity are weighted quite heavily in theinvestment decision, independent of whether it direct-ly expands markets for producers’ products or reducesthe costs of their inputs. This indicates that agents(cooperative managers) enjoy relative autonomy inpursuing international strategies and that there is rela-tively little difference between LOL’s approach tointernational investment and that of an IOF, particular-ly in the feed sector.

Harvest States CooperativesHarvest States, of St. Paul, MN, is a regional

grain marketing and farm supply cooperative active inexporting a wide range of agricultural commodities.Export sales are made both directly to end-users andthrough U.S. or foreign-based sales agents. The coop-erative also participates with a transnational grain cor-poration in a joint venture established to export feedgrains and shares a Mexico sales office with anotherlarge U.S.-based grain processing firm.

With the organization’s long history of marketinggrain sales throughout the world, Harvest States rec-ognizes the importance of the international market-place and views it as a major potential growth area forU.S. agribusiness firms. However, Harvest States alsosees some major expansion opportunities for its value-added operations in grain and food processing in thedomestic market. In reconciling how best to allocate its

available capital, Harvest States management is com-mitted to assessing risk versus reward and establish-ing priorities accordingly.

Harvest States’ management sees two trendscombining to make it increasingly important for U.S.agricultural exporters to secure working relationshipswith end-users in importing nations. First, budget con-straints dictate a reduced role for the U.S. Governmentin promoting U.S. agricultural commodities abroad.This means that more export transactions will takeplace under private negotiation instead of underGovernment programs. Second, many countries aretaking steps to privatize their agriculture and food-processing sectors, thereby moving the task of import-ing raw materials from governmental agencies to end-users and private buying groups.

Harvest States has taken steps to position itselffor this transition by establishing ties with end-users inimporting nations whenever possible. The regionalcooperative is also a member of a consortium of U.S.,Dutch, Swedish, French, and German cooperatives thattogether own nearly 48 percent interest in an interna-tional grain trading firm. The balance of this interna-tional firm is owned and controlled by a large, U.S.-based grain processing firm. Contacts initially fosteredthrough this group have evolved into commodity trad-ing relationships with the Dutch, Swedish, and Frenchmembers of this international consortium.

Recently, Harvest States was offered the opportu-nity to establish a joint venture in grain processingwith a private company in another country. The coop-erative is an attractive joint-venture partner for suchprivate processors because it is seen as a reliablesource of high-quality raw material (grain), with directlinkages to U.S. producers. Forming alliances with pro-ducer-owned entities is seen by such processors as away to reduce their reliance on transnational grainmerchants and gain more control over supply.

One potential sticking point to Harvest Statesinvolvement was that the joint-venture processingentity would have to be committed to using the appro-priate quality of grain from the cheapest source. Thatmeant the plant would not necessarily always use U.S.grain, a factor that could have rankled some HarvestStates’ members. That possibility never materialized,however, because another company submitted a high-er bid for the processing facility that the joint venturehad considered buying and operating.

Had the joint venture moved ahead, the ultimateinvestment decision would have required approval ofthe cooperative’s board of directors, all of whom arefarmers and, as a result, sympathetic to the concerns of

their producer-constituents. Management believes afinal decision would have been subject to much discus-sion. The outcome would depend on how all the fac-tors involved finally came together. The transactiondidn’t reach that point, and management could notspeculate on what the board‘s decision would havebeen.

The management of this cooperative tends to begrowth-oriented and willing to pursue lucrative newbusiness opportunities, even if somewhat outside thecooperative’s traditional core-commodity areas.Management sees international investment as havingthe potential for a rate of return that will help ensuresurvival of the cooperative as a going concern, an elu-sive factor in mature U.S. markets. In the view of man-agement, if Harvest States does not allocate its capitalaccording to the dictates of the market, it is doomed tostagnation and eventual failure.

