DOCUMENT RESUME

ED 078 301 AC 014 504

AUTHOR Schaars, Marvin A.TITLE Cooperatives, Principles and Practices.INSTITUTION- Wisconsin Univ., Madison, Univ. Extension.PUB DATE 71NOTE 108p.

EDRS PUCE . MF-$0.65 HC-$6.58DESCRIPTORS Classification; *Cooperatives; Financial Support;

History; *Information Sources; Laws; Organization;Public Relations; *Teaching Guides

ABSTRACTA teaching aid and information source on activities,

principles, and practices of cooperatives is presented. The followingtopics are included: (1) Basic Interests of People, (2) LegalOrganization of Business in the United States, (3) what Is aCooperative? (4) Procedure for Organizing Cooperatives, (5) howCooperatives Are Run and Managed, (6) Financing of Cooperatives, (7)

Keeping the Members and Public Informed, (8) Kinds of Cooperatives,(9) Legal Basis, (10) Historical Development, (11) History ofCooperatives in the United States, (12) Extent of CooperativeBusiness, (13) Benefits from Cooperatives, and (14) Limitations ofMarketing, Purchasing, and Service Cooperatives. (cm

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COPr PRINCIPLES

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U S DEPARTMENT OF HEALTH,EDUCATION & WELFARENATIONAL INSTITUTE OF

EDUCATIONTHIS DOCUMENT HAS BEEN REPRO A1457OUCEO EXACTLY AS RECEIVED FROMTHE PERSON OR ORGANIZATION ORIGINATING IT POINTS OF VIEW OR OPINIONS

0 STATED DO NOT NECESSARILY REPRESENT OFFICIAL NATIONAL INSTITUTE OFEDUCATION POSITION OR POLICY JES,

PRACTICES

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This is a second revision of this publication and supersedes Circular 420 originallyprepared in 1936 by the following members of the Department of Agricultural Economics:Chris L. Christensen, Asher Hobson, Henry Bakken, R. K. Froker, and Marvin A. Schaars.The first revision was made in 1952 by Asher Hobson vv'th special acknowledgments toProfessor Charles Bunn of the Law School, to Marvin A. Schaars and Karl Shoemaker ofthe Agricultural Economics Department, and to Leslie Drayton, a graduate researchassistant. This second major revision in 1970-71 was made by Marvin A. Schaars with theexception of the section on "Keeping the Members and Public Informed" which wascontributed by Francis Groves of the Agricultural Economics staff.

COOPERATIVES,

PRINCIPLES AND PRACTICES

Marvin A. Schaars

Marvin A. Schaars is professor of agricultural economics, College of Agricultural and Life Sciences, University of WisconsinMadison and

Division of Economic and Environmental Development, University of WisconsinExtension.

University of Wisconsin Extension, Gale L VandeBerg, director, in cooperation with the United Stales Department of Agriculture andWisconsin

counties publishes this information to further the purpose of the May 8 and June 30, 1914 Acts of Congress, and provides equal opportunities in

employment and programming This publication is available to Wisconsin residents from county Extension agents It's available to ouvaf-statepurchasers from Agricultural Bulletin Budding, 1535 Observatory Drive, Madison, Wisconsin 53708 Editors, before publicizing, should contact

the Aletcultutal Bullet.. Building to determine its availability Piles two dollars plus postage.

FOREWORD

According to Wisconsin Statutes 37.29 and 118.08(8) passed in the mid-1930's, cooperative marketing,consumers' cooperatives, and conservation of natural resources shall be taught in the University, countyteachers' colleges, high schools, and schools of vocational, technical, and adult education. And Wiscon-sin Statute 118.19(6) requires adequate instruction in cooperative marketing and consumers' cooperationfor a certificate to teach courses in economics, social studies, or agriculture in the state. The statutealso directs the State Superintendent of Public Instruction and the Dean of the College of Agriculture tocooperate in preparing outlines for teaching cooperation in Wisconsin's public schools.

To meet these requirements, the University has had courses in cooperation and conservation of naturalresources for many years. It has also met the mandate to prepare teaching materials for the publicschools.

This publication, the second revised edition of the original appearing in 1936, is not only designed as ateaching aid but also as a source of information for anyone interested in the principles and practices ofcooperatives. Major emphasis is placed upon fanner cooperative activities since most of the associationsin this state are farmer owned and controlled. The volume of urban consumer cooperatives, while impor-tant, is a small part of the total business done cooperatively.

Major emphasis is also placed on cooperative marketing practices since the bulk of farmer cooperationin this state and in the nation is in the marketing of farm products. In 1968-69, four-fifths of the totaldollar volume of farmer cooperative business was in marketing, one-fifth in cooperative purchasing -both in Wisconsin and nationwide. Except for the large increase in urban credit unions, it appears thatmost cooperative activity will continue to be among farmers for some time despite the shrinking numberof farms and rural population.

CONTENTS

BASIC INTERESTS OF PEOPLEPRODUCERS INTERESTS

WORKERS OR LABORERS INTERESTS

CONSUMERS INTERESTS

BUSINESSMEN'S INTERESTS

INDIVIDUAL EFFORTCOLLECTIVE EFFORT ON A SELF-HELP BASIS

GOVERNMENTAL EFFORT

A COMBINATION OF EFFORTS

LEGAL ORGANIZATION OF BUSINESS IN THE UNITED STATESGC7ERNMENT BUSINESS

PRIVATE BUSINESSES

I-xlividually-owned

Partnership

Corporation

WHAT IS A COOPERATIVE?DISTINGUISHING FEATURES

FUNDAMENTAL CONCEPTS

BASIC PRINCIPLES

Control by Member Users

Nonprofit Operations

Limited Dividends

SUPPLEMENTARY PRINCIPLES

LEGAL IDENTIFICATION

SIMILARITIES WITH NONCOOPERATIVE BUSINESSESDIFFERENCES BETWEEN COOPERATIVE AND NONCOOPERATIVE BUSINESSES

PROCEDURE FOR ORGANIZING COOPERATIVESPRELIMINARY MEETING

WORK OF THE SURVEY COMMITTEE

Is There a Need for a Cooperative?

What is the Potential Volume of Business?

Is a Good Manager Available?

What Facilities Will Be Needed?

What Funds Are Needed to Begin Operations?

Estimated Cost to Run the Cooperative?

What Experience Have Potential Members Had With Cooperatives?

What Miscellaneous hems Need to be Considered?

REPORT OF THE SURVEY

WORK OF THE ORGANIZING COMMITTEEMembership Drive

Incorporating the Association

Arranging for First Meeting of Members

HOW COOPERATIVES ARE RUN AND MANAGED

MEMBERS

V

DIRECTORS

Duties and Responsibilities

Large Boards and Committees

Election of Directors

Qualifications of Board Members

MANAGER

EMPLOYEES

OPERATING PRACTICES

Buying Products Outright from Members

Handling Products on a Separate Account Basis

Pooling Products

Selling on a Commission Basis

Bargaining for Prices

RETAIL AND WHOLESALE ASSOCIATIONS

DEVELOPMENTS IN OPERATING PRACTICES AND ORGANIZATIONS

2FINANCING OF COOPERATIVES

P) iNCIPLES OF FINANCING

USE OF CAPITAL

Defraying Organizing Expenses

Providing Facilities (Fixed Assets)

Meeting Operating Expenses (Working Capital)

Financing Farm Production

KINDS OF CAPITAL

SOURCES OF CAPITAL

EVIDENCES OF EQUITY CAPITAL

Common Stoe.

Preferred Stock

Certificates of Equity

Membership Certificates

Capital Book Credits

Reserves

REVOLVING CAPITAL PLAN OF FINANCING

How Capital is Accumulated

Methods of Showing Investments

Redemption

Advantages

Disadvantages

RESERVES

FINANCIAL STATEMENT

Balance Sheet

Income and Expense Statement

4KEEPING THE MEMBERS AND PUBLIC INFORMED

NEED FOR EDUCATION PROGRAMS

PAYOFF IN MEMBER COMMUNICATIONS

NEW EMPHASIS ON COMMUNICATIONS

The New Generation

Cooperative Growth

Cooperative Image

PREREQUISITES FOR SUCCESSFUL COMMUNICATIONS

Cooperative Commitment

Management

Products and Services

Planning

Opportunities for Feedback

vi

WHAT TO COMMUNICATECooperative Information

Technical Information

Economic Information

COMMUNICATIONS METHODS

WHEN TO COMMUNICATE

4KINDS OF COOPERATIVES CLASSIFICATION BY sr . JCTUR E

CLASSIFICATION BY TYPE OF MEMBERSHIP

Local Associations

The Federation

The Centralized Association

Combination Form of Organization

National Associations

CLASSIFICATION BY FUNCTIONS

Production Associations

Processing Associations

Sales or Marketing Associations

Purchasing Associations

Service Associations

5THE LEGAL BASIS FOR COOPERATIVES

FEDERAL LAWSCapper-Volstead Act of 1922

Other Federal Laws

STATE LAWS

TAXATION OF COOPERATIVES

MARKETING CONTRACTS

PurPonTypes of Contracts

Duration of Contracts

Remedies for Breech

Filing Contracts Third Party Notice

Contracts No Substitute for Efficiency

HISTORICAL DEVELOPMENT OF COOPERATIVES ABROADBEGINNINGS IN ENGLAND

Action to Alleviate Distress

Early Cooperative Societies

The Owenites

Dr. William King Father of Distributive Cooperation

The Rochdale Pioneers

The Christian Socialists

COOPERe...IiVE CREDIT IN GERMANY

DANISH CCOPERATIVES MARKETING AND FARM SUPPLY

COOPERATIVES IN OTHER LANDS

7HISTORY OF COOPERATIVES IN THE UNITED STATES

SPORADIC BEGINNINGS, 1810-1870

GENERAL FARM ORGANIZATION INFLUENCEPERIODS OF COOPERATIVE DEVELOPMENT

Before 1870 Isolated Locals, Trial and Error Period

187011100 Granger and Alliance Influence

1900.1920 Expansion, Governmental Approval, and Encouragement

Decade of 1920's One of the Most Active in Cooperative History

After 1930 Growth, Diversification, Bigness, Mergers

VII

CONSUMER COOPERATIVE - RURAL AND URBAN DEVELOPMENTS

COMMUNAL SOCIETIES - LIVING, WORKING, WORSHIPPING TOGETHER

STATE AND NATIONAL ORGANIZATIONS- COUNCILS, LEAGUES, INSTITUTES, TRADE ASSOCIATIONS

EXTENT OF COOPERATIVE BUSINESSURBAN CONSUMER COOPERATIVES

COOPERATIVES IN WISCONSIN

8BENEFITS FROM COOPERATIVES

BENEFITS TO MEMBERS

COMMUNITY WELFARE

9LIMITATIONS OF MARKETING, PURCHASING, AND SERVICE COOPERATIVES

PRICE CONTROL

PRODUCTION COSTS

ELIMINATION OF THE MIDDLEMAN

CONTROL OF AGRICULTURAL SURPLUSES

OTHER LIMITATIONS

94GLOSSARY

viii

COOPERATIVES, PRINCIPLES AND PRACTICES

Cooperatives are composed of people. Peoplein all walks of life--people everywhere--havegrouped together to do collectively what verylikely could not be done at all individually, ornot as well. Such group action has, no doubt,existed since the beginning of time. Self-helpthrough mutual aid has enabled man to progressfrom an uncivilized to a highly civilized state.Despite the great advances that have been made,he still finds much benefit from working withothers.

Since the word "cooperative" or "cooperation"is properly applied to many group activities,note that in this publication it refers to thosecollective activities of an economic and socialcharacter that center largely around the busi-ness of selling, buying, making a living, andservicing the needs of its members. Becausemost cooperatives today meet rural needs, themain emphasis will be on farmer cooperativeassociations.

BASIC INTERESTS OF PEOPLE

Every person has wants he wishes to satisfy.These may be such basic creature wants as thedesire for air, water, food, clothing, and pro-tection from the elements as well as the psycho-logical ones calling for love, companionship,sympathy, respect, honor--to mention a few.

Some may say that the greatest want or desireof all is for money. Yet money in itself is onlyvaluable to the extent that it can purchase goodsand services and, in some circles, add to thepresage of the person having it. By and largethe great majority of people strive to elevatetheir plane of living--to enrich life through com-fortable living, education of their children, re-siding in a respectable neighborhood, havingreal friends, and in other ways getting personaland family satisfactions out of life.

Although every person wants, in general, toimprove his manner of living, his needs andinterests will vary. In particular, those whobelong to cooperatives have different economicreasons for belonging depending on whetherthey are producers, workers or laborers, con-sumere, or businessmen.

PRODUCERS' INTERESTSAgricultural producers are chiefly interested

in efficiently marketing their products so thatthe money received will cover all the productioncosts plus a profit on the investment. Ma Id-

mizing net returns `nom farming is the goal.Tnis calls for more than effective marketing -it also calls for keeping production costs as lowas possible. Production costs include seed,fertilizer, chemicals, machines, labor, taxes,interest payments, sand many service costs(tractor repairs, veterinary fees, etc.). Themoney received (farm prices) minus productioncosts equals the net farm income from farmoperations. Cooperatives can both marketproducts effectively and sell items needed forproduction in order to increase net farm income.

WORKERS' OR LABORERS'INTERESTS

Workers or laborers are principally interest-ed in wages, fringe benefits, general workingconditions, secure employment, and promotions.To this end, workers have organized bargainingassociations (labor unions) to bargain collective-ly with the management of individual firms orwith management representatives A a wholeindustry.

