COOPERATIVES are formed because of a

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1 Cooperatives COOPERATIVES are formed because of a need to purchase or market a product. How can your FFA chapter operate as a cooperative? You and other FFA members are marketing a product agricultural leadership education. Just like any organization or business, an FFA chapter takes money. Consider ways in which you can organize your FFA chapter into a cooperative. Objective: Investigate the history of cooperatives by identifying the types, principles, and conditions that exist in the cooperative ownership structure. Key Terms: centralized cooperatives cooperative federated cooperatives international cooperatives local cooperatives margins mixed cooperatives national cooperatives regional cooperatives super local cooperatives vertical integration Cooperatives and Their Structures A cooperative is a business owned and controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use. If you were to use or purchase products from a cooperative, you could be an owner (member) of a cooperative. The more you use the co-op, the more you receive. If the cooperative has a profit at the end of the fiscal year, you would receive money back. You can easily understand the more you shop, the more you save slogan, but this actually could put money back into your pocket because earnings are re-allocated to members based upon amount of use. Page 1

2 THE BEGINNING OF COOPERATIVES Cooperatives have existed for many years. Early on, people would gather when harvesting larger animals. You could not harvest, skin, clean, cut up, and store the entire animal by yourself in one day. As a result, you would get people to help you. In turn, you would help them. You can probably recall the common Thanksgiving story; this sharing of the harvest is a prime example of a basic cooperative. There are, however, examples of cooperatives long before European settlement in the United States. Babylonians are noted in their development of agriculture cooperatives by pooling their resources during farming. In addition, the Chinese developed savings and loans similar to cooperatives we have today (known as credit unions). In North America, clearing land in preparation for the planting of crops and for barn raisings all required cooperative efforts. The first formal cooperative business is assumed to have been developed in 1752 by Benjamin Franklin. This cooperative was a mutual insurance company called the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. This cooperative was established to protect and rebuild citizens investments in their homes if destroyed by fire. Not long after the first organized cooperative, a farm organization including the Farmers Alliance and the Farmers Educational and Cooperative Union of America (known as the National Farmers Union) began to promote cooperative development. By 1900, at least 1,223 cooperatives were active in the United States. For example, Grange is a farmer organization established to improve the economic and social position of the nation s farm population (National Grange). It began to engage in cooperative marketing and purchasing. Cooperatives still exist in the United States, and we owe what we know to the British. The modern form of cooperatives was developed in Britain in the 19th century. They developed the structure that we use when developing cooperatives. Their development of cooperatives stemmed from a need during the Industrial Revolution. A group of 28 workers was dissatisfied with the community merchants FIGURE 1. Before the exchange of money for goods and services, people bartered. because they were charging them high prices for goods and not paying them well for products they made. During this time, many of the 28 people were working for corporations and were purchasing goods with money, which was just starting to be established as a common form to buy goods rather than trade them. As a result, these people banded together and began to sell their own goods to each other. Page 2

3 TYPES OF COOPERATIVES There are three types of cooperatives: purchasing, marketing, and service. Purchasing Purchasing (supply) cooperatives supply production agriculturists with input needs, such as seed, fertilizer, petroleum, chemicals, and farm equipment. For instance, if you were a farmer with 20 acres of strawberries or a farmer with 200 head of cows, you would need supplies to maintain production. You might need fertilizer, plants, and equipment if you are the strawberry farmer. If you are the cattle farmer/rancher, you might need feed, hay supplies, fencing, and vaccines. You will need to buy these supplies to help you manage your operation better, and a cooperative can supply you with the necessary materials. American farmers purchase about 28 percent of their supply needs through cooperatives. Marketing A marketing cooperative sells its members farm products and maximizes the return. Operations can be diversified and complex. Some marketing cooperatives perform a limited number of functions, while others vertically integrate. Vertical integration owns portions of the business or production process and, therefore, often adds value to the products for a higher return. In the previous example of the strawberry grower and the cattle rancher, the producers may belong to a cooperative. The cooperative will market their products and may even add value to them to make the worth more yielding. For example, the strawberry grower has 20 acres of strawberries in Florida. Twenty acres of strawberries is too many to sell locally, and yet 20 acres is not large enough to create your own company and to distribute regionally. In this case, it would be in the best interest of the grower to join with other growers in the area to form a cooperative. Then FIGURE 2. If you produce a small amount because of limited acreage, you may join with others to form a cooperative. the cooperative will be large enough to sell the berries across the nation and to provide facilities for cleaning the berries. If the cooperative is large enough, it may produce jelly as well. Some marketing cooperatives sell products in grocery stores under their own brand name. Some examples with which you may be familiar are Land O Lakes, Ocean Spray, and Florida s Natural. Marketing cooperatives serve their members in many ways, such as through bargaining for better prices, storing and selling members commodities, and processing farm products Page 3