Management recognizes there is often little short-term incentive for members to support internationalinvestment by the cooperative. These types of venturestend to be long-term investments, with projected pay-offs anticipated to be several years ahead. Meanwhile,in any business such as Harvest States, where there arelimits on available capital, foreign investment takesresources away from other projects perceived byfarmer members to offer more immediate and tangiblebenefits, such as domestic processing facilities. Finally,the often higher-risk nature of foreign investment,along with the perceived loss of control due to thephysical distance of the asset, can dampen enthusiasmfor international ventures.

Management views such limitations as challengesto be addressed through member education and com-munication whenever promising international oppor-tunities develop. They feel that over the long term,farmers will recognize that carefully selected interna-tional investments can be in the best interest of thecooperative, even if such ventures don’t appear to pro-vide direct, immediate benefits to members.2 Whilethis suggests a scenario of the agents educating theprincipals as to what is best for the principals, man-agement noted that the process can and should be apositive, constructive one. The same process is fol-

2 The example given by one manager is how the decision was madeto accept shipments of Canadian wheat at the cooperative’selevators. Management finally convinced the board of directorsthat, despite significant member opposition, this action wasnecessary for the cooperative to remain competitive withsurrounding, private elevators that were buying the grain at asubstantial discount to the price of U.S. wheat.

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lowed whenever the organization considers anythingnew or different.

Meanwhile, the board of directors plays animportant role in articulating alternative goals held bythe principals to management. The board also mustapprove any major investment decision entailed byinternational expansion. This requires reconciling mar-ket information, member demands, and cooperativeprinciples in an attempt to make strategic decisionsthat will simultaneously enhance financial perfor-mance and fulfill the cooperative mission of providingservices to its members.

Harvest States gives high priority to internationalinvolvement, especially to the extent that it comple-ments a policy of increasing value-added processingoperations. Recent strategies used by the cooperativeindicate a willingness to seek out joint ventures orother alliances with either cooperatives or IOFs wheresuch arrangements appear synergistic. Discussionswith management also indicate that Harvest States’board continues to play an important role in seeingthat new activities started by the cooperative retain anorientation to member service. In this way, HarvestStates is somewhat more restricted in its choice ofinternational investments than an IOF in a similar mar-ket situation.

Farm/and Industries, Inc.Farmland Industries of Kansas City, MO, is a fed-

erated regional cooperative active in producing, pro-cessing, and distributing agricultural inputs and prod-ucts. In the early 198Os, some members of Farmland’smanagement team felt that the cooperative couldincrease its international involvement through betterintra-company coordination. A subsidiary was formedto synthesize and coordinate trade activities byFarmland’s various divisions.

The subsidiary attempted to arrange barter tradewith other countries involving Farmland’s grain,petroleum, and fertilizer divisions. However, accord-ing to a former Farmland executive, top managementat the time tended to be domestically oriented and wasnever fully behind this venture. It is also likely that thetendency for individual division heads (as agents) topursue their own agendas vis-ri-vis international tradecontributed to the failure of this attempt to institute aunified international strategy.

In the intervening years, Farmland has had a sig-nificant management turnover and today, as stated in arecent annual report, the cooperative’s “commitmentto becoming a global company is strong.” One upper-level manager said the cooperative’s objective regard-

ing international involvement is “to move all mem-

bers’ commodities and products into all world marketswherever they can effectively compete in quality, price,and customer service.“ The company’s commitment toincrease international marketing is evidenced by the 85countries to which they shipped products in fiscal1994, versus only 44 in 1993. Farmland currentlyexports grain and oilseeds, pet food, feedstuffs, freshand processed beef and pork, lubricants, and fertilizer.The cooperative also imports crude oil and fertilizerinputs for further processing in the U.S.