In some countries, more so than in the UnitedStates, workers have set up cooperatively ownedfactories in which the workers have full manage-ment responsibility and stand to gain or losefrom their cooperative undertaking. In Canadaand India there are cooperatively owned farms

as there are in Israel. On the West Coast in thiscountry, workers owned plywood factories co-operatively; and in the Appalachian coal fieldssome mines are run cooperatively by the miners.Note that these places of employment are ownedand run by the workers - these should not beconfused with factories owned by cooperativeswhere, of course, people work on a strictly em-ployer-employee basis.

CONSUMERS' INTERESTSConsumers are primarily interested in real

income, that is, in the best goods and servicesfor the dollars spent. They are interested inthings that are used in day to day living. Hence,consumers are spenders whereas producers areearners. As spenders, consumers naturallywish to get as much as possible for their dollarsin quantity and quality. Consequently, consumersinform themselves, watch ads, shop around, andalso run businesses cooperatively to stretch thefamily's income.

BUSINESSMEN'S INTERESTSBusinessmen or middlemen make their living

from buying resaleable goods at one price andselling them at a sufficiently higher price tocover all costs and provide a profit (except foragent middlemen who receive a fee for bringingbuyer and seller together). Their interest inbusiness is chiefly to maximize profits. Thisdoes not imply neglect of service to the customernor indifference toward consumer wants and in-terests. To maximize profits, unit costs ofoperations must be kept at a minimum. To thisend, businessmen have organized cooperativebuying associations, have become members ofvoluntary chain store organizations, and throughtheir trade associations have generally attemptedto improve their business status.

INDIVIDUAL EFFORTWhatever, the interest, the big question is --

how can this be best accomplished? Unquestion-ably, much can be done by one's self. Somefarmers are expert salesmen and know when,where, and how to sell to good advantage. Someconsumers are very adept at smart buying. Andsome individual business firms have repeatedlydemonstrated their shrewdness in timing pur-chases and sales. Too often, however, thesecases are the exception rather than the rule.The sharp decline in the number of unaffiliatedretail grocery stores is mute testimony to the2

difficulties of survival in a highly competitiveeconomy. Many farmers are more efficient andknowledgeable as producers than as marketersof products or skillful buyers of farm supplies.Individualism has its merits but also many han-dicaps.

COLLECTIVE EFFORTON A SELF-HELP BASIS

Self-help through mutual assistance is anotherway to achieve the interests previously named. Co-operating with others has often proven a satisfac-tory way to help one's self while at the same timeassisting others in helping themselves. Suchgroup action does not eliminate self - interest whichis a driving force in private enterprise. In fact,being altruistic and working with others may beone of the best ways to put forward one's self-in-terest.

GOVERNMENTAL EFFORTIn the United States relatively little commerce

and industry is carried on by county, municipal,state or federal governments. However, somethings can be done most effectively by the govern-ment. This is especially true if exceptionallylarge risks are involved in an enterprise so thatno private group would invest its capital norwould any banker loan money for it. Or, the pro-ject may require so much capital (as the buildingof a huge dam) that only the government couldarrange for its construction. Sometimes a cen-tral government may wish to monopolize the pro-duction and marketing of a product to earn reve-nue for the government (tobacco, for instance).In less developed nations, governments may en-gage in numerous business enterprises which inmore developed countries are operated eitherprivately or cooperatively.

A COMBINATION OF EFFORTSIt is not uncommon for the government to col-

laborate with business firms to achieve goalswhich firms acting independently might not ac-complish otherwise. Such gove:nment assistancemay be quite indirect such as providing marketnews, market statistics, mortgage guarantees,tariff protection, establishing mandatory grades,curbing monopolies, passing enabling legislationfor cooperatives, and fostering competition. Orit may be direct through such action as grantingof loans (Rural Electrification Association loans)permitting use of quality designations on products(United States Department of Agriculture AA seal

on butter), or federal inspection as to the purityof products (meats stamped "U. S. Inspected").Such collaboration is carried on largely in the in-

terests of the citizens as a whole rather than forthe benefit of particular firms or the people whodo business with them,

COOPERATIVES ARE PRIMARILY MADE UP OF PEOPLE. ALTHOUGH CAPITAL, EMPLOYEES, VOLUME

OF BUSINESS, AND GOOD BUSINESS PRACTICES ARE ALL VERY IMPORTANT FOR SUCCESSFUL OPERA-

TIONS, THE MOST IMPORTANT ELEMENT IN THE ASSOCIATIONARE THE PERSONS WHO MAKE UP THE

MEMBERSHIP.

LEGAL ORGANIZATIONOF BUSINESS IN THE UNITE"

The types of business enterprises within acountry may be divided into two major categories,governmental and private or nongovernmental. InRussia and other communist countries business islargely owned and run by the governments. Inthe United States, few businesses are owned oroperated by government - and those that are, aredone so to enhance public welfare. More specif-ically, the purposes are:

1. To control a business such as the liquorbusiness.

2. To obtain revenue for the government aswith tobacco monopolies.

3. To operate what is best done as a monopoly,as in the case of basic services such aspower, light, water, transportation, andutilities.

4. To carry out government policies such asbuying up farm products to support farmprices.

5. To provide a widely needed service, evenif a loss in operations is experienced, aswith the U. S. postal service.

Since some persons mistakenly believe thatcooperatives are some sort of quasi-governmen-tal institutions, it may be well to point out a fewother characteristics of governmentally-runbusinesses.

GOVERNMENT BUSINESSUnlike private business, a governmentally-run

business does not need to earn a profit becausethe government has the power to tax to make upany deficit. It can also print money, if necessary,to pay its bills; and it can also exclude competi-tion by edict to keep the market for itself. Noprivate business, cooperative or otherwise, hasthese powers. Therefore, it should be clear thatcooperative businesses are unlike governmentally-operated ones. Internal controls, management,financing, and operational procedures also aregreatly different for these two kinds of businessesas will be seen.

4

-TES

PRIVATE BUSINESSESAll nongovernment operated business is, there-

fore, private business including that of cooper-atives. Through common usage, the term privatebusiness often refers to noncooperative, nongov-ernmental business and is considered the oppositeof cooperative business. However, it should beapparent that cooperatives are also private busi-nesses - but with cooperative ownership.

From the standpoint of legal organization, thereare three basic types of private business organ-izations in our free enterprise system: individ-ually owned businesses; partnerships of two ormore persons; and corporations. Corporationsmay be either profit-type (standard investor -o:iented) or nonprofit-type (patron-oriented orcooperative). Since these two differ in manyrespects, it may be just as well to classify theforms of business organizations as:

1. Individually-owned businesses or sole pro-prietorships.

2. Partnerships.3. Standard or regular corporations.4. Cooperatives.

Table 1 summarizes the differences in methodsof operation of these four types of businesses.

Table 1. Methods of Doing Business Under Private Enterprise 1

Features compr

Types of Business

Individual Partnership

Corporation

Investor-Oriented Cooperative.

1. Who uses the services?

2. Who owns the business?

3. Who votes?

4. How is voting done,

5. Who determines policies?

6. Are re' urns on ownershipcapital limited?

7. Who gets the operatingproceeds?

Nonownercustomers

The individual

None necessary

None necessary

The individual

No

The individual

Generally nonownercustomers

The partners

The partners

Usually by partners'share in capital

The partners

No

The partners in proportionto interest in business

Generally nonownercustomers

The stockholders

Common stockholders

By shares of commonstock

Common stockholdersand directors

No

The stockholders inproportion to stock held

Chiefly the ownerpatrons

The member-patrons

The member-patrons2

Usually one-memberone-vote

The member-patronsand directors

Yes 8% or less

(usually less, if

any) 2

The patrons on apatronage basis 2

"Cooperatives in Agribusines, Educational Circular 33, Farmer Coop. Service, U.S. D.A., Washington D. C., 1988.

;Usk cooperative Plieellilet

Individually-ownedOne person owns and controls the operations.

He assumes the risk of ownership, keeps allprofits, and bears any losses. The owner's de-cisions are final. He is personally responsiblefor the investment in the business, the actions ofhis firm, and for any growth or expansion of hiscompany.

There are advantages to this method of doingbusiness. The owner is his own boss - he doesnot take orders from anyone. Any net profits be-long to him and need not be shared with anyone.(This does not preclede a profit-sharing plan withemployees.) Individually-owned businesses areeasy to set up - no incorporation papers need tobe drawn, no incorporation fee need be paid, nobylaws need to be adopte Personal talents andinitiative are personally rewarded and, thus, theincentive to achieve is compensated.

Individually-owned businesses also have handi-caps. The available capital is limited to what theowner has or can borro'1. As a result, many ofthese firms are small. Business losses are borneby the owner and not shared with others. Busi-ness debts are the unlimited liability of the owner.Decision making rests in one individual, so it islimited to the business ability of the owner. Also,unless otherwise provided for, the business ceaseswith the death of the owner.

PartnershipWhen two or more persons mutually agree to

own and operate a business jointly, without theformality of incorporating, then a partnership isformed. Each person in the combine is a partnerbut not necessarily on an equal basis. Togetherthey pool their resources, borrow on the strengthof all the partners, share in the decision-makingprocess and collectively bear the debts. Theydivide the net earnings of the business as well asits losses according to their contractual agree-ment. The additional capital and skills, trainingand experience that the several partners can pro-vide strengthens the organization.

There are some disadvantages too. Each part-ner is personally liable for any and all debts ofthe business and commitments made by any nart-ner (so-called unlimited liability. There are also"limited partnerships" in which partners' liabilityis limited.) The partnership ends with the deathor withdrawal of any partner. Also, the partnersneed a high degree of "give and take" if the ar-rangement is to last.

CorporationA corporation is a legal entity created by law.

Its owners hold shares of common voting stock.(In a nonstock corporation, shares of commonstock are not issued. Instead owners generallypay a membership fee.) The powers of the cor-poration are derived from the corporation lawsunder which the organization took place. With

5

few exceptions, business firms are incorporatedor chartered under state rather than federal lawsand are generally under the laws of the statewhere the principal or home office of the companyis located.

The Advantages to Incorporating a Business Are:

Stockholders have limited legal liability. Inthe event of losses or bankruptcy each stock-holder can only lose the amount representedby the stocks he owns (assuming he is not acreditor of the corporation).

The corporation can go on indefinitely unlessit is purposefully dissolved or was incorpo-rated for a specific number of years - thedeath of a stockholder or the sale of his stockdoes not terminate the corporation.

Investment in the corporation through thepurchase of shares of stock can be madeeasy for large and small investors sinceshare values can be kept low enough toattract many investors - savings of manypeople can be used by business undertakingsas a result.

Transfer of ownership rights through thesale of stock is accomplished relativelyeasily.

Since the corporation is separate and distinctfrom any of its stockholders (except in thecase of a corporation held tightly by one or afew persons), its ability to borrow money isgenerally greater than that of any of its indi-vidual owners - hence, greater businessactivity may be undertaken.

A corporation operating profitably can gen-erate capital for business growth and expan-sion. Such capital can be more easily ac-quired than through additional sales of sharesof stock.

Major Disadvantages Are:

Each stockholder has limited, and oftentimesvery little, if any, control of the business.Proxy voting (where one person is authorizedby other stockholders to vote their stockhold-ings) and cumulative voting (where a holderdoes not vote on certain issues but is permit-ted to cast correspondingly more votes onanother issue) may give more control to somestockholders than to others.

Many corporations are impersonal, "cold,"and "soulless." Directors and stockholdersfrequently condone actions in the name of a

6

corporation which would ne-, er be permittedif identified with any particular person.

There are costs involved in forming corpo-rations, incorporating them, keeping stock-holders informed, distributing dividends,paying corporate taxes, reorganizing theirstructure and dissolving them.

Profits of a corporation are subject to doubleincome taxation - first, at the crrporationlevel and, again, at 'he stockholder or divi-dend recipient level (Up to $100 dividends perperson are deductible, however).

The above comments p irtain to corporationsgenerally. From a legal standpoint, there aretwo kinds of corporations - the investor-orientedor standard corporatior; and the patron-orientedor cooperative corpora ion. (Since very few co-operatives are not incorporated, he term cooper-ative refers to an incorporated organization un-less otherwise specified. Cooperatives, there-fore, are special types of c rporatious.) Thesetwo types of corporations t. : . a both similaritiesand differences. However, before pointing theseout, the general nature and description of cooper-atives should be examined.

WHAT IS A COOPERATIVE?

A cooperative is a business voluntarily ownedand controlled by its member patrons, and oper-ated for them and by them on a nonprofit or costbasis. It is owned by the people who use it. Itis organized and incorporated to engage in eco-nomic activities with certain ideals of democracy,social consciousness, and human relations in-cluded. As Professor Paul Casselman states, itis "an economic system with a social content."A cooperative provides services and benefits forits members in proportion to the use they makeof their organization rather than earning profitsfor the shareholders as investors.

A cooperative is part of our free enterprise,competitive, capitalistic system rather than awelfare agency or a charitable and benevolentsociety. It depends upon income earned fromrendering services to meet its expenses ratherthan upon donations, government handouts, orsupport from philanthropic organizations. Ser-vice, paid for by its member patrons, is itsprimary orientation.

The primary goal of a cooperative is to meetmembers' needs in an economical, efficientmanner, whereas the goal in the investor-orientedcorporation, the partnership, and the sole pro-prietorship is to maximize profits for the ownersof the business.

