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Dr. Gary BresterDept. of Agricultural Economics and Economics

Montana State University

AGBE 445

Bozeman, MT

Cooperative Business Structures

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OUTLINE

1. Firm Ownership Structures

2. User/Owner Firms

3. Scope of Cooperatives

4. Economic Rationale

5. Issues Facing Cooperatives

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Firm Ownership Structures

1. Firms are owned by peoplea. Some people own firms for

investment purposesb. Some people own firms for

personal reasonsc. Of course, some firms are owned

by other firms2. Firms may be publically-owned3. Other firms are privately held4. And, some firms are owned by those

who also use the services of the firm

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OUTLINE

1. Firm Ownership Structures

2. User/Owner Firms

3. Scope of Cooperatives

4. Economic Rationale

5. Issues Facing Cooperatives

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Rochdale Principles1. Set of ideals (seven) for cooperative

businesses established in Rochdale UK, 1844

2. Summary of general principles: a. User-Owned

Goal is proportional to useb. User-Controlled

Board of Directors consists of users/members

Not proportional in generalc. User-Benefits

Profits distributed to users based on proportionality of use

Lower (higher) prices for services (goods)

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User/Owner Firms

1. Fraternal Organizations

a. Serve a communal objective

b. Devote net earnings exclusively to

a cause such as a charity, religious

organization, or educational group

c. Must have a fraternal purpose

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User/Owner Firms

1. Fraternal Organizations (continued)

d. Operate under a lodge system Parent organization Subordinate lodges or branches

e. Examples include Thrivent Financial Knights of Columbus Sons of Norway

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User/Owner Firms

2. Mutual Companiesa. Designed to meet needs of members

Need to be profitable for continued sustainability

May have additional purposes beyond profit maximization

Do not usually obtain capital from members through direct investment

b. Do not have external shareholders

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User/Owner Firms

2. Mutual Companies (continued)

c. Services that are unique to a group

For example, the insurance needs of rural communities

d. Examples

Mountain West Farm Bureau Mutual Insurance Company

Liberty Mutual

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Cooperatives

1. Rural Electric/Telephone Cooperatives

2. Financial Cooperatives

3. Open Cooperatives

4. Closed (New Generation) Cooperatives

5. Non-Traditional Cooperative Structures

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Cooperatives

1. Rural Electric/Telephone Cooperativesa. Public utility cooperatives that

developed infrastructure especially in rural areas

b. Rural electric cooperatives established by the New Deal

c. Telephone cooperatives established in 1951

d. Profits are re-invested or distributed as patronage

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Cooperatives

2. Financial Cooperatives

a. Cooperatives developed to provide financial services to members

b. Often developed to meet specific needs of their members

c. Usually serve a specific group

Montana Educators Credit Union

Northwest Farm Credit Services

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Cooperatives3. Open Cooperatives

a. Members/owners result from business patronage

b. Member investment is not requiredc. Profits are allocated to members

based on patronaged. A variety of mechanisms are used to

return equity to memberse. Corporate income taxes can be

avoided if profits are distributed in a specified manner

f. Example: Town & Country Supply

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Cooperatives4. Closed (New Generation) Cooperatives

a. Members/owners are based on equity investments

b. Share investments provide a right and an obligation to participate

c. Profits are distributed through patronage returns

d. Working capital is often accumulated through unit retains

e. Shares can be traded to other usersf. Share values changeg. Example: Western Sugar Cooperative

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Cooperatives5. Non-Traditional Cooperative Structures

a. Cooperatives have become creative in finding ways to acquire equity capital from non-members Preferred stock represents

non-voting rights to profits Limited Liability Corporations

have been bundled (blurred?) in co-ownership arrangements

Joint ventures provide another alternative

b. Example: Wyoming Sugar Co. LLC

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OUTLINE

1. Firm Ownership Structures

2. User/Owner Firms

3. Scope of Cooperatives

4. Economic Rationale

5. Issues Facing Cooperatives

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Scope and Scale

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01

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0Cooperatives' Share

Agricultural Commodity Marketing Farm Supplies

Per

cen

t

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Scope and Scale

1. National Rural Electric Cooperatives

a. 911 Electric utilities

b. $97 Billion in assets

c. $34 Billion in sales revenue

2. Montana Rural Electric Cooperatives

a. 24 Electric utility companies

b. 155,650 member/owners

c. 3 billion kWh per year 22% of Montana total electricity

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Scope and Scale

Montana Oil Refining Capacities

Phillips 58,000

CHS Inc. 55,000

ExxonMobil 60,000

Calumet 10,000

Barrels Per Day

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OUTLINE

1. Firm Ownership Structures

2. User/Owner Firms

3. Scope of Cooperatives

4. Economic Rationale of Cooperatives

5. Issues Facing Cooperatives

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Cooperative Rationale

1. Competitive yardstick

2. Market access

3. Pooling risk

4. Participation in value creation

a. Investments in upstream and downstream business activity

b. Reduce transactions costs

c. Improve quality

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OUTLINE

1. Firm Ownership Structures

2. User/Owner Firms

3. Scope of Cooperatives

4. Economic Rationale

5. Issues Facing Cooperatives

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Cooperative Issues

1. Capital acquisition2. Equity management3. Corporate/Personal income taxes4. Strategic business management5. Director recruitment and development6. Management development7. Cooperative education

a. Public educationb. Student educationc. Employee education

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QUESTIONS