In 1993, Farmland aggressively moved to increaseits presence in the international grain market by pur-chasing a Swiss-based grain trading firm. The graintrading group, with offices in Geneva; London; Paris;Bremen, Germany; Buenos Aires, Argentina; andMemphis, TN, is a transnational entity with a world-wide network of buyer and seller contacts and no par-ticular loyalty to any one country. It will allow thecooperative to compete head to head with transnation-al grain merchants in the “optional-origin” sourcing ofgrain. The grain trading group operates as a whollyowned subsidiary with the marketing of U.S. grain asan “absolute priority,” but other origins are also used.Farmland says this purchase represents the culmina-tion of a 50-year struggle by U.S. agricultural coopera-tives to establish a viable presence in the internationalgrain market.

The international firm not only facilitates the saleof more U.S. grain, but also provides Farmland with aglobal network of contacts and a wealth of marketintelligence, including information on world grainsupply and demand, weather, political unrest, andother trade-related matters. The worldwide trendtoward privatization makes this network of contactsand market information even more essential. As coun-tries transfer food importing from governmental enti-ties to private end-users, direct contact with those end-users becomes paramount. Having direct contactrecently paid off for Farmland when it signed a long-term wheat supply agreement with private millers inanother country. Particularly attractive to the foreignmillers was the opportunity for identity preservationof grain offered by the cooperative’s network of local,sub-terminal, and export elevators.

Despite the obvious strengths gained byFarmland through ownership of the transnationalgrain trading firm, this presents an interesting paradoxfor the cooperative. At a fundamental level, the twoorganizations are built around contrasting, even con-tradictory, purposes. The marketing cooperative wasinitially conceived as a vehicle to facilitate the sale of

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its members produce. These members were linked by ashared identity and concentrated in a given geographi-cal area. As such, they could see themselves in compe-tition with other producers outside their relevant area.

This relevant area was initially local, but todaytends to be regional or national. Ultimately, the market-ing cooperative became a means to improve its mem-bers competitive position vis-li-vis producers in otherareas. The trading firm, on the other hand, is an entitydesigned to generate profits through the arbitrage ofcommodities between locales, regions, or nations. Profitaccrues to the entrepreneur-owner or investor. The suc-cess of this entity is directly related to the fact that it hasno loyalty to or identity with any one locale, region, ornation, and is thus able to trade freely among all.

Thus, it is paradoxical when such a trading entitycomes under the ownership and control of a marketingcooperative owned by producers within a given regionand nation. The cooperative cannot hold the transnation-al trading firm strictly to its own imperative to increasemarkets for member products first without jeopardizingthe essence of the trading firm critical to its success.

Farmland also established its first internationaloffice in 1993, a wholly owned subsidiary operating inMexico. Its main purpose is to expand sales of anddevelop new markets for products and services of U.S.members. The office will also allow the cooperative togain familiarity with Mexican business culture andmay open the door for expansion into other LatinAmerican countries.

Based on the cooperative’s past activities and thestatements of management personnel, Farmland’sinternational activities seem to be guided by a fairlyrestrictive imperative to expand markets for memberproducts or reduce the cost of member supplies-insum, to serve the needs of a majority of the principals(member-owners), as the agents (managers and direc-tors) perceive them.

As opposed to an IOF, which might establish afeed plant in another country based strictly on a pro-jected risk/return ratio, Farmland wouldn’t do sounless that country had the potential to be a long-termimporter of U.S. feedstuffs. Farmland’s internationalinvolvement is part of a larger strategy of diversifica-tion and expansion into more value-added processingoperations. Farmland seeks to add value to members’raw commodities in mature markets that are oftenmature or stagnant. International markets, especiallyin countries undergoing privatization, often offergreater earnings potential.

DiscussionUsing agency theory to frame these three case

studies reveals the often paradoxical nature of interna-tional involvement for agricultural cooperatives.Cooperatives often find themselves forced to pursueinternational strategies as a way to remain competitivewith IOFs, given the concentrated agricultural marketsin which they compete.