DISTINGUISHING FEATURESDefinitions do not describe all aspectb of a

cooperative. Therefore, it is well to look atthose features which distinguish a cooperativefrom other business enterprises and which willhelp answer the question, "Is an organization acooperative or not?" Criteria suggested aftera study by the Farmer Cooperative Service (FCS)include:

1. Does the organization provide economicbenefits te. member patrons? (This doesnot preclude educational, social, or otherbenefits.)

2. Is the company essentially a nonprofit en-terprise? That is, is it to benefit users ofits services rather than to make profits for

the organization or for the members as in-vestors?

3. Is the organization controlled by the Peoplewho use it ? Generally every member isgiven a single vote irrespective of the vol-ume of business he transacts with the firmor how much stock he owns. Sometimescontrol is based on the volume of businesshe conducts with the company (patronage-voting).

4. Is the organization centered around themutual interests of its members, that is,around a common bond of interest?

If the answer to each of these questions is"yes", then the organization can be considereda true cooperative. (For a discussion of thesecriteria see Savage, Job K. and Volkin, David,"Cooperative Criteria," Service Report 71,Farmer Cooperative Service, U.S. Departmentof Agriculture, Washington D. C. , February 1965.)The FCS added three other desirable policies forcooperatives without, however, limiting theirapplication to cooperatives. They are:

1. Risks, costs, and benefits are sharedequitably among patrons (note that the wordis "equitably" and not "equally").

2. Members have an obligation to patronizetheir cooperative.

3. Business is done primarily , not necessarilyexclusively, with :.:embers

FUNDAMENTAL CONCEPTSBasic to any cooperative organization is the

spirit of voluntaryism and the element of pro-portionality. These two concepts are foundationblocks upon which the cooperative structure rests.

The very idea of cooperating presupposes vol-untary action of those involved. Coercion is theantithesis of cooperation. Persons compelled toact contrary to their wishes are not truly cooper-ating but are simply going through the motions.The form should not be mistaken for the substance.True cooperation with others is a feeling that

7

comes from the heart - compulsion is somethingimposed on the individual from the outside (bylaw or edict). (Contrasted with this purely vol-untary cooperation, there are cases of so-calledcompulsory cooperation where those in the minor-ity are forced by law to abide by the decisions ofthe majority - as in marketing agreement andorder programs - or of a central authority. Suchaction ought to be called "compulsory collabor-ation" since it is not voluntary.) As one personremarked, "men may collaborate with one anotherunder compulsion but they cooperate only in free-dom." In true cooperatives, persons are free tojoin if they wish and leave when they want to.This is the spirit of voluntaryism.

When people cooperate they share with oneanother the risks, responsibilities, duties, rights,and benefits of their collective effort. No oneperson or segment bears the total responsibilityor obtains all the benefits. All are involved ingiving and taking, furnishing and sharing, riskingand benefiting. On what basis? The most prac-tical basis is according to the amount of use madeof the company (on a dollar volume of businessbasis). This proportional basis appears just,easily comprehended, and entirely feasible froman operational standpoint. It implies that mem-bers should finance their cooperative, meet theiroperating costs, and share in the savings (andlosses) on this basis. To do otherwise, as onewriter has expressed it, "distorts the individu-ality of the participants, creates rm.ladjustments,and undermines the aggregate nature of the co-operative."

BASIC PRINCIPLESAs indicated, cooperatives have features and

fundamental concepts which distinguish themfrom ordinary corporations. In addition, thefollowing distinctive principles identify business-type cooperatives:

1 Control by member users - also calleddemocratic control.

2. Operations on a cost-of-doing businessbasis - that is, nonprofit operations.

3. Limited returns or dividends upon owner-ship capital.

Control by Member UsersEach member is generally limited to one vote

on each issue that is voted upon, regardless ofhow much stock he owns or how much businesshe transacts with the cooperative. Wisconsincooperative law specifically states that "eachmember entitled to vote shall have one vote" andthat "voting by proxy shall not be allowed in anycooperative."

Voting on a one-man-one-vote basis is not inaccordance with the concept of proportionality.To rectify this, cooperative law in a number ofstates permits the basic one-member-one-voteto be supplemented by permitting additional votesbased on the volume of business transacted theprevious year by the member with his cooperative.Generally, the maximum number of votes anymember may cast is specified to prevent control

Ns,

COOPERATION CALLS FOR GROUP ACTION WHETHER IT BE OF MEMBERS SERVING ON COMMITTEES, OFDIRECTORS WRESTLING WITH A MAJOR POLICY MATTER, OR OF THE MANAGER WITH HIS DEPARTMENTHEADS DECIDING ON A PLAN OF BUSINESS CONDUCT.

8

el,

by a minority of members. Thus, a grain co-ope,:ative might permit one vote to be cast foreach 1000 bushels of grain marketed the yearbefore by the producer member but limit thevotes to 10 for any single member. Democraticcontrol is maintained by relating the power tovote to the use made of the organization. It alsoidentifies voting with the interest members havein their cooperative as shown by their patronage.

Nonprofit OperationsThe second principle is achieved by charging

patrons only the actual cost of performing ser-vices. If there are overcharges, these are re-turned to the patrons in proportion to the businessthey have transacted with the cooperative. Thecooperative is not operated to profit at the ex-pense of its member patrons. Any excess incomeover expenses (called "profit" in a regular cor-poration and "net savings," "net income," or"net earnings," in a cooperative) is returned aspatronage refunds to the member patrons pur-suant to a mandatory contract to do so. Suchmandatory contract (usually included in the by-laws or by resolution) must be in effect beforethe year's operations begin. It clearly estab-lishes that any excess income over expensesbelongs to the patrons and is not the property ofthe corporation.

Accounting-wise such excess income over ex-penses seems to be a profit, but in view of theexistence of the mandatory obligation to refundit to the patrons, the return of the over-chargesactually reduces the gross income and places thecooperative on a cost-of-doing business basis.Operating on a nonprofit basis simply means thatthe cooperative is not run to make profits for theinvestors by maximizing dividends on shares ofstock but rather to benefit member patrons. Therefund of over-charges may be in cash, partly incash and the rest deferred, or entirely deferred.Since passage of the 1962 federal Tax Law, mostcooperatives refund at least 20 percent in cashand the rest as noncash refunds (see section ontaxation).

Limited DividendsThe third principle is intended to keep the co-

operative operating for the benefit of the patronsand not specifically for the stockholders. (notethat the return on the investment is called a"dividend" and not "interest," although the rel-atively fixed annual return appears more like aninterest payment than a variable dividend. In-terest payments are operating expenses; dividends

are not. (See the Glossary for the definition ofthese two terms.) The money-capital-used forproduction should be paid for its use as are labor,land, and management. The nominal payment foruse of such capital is around 5 percent or approx-imately equal to the return on government bonds.Such restriction on dividends discourages controlof a cooperative by persons more interested instock dividends than on savings or refunds to pa-trons. The limitation likewise tends to keep thevalue of the shares of stock at face value (par).Dividends, of course, are paid out of net earningsand if there are none, no payments can be madewithout impairing the capital of the cooperative.Some cooperatives pay no dividends on equity ca-pital (ownership capital from members).

State and federal laws need also to be examinedto learn the maximum dividend permitted. Forexample, to come under the protection of theCapper-Volstead Act, a cooperative must eitherlimit dividends on stock or membership capitalto 8 percent or restrict voting rights to one-mem-ber-one-vote. Also, to qualify for exemptionfrom federal income taxes, among other restric-tions, dividends must not exceed 8 percent perannum or the legal rate of interest in the state ofincorporation, whichever is greater, on the parvalue of the stock.

SUPPLEMENTARY PRINCIPLESIn 1966 the International Cooperative Alliance

(ICA) decided that the following principles, inaddition to the three mentioned above, should beconsidered "essential to genuine and effective co-operative practice."

1. Membership should be voluntary and avail-able without artificial restriction or anysocial, racial, political, or religious dis-crimination to all persons who can makeuse of its services and are willing to acceptthe responsibilities of membership ("openmembership," and the principle of "political,racial, and religious neutrality").

2. Surplus or savings, if any, belong to themembers and should be distributed so nomember gains at the expense of others (the"patronage refund" principle).

3. All cooperatives should educate their mem-bers, officers, employees, and the generalpublic in the principles and techniques ofcooperation (the "promotion of education"principle).

4. All cooperative organizations, to best servetheir members and their commutates should

9

actively cooperate in every practical waywith other cooperatives at local, national,and international levels.

Of course, not all persons agree or accept theICA's principles. The three basic principleswhich distinguish cooperatives are commonly ac-cepted, but not those that define a cooperative'smethods of operation. The three hard core prin-ciples are widely considered the real, invariableones. The others are highly recommended ordesirable yet vary with the times and the environ-ment. To illustrate these variations, many mar-keting associations do not follow an open member-ship policy but rather, a selective and restrictivepolicy (housing cooperatives and credit unionsgenerally follow a restrictive policy); irrigationcooperatives generally vote on the basis of acresirrigated rather than on a one-man-one-votebasis; patronage voting is in line with the prin-ciple of proportionality; and thousands of suc-cessful cooperatives never set aside funds foreducation.

In considering principles one should keep inmind whether he is defining a type of businessorganization or some type of social movement,cult, or humanitarian agency. In this publication,attention is given primarily to the former.

LEGAL IDENTIFICATIONThe first cooperative law was passed in England

in 1852. It legalized business organizations oper-ated by and for its member patrons. Since thattime many countries, states, and provinces haveenacted legislation permitting cooperative insti-tutions to function as business entities.

Not all of these laws spell out the character ofcooperatives - some are quite general, othersmore specific. Wisconsin has three laws underwhich cooperatives incorporate - Chapter 185 ofthe statutes, the Wisconsin Cooperative Law, un-der which all but the credit union cooperatives areincorporated; Chapter 186, the "CooperativeCredit Associations" law under which the creditunions are organized; and Chapter 202 underwhich town mutual insurance companies are estab-lished. The principal provisions of the Cooper-ative Law are summarized in the section, "LegalBasis for Cooperatives." There are 99 sectionsand many subsections in the law indicating itsinclusive character. Many other laws, especiallythe federal acts, also relate to cooperatives andare discussed la,er.

10

SIMILARITIESWITH NONCOOPERATIVE

BUSINESSESIn many respects, cooperatives are not unlike

the noncooperative businesses with which theymust compete. This has led some persons toconclude that "a cooperative is just another placeto trade or do business." This is incorrect, aswill be shown.

Among the similarities, however, are the fol-lowing. Both types of businesses enter the labor,capital, and management markets and must paythe same wages, same interest rates, and com-parable compensation for management. Manyoperational practices are the same, such as pack-aging, storing, transporting, processing, grant-ing of credit, advertising, and pricing. Bothtypes aim to improve their efficiency and operateeconomically. Both may be located in comparablebusiness sections of the city or town. The samegeneral economic factors - employment and un-employment, tightening or loosening of credit,inflation said deflation, taxes, and changes inconsumption patterns - affect both.

To be sure, the viewer cannot tell whether heis looking at a cooperative or noncooperative justby looking at the outside of the store, the ware-house, or the elevator. He must look behind thisfacade to determine which is which.

DIFFERENCES BETWEENCOOPERATIVE ANDNONCOOPERATIVE

BUSINESSESThe differences are primarily in the relation-

ship between the owners and their organizationand in the way profits and net savings are distri-buted. In this comparison, it is assumed that thecomrasting institutions are corporations (seelable 2). Sole proprietorships and partnershipsalso differ from cooperatives in many similarways.

These differences clearly identify the cooper-ative as a different type of business organizationfrom noncooperatives. Despite these differences,cooperatives are as much a part of the competitive,free enterprise, capitalistic system as noncooper-ative, profit-oriented companies are.

A major difference between the two is that co-operatives attempt to correct imperfections in thesystem and to make it function more effectivelyfor producers and consumers whereas the other

institutions are less concerned about eradicatinginequities, faulty functioning, and other short-comings than in profits earned. Since cooperativesare not found everywhere to exert pressure for

correcting abuses and antisocial practices, anti-trust laws, minimum mark-up laws and other reg-ulatory legislation have been enacted at the stateand federal level.

Table 2. Differences Between Cooperatives and Noncooperative Corporations.

Differences Standard Corporation Cooperatives

Purpose To earn profits for investors, increase value ofshares, and provide employment for owners of smallcorporations

To maximize net and real income of member users.and provide goods and /or services at cost to memberusers.

To ;cave its members primarilyTo serve the public generally

Organization Incorporated under state general corporation lawno federal charter

Organized under state cooperative law, some such asfederal credit unions, under federal charter also

Except for closely he'd corporations, anyone mayown stock.

Organized and owned by investors

Organized around mutual interests of its memberusers.

Organized and owned by member users

Stock of large corporations is sold on stockexchanges or "over the counter"

No public sale of common voting stock none listed

on stock exchanges.

Control By investors, the stockholders

Policies determined by stockholders and directors.Voting on ham .; stock ownership according to thenumber of shares held

By member patrons.

Policies made by member users and directors. Votingin local associations usually on a one-man-one-vote

basis, or patronage basis. In federations, locals voteeither on number of members represented or on volume of business done with the central organization.

Proxy voting permitted. Frequently control isexercised by "inside cliques".

Generally, no proxy voting. Seldom that internalcliques can get control

Sources of Capital From investing public.

From successful business operations with all orpart of the profits reinvested.

From member users primarily

From net earnings on successful or erations withreinvestment of part or all of the sav 'els.

Distribution of NetMargins To stockholders in proportion to number of shares

of stock held.To patrons on a patronage basis after modestdividends on stock have been paid, reserves and, insome cases, an educational fund and bonuses

to employees are set aside.