4 into more consumer-ready goods. Agricultural marketing cooperatives account for approximately 30 percent of the production agricultural marketing volume. Servicing A service cooperative provides various services (e.g., pesticide applications, seed cleaning, and artificial insemination) to its members. Service cooperatives include organizations such as the Farm Credit System, a network of borrower-owned lending institutions. Rural electric cooperatives are another example of a service cooperative. If the strawberry grower had only wished to have the berries cleaned (not marketed), he or she may join with other area growers to develop a cooperative that cleans the berries. PRINCIPLES OF A COOPERATIVE As discussed previously, the development of principles was developed in Great Britain. In 1875, the Rochdale system was developed in carrying out its cooperative activities. The Rochdale system developed seven principles: Voluntary and open membership It is open to all people who are able to use the service and who are willing to become members, with no discrimination. Democratic member control The members have control of the cooperative s policies and marketing decisions. Members economic participation Members contribute equally to and democratically control the capital of the cooperative. Autonomy & independence This is a self-help organization controlled by its members. If the co-op raises capital from external sources, it is based upon member control. Education, training, and information It provides education and training for members, elected representatives, managers, and employees. Members should also inform the general public about cooperatives. FURTHER EXPLORATION ONLINE CONNECTION: Cooperatives Cooperatives can be beneficial for producers and consumers. For example, owners may earn more while decreasing costs for consumers. Many times, cooperatives are created as an economical alternative. Farmers often use cooperatives to purchase feed and seed. However, people across the nation can find local cooperatives where local produce may be available at a discounted rate. Because the cooperative often supports local producers, the impact on the environment is decreased in terms of transportation. To find out more about cooperatives, visit the following link: Page 4

5 Cooperation among cooperatives Cooperatives should work together through local, regional, national, and international cooperatives. Concern for community There should be a sustainable development of communities through policies and programs determined by members. COOPERATIVE POLITICS In the early 1900s, the United States government began to pass laws that provided a favorable environment for cooperative development. A commission established in 1908 by President Roosevelt noted that the country lacked adequate credit for the agriculture sector. This lead to the passage of the Federal Farm Loan Act in 1916, which lead to the creation of the Farm Credit System. Following earlier legislation, the Capper-Volstead Act of 1922 was crucial for agricultural marketing cooperatives because it allowed farmers to join together in cooperative marketing associations. This act was needed because during this time, there were many anti-trust laws breaking up larger corporations. In addition, the Sherman Antitrust Act allowed for the formation of agricultural cooperatives. Cooperatives were largely encouraged during the 1920s and 1930s because of the economic downturn from World War I. Presidents Harding, Coolidge, and Hoover supported cooperatives. As a result, the Agricultural Marketing Act of 1929 was passed. This legislation established a fund for cooperative loans. During the 1930s, the USDA recorded more than 12,000 agricultural cooperatives. Since this time, the number of cooperatives has been declining due to dissolution, mergers or consolidations, and acquisitions as cooperatives, like other businesses, adjust to a changing economic environment. However, revenues continue to increase. In 1997, the USDA reported 3,791 farmer cooperatives generating more than 106 billion dollars. FIGURE 3. Orange producers in Florida formed a cooperative that makes and sells Florida s Natural orange juice. REASONS FOR FORMING COOPERATIVES Cooperatives are formed to aid the members in a service, in marketing, or in the purchasing of materials. Cooperatives are formed from a need. Generally, cooperatives are developed from smaller groups of producers or suppliers to compete with larger corporations. For example, the Florida s Natural cooperative was formed by orange producers in Florida. The cooperative provides the producers with a facility to process their oranges into juice at cooperative-owned processing facilities. This brand-name item is sold in grocery stores across the United States. Page 5