However, these international strategies, as devel-oped by IOFs, are premised on the logic of shiftingcapital among enterprises and nations based on antici-pated rate of return. Such a “light-footed” investmentstrategy often appears at odds with cooperatives’founding purposes, which were tied to enhancing ser-vices, providing markets, or reducing input costs for agroup of members within a specific region and nation.Thus, international involvement may show the poten-tial contradictions that cooperatives face as theyattempt to fulfill their dual objectives of enhancingmember service/increasing member participation andensuring survival through growth and earnings.

Through our empirical analysis, we attempt todemonstrate how agents (cooperative managers anddirectors) may pursue their own goals via internation-al involvement and how these goals may or may notbe compatible with those of the principals (cooperativemembers). Interviews with management personnelshow they tend to support international involvementby their cooperative as a profitable growth strategy.

Some members may also support internationalinvestment, while others resist it on the basis that itdiverts capital away from other enterprises that couldmore directly enhance member services or earnings.The cooperative’s board of directors, as an agent of themembers, plays an important role in determining towhat extent the voices of these dissenting members areheard in the debate over international investment.

The diverse activities and organizational struc-tures of U.S. cooperatives preclude generalizationsregarding the role of cooperatives in the global foodsystem based on these three cases. However, ouranalysis suggests some advantages and disadvan-tages for regional, multi-commodity cooperatives ver-sus IOFs as they attempt to compete in the globalfood system.

Limitations to International Involvement1. The diverse interests of members in regional,

multi-commodity cooperatives may present a structur-al constraint to international involvement. Investmentin overseas assets or the importation of commoditiesfor domestic processing or marketing tends to provide

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commodity-specific benefits, and is likely to be per-ceived to provide greater benefit to some producersthan to others. The heterogeneity of the membership inregional cooperatives handling production supplies aswell as the marketing of multiple commodities, willmake such international investment controversial andcontested.

Disagreement about proposals for specific inter-national endeavors may coalesce into direct conflictbetween coalitions of members or between membersand management concerning the cooperative’s interna-tional activities, or on the relative importance ofgrowth or stability to the long-term interests of thecooperative. Resolution of such conflicts tends to be along process, and the window of opportunity for inter-national investment may be relatively small.

2. A related structural issue, noted by Kennedyand Spatz, is that cooperatives often have ties to adomestic resource base that may limit their interna-tional activity compared with IOFs. These ties includeboth the “physical plant” owned by the cooperative inits country of origin and the assets owned by itsfarmer-members, the value of which the cooperativehas been charged with protecting.

International activity of the cooperative which isperceived to devalue the productive assets of itsfarmer members (through, for example, enhancingmarkets for foreign grain relative to U.S. grain) is like-ly to be resisted by the membership, even though itmay enhance survival of the cooperative as a goingconcern. Other authors such as Bager have noted thatcooperatives are usually tied to particular social groupswithin particular nations and, by extension, to certain

same terms as an IOF, i . e . , s t r i c t l y i n s t r u m e n t a l , e c o -nomic terms. This undercuts a major resource of coop-eratives-the knowledge of how to organize producersfor collective action. This has traditionally been coop-eratives’ comparative advantage over IOFs in compet-ing for farmers business.

6. Important social, cultural, and political barriersto international involvement by cooperatives mayexist, such as language differences and nationalist ide-ology by cooperative managers and/or members.Nationalist ideology may represent a more significantbarrier for cooperatives than for IOFs because the prin-cipals in a cooperative (the members) have more voiceinto the decisionmaking process than principals in anIOF. Also, farmers from a given nation, as a group,have traditionally seen themselves in competition withthose from other nations for a share of limited interna-tional commodity markets.

Language is an especially significant barrier tointernational cooperatives because members comefrom multiple countries. The governance structure ofcooperatives demands a certain amount of memberparticipation in the decisionmaking processes to beeffective. Achieving this ideal becomes more difficult ifmembers do not share a common language.

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Cooperative A dvan tagesAlthough the globalization of agriculture and

food presents formidable challenges, there are areaswhere cooperatives may be at an advantage comparedwith IOFs, if they properly position themselves.