Stock Dividends No limit depends on amount of prof its anddistribution policy.

Limited to a nominal arncunt generally does notexceed 8 percent.

Operating Practices Use conventional methods of financing sale of

stock, issuance of bonds, bank loans, and reinvest-ment of part or all of the profits

Use revolving capital plan of financing based on theamount of business transacted with patrons inaddition to conventional financing procedures

Usually purchase products on a cash basis.

Business done with public generally and not restrictedas to clientele except in exceptional cases.

Usually pool sales receipts and pay average prices bygrade for products received

Business done primarily and in many marketingAciations using marketing contracts exclusively

with members.

Primarily interested in operational efficiency to cutcosts less interested in, pricing efficiency.

Charge competitive prices or what "the traffic willbear",

Not only interested in operational efficiency but inpricing efficiency as well so that differential pricingby grades may reveal to producers ult,,nate consumerpreferences, tastes, and purchases.

Charge either competitive or "break-even" prices inpurchasing associations.

Initial Transaction Thr purchase or sale is a complete transaction. The purchase or sale is, in a sense, a conditionaltransaction subject to a refund or additional paymentat the end of the accounting period, if net earnings orsavings are made.

Tax Treatment Subject to many kinds of taxes including state andfederal corporate income taxes.

Also subject to many different kinds of taxes. How.ever, cooperatives organized under Chapter 185 donot have to pay a state corporate income tax and, ifabout 10 restrictions are met, can also be exemptfrom paying federal corporate income taxes. Netearnings are taxable to farmer recipients.

Privately owned electric utilities are subject toproperty taxes on real estate,

_Rural electric cooperative in Wisconsin are taxed ongross income rather than on assessed property values.

11

PROCEDURE FOR ORGANIZING COOPERATIVESEvery care should be taken to start a cooper-

ative under favorable conditions. To be success-ful, the cooperative, the same as any other bus-Mess, must meet a need, be soundly financed,and capably managed. It is most important toknow in advance whether enough people are inter-ested in dealing with the organization to insure avolume of business large enough for efficient andeconomical operation. Sound and feasible finan-cing plans must be set up before actual organiza-tion, and potential members must furnish sub-stantial evidence that they are willing to contri-bute their share of the needed capital. Stepsshould also be taken to secure capable manage-ment before the association starts business.

To launch a cooperative, it is necessary thatfour major jobs be done:

- Determine the need for a cooperative and itspotential for success.

- Decide on the form and plan of organization.

- Incorporate and complete the organizationinto a permanent going concern.

- Obtain members, capital, management, andbusiness volume.

PRELIMINARY MEETINGThe idea of setting up a cooperative generally

originates with one or a few persons. They dis-cuss the plan with friends and neighbors. If thesuggestion is generally accepted, one or moremeetings should be called to place the proposalsbefore others in the area. These preliminarydiscussions are highly important. They providean opportunity, before formal organization isundertaken, for prospective members to weighprobable advantages against estimated costs. Itgives those interested a chance ,-) concentrate onpossible problems and operating plicies of suchan association. The discussions often lead tomodifications of the original plans.

If, as a result of these open discussions, thereis widespread support and approval of the generalidea, the next step is not actual organization, as

12

sometimes happens. Instead, a survey committeeshould make a more careful study of the conditionsunder which the cooperative is to operate.

WORK OF THE SURVEYCOMMITTEE

The general meetings :slay hive presented factsand figures which had a bearing upon whether ornot to organize, but usua.ly much needed infor-mation is lacking at such meetings. A surveycommittee needs to secure pertinent facts thatfurnish more definite answers to some of thequestions raised - questions which have an impor-tant bearing upon the success or failure of theproposed undertaking.

The survey committee may be aided by technicaladvice from the Extension staff of the University,the State Department of Agriculture, and fromthose connected with similar cooperatives in ad-joining regions.

A general survey for a proposed farm market-ing association should try to answer the followingquestions.

Is There a Need for a Cooperative?The first and basic consideration is to decide

whether there is a real need for the proposed asso-ciation. How is the product now being handled?In what ways can a cooperative improve upon thepresent situation? If there is no substantial need,there is little to gain, and harm might result inorganizing another marketing outlet.

What is the Potential Volumeof Business?

Not only must the cooperative be needed, butit must have enough business to meet its oper-ating expenses and at the_same time leave somemargin of savings. The committee must firstestimate the potential number of members andthe volume of business this membership mayprovide.

In starting a new cooperative there is often atendency to overestimate the volume of businessthat may actually materialize. Be sure that the

amount of business upon which the cooperativecan depend will meet or exceed its minimum re-quirements. The minimum volume depends uponthe area which can be economically covered, theintensity of production within that area of thecommodity to be marketed, and the amountswhich potential members within that area candeliver to the cooperative.

Is a Good Manager Available?Although the survey committee does not hire

the manager, it should investigate the availabilityof such person. Unless there is a strong likeli-hood that a good manager can be employed, thereis little prospect than an organization could suc-ceed even though it is needed. A good managershould be able to plan, organize, direct, andcontrol the operations of a company; understandbusiness principles; and know the product he isto handle, its competition and pricing. He mustbe ablr to get things done through others, getalong with people, and gain their confidence.

What Facilities Will Be Needed?What land, buildings, and equipment will be

needed to handle the estimated ,olume of business?Can they be rented, purchased, or will it be nec-essary to build? These matters have an impor-tant bearing upon the amount of capital whichwill be required. If the required facilities areextensive, consult with engineers and skilledtechnicians. If the capital requirements arelarge, examine carefully the possibility of buyingor renting buildings and equipment. Actual op-erating experience will give the organization amore reliable guide later as to the kind and typeof facilities most suitable for its needs.

What Funds Are Needed to BeginOperations?

If the volume of business, and the cost of ac-quiring the necessary land, buildings, and equip-ment (by rental, purchase, or construction) areknown fairly accurately, then the amount of fundsneeded can be estimated reasonably well. Howare these funds to be obtained? What proportionwill the members contribute by purchasing stockor by other means? How much can be borrowedand upon what terms? One of the main causes forfailure among cooperatives has been underfinan-cing. The preliminary survey should furnish theinformation upon which a sound financing plan maybe based. Furthermore, the preliminary studyshould indicate the extent of financial supportwhich member-producers should supply.

Estimated Costto Run the Cooperative?

An important function of the survey committeeis to estimate as well as possible the probableoperating cost - totally and per unit of businessand then compare these costs with existing mar-gins of operation to see whether any worthwhilesavings can be realized. Knowledge of such costsand probable savings is necessary to dispel exag-gerated ideas of potential savings that prospectivemembers may have. Under strong competitiveconditions, the committee is likely to find thatpotential savings are minimal - under imperfectmarket conditions, quite sizeable. If under thelikely volume that can be counted on, little or nosavings are predictable, the committee may wishto estimate what volume would be necessary tomake the venture worthwhile for the member-patrons.

What Experience Have PotentialMembers Had With Cooperatives?

A community in which farmers have had longexperience with cooperatives is likely to haveless difficulty in operating a new cooperative thana community with no cooperatives, or a commu-nity that has failed in attempted cooperation.Membership support is likely to grow with expe-rience. Experienced cooperators give their asso-ciation a chance to prove its worth.

The reception of a new idea depends upon gen-eral attitudes, but attitudes are not always basedupon economic considerations alone. Customs,habits, social contacts, religion, business con-nections, types of leadership, education, expe-rience, and a number of other influences waildetermine the amount of effort and time necessaryto make organization a reality. Insofar as pos-sible, those who want to create cooperative asso-ciations should evaluate the influence favorableand unfavorable to organization.

Cooperatives should not be unduly promoted byhigh pressure salesmanship or by over-enthusi-astic leaders - they may proce^r1 too fast arld toofar ahead of their support. Similarity in thougntsand actions is necessary for ventures dependentupon mass approval.

Perhaps the main conclusion to be drawn onthis score is that, if the community has had littleor no experience in cooperation, the beginningsshould be modest. Growth should come with ex-perience.

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What Miscellaneous Items Needto be Considered?

The survey committee may look into and incor-porate other matters in its report. The followingitems may be included.

How much will organization cost including thefees for incorporation, attorney's fees, and inci-dental expenses?

Should an organization agreement (sometimescalled a membership agreement as distinct froma members' marketing contract) be used? If so,one must be prepared. Later the number whosign the agreement will indicate the real supportfor the cooperative and show whether there areenough signers to warrant forming the cooperative.

What services should the cooperative provide?What does the cooperative expect to accomplish?Higher farm prices? Assured market outlets?Quality improvement in products that may resultin market expansion and new outlets? Servicescurrently unavailable? Stronger bargaining powerfor the growers? Lower costs?

What qualifications for membership should berecommended? And to what extent and under whatconditions would business be done with nonmem-bers? Federal tax laws and the Capper-VolsteadAct (the federal cooperative marketing act) needto be taken into account on this matter. A creditunion, a production credit association, and an ir-rigation cooperative would, of course, confinetheir businesses to members only.

if a marketing cooperative is being planned, howwill the farmers be paid for products they deliver?Ordinarily, a new cooperative with limited financesand experience does not pay cash outright for pro-ducts but either sells them for patrons on an indi-vidual account basis or on a pooling basis, andpays the growers after operating expenses are de-ducted from sales receipts.

If a purchasing cooperative is contemplated,should products be priced at the prevailing mar-ket prices which competitors charge or less?Net earnings or savings can be returned at theend of the business year in the form of patronagerefunds. Price cutting by a new association isdangerous and is not generally recommended -even experienced associations by and large, avoidit.

REPORT OF THE SURVEYAfter the survey has been completed, some

definite conclusions can be formed relative tothe need for organization and the obstacles thatmay be encountered. The results of the surveyshould be submitted to the prospective members.14

if mimeographed copies can be prepared beforethe meeting, potential members can study thereport and come prepared to discuss it. Thegroup should discuss the report objectively atone or several meetings and decide whether togo ahead with organization plans or to drop theidea. If the decision is to go ahead, the chairmanshould appoint an organizing committee of willingworkers including most likely some or all whoserved on the survey committee.

Some decisions made at this meeting will cer-tainly guide the organization committee. Planssuch as capital stock or nonstock, bargaining ormulti-service operating cooperative, owning orleasing facilities, use of member marketingcontracts or not, and amount of capitalizationwill very likely have been agreed upon as thesurvey report was discussed.

WORK OF THE ORGANIZINGCOMMITTEEThe functions of this committee consist of

- -Soliciting me.nberships, capital contribu-tions, and signed member marketing con-tracts.

- -Incorporating the association.

- -Arranging for the first meeting of the newlyincorporated association in collaborationwith the temporary president.

Membership DriveThe organizing committee, possibly helped by

other interested persons, calls on prospectivemembers getting them to sign an organization ormembership agreement, if used. An organizationagreement is a member's promise to belong tothe association, do business with it, and furnishpart of the capital provided sufficient other signersare obtained to warrant going ahead with the asso-ciation - a number usually stipulated in advance.If the cooperative is to be a marketing associationand use a member marketing contract, then nomembership agreement will be needed. Instead,signatures to the marketing contract indicate whoare ready to join the cooperative and about howmuch volume will be marketed. These contractsbetween the potential member and the proposedcorporation need to be validated (officially acceptedand signed by an officer) when the corporationbecomes a legal entity and can be drawn with thisin mind.

The prospective member should also be asked toto subscribe to the capital of the organization and

should say how much cash he will pay down on theshares he will take. If the cooperative is to be anonstock or membership organization, then themembership fee might be collected at the time ofthe call or assurances given as to when it will bepaid.

If the number of potential members falls shortof the goal, steps to incorporate will be held upuntil a special meeting of interested personsdecides whether to proceed. Generally, marketingcontracts become binding only if a fixed number ofsigners or stated volume of farm products to bemarketed is obtained.

Incorporating the AssociationAll cooperatives - no matter how small - should

incorporate, in order to limit the liability ofmembers for the debts and obligations of the as-sociation. It is well to secure competent legaladvice in drawing up the articles of association.These articles are, in effect, a charter from thestate when accepted by the Secretary of State.The bylaws must not conflict with either statelaws or the articles.

Most cooperatives incorporate under state laws.Federal land bank associations, production creditassociations, the Bank for Cooperatives, andconsumers cooperatives in the District of Colum-bia incorporate under federal laws only. Creditunions may choose to incorporate under federallaws and approximately one-half have done so.

There are certain steps to follow to incorporatean association. The Articles of Incorporation(forms for capital stock or for nonstock associ-ations can be obtained from the State Departmentof Agriculture, Madison, Wisconsin or from thesecretary of state) are filled out and signed by atleast five persons. These articles show the nameof the association, its location, purpose, theamount of capital stock, number of shares, andpar value (face value) of shares in capital stockassociations, the number of directors (in Wiscon-sin at least five), the general officers and theirduties. The original and verified copies of theArticles of Incorporation plus the filing fee aresent to the secretary of state (Capitol, Madison,Wisconsin).

The verified copy returned by the secretary ofstate should then be recorded with the register ofdeeds in the comity where the central office of theassociation is located. The legal existence of acooperative begins when the duplicate originalarticles are left for recording. Upon receivingthe certificate from the register of deeds thatthe duplicate original articles have been recorded,the secretary of state issues a certificate of in-corporation.

The secretary of state charges a fee for filingthe articles of association for a new cooperative- $1 for each $1000 of authorized stock, but inno case less than $20; and from a nonstock asso-ciation, a fee of $20. (State law limits promotionexpenses payable in cash or shares of stock to amaximum of 5 percent of the paid up capital stockor membership fee.)

