Cooperatives in the food industry

Types of cooperativesTypes of cooperatives History and statusHistory and status Relative importanceRelative importance Coop problemsCoop problems

What is a cooperative

a business voluntarily owned a business voluntarily owned and controlled by its member-and controlled by its member-patrons and operated for patrons and operated for them on a nonprofit or cost them on a nonprofit or cost basis.basis.

Cooperatives

Legal entity that permits Legal entity that permits group actiongroup action

Set up to serve and benefit Set up to serve and benefit those that use themthose that use them

Stockholders are membersStockholders are members

Requirements of a coop

Ownership and control of the Ownership and control of the enterprise must be in the enterprise must be in the hands of those who utilize its hands of those who utilize its services.services.

Requirements of a coop

Business operations shall be Business operations shall be conducted so as to approach conducted so as to approach a cost basisa cost basis

Requirements of a coop

Return on the owner’s Return on the owner’s invested capital shall be invested capital shall be limited.limited.

Coop v. Stockholder owned

CooperativeCooperative»One member - one vote

»Coop returns go to the users

Stockholder ownedStockholder owned»Stockholders vote by shares owned

»Firms maximize return to stockholders

Purpose of coops

Do what you can’t do aloneDo what you can’t do alone Act as a competitive yardstickAct as a competitive yardstick

Purpose of coops

Provide productsProvide products Stabilize expanding marketsStabilize expanding markets Allow farmers to move up and Allow farmers to move up and

down the food chaindown the food chain

Purpose of coops

Enhance returnsEnhance returns» Increased efficiency

» Improved market coordination

»Greater bargaining power

Reduce costReduce cost

What coops cannot do

Set price without supply controlSet price without supply control Eliminate middlemenEliminate middlemen Ignore customer/memberIgnore customer/member»Membership is voluntary

Types of cooperatives

MarketingMarketing PurchasingPurchasing ServiceService ProcessingProcessing

Marketing coop Perform marketing functionsPerform marketing functions»assembly, grading, packaging

36% of farm receipts in 199536% of farm receipts in 1995MilkMilk 100%100%GrainGrain 41%41%Fruit and vegFruit and veg 37%37%LivestockLivestock 9%9%

Purchasing cooperatives

Sell inputs to farmersSell inputs to farmers 28% of farm expenditures, 199528% of farm expenditures, 1995

PetroleumPetroleum 48%48%Fertilizer Fertilizer 42%42%Feed Feed 21%21%Seed Seed 11%11%

Service cooperatives

Common in the 1930-40sCommon in the 1930-40s Provide what may not Provide what may not

otherwise be providedotherwise be provided»REC

»Telephones

»Farm Credit

Processing cooperatives

Farmer owned vertical integrationFarmer owned vertical integration»Sunkist oranges, Ocean-Spray

»Sun-Maid raisins, LOL dairy products

»Farmland meats

Consumer cooperatives

Many of the same motivationsMany of the same motivations»Cost savings

»Provide what wouldn’t otherwise exist

»Control the input

ExamplesExamples»Food (organic), housing, daycare

Regions and commodities Leading coop statesLeading coop states» CA, WS, MN, Iowa

Percent of coop salesPercent of coop sales» Dairy 34%» Grains and oilseeds 27%» Fruits and vegs. 13%

Percent of suppliesPercent of supplies» Fuel 27%» Feed 24%» Fertilizer 19%

Types of organizations

Independent local associationsIndependent local associations»Relatively small and focused

Federate associationsFederate associations»Coop of local coops

Both build on Both build on strength in strength in numbersnumbers and and common needscommon needs

Types of organizations

Centralized associationsCentralized associations»Control at top by members and

direction given to the locals

Mixed associationsMixed associations

History and Status

Active periodActive period 1910-19301910-1930 ConsolidationConsolidation 1930-19501930-1950»Formed federations

GrowthGrowth 1950-19901950-1990» Increased membership

» Increased sales

Problems of coops

Issues of controlIssues of control»Vote by member or volume

»Leadership

FinancingFinancing»Can’t sell more shares

Reasons for coop failure Lack of sufficient capitalLack of sufficient capital» Less than efficient size adds to cost

Inadequate membership supportInadequate membership support» Variability in volume

Ineffective managementIneffective management» Competitive market for managers

New Age cooperatives

Value added closed coopsValue added closed coops»Ethanol production

»Turkey processor

»Pork production

»Ethanol and beef

»Eggs

New Age Closed

Limited membershipLimited membership Investment and commitmentInvestment and commitment»Cash and product

Stock appreciates in valueStock appreciates in value»Can be sold

New age example

Value added corn processorValue added corn processor»Farrow to finish hog production

»2500 sows

»8 nurseries

»18 finishers

»$7.5 million for facilities and operation

Value added corn processor

RequirementsRequirements»40% equity = $3 million

»600,000 bu of corn/year

100 shares100 shares»$30,000/share

»6,000 bu corn/year

Value added corn processor

Members required to deliver Members required to deliver corncorn

Paid the current market pricePaid the current market price Profits paid on a bushel basisProfits paid on a bushel basis

Iowa Initiatives

Ethanol plantsEthanol plants Iowa Cattlemens AssociationIowa Cattlemens Association Iowa Premium PorkIowa Premium Pork