1. Cooperatives are perceived as reliable, qualitysuppliers. End-users in other countries often feel that byforming alliances with cooperatives they are aligningthemselves with producers and thus assuring them-selves of a consistent supply of agricultural and foodproducts. Furthermore, the organizational structure ofregional cooperatives can provide for the identity-preservation of agricultural commodities from the farm-gate through processing and export or through exportin their unprocessed form to foreign-based processors.

This provides an example of structure as enabling,rather than constraining, for cooperatives. Direct linksto producers and the nature of their commodity-mar-keting infrastructure has led to cooperatives beingsought out as joint venture or supply agreement part-ners by end-users in other countries, especially thosethat are highly concerned about quality, uninterruptedsupply, or with identity preservation of a product fromthe farm level to the foreign processing plant.

2. Cooperatives are often seen as highly ethical,trustworthy business partners by agricultural entities inother countries. Because U.S. cooperatives were formedin response to economic concentration and market fail-ure and have been historically associated with self-empowerment of economically or politically disadvan-taged small producers, they are not perceived asexploitive, capitalist organizations. This may make themattractive investors for developing nations seeking toavoid exploitation at the hands of TN&. Such a percep-tion has contributed to LOLs success in internationaldevelopment. Today’s U.S. agricultural cooperativeshave undergone significant transformation since theirfounding by small, agricultural producers and must con-tinue to prove that they are worthy of this reputation.

3. As the macro-level trend toward globalizationproceeds, it is constantly creating local and regionalniches in the food system that cooperatives may beuniquely qualified to fill. For example, in some con-sumer markets, the reaction to globalization has beenmanifested in increased concerns about food safetyand quality. Many consumers are becoming increasing-ly interested in not just how much their food costs, butin knowing where it comes from, how it gets to thesupermarket shelf, and what processing operations areperformed on it. Such consumers are increasinglyseeking out alternatives to conventional food channels.

In fact, a recent article suggests that in the future

as much as 12 percent to 18 percent of food may be pro-duced and marketed outside of mainstream channels(Smith). Cooperatives can play an important role in thisalternative food distribution system by using their mar-keting infrastructure to reestablish direct links betweenfood producers and consumers, thereby alleviatingconcerns over food safety and quality. However, doingso will necessitate moving beyond traditional commod-ity channels to encourage their members to experimentwith new products and production methods and seek-ing out new alliances with consumer groups.

4. As improved communication technology facili-tates the reorganization of highly centralized, corpo-rate bureaucracies into more flexible, diffuse organiza-tions, the federated cooperative system could be wellpositioned to compete in a “post-industrial” food sys-tem. Authors such as Piore and Sabel suggest thatglobalization involves a fundamental shift away fromsystems of mass production, to methods resemblingcraft production. These authors suggest that the pro-duction system around which modern industrialnations are built entails using semi-skilled workersand special-purpose machinery to produce standard-ized goods for mass markets. They contend this histor-ically specific system has reached its limits, as reflectedin recent economic slowdowns.

Piore and Sabel believe that future production ofconsumer goods will be characterized by “flexible spe-cialization,” a strategy of permanent innovation thatinvolves using highly skilled workers and multi-pur-pose machinery to produce a variety of goods cus-tomized to meet the needs of different groups of con-sumers. The federated cooperative system has thepotential to offer such flexibility through encouragingautonomy and innovation at the local level. Like theprocess of establishing producer-consumer linkages,adopting a strategy of flexible specialization wouldentail a decreased reliance on the mass marketing oftraditional commodities through current transporta-tion and processing infrastructures and a shift towardthe marketing of more specialized consumer products.

However, many large cooperatives are still con-solidating control and centralizing decisionmaking atthe regional level. Such trends in the past have tendedto stifle local innovation and have given regional coop-eratives a reputation as largely stagnant and resistantto change. The ability of these cooperatives to use thestrengths of their local associations is still in question,but our case studies provide two examples of decen-tralizing tendencies.