According to Wisconsin Cooperative Law, "afterarticles have been filed and recorded, an organi-zation meeting of the temporary board shall beheld at the call of a majority of the incorporatorsor of the temporary ,Iirectors for the adoption ofbylaws, election of temporary officers, and trans-action of other business."

Arranging for First Meetingof Members

Wisconsin law states that "the first meeting ofthe members shall be called by the temporarypresident or a majority of the temporary direc-tors." It is well to work with the organizationcommittee in calling this first meeting (in mostcases the members of the committee are also theincorporators and named in the articles as thetemporary board of directors). All prospectivemembers should receive written notice of the place,day, and hour of this first membership meeting;and the notice according to law "shall be given notless than 7 nor more than 30 days before the meet-ing at the direction of the person calling the meet-ing.

The usual business of the first meeting is theelection of a board of directors and the adoptionof bylaws. The board of directors should meetsoon after this first meeting to elect officers, signa "waiver of notice" of the meeting of the board,validate (officially accept and sign) the marketingcontracts and stock subscriptions now that the co-operative is a legal entity, select a bank withwhich to do business, select a manager (or atleast take steps toward this end), and take actionsthat will get the association functioning as a going

concern.

15

Bylaws generally include provisions for:

- the designation of the fiscal year.

- eligibility, duties, liability, and termina-tion of membership.

- conduct of meetings of members includingnotice of meetings, quorum, voting rights,and order of business.

- the election of directors, officers, theircompensation, and their removal and fillingof vacancies.

- duties of directors and of officers.

- duties and powers of the manager.

- method of cooperative operations involvingpooling practices, revolving capital planof financing, and the distribution of netsavings.

- details with respect to capitalization, stocksubscription, stock transfer, reserve ac-counts, and unclaimed allocations or monies.

- compliance with federal income tax lawsand state marketing orders.

- provisions for marketing contracts withmembers.

- compliance with federal income tax lawsand state marketing orders

- provisions for marketing contracts withmembers.

- affiliating with other cooperatives.

- dissolution procedures.

- adoption of a seal

- amending the bylaws.

16

HOW COOPERATIVES ARE RUN AND MANAGED

The management of a cooperative is composedof three separate and distinct groups: members,directors, and managerial staff It requires theactive participation of all three to make a coor-dinated whole. It is not unusual for members toconsider themselves quite outside the sphere ofmanagement. But in final analysis, the respon-sibility for management is theirs - as it shouldbe. Their money finances the association, their

products are handled, they reap the savings, andthey shoulder the losses. Hence, it is logicalthat final control rests squarely upon the members.Since members share in both ownership and con-trol, they have important duties to perform inthe management of their organization.

The management of a cooperative may be re-presented by a triangle.

It is a tripartite arrange-ment that becomes more com-plicated as cooperatives be-come larger and more com-plex and as intangible as wellas tangible factors requireconsideration.

Membership Control

The management relationship may be pictured in another way.

TheMemberselect

The Board of Directorswhich appoints

The Managerwho appoints and supervises

The Operating Staff

MANAGERORMANAGER

TEAM

BOARDOFDIRECTORS

MEMBERS

MEMBERS ELECT DIRECTORS AND ESTABLISH BROAD POLICIES, DIRECTORS HIRE THE MANAGER ANDKEY PERSONNEL AND ACT ON MAJOR OPERATING PROBLEMS, THE MANAGER HIRES EMPLOYEES ANDIMPLEMENTS THE DECISIONS OF THE BOARD OF DIRECTORS.

17

MEMBERSIn both illustrations, management starts with

membership. Members formulate the broadgeneral policies of the association and elect di-rectors to supervise the execution of thesepolicies. The manager and his staff put intopractice the policies prescribed by the membersunder the guidance of the board of directors.This division of activities places important re-sponsibilities on members, which should not betaken lightly.

Members participate in management in a num-ber of ways. The most important are when they:

Adopt and amend bylaws and the articlesof incorporation as well as resolutions andand motions presented at meetings.

Elect and remove directors.

Approve changes in capitalization and majoradditions to plant and services.

Require that officers, directors, and employ-ees carry out the provisions of the articles,bylaws, and mandates of the membership.

Require an accounting, at least annually, ofmanagement's stewardship.

Assist in financing the organization.

Support the association with their patronageand, if possible, get others to do so also -and pay accounts promptly.

Become active in the cooperative's affairs byattending meetings, serving on committees,accepting special assignments, and genuinelybacking the association.

Abide by the decisions of the majority.

Criticize constructively and suggest newideas without requesting special favors.

Keep informed about the cooperative bystudying annual reports; reading house organs;conversing with directors, officers, and em-ployees.

Defend the cooperative and its managementwhen it is unjustly criticized or attacked.

Cease being a member if throughly dissatis-fied with the cooperative before ruining theassociation for others.

In general, it may be said that members havecomplete control of the association although theydo not always exercise their control. However,in order to exercise this control, they must takeaction in legally called meetings. The bylaws

18

should specify the procedure to be followed incalling meetings.

Since it would be inconvenient, if not impossible,to hold meetings of members every time a man-agement problem arose, and since the member-ship is not in position to judge operating details,the members usually delegate powers to the boardof directors to act for them. These powers aregenerally delegated through the statutes, the ar-ticles, and the bylaws which define the duties ofofficers and directors. Since the board acts forthe membership, it is very important for mem-bers to elect reliable and capable persons to re-present them on the board of directors. This isprobably the members' number one managementresponsibility.

However, members do not delegate all theirpowers to the board. Some are specifically re-served for the members by law. They retain, atall times, the right to approve matters of highpolicy and to review the actions of the board andmanagement. The annual meeting is held to givemembers an opportunity to legislate new policies,to review the results of previously adopted pol-icies, and to make changes in the plan of oper-ations.

The officers and managerial staff report to themembers of the association at the annual meeting.These reports should compare the operations forthe past year with one or more of the previousyears. Such a comparison shows the increasesand decreases for the year. A clear and under-standable financial statement should be a part :fthis report. Members should see to it that thebooks and records are checked by an outsideindependent auditor . This is especially impor-tant for those organizations doing a considerablevolume of business. The auditor should be re-sponsible only to the membership. It is his dutyto give members a true and accurate picture ofthe operations of the association. This protectsthe directors and the manager as well as themembers.

At the annual meeting, the directors and themanager should also tell members of contem-plated major changes for the coming year. Suchreports give members a chance to ask questions,make suggestions, and, if need be, issue newdirectives.

Membership participation in management neednct be confined to the annual meeting. The by-laws should provide for calling special meetingsof members whenever it is deemed advisable bythe officers, the directors, or by a small pro-portion of the membership. The point to be em-phasized, however, is that members exercise

their authority only in legally held meetings.Wisconsin statutes do not permit voting by proxy,and voting by mail is limited to specific conditions.This means that members, to participate in man-agement, must attend meetings. The votingpower of members is equal through the one-man-one-vote principle. This should be an added in-ducement for members to attend and expresstheir desires through the ballot.

DIRECTORSMembers formulate policies by adopting the

Articles of Incorporation and bylaws, and throughaction taken at annual and other meetings. Butthey delegate to the board of directors the re-sponsibility of translating these policies intoaction. It is the duty of directors to safeguardthe interest of members.

The directors hire and supervise the managerand others qualified to carry out the members'

policies. They interpret the policies of the mem-bers and take the necessary steps to put them intoeffect. The directors prescribe how the associ-ation shall be operated to carry out most effec-tively the expressed wish of the members. Acapable board of directors is a "must" to operatea cooperative successfully.

It should be pointed out, however, that direc-tors can act only as a board. An individual di-rector, unless specifically authorized to act bythe board, has no authority as an individual di-rector. Directors as individuals should not.

--Interfere with management.

--Give orders to employees.

--Ask or expect favors from the association.

--Speak for the board, unless authorized to do so.

--Show favoritism to relatives.

Duties and ResponsibilitiesTo elect capable individuals as directors, members must have a clear understanding of the duties and

responsibilities of directors. Directors must:

Formulate policies consistent with the objectives of the cooperative.

Select a competent manager and pay a salary commensurate with his ability, define his authority, andthereafter not encroach upon his rights.

Implement policies voted by the membership.

Elect officers of the directorate.

Raise capital, borrow funds, supervise disbursement of funds and manner of distributing patronagerefunds, and determine dividend policies.

Select depository banks and a qualified auditor.

Remove officers for cause and fill vacancies on the board.

Keep records of all board meetings.

Make contracts, leases, loan agreements, etc., with full understanding of the terms.

Establish pricing and sales policies as well as general rules for guidance of managementsuch ascredit policies, discounts, etc.

Establish broad policies relative to employees - such as job classifications, pay schedules, retire-ment, and other fringe benefits.

Evaluate results and plan for future operations.

Strive for efficient and competitive operations.

Direct the manager to prepare before the close of each year an operating budget for the next fiscalyear for board approval.

Perpetuate the association and make long-range plans.19

Whatever tl._ duties and powers of a boardmember may be, he must act or become person-ally liable for any damages or injuries the asso-ciation may suffer from his negligence or failureto fulfill the duties of his office. If there is aconflict of interest het---een a director's interestand that of his association, he should disqualifyhimself from voting on the issue and have thisrecorded in the minutes of the board's meeting.He should speak up in a board meeting if he thinksa proposed action is unauthorized or wrong. Heshould have the minutes record his dissent toavoid any liability on his part to the associationor its members for the wrongful act. Perpetra-tion of fraud, neglect of duty, or acting impru-dently can make the director personally andlegally liable for damages sustained by the asso-ciation.

However, directors cannot be liable for mis-taken judgement . They may make serious mis-takes, but if they acted in good faith and to thebest of their ability, there can be no recourse onthe part of complainants, except by electing newdirectors at the next election.

Large Boards and CommitteesThe size of boards of directors varies widely.

In Wisconsin, there must be at least five mem-bers. In this state, boards elect their own offi-cers. Local boards usually have 5 to 9 members.In large associations, especially in regional or-ganizations, the board may be larger. Whenboards are large, the work may be divided amongpermanent committees, such as:

A membership committee.

A finance, budget, and audit committee.

A labor relations committee.

A merchandising or purchasing committee.

A building and equipment committee.

A plant operations committee.

Each committee studies the problems in itsparticular field, and makes its recommendationsto the board for action. (See Griffin, Nelda,Hulbert, Helim H., aid Volkin, David, "DirectorCommittees of Farmer Cooperatives," Farm Co-operative Service General Report 85, FCS, USDA,Washington, D. C. , 1960, for a discussion of thefunctions of these committees.)

When the board is large, it is usual to select3 to 5 members of the board, including its offi-cers, to act as an executive committee. Thiscommittee acts, in the absence of the board,within specified limit, set by the board, and by20

the cooperative law of the state (see Section185.33) . The executive committee meets oftenerthan the entire board and, in fact, becomes anintegral part of management in very iarge co-operatives. All it actions between board meet-ings should he reviewed by the board at its nextmeeting. On those acts approved by the boardshould remain in effect after the board meeting.The board cannot, however, delegate certainpowers as listed in Section 185.33 to a smallernumber of its own body.

YOUNG AND OLD, MEN AND WOMEN ALLCONTRIBUTE TO SOLVING P3OBLEMS THATAFFECT ALL MEMBERS.

Election of DirectorsThe most common and oldest way to elect di-

rectors in both large and small associations isby nominations from the floor. Although thismay be easy and convenient, it is not necessarilythe best way to get a truly qualified and repre-sentative board of directors, even in a local asso-ciation.

The next most common method, and one thathas much merit, is to use a nominating committee.This committee of 3 to 5 members (either appoint-ed by the president, by the board of directors,or elected by the members) prepares a slate ofcandidates, preferably at least two nominees foreach open directorship. The nominating com-mittee often publicizes candidates' names andvitae in the cooperative's house publication beforethe annual meeting, and presents the nominationsat the annual meeting. The chairman ordinarilycalls for nominations from tho floor to add tothose recommended by the committee, after whicha vote is taken. A nominating committee whichrepresents the different areas where the member-ship lives can evaluate individual qualifications,make certain that candidates from different geo-graphical areas and with possibly different pointsof view 'Ire considered for a well bP'^-4eid andable board, and can judge the merits of existingdirectors for renomination.

Other nominating methods include caucus of themembers; petition of members; district meetings

of members; and in federated associations, bymember association nomination. Nominationmethods of small and lar,:e associations are muchthe same except for methods involving districtmeetings or member associations in large co-operatives.

Voting by secret ballot is preferable to votingby acclamation. Voting by proxy is not allowedin any cooperative in Wisconsin, but bylaws mayprovide that delegates may vote in large associ-ations for the members they represent.

Some state laws require farmer cooperativesto have so-called public directors on the board.Such directors do not have to be producers normembers of the cooperative - simply represent-atives of the public interest as they individuallyinterpret it. Some bylaws state that the publicdirector is to be named by or be the Director ofthe State Department of Agriculture or the Deanof the College of Agriculture - in other instancesthe appointment is less specific. In one case,the retired president of a Bank for Cooperativeswas chosen to be a public director on the boardof a large regional cooperative. A poll of coop-er:tive managers and directors several years agooverwhelmingly disapproved of having public di-rectors.

Qualifications of Board MembersThe broad powers exercised by the board of

directors leaves much room for discretionaryaction. Hence, the duties of directors shouldnot be assumed lightly. It is a position of respon-sibility that should not be permitted to fall into arubber stamp category. It is a position of leader-ship requiring certain qualifications.