6 Other Similar Examples Agricultural: Land O Lakes dairy Sun-Maid raisins Sunkist citrus Ocean Spray fruit and citrus Farmland processed meat Nonagricultural: Credit unions banking ACE hardware Best Western hotel Associated Press journalism AREAS OF OPERATION Cooperatives operate nationally and internationally. They can be classified in the following ways. TABLE 1. Cooperative Areas of Operation Local cooperatives operate in a single county in the United States. An example is a local farmers market. Regional cooperatives serve an area comprising numerous counties, an entire state, or a number of states. Examples vary according to what is needed in the area. In Illinois, Farmer Service (FS) is a cooperative that supplies seed, fertilizer, and feed to farmers. It is operated by the Illinois Farm Bureau. Super local cooperatives operate in two or more counties, often with several branch facilities. An example is an electric cooperative. National cooperatives serve a major portion or most of the United States. Examples are Sun-Maid, ACE, & Florida s Natural. International cooperatives operate in more than one country, with headquarters in the United States or in another country. Examples are Ocean Spray, Best Western, & Associated Press. COOPERATIVE GOVERNANCE Cooperative ownership and governance structure is developed through a state-chartered business; it is organized and operated as a corporation under applicable state laws. There are also notable attributes to cooperatives. Page 6

7 Control Management is controlled by a board of directors elected by the members. All or most of the directors must be members of the cooperative. Thus, the leaders are regular users of the firm s products or services. TABLE 2. Cooperative Attributes Capital Equity comes from the members rather than from outside investors. Earnings Earnings (or losses) are on business conducted on a cooperative basis, often called margins. Margins are the profit or loss of a business and are allocated to the members on the basis of the use they made of the cooperative during the year. Taxes Earnings from businesses with members are taxed once, as income of the corporation when earned or as income of the members when allocated to them. Life Members can routinely join or resign without disrupting the ongoing operations. TABLE 3. The Governance System of a Cooperative Operates in One of Three Systems In centralized cooperatives, individuals and business entities are members. Virtually all local and super local cooperatives are centralized. Regional, national, and international cooperatives may also be centralized. A centralized system has: One central office One board of directors elected by its members A manager (chief executive officer) who supervises all operations Business may be conducted through numerous branch stores or offices staffed by employees responsible to the central management team. Federated cooperatives have other cooperatives as members. Each member of a federated cooperative is a separate cooperative that owns a membership share entitling it to voting rights in the affairs of the federated cooperative. Local cooperatives commonly form federated co-ops to perform activities too complex and expensive for them to do individually. For example: Manufacturing production supplies Tapping major financial markets Marketing on a national or worldwide scale Each member of a federated cooperative typically has its own board of directors, manager, employees, and facilities to serve its members. The federated cooperative has its own hired management, staff, and a board of directors elected by and representing its member cooperatives. Mixed cooperatives have individuals and other cooperatives as members, and all are given voting rights representative of their membership. Page 7

8 Checking Your Knowledge: 1. When were cooperatives first developed? 2. Why were cooperatives developed? 3. What are the Rochdale seven principles? 4. Describe each of the seven principles. 5. List one agricultural and one nonagricultural cooperative and two reasons why they might have been developed. Expanding Your Knowledge: Identify a cooperative you learned about in the lesson or found on the Internet. Develop the purpose of the cooperative, why the co-op was developed, the category of its operation, and the structure within which it operates. Web Links: Introduction to Cooperatives National Council of Farmer Cooperatives The National Cooperative Business Association Agricultural Career Profiles Page 8