Harvest States is returning more local autonomyto some of its centrally held locations by combining

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their operations with a locally controlled, affiliatedmember cooperative in their region. This venture cen-tralizes such functions as risk management that offereconomies of centralization and specialization, but itlocalizes operational decisions. Farmland has recentlyestablished joint venture processing operations withsome of its local affiliates to combine the grain origina-tion strength of the local with the regional’s technicalexpertise and ability to generate investment capital.Such innovation and decentralization may be crucial tocooperatives survival in a global market.

Conclusions and RecommendationsOur main objective in this report is to provide a

broad conceptualization of the major issues faced bycooperatives during the globalization of agriculturaland food markets. The three cases show that someregional cooperatives are becoming quite active in inter-national markets, but they also highlight the difficultiesthey face in competing with IOFs on a global scale.

The framework of agency theory has been used toshow how cooperative members, managers, and direc-tors may hold incongruent goals for their cooperative,and may see international involvement as providing anopportunity to pursue personal goals at the expense ofthe general well-being of the cooperative and its mem-bership. This theoretical framework, when applied tothe case studies, suggested several possible limitationsfor international involvement by cooperatives.

The organizational structure of cooperatives maybe constraining in that the diversity of the membershipin regional cooperatives, as well as these cooperatives’ties to domestic resource bases and social groups, maylimit international involvement. The high-risk andlong-term nature of much international investmentmay also limit this activity by cooperatives. Finally, theperception of cooperatives as quasi-state entities andother social, political, and cultural barriers may limittheir international involvement. However, the organi-zational structure of cooperatives could be enabling aswell as limiting, by giving them an advantage in estab-lishing international alliances with end users of agri-cultural products. Cooperatives direct links to produc-ers make them a reliable, quality supplier for end usersand have contributed to an international image ofcooperatives as ethical, trustworthy business partners.Further, the organizational structure of cooperativescould enable them to take advantage of new technolo-gies which would put them at the forefront of post-industrial trends toward the decentralization of opera-tional control in industry. This same structure couldalso help them to establish direct producer-consumer

linkages and fill the local and regional niches that maybe an important part of the food system of the future.

Here are some specific recommendations on howcooperatives might draw on the enabling features oftheir organizational structure to take advantage ofopportunities offered them by this new global foodsystem.

1. Cooperatives need to seek out member com-mentary on questions involving international involve-ment. Cooperative participants must educate them-selves about the dynamics of the new global foodsystem. But this educational process should not bestrictly an endeavor of managers educating membersin the tenets of economic logic. While managers mustplay a crucial role in providing market information tomembers, management and boards must also allowthemselves to be educated by members. They need tomake a concerted effort to listen to farmers’ views ofthe globalization process and try to understand themultiplicity of goals that farmers may hold for theircooperative.

Then members, directors, and managers need towork together to address how the cooperative canmeet these goals, and what role international involve-ment for the cooperative may play in meeting them. Alikely outcome of such a mutual education process isthat international involvement could be directedtoward those endeavors that provide enhanced mem-ber service as well as increased earnings and ultimate-ly a secure organization. This evaluation is essential ifcooperatives are to continue fulfilling their historicalpurposes.

2. Cooperatives must seek international opportu-nities that they are uniquely qualified to fill. The glob-alization of agriculture and food is a multi-dimension-al phenomenon that opens up many new opportunitiesin food production, processing, and distribution, bothdomestically and internationally. Competing success-fully in the international arena does not require thatcooperatives go head-to-head with TNCs in a battle fora share of the traditional mass production and market-ing commodity channels. Cooperatives may be poorlyequipped to compete in this arena with better financedand “internationally seasoned” transnational IOFs.