A director must be a member, and should bean active patron. He should have good businessjudgement. A willingness to serve and acceptresponsibility is also essential. Only those knownto be loyal to the association, and who considerthe position one of public trust should be elected.A director must be able to cooperate with others.He should have a repute tion for honesty and in-tegrity, and expect no special favors from theassociation. He must be able to analyze, makedecisions, abide by majority opinion, be objec-tive, and be able to work with others. It wouldhelp if he were articulate in expressing hisopinions; is an independent thinker, progressivein outlook, and a firm believer in cooperatives asa way of doing business.

In short, the qualifications for a director aregood business judgment, a high sense of duty,good character, zeal, and tact - coupled with asincere belief in the worthiness of the undertaking

he is helping to direct.The way the board of directors assumes its

responsibilities largely determines the soundnessand growth of the cooperative. There is no sub-stitute for an active and capable hoard of directors.

MANAGERThe directors are responsible to the member-

ship. The manager is responsible to the boardof directors. The board establishes the broadlines for carrying out policies, but does not ex-ecute policy. That is the manager's job. It issometimes difficult to define the line betweenformulating policy and executing it, but it is animportant distinction to be kept in mind at alltimes. There should be a distinct and recogniz-able division of responsibilities between the boardand the manager.

The board must assume full responsibility forinterpreting the desires of the membership andmust formulate policies to fulfill these desires.It may indicate the lines of action, but must leavethe details of execution to the manager. Theboard determines whether the manager and hisstaff do the job satisfactorily by evaluating theresults of their operations.

The manager's job is to serve the member-patrons efficiently, courteously, competitively,and to get things done through other people. Tothis end the manager uses the business resourcesat his command, namely, men (labor), money(capital and credit), machines, and materials.His functions are to plan ahead; organize hisresources into an efficient, workable organization;direct, exercise leadership, delegate, and getthings done by working with and through people.He coordinates and integrates the resources to

work as a unified whole. Finally, he controls,appraises, and evaluates performance so as toknow when, where, and how to initiate remedialaction. To do these things well, the managerneeds both technical and executive skills - tech-nical, to solve problems related to physical andinanimate resources; and executive, to solveproblems of human resources such as relate tomembers, employees, competitors, and peoplegenerally.

Most boards of directors lean heavily uponcapable managers for advice and counsel cn manyboard actions. The manager and his staff arefrequently asked to furnish the information uponwhich policy decisions are based. They are bestacquainted with the details of operations, and,thus, are often able to appraise the feasibility ofproposals. From this it is clear that there shouldbe a close working arrangement between the board

21

and the manager. Whilethere may be overlap-ping duties, the linesof responsibility arequite different.

PLANNING

0ORGANIZING z0

Ht)ZnU.

DIRECTING I-zitti

mmoigee,#01COORDINATING

CONTROLLING

THE ABOVE INDICATED FUNCTIONS OR DUTIES OF MANAGEMENT NEED TOBE PERFORMED IN ORDER TO ACHIEVE THE PURPOSES AND GOALS OF THECOOPERATIVE.

To prevent confusion in responsibilities, mem-bers of the board should not be employed in man-egerial positions. The manager is responsibleto the board. The board hires - and fires - themanager. When a director is manager, it maybecome more difficult for the board to exerciseits authority over the manager. The manager,in such a case, not only works for the board, butalso works for himself as a member of the board.There are outstanding instances where this ar-rangement has been followed successfully, butas a principle, it is not recommended.

The manager's task is to supervise the oper-ating details of the elkLerprise. If this involvesmore detail than one man can personally attendto, he may hire assistants. If the ramificationsof the business are national in scope, managementmay be divided into several departments and anassistant put in charge of each. The more exten-sive the business, the greater are the problemsof supervision and coordination. Members ofcooperatives are apt to minimize the importanceof a good executive. This is shown by their re-luctance to pay salaries commensurate with theservices received.

A competent manager should capably and re-sourcefully operate the business according tocooperative principles and complying with thedirectors' policies. He must deal with employeesand members tactfully. He should genuinelyattempt to fulfill the aims of those whom heserves, providing their objectives are intended

22

to promote social and economic well being. He

serves all members, and is completely respon-sible to the directorate.

One of the best indicators of the high quality ofmanagement which cooperatives have had over theyears are the hundreds of millions of dollars in-vested in feed mills, refineries, processing plants,large wholesale and retail outlets, and many otherservice rendering institutions. Farmers wouldnot have these facilities today if it had not beenfor hundreds of topnotch managers over the years.

EMPLOYEESIt is quite apparent that a successfully run co-

operative is many times due to capable, energetic,and honest employees. Their place in the totalorganization of a cooperative should never beminimized. They can make or break a cooper-ative. They are that it portant link between thecooperative and the patron which can create goodwill for the company or do just the opposite.Sometimes principles of cooperatives are dis-cussed as though adherence to them assures suc-cess, but such devotion to ideals generally over-looks the highly practical, albeit mundane,aspects of good employees, competitive pricing,reliable quality products, and satisfying services.The day to day contact between e..ip'oyees andmembers is the most realistic relationship manymembers have with the association.

Large-scale regional associations provide op-portunities for employees to be upgraded throughemployee-training programs. Many managers ofbig companies have started at the bottom. Suchtraining courses not only teach employees to bebetter salesmen, member contact men, and ad-visors to members on production problems, butalso to know the deeper meaning of cooperation,its principles, legal basis, tax considerations,finances, and other less tangible aspects of co-operatives. Although for many employees workat a cooperative is just like any other job, forothers it is an opportunity for dedicated serviceto fellow citizens and for community welfare.

Employees are often urged to purchase pre-ferred stock, certificates of interest, or othernonvoting equity shares in the company so theywill take a deeper interest in the cooperative.They are permitted to share in the distributionof net savings of the cooperative on the groundsthat their efforts helped make these savingspossible and as partners with patrons in a com-mon endeavor (Wisconsin cooperative law per-mits this - see Section 185.45 (2) (b)). They arerewarded for suggestions that make operationsmore efficient. And they are given fringe bene-fit payments the same as employees in other in-dustries receive.

Employees are often unionized in associationsthat have a large number of workers and espe-cially in cooperatives that are located in sizeableurban centers. Such union activity among em-ployees, in a sense, counteracts the collectiveaction of the member-patrons themselves.

OPERATING PRACTICESAssociations differ from one another in their

operating methods. By no means do they allhandle farm products in the same fashion. Themore important methods are

1. Buying products outright from members.

2. Handling products on a separate accountbasis.

3. Pooling products.

4. Selling on a commission basis.

5. Bargaining for prices.

Buying Products Outrightfrom Members

Some associations pay farmers cash for theirproducts when they are delivered to the asso-ciation. The cooperative takes title to the pro-

ducts (buys) and then sells them in the market.If the association sells the products at pricesenough higher than what was paid for them to cov-er all expenses and reserves and still have a netearning, then the net earnings may be declaredas a patronage payment to the farmers at the endof the accounting period. Most cooperative grainelevators pay cash for the grain as it is received.

Handling Products on a SeparateAccount Basis

Instead of paying cash for products on delivery,some cooperatives (such as livestock truckingassociations) pay the farmers for the productsafter they have been sold. The expenses of thelocal association, transportation costs, andterminal market expenses are deducted from thesales value and the farmer is then given a checkcovering the remaining value. This way the localassociation does not take title to the products,does not need cash to buy them, and does nothave the financial risk inherent in ownership ofthe products.

Pooling ProductsIn cooperative cheese factories, milk plants,

cranberry, cherry, wool, and tobacco marketingcooperatives, the general practice is to pooltheir members' products. Each producer's pro-ducts are not kept separate. Instead, the pro-ducts of all patrons are mixed according togrades and are handled by the cooperative ascollective quantities. In some associations, apartial payment is made to the farmer when hedelivers his products and a final settlement ismade when all the products have been sold. Eachproducer receives, therefore, the average price(minus necessary operating costs) at which theproducts in the pool were sold.

Selling on a Commission BasisIn the terminal livestock, fruit, and vegetable

markets, cooperative terminal sales agencieshandle products on a commission basis. Sincethere are no contracts between the local associ-ations at country points and the terminal salesagencies, these agencies handle products formembers and nonmembers alike at the usual pre-vailing commission rates. The sales agency ona terminal market is ordinarily set up and placedon the market by a federation of local associationsand individual producers who regularly sell in themarket.

23

Terminal sales agencies differ from marketingfederations in the number and type of servicesperformed. Structurally, they are alike - farmersare members of locals and locals of central asso-ciations - but whereas the sales agency conductsessentially a commission business, does little orno advertising, branding of products, or storing;the marketing federation, described later, per-forms numerous marketing services.

Bargaining for PricesIn some respects collective bargaining associ-

ations are comparable to labor unions. However,while laborers bargain with employers over wagesand working conditions, the farmers' collectivebargaining associations bargain with purchasersof farm products over the prices and conditionsof sale of the farmers' products. The productsare marketed - processed, packed, and distri-buted - by the buyers, but the price at which allmembers of the association sell to the buyers isnegotiated between the farmers' bargaining asso-ciations and the buyers. This type of associationis most common among milk producers whosupply city markets and privately operated milkplants.

Sometimes associations perform services inaddition to bargaining - namely, checking theaccuracy of weights, tests, grades, and marketuses of the product; improving the quality; andpaying the producers. Each farmer delivers hisproducts to the buyer directly. The associationdoes not handle the product. Some bargainingassociations have expanded their activities to in-clude operating milk processing plants for surplusmilk. When this is done, they are no longerstrictly bargaining associations. Instead, theyare bargaining and marketing or operating asso-ciations combined.

These are the principal ways cooperativeshandle their patrons' products. It should be add-ed that large cooperatives often engage in exten-sive business operations to sell the farmers' pro-ducts. Cooperative fruit marketing associationsnot only sell fresh fruit, but may operate canningfactories, fruit juice plants, and freezing plants.They may even have their own lumbering oper-ations, lumber mills, and box factories to makethe boxes which they use.

RETAIL AND WHOLESALEASSOCIATIONS

There are two types of purchasing associations- local associations and central purchasing asso-24

ciations. Local associations conduct essentiallya retail business, such as cooperative feed stores,grocery stores, oil and gas stations, and farmsupply stores. Central purchasing associationsconduct primarily a wholesale business and sup-ply local cooperative retail units with the suppliesthey handle. Some of the larger wholesalers alsooperate mills and do processing. The cooperativewholesale organizations are generally federated,with locals as members of the central association.Many central associations, in turn, have gottentogether and organized other supplying organiza-tions as well as factories, mills, and processingplants in order to effect greater savings at themanufacturing level. National Cooperatives, Inc.of Albert Lea, Minnesota and U:dted Coopera-tives, Inc. of Alliance, Ohio were such coopera-tives serving wholesaling units. (These two mergedin 1972 -now called Universal Cooperatives.)

The operations mentioned above pertain essen-tially to farm marketing and farm supply associ-ations. But many other types of cooperativeswhose day to day operating practices are quitedifferent serve both farmers and urban people.The credit union and the Production Credit Asso-ciation (PCA), the Federal Land Bank Associa-tions (ELBA) and the banks for cooperatives eachhave their own ways to serve their clientele al-though all four are in the financing business. Co-operatives in the same line of business, such asfarm supply centers, do not necessarily operatethe same way either - some carry large inven-tory stocks, others very little; some have a lib-eral customer credit policy, others do a strictlycash business; etc.. Whatever practices arefollowed, the aim is to serve member patronsefficiently, honestly, without favor or prejudice,and continuously.

DEVELOPMENTS INOPERATING PRACTICES ANDORGANIZATIONS

Many changes have taken place in the last 50to 75 years in operations of cooperatives in theUnited States.

The Rochdalians organized a cooperative gro-cery store in England in 1844 using practicesthat were so successful they are known to thisday as Roth!, lian principles. They were pri-marily Intel-. I in honest weights and measures;pure unadulterated foods; the right to run theirown affairs and to vote in a democratic fashion;the desire to organize unimpeded by restrictivelaws; equal control by the people over the runningof their store rather than according to the amount

of money invested; and the ultimate attainment ofcooperative production on farms and in mills, co-operative distribution, and cooperatively ownedhousing - that is, self-supporting home commu-nities as advocated by Robert Owen.

Early American farmer cooperatives had someof the same ideals, but, more specifically, wereinterested in curbing the power of railroads(early Granger antirailroad legislation); reducingthe gross margins taken by middlemen; and mak-ing the free market function more perfectly byestablishing grades, standards, realistic pricedifferentials, etc.. They wanted to solve therural problems of low prices, uncertain markets,and dealer control, and other aspects of monop-olistic and competitively imperfect markets.And they wanted state and federal legislation tolegalize cooperatives and to escape the threat ofviolating antitrust laws. It is apparent that Amer-ican farmers were primarily interested in cooper-atives to improve their economic condition ratherthan for social reform.

Modern day farmer cooperatives are still pri-marily concerned about economic matters asthey affect farmers and mush less so about thepublic welfare aspects of collective action. Nu-merous important developments have taken placein the last half century that, unfortunately, arenot well known. To mention that 7 farmer co-operatives in 1971 are among the 500 largestbusiness corporations in this country (Fortunemagazine) and that a number of cooperatives doseveral hundred million dollars of business an-nually (one in 1971 did over 800 million dollars)is quite revealing to many. Other changes thatmight be mentioned are:

Multiple commodity organizations are repla-cing single commodity associations.

Multiple function associations are replacingmany single function cooperatives.

Decentralized control in local associationsis giving way to much more centralized con-

trol in both centralized and federated associ-ations.

There is even greater dependence upon in-fluencing prices through effective bargaining,careful grading, product control, branding ofproducts, and market penetration; althoughearlier cooperatives placed much emphasisupon savings derived by reducing operatingcosts.

There is greater emphasis on merchandisinginvolving brand names, pricing, dealer ser-vice, product promotion, advertising, new

product development, and other merchandis-ing techniques while in earlier years, mar-keting cooperatives essentially handled pro-ducts - packing, storing, shipping, and con-signing to established traders.Inadequate and oftentimes poorly financedassociations have given way to financiallystronger cooperatives with more sources offunds. Farmer cooperatives use the revolv-ing capital plan of financing widely and thishas resulted in extensive capital accumulationsand systematic repayments.

Cooperatives have branched out into many,fields including housing, credit unions, alltypes of insurance, businessmen's cooper-atives, optical, medical, and pharmaceuticalservices, memorial and burial associations,artificial breeding associations, and manyother types on a local, regional, and nationalbasis. As a result, nonfarmer membershipnow exeeds tha+ of farmer membership in theUnited States. Prior to the twenties, mostcooperatives in the United States were re-stricted to farmers' marketing, purchasing,and mutual fire insurance cooperatives.

Extensive business experience from years ofoperations at different levels in the markethas replaced inexperience or limited know-ledge of business practices and procedures.Thus, cooperatives are stronger competitivelyand are innovators as well as followers.

For many years increased volume of businessdepended primarily upon internal growth, butsince the fifties many cooperatives have grownexternally through mergers, consolidations ,and acquisitions.

Prior to the 1920's, cooperatives attemptedto get-appropriate legal basis for their oper-ations. Since then all states have legalizedcooperatives and many states, as well as thefederal government, are required by law toassist cooperatives. The tide has changedfrom restriction of and indifference to cooper-atives to endorsement of and outright promo-tion of cooperatives - especially of farmers'associations, rural oriented cooperatives(such as the rural electric cooperatives),thrift associations (credit unions), and co-operatives for disadvantaged groups in urban(ghetto) centers and rural areas.Extensive processing, refining, and manu-

facturing by central associations now provideaffiliated local supply cooperatives with mer-chandise.

25

FINANCING OF COOPERATIVES

Adequate financing is one of the fundamentalsof sound business operations. Land (or naturalresources) and labor (including management) arethe other two elements essential to production inaddition to capital. A cooperative also uses theseif an efficient job is to be done by the cooperative- ample capital must be provided and used wiselyalong with land and labor.

PRINCIPLES OF FINANCINGCooperatives involve give and take by the mem-

bers. If a cooperative is to provide services atcost and if members expect to benefit from itsoperations, then it is apparent that members mustalso assume the responsibility of financing theirundertaking. Plans for financing must be con-sistent with the principles of cooperation as wellas with legislation and administrative rulings.Cooperative principle ., of financing include thefollowing:

1. Member-patrons control the cooperativerather than member-investors. Control is notlinked with investment as in a standard corpora-tion. Voting in a local or primary cooperativeunder Wisconsin law is on a one-man-one-votebasis and not according to how many shares ofstock a member owns as is done in a standardcorporation. The purpose of the cooperative isto provide services at cost rather than to maxi-mize returns on the capital invested in it. Con-trol is, therefore, separate from investment.

2. Capital should be furnished as much aspossible in proportion to the use made of the co-operative by the individual members. Earlier,mention was made of the basic principle of pro-portionality - sharing in the risks, receivingbenefits, and providing financial support in pro-portion to the volume of business transacted withthe cooperative. From the standpoint of equitythis seems fair. Patronage refunds are distri-buted on a proportional business basis to achieveservice at cost. Since this practice is acceptedas equitable, it seems logical to require capitalinvestments on the basis of patronage as well.This appears much fairer than to expect equal

investments by patrons irrespective of the amountof business each does with the association.

3. The use of capital should be rewarded withsmall dividends when earned. This may not onlyinduce members to invest in their cooperativebut likewise to leave their money in the organiza-tion after they no longer need the cooperative'sservices. "Limited returns on equity capital" isa commonly accepted principle of cooperatives.This principle does two things - it subordinatesthe importance of capital and at the same timerecognizes that a modest dividend for its use isfair and desirable. The Rochdalians in 1844followed the practice that "capital should be oftheir own providing and bear a fixed rate of in-terest." Such nominal dividends (4 to 6 percentor so) should only be paid if net earnings warrantit.

4. Current member patrons should providecapital and should supplement or replace thatprovided by members in earlier years. Bothownership and control should be vested in activepatrons to maintain the cooperative character ofthe association. The revolving capital plan offinancing (described later) provides for currentpatrons to do part or all of the financing on apatronage basis.

5. Cooperatives need adequate capital to func-tion efficiently and to endure. They need reservesfor depreciation, obsolescence, and unpredictablecontingencies. Not only is it important to havesufficient capital initially but growth in volumeand services requires continued financial expan-sion. This takes financial planning and top creditratings with banks and lending agencies.

6. Business should generate new capital. Thismeans that gross margins (the difference betweenthe selling price and the buying price) should bewide enough to cover all expenses and also pro-vide for net margins (net earnings or savings).These net margins plus additional earnings fromdividends, interest, and refunds constitute thesource out of which dividends on stock, allocatedreserves, employee bonuses, provision for an

educational fund, and refunds are made. Sincethe cooperative needs to generate capital for itsfuture use, only part of the refunds will be paidin cash - the deferred refunds will provide neededcapital. About half of the profits, after taxes, ofAmerican business corporations is retained andplowed back into the business. This is a mostimportant source of capital. It lessens the needto borrow funds, keeps control of the funds in theorganization, and since only nominal dividends,if any, are paid to members for the use of suchfunds, it can also reduce the cost of capital.

7. Cooperative securities (shares) are redeem-

ed only at their par value (original face value) andnot on the basis of their book value. This reducesspcnulation since their redemption value is con-stant. For example, if the par value of a share ofcommon stick is $25, then the holder will be paid$25 for it when it is redeemed by the cooperative,even though the book value (the appraised value ofall assets divided by the total number of sharesoutstanding) might be $30 or $23. Only at disso-lution, merger, or bankruptcy is the book valueof the shares very significant.

8. Cooperatives should have the first optionto purchase shares of stock to be sold by mem-bers . Generally, such purchase option is statedon the face of the stock certificate. This is es-sentially a precaution to prevent voting commonstock from getting into the hands of persons withpossible ulterior motives or lacking in mutualinterests with member.

9. Ways and means of returning capital to

members who cease to be patrons should be de-vised. A practical and fair stock redemptionprogram should be instituted, pcssibly throughthe establishment of a redemption fund, so thatpatrons who no longer have any need for the co-operative and wish to get their money back cando so without a long waiting period or difficultyin finding a buyer for the stock. Cooperativesecurities are not listed on the stock exchangesand, therefore, do not have the flexibility ofstocks which are. Consequently, assurance ofgetting their money back upon retirement, leavingthe community, or quitting farming would makeinvestment in cooperatives more attractive.

10. The par value of stock (cost) or member-ship fees in nonstock companies should be gearedto the income of the people who will comprise thecooperative. Where incomes are low, low valueshares should be issued to make it possible formost people to acquire at least one share or mem-bership with voting rights - in wealthier commu-

nities shares of higher par value could be issued.Credit unions universally have a low share valuefor membership - $5. On the other hand, sharesin cooperative plywood factories have very highvalues. Low value shares make it possible todiffuse and extend membership rather easily,but it may likewise cause persons able to investin more shares to hold back since they have ac-quired voting rights and full membership statuswith only one low-priced share. Conversely,high valued shares of $100, $200, or $500 mayrestrict sales, but these can provide sizeableinvestments by persons genuinely interested inthe cooperative as shown by their willingness toinvest such larger sums.

USE OF CAPITALCapital is needed to:

- pay costs of organizing the cooperative in-cluding such items as attorney's fees.

- provide physical facilities such as land,buildings, machinery, trucks, and equip-ment.

- meet expenses of operations - payrolls,maintenance, utilities, taxes, insurance,repairs, raw materials, fringe benefits,etc..

- finance farm production through subsidiaryagricultural credit corporations, contractfarming arrangements, and extension ofloans and large accounts receivables.

Of course, capital needs vary greatly dependingon whether facilities, trucks, and equipment areleased or owned; whether large or small inventorystocks are carried; and whether finance coopera-tives such as Production Credit Associations andCredit Unions are available to finance farm pro-duction or whether this is to be done by the co-operative. These are only a few of the considera-tions that have a bearing upon the need for capital.

Defraying Organizing ExpensesThe first need for money in a cooperative is

usually to organize. Before an association actu-ally starts business operations, money may beneeded to determine the need for an association;to develop an organization plan; to print articles,bylaws, and other necessary organization papers;to sell stock or collect membership fees; to obtainmembership contract signatures when membershipcontracts are used; and to hire an attorney.

27

Organization expense can often be kept at aminimum if a number of peopie share the prelim-inary work. Then the burden will not fall tooheavily on a few, and group interest and responsi-bility is likely from the start. Probably for thesereasons, and possibly also to discourage profes-st,nal organizers, Wisconsin Cooperative Lawprohibits using more than 5 percent of the moneywhich is received from the sale of stock to organ-ize. The College of Agricultural and Life Sciencesand the State Department of Agriculture can assistgroups in the state who contemplate starting co-operatives.

Providing Facilities (Fixed Assets)One of the main needs for funds by cooperatives

is to acquire facilities such as plant site, plant,machinery, and equipment. This is particularlytrue in local marketing associations, such asdairy plants which manufacture or process. Thesefacilities are what the bookkeeper and accountantcall the fixed assets of an association. As far aspossible, the members should furnish the moneyfor the fixed assets to give the association a strongfinancial beginning and a good credit base. It isseldom desirable to borrow more than 50 or 60percent of the market value of the fixed assets.

It may be better to lease physical facilities whenthey can be leased at favorable rates. To ownsuch facilites ties up large amounts of capitalthat might be more productively used as workingcapital in day to day operations. Many chainstores do not own the stores they occupy but leasethem. Many trucking firms or users of truckslease the trucks. With so many leasing firmscurrently serving American business, it is goodbusiness to inquire what savings - cost-wise, tax-wise, service-wise, and financial-wise - can bemade from leasing facilities instead of owningthem.

Meeting Operating Expenses(Working Capital)

Another major use of money is for operatingexpenses. This includes the payment of salariesand wages, insurance, taxes, purchase of goodsfor resale by purchasing associations, and ingeneral, all out-of-pocket expenses. Capital forthese uses is commonly called working capital orcirculating capital.

Working capital is also used for advances orpart payments to farmers for commodities de-livered to associations to be marketed. It is notonly desirable, but necessary, to pay farmers

28

something at the time, or shortly after, the pro-duct is delivered. Moreover, the associationcan generally borrow for this purpose easier andat lower rates of interest than individual farmerscan.

When produce is paid for in full within a fewdays, or even a few weeks after delivery, advan-ces or partial payments are usually not made.However, in some sales associations, final pay-ments are delayed several weeks or even monthsdue to an extended storage or marketing period.Such associations may handle products producedseasonally but marketed over a much longer per-iod. In these associations, advance paymentsof 50, 75, or even 90 percent of the expectedprice and value of the products are frequentlymade so that the producer can pay his bills in-curred in producing the products.

Often, cooperatives have enough money forfixed assets, but do not have enough operatingcapital. If the members have furnished the moneyfor fixed assets, then these fixed assets can beused as security for borrowing money for opera-ting purposes. If fixed assets are also underfi-nanced, then the shortage of capital might besolved by leasing the facilities and using memberinvestments for working capital. While membersshould furnish a substantial part of the total cap-ital needed, especially for fixed assets, theamount each member would be required to furnishcould still be small and within hie means.

"PCA CAN HELP YOU WHEN YOU NEED CREDIT."

----.0-,---------1-1

.,1

PRODUCTION CREDIT ASSOCIATION (P.C.A.)LOANS, FEDERAL LAND BANK (F.L.B.A.)LOANS, AND CREDIT UNION LOANS ARE MADEBY FARMERS' COOPERATIVE FINANCE ORGAN-IZATIONS TO FINANCE THE PURCHASE OFFARMS, BUILDINGS, MAINTENANCE OF BUILD-INGS AND FARM OPERATIONS ON SHORT,MEDIUM AND LONG TERM BASE&

Methods of financing are discussed later, butit may be well to note a few advantages of havingadequate working capital. It allows managementto take advantage of cash discounts when purchas-ing supplies. Such discounts are usually 1 or 2percent for cash payments within 10 days of pur-chase. Annually, this amounts to an attractiverate of interest. Also, adequate working capitalpermits buying in large lots rather than on ahand-to-mouth basis. When quantity purchasesare made carefully, substantial savings are fre-quently possible. In general, prompt paymentof bills adds to the buiness reputation of a co-operative, and plant and equipment are likely tobe kept in better repair and efficiency when ade-quate working capital is available.

Financing Farm ProductionSince the establishment of Production Credit

Associations, there is less need for farmers'marketing cooperatives to finance the productionof crops to be marketed. But in the twenties andearly thirties some marketing cooperatives, espe-cially in the South among cotton farmers, set upsubsidiary agricultural credit corporations tofinance farm production. This was one way tohelp farmers to join cooperatives since creditgranted by independent merchants carried withit the obligation to sell the harvested cotton tothe merchant. Few cooperatives have such sub-sidiary corporations for financing farm produc-tion today.