Cooperatives must keep in mind the admonitionby Piore and Sabel that domestic and internationalconsumer markets of the future will reward “perma-nent innovation,“ flexibility, and attentiveness to con-sumer demands. Cooperatives whose strategy forinternational competition involves solely a redoublingof efforts to compete with IOF agribusinesses for ashare of traditional commodity markets at the global

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level may be resigning themselves to failure. Instead,cooperatives should seek business opportunities pro-vided by globalization in which their organizationalstructure offers them a comparative advantage overIOFs. At the local or regional level this may involvefacilitating producer direct-marketing of food productsto health- and food-safety-conscious consumers. On aninternational level, it might involve drawing on coop-eratives’ reputation as quality suppliers and ethicalbusiness organizations to establish alliances with for-eign-based end-users of agricultural commodities.

3. Closely related is the need of cooperatives tohelp members develop alternative products and mar-kets as well as new ways of adding value to traditionalagricultural commodities. Both domestic and interna-tional markets of the future are likely to increasinglycall for differentiated consumer products rather thanbuild commodities. Many regional cooperatives,including the three discussed in this report, havebecome fairly active in further processing of tradition-al agricultural commodities in recent years.

However, like other traditional commodity mar-kets, these processing sectors tend to be relatively con-centrated in the hands of a few large IOFs. The morepromising market opportunities of the future may liein development of new, customized products to meetspecialized consumer demands. These new productswill increasingly be produced, processed, and market-ed outside of traditional channels. Pursuing such alter-native markets will require considerable courage andinnovation from cooperatives.

4. Capitalizing on the opportunities mentioned inpoints (2) and (3) will require high levels of memberinvolvement and innovation within cooperatives.Creating an environment that will foster such a spiritof innovation may necessitate further decentralizationof control. At the regional level, this may require flat-tening hierarchical managerial structures and return-ing more operational autonomy to local affiliates, linestations, and operating units. At the local level, it mayinvolve increased member participation in formulatingstrategic goals for their cooperative, increased informalworking relationships between local associations, andcloser, but more informal relations between the localassociation and the regional cooperative staff. The fed-erated structure of many regional cooperatives offers amodel which could facilitate such decentralization, butit will take a conscious effort by the upper levels ofmanagement to make it a reality. Relinquishing suchcontrol is difficult and often goes against the historicaltendency toward centralization of decisionmakingwithin cooperatives. However, it may be essential if

cooperatives are to foster the spirit of “permanentinnovation” required by intensely competitive globalmarkets.

5. Finally, cooperatives need to broaden their def-inition of what international involvement entails andwhat goals may be served by it. To this point, the inter-national activities of U.S. agricultural cooperativeshave been primarily economic in nature. Proposals forinternational involvement are evaluated in instrumen-tal terms, based on potential earnings capacity. Such anarrow focus may obscure the potential social and cul-tural benefits offered by participation in a global mar-ketplace.

U.S. cooperatives can use their organizationalstructure to facilitate international cooperationbetween farmers of different nations by seekingalliances with producer-owned and -controlled organi-zations in other countries. Aside from any direct eco-nomic benefit they may provide, such alliances couldinitiate an exchange of information among agriculturalproducers of different nations that could result in cul-tural enrichment for all groups and enhance the quali-ty of rural life throughout the world.

There are many roles for cooperatives in the glob-al food system. This is partly because the globalizationof agriculture and food does not imply one monolithicglobal market, but many intricately intertwined local,regional, and international food production, distribu-tion, and consumption networks. Some large regionalcooperatives can and will persist for a number of yearsin head-to-head competition with the transnationalIOFs on a global scale, much as they have done foryears on a regional and national scale.

These organizations will continue to provide the“competitive yardstick” function in the global market-place that Nourse envisioned them providing in thenational economy. However, these cooperatives maybe able to improve their competitive position vis-24sIOFs by seeking innovative new working relationshipswith their local associations and farmer members thatinvolve developing customized products for differentgroups of consumers. Other cooperatives will operateentirely in these niches created by globalization, help-ing to shape and create alternative food systems.

If U.S. farmers are to maintain a direct presencein the international marketplace, cooperatives mustexplore the ways in which their organizational struc-ture is enabling in an international context, and theymust take into account social and cultural, as well aseconomic, benefits to international cooperation.

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Bibliography

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Bonanno, Alessandro, Lawrence Busch, William H.Friedland, Lourdes Gouveia, and Enzo Mingione.From Columbus to ConAgra, The Globalization ofAgriculture and Food. Lawrence, Kansas:University Press of Kansas, 1994.

Condon, Andrew M. “The Methodology andRequirements of a Theory of ModernCooperative Enterprise.” In Cooperative Theory:New Approaches, ed. Jeffrey S. Royer, ServiceReport 18,1-32. Washington DC.: USDA-ACS.,1987.

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Fama, Eugene F. and Michael C. Jensen.“Agency Problems and Residual Claims.” Journalof Law and Economics. 26:327-349,1983.

Garkovich, Lorraine and Janet Bokemeier.Farm Women and Agricultural Cooperatives inKentucky. ACS Research Report 65. WashingtonDC: USDA-ACS, 1987.

Gray, Thomas and Gillian Butler. “Toward anAxiomatic Theory of Membership StructuralDesign: With a Pilot Test from DHIACooperatives.” Presented at the Southern RuralSociology Association Meetings, Nashville, Tenn.,1994.

Heffernan, William D. “Agricultural Profits: Who GetsThem Now, and Who Will in the Future?“ resent-ed at the fourth annual conference, SustainableAgriculture: People, Products and Profits. Ames,Iowa: Leopold Center for SustainableAgriculture, 1994.

Heffernan, William, Douglas Constance and RobertGronski. “Concentration of AgriculturalMarkets.” University of Missouri: Department ofRural Sociology, 1994.

Jensen, Michael C. and William H. Meckling. “Theoryof the Firm: Managerial Behavior, Agency Costsand Ownership Structure.” Journal of FinancialEconomics. 3:305-360,1976.

Kennedy, Tracey L. and Karen J. Spatz. “Over There.Cooperatives Going Global to EnhanceMarketing Position.” Farmer Cooneratives.60(7):14-17, 1993.

Lasley, R. Paul. Organizational Structure and MembershipParticipation in Farmer Cooperatives. Ph.D. disserta-tion, University of Missouri-Columbia, 1981.

Murray, Gordon. “Management Strategies forCorporate Control in British Agricultural Co-operatives-Part 1.” Agricultural Administration.14:51-63,1983.

Nourse, Edwin G. “The Place of the Cooperative inOur National Economy.“ In American Cooperation1942 to 1945,33-39. Washington DC: AmericanInstitute of Cooperation, 1945.

Piore, Michael J. and Charles F. Sabel. The SecondIndustrial Divide. New York: Basic Books, Inc.,1984.

Rowan, Roy. “A Farm Co-op in the Hands of HighRollers.” Fortune. April 20:151-160, 1981.

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Staatz, John M. “The Structural Characteristics ofFarmer Cooperatives and Their BehavioralConsequences.” In Jeffrey S. Royer, editor,Cooperative Theory: New Approaches. ServiceReport 18,33-60. Washington DC.: USDA-ACS,1987.

Vitaliano, Peter. “Cooperative Enterprise: AnAlternative Conceptual Basis for Analyzing aComplex Institution.” American lournal ofAgricultural Economics. 65(5):1078-1083,1983.

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U.S. Department of AgricultureRural Business-Cooperative Service

1400 Independence Ave., SW, Stop 3257Washington, D.C. 20250-3257

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 United States Department of Agriculture (USDA) prohibits discrimination in its

programs on the basis of race, color, national origin, sex, religion, age, disability, political

beliefs and marital or familial 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, write the Secretary of Agriculture, U.S. Department of Agriculture,

Washington, D.C. 20250, or call l-800-245-6340 (voice) or (202) 720-I 127 (TDD). USDA

is an equal employment opportunity employer.