However, farm supply cooperatives help financeproduction by extending credit. Feed, fertilizer,seed, chemicals, equipment, and other items arefrequently charged and then are paid for afterproducts are harvested and sold,

Some cooperatives have financed broiler pro-duction this way on a contract farming basis.This extension of credit increases the coopera-tive's need for working capital.

KINDS OF CAPITALFrom the standpoint of ownership, there are

two kinds of capital - equity capital and debtcapital.

Equity capital is provided by the member own-ers of the business. In the balance sheet it isreferred to as the net worth. It is the equity thatthe owners have in the business - the dollars leftwhen the total liabilities (money owed to others)are subtracted from the total assets (total worthof the company). Thus, total assets minus totalliabilities equals net worth or ow-iers equity. Toillustrate, Farmer A has a farm worth $110, 000.He has $60, 000 of his own money invested in it

and has a mortgage of $50, 000. The total assetsequal $110, 000; total liabilities equal $50, 000;and net worth or owner's equity equals $60, 000.

Debt capital is repress ntt-i by loans (short andlong term such as mortgages), bonds, certificatesof indebtedness with due dates, and any otherevidences of credit extended to tilt business.Mortgage credit is used largely to finance fixedassets such as buildings, expensive equipment,trucks, and the like. Debt capital from othersources is used mostly to provide wc rking capi-tal for current financial needs. To measure theworking capital a company has, just subtracttotal current liabilities from total cur -ent assets.(Total current assets minus total current liabili-ties equals net working capital.)

Current assets consist of cash on hand and inbanks; accounts receivable for merchandisesold but not as yet paid for; inventory of com-modities on hand and ready for sale, process-ing, or manufacture; notes that are collectablewithin one year; and prepaid expenses such asprepaid rent, prepaid insurance, and similarexpenses paid for but applicable to operationsfor some future period.

Current liabilities consist of accounts payableto suppliers, to members, or to others forcommodities furnished; accrued expenses suchas taxes, payroll, and interest which have ac-cumulated but are unpaid; and notes payable tobanks and others within one year.

SOURCES OF CAPITALCooperative business associations get funds

for equity capital from members, nonmemberinvestors, and from successful business opera-tions. This capital is obtained in four ways;

1. Members and investors purchase commonand preferred stock outright.

2. Memberships are sold.

3. Deductions or per unit retains are author-ized for which capital securities are issued(for example, 1 cent per pound of butterfat,10 cents per box of fruit, etc. , are kept bythe cooperative for which certificates ofinvestment are issued).

4. Cooperatives retain the net earnings frombusiness operations rather than distributethem - a chief source of funds over theyears for many cooperatives.

Considerable equity capital is obtained from acooperative's business operations. Deductions

29

are made from payments to member and nonmem-ber patrons of a marketing association and earn-ings or savings applied to reserves and surplusare examples of this. Payment of patronage re-funds in capital stock, in certificates cf indebt-edness, in capital book credits, or in patrons'equity reserve also builds up membership capitalin cooperatives. When payments are delayed toproducers for products marketed, it adds to theavailable capital of an association, at !east tem-porarily. Delaying payment of bills or accountspayable has the same effect as temporarily in-creasing available operating capital for otherpurposes, but, as pointed out earlier, this fre-quently results in additional cost rather than insavings.

Debt capital is money obtained from commer-cial banks, from Banks for Cooperatives, andfrom governmental agencies such as the RuralElectrification Administration for electric andtelephone cooperatives and the Bureaus of Fisheries, Indian Affairs, and Reclamation. In ad-dition, government insures loans for qualifiedhousing and it participates under restrictiveconditions with private lenders in making loansto eligible small business firms. Commercialbanks and Banks for Cooperatives grant short-term (30,60, or 90 day loans), intermediate-(3 to 5 year loans) and long-term loans.

Loans to cooperatives are also classified asfacility loans, if the money is to be used forplant and equipment; operating loans, if the mon-ey is to be used primarily for current operatingpurposes; and commodity or warehousing loanswhen the loans are secured entirely by ware-house receipts issued by an organization otherthan the borrower. No sharp distinction can bemade between these loans, since they are notclassified entirely on the basis of use, security,or duration. For example, both facility andoperating loans are frequently obtained with fixedassets pledged as security. The money, borrow-ed on the security of these fixed assets, mightfinance either facilities or operations. Commod-ity or warehouse loans are really operating loansbacked by a special type of security such as ware-house receipts on products in bonded warehouses.

In the past, fixed assets have been the mainsource of borrowing power for a local cooperative.Loaning agencies relying solely upon security didnot investigate much further than to appraise thefixed assets and to check prior liens (chargesagainst the assets). Some associations use bondedwarehouse receints or accounts receivable as col-lateral or security for loans.30

But creditors also consider other factors thanmerely the security of the loan. This is partic-ularly true for the district Banks for Cooperatives,which frequently assist cooperatives with theirbusiness problems as well as loaning them money.In addition to security, commercial banks and theBanks for Cooperatives are interested in how themoney is to be used and whether the associationis ab1.- to pay the interest and principal out ofearnings.

EVIDENCES OF EQUITYCAPITAL

Ev:dences of equity capital are shares of com-mon stock, preferred stock, certificates of equity,membership certificates, capital book credits,and reserves. Equity capital may or may not beon a revolving fund basis, may or may not beardividends, and also may or may not have a fixedmaturity date. The latter two considerations areleft largely to the discretion of the board of direc-tors.

Common StockAssociations are usually organized on a stock

basis when large amounts of capital are needed.Members tend to look upon the purchase of stockboth as an investment and as a membership re-sponsibility. Capital stock is issued as commonstock and preferred stock. Most cooperativeslimit their issue to common stock, although thereare important and frequent exceptions. Commonstock is more satisfactory than preferred stockfrom the point of view of the cooperative sincecommon stock carries no fixed dividend rate.The board of directors determines annually whatdividend rate, if any, is to be paid on commonstock.

In stock associations, ownership of one or moreshares of common stock is usually required formembership and voting privileges. Moreover, theownership of common stock is often limited to pro-ducer members. In some states a cooperativemay issue two types of common stock - one car-ries voting rights and the other does not.

It is desirable, in planning a cooperative, tomake adequate provisions to assure that the stockwill be kept in the hands of active patron-membersat all times. This can be done by indicating onthe face of the certificate that the holder mustfirst offer the stock for sale back to the coopera-tive before selling it to any other body. Also,both voting and nonvoting common stock might beissued - voting stock to be restricted to producer-

patrons, and no such restrictions on the nonvotingshares. Whenever a holder of nonvoting stock be-comes eligible to vote, his nonvoting stock shouldbe exchanged for voting stock. In every respectexcept the privilege of voting, nonvoting and votingstock are equal. They carry the same propertyrights; the same rate of dividends is paid on each;and in the event of liquidation, nonvoting stockshares equally with the 'sting.

Preferred StockPreferred stock seldom carries any voting or

membership privileges, but it usually specifiesa fixed rate of dividends. Such dividend accumu-lates for some associations until paid. The hold-ers of preferred stock, regardless of its cumula-tive feature, have a prior claim over commonstockholders upon the annual earnings of the asso-ciation up to the amount of the dividends, and or-dinarily, in case of dissolution, upon the assets ofthe association up to the par value (cost) of thepreferred stock. Cooperatives seldom restrictownership of preferred stock. Thus, holders ofpreferred stock are likely to be more interestedin the association as investors than they are asmembers. Large issues of preferred stock tendto place on the association an undesirable, heavyburden at all times, and also make the commonstock less attractive to members and prospectivemembers.

Cooperatives should ponder seriously the ad-visibility of issuing preferred stock that is cumu-lative. It is sometimes necessary, however, toinclude this feature to make it attractive to inves-tors who have little or no connection with theassociation as patrons. While preferred stockusually carries no voting or membership privi-leges, the cooperative act requires that anyamendment of the articles or bylaws relating topreferred stock must be approved by two-thirdsof the holders of preferred stock voting at sucha meeting. If preferred stockholders are per-mitted to cast one vote for each share of stockthey hold, the amendment shall be adopted byholders of at least two-thirds of the shares en-titled to vote thereon. Also, two-thirds of themember votes cast must approve the amendmentfor passage. A copy of any proposed amendmentrelating to preferred stock and a mail ballotthereon shall be sent to each holder of commonstock and to each holder of preferred stock.

Certificates of EquityMany cooperatives issue certificates of equity

to patrons who invest capital through deductionsfrom payments for products marketed throughthe association, or through earnings which areprorated to the patron but not paid to him in cashduring the year earned. Such certificates arecalled certificates of indebtedness, certificatesof interest, advance fund certificates, revolvingfund certificates, and patrons' equity reservecertificates. Regardless of the term, all havecertain features in common.

They show the patron's contributions to thecapital of the cooperative in proportion to thebusiness each patron transacted with the associ-ation. They represent funds that belong to thepatron and are normally repaid to him later.They sometimes bear interest and are quite com-parable, in many respects, to investments in thepreferred stock of the association. The moneyrepresented by these certificates is used as anyother capital which the association has. Thecertificates are the patron's legal claim to partof the capital funds. The funds belong to the pa-trons, and the certificates are evidence of theamounts which the association has retained and,hence, owes to the patron. They represent theclaims of the patrons on the association.

Membership CertificatesWhen the nonstock plan of organization is fol-

lowed, initial capital is usually provided throughmembership fees. This plan is less adaptableto associations requiring large amounts of capital,since it is seldom possible to raise large sumsin this manner.

The property rights in a nonstock associationnaturally do not accrue the same as in a stockassociation. An association must provide thatmembers shall have either equal or ur- -pal pro-perty rights. Equal property rights mean thateach member has the same (equal) claim on theproperty of the association regardless of theamount of business he does as a patron. Becauseof the varying amounts of products purchasedfrom or marketed through the association, it isusually provided that property rights shall be un-equal and in proportion to the business transacted.The basis upon which property rights are to bedetermined must be stated in the Articles of In-corporation,

Amendments or repeal of provisions in thearticles or bylaws relating to property rights ofnonstock associations usually requires a favorablevote of at least two-thirds of the members.

31

Capital Book CreditsAlthough many cooperatives issue certificates

of equity to represent investments in capital,other associations simply send notices to mem-bers of the amount of capital credited to themduri the year in the cooperative's books. Whenthis is done, no formal certificates of equity areissued. Such notices of allocation are issuedunder the revolving capital plan of financing.These notices have considerable merit over for-mal certificates of equity since the certificatesare sometimes lost or destroyed. This troubleis avoided when simple notices of book creditsare made.

ReservesPart of the equity capital shown in the balance

sheet is designated as unallocated reserves. Old-er associations frequently set aside reserve fundsfor contingencies or for business expansion, with-out allocating them on a proportional basis amongthe affected patrons. In Wisconsin these wereoften called "patrons' equity reserves" and sodesignated in the balance sheet. Recently, withqualifications for federal income tax exemptionmore explicitly defined, reserve monies (exceptthose for depreciation and obsolescence) areusually allocated among patrons. As late as themid-fifties, about 10 percent of the equity capitalof marketing and farm supply cooperatives in theUnited States was still in unallocated reserves.

REVOLVING CAPITALPLAN OF FINANCING

The revolving capital plan of financing is aunique plan of financing business operations usedby about two-thirds of all farmer cooperatives inthe United States. Capital is provided by patron-members, used for a time by the cooperative,and then redeemed or repaid to the member-pa-tron on a revolving basis. The revolving fundplan is distinctively cooperative since it is notused by other types of business organizations.It is one of the most effective ways to accumulatecapital, to have current member-patrons furnishfunds in proportion to their uEe of the cooperative,and to provide a systematic way of returning in-vestments to member-patrons later.

Marketing, purchasing, and service organiza-tions, and capital stock as well as nonstock co-operatives can use the revolving capital plan offinancing provided proper authorization is givenin the bylaws or other legal documents. Neworganizations may begin with this plan at the32

very start and older organizations may also setup the plan to get members to invest.

How Capital is AccumulatedThe first necessity is to accumulate capital.

This is done either through authorized deductions:;.r unit retains) or by retaining part or all of the

net savings due patrons (deferred patronage re-funds). A third, but rare, way is direct cash in-vestment in revolving certificates that bear inter-est. Since this latter is the exception, the dis-cussion is limited to the two major ways of gettingcapital.

Per unit retains are capital contributions with-held from patrons from sums the cooperative owesthem. For example, a dairy cooperative maywithhold 1 cent per pound of butterfat, or 5 centsper hundredweight of milk from a farmer's milkcheck for capital purposes in addition to the .egu-lar costs or operating charges the farmer pays.Thus a dairy farmer selling 500,030 pounds ofmilk through his cooperative during the yearwould contribute $250 to the capital of the asso-ciation with a per unit retain (if 5 cents per hun-dredweight being withheld from each month'smilk check.

Although per unit retains could theoretically bewithheld in purchasing associations (for example,2 percent per dollar of purchases) this does notwork well and, therefore, is seldom done. Withrare exceptions, only marketing associations usethe per unit retain method to accumulate capital.

Both marketing and purchasing associationsuse the deferred patronage refund plan to accumu-late capital. Such accumulations can only be madein years in which the cooperative has net earningsand, therefore, has money to be withheld from pa-trons. However, under the per unit retain method,sums can be accumulated even though the coopera-tive has no net earnings for the year or even expe-riences a loss.

The amount of refunds withheld from the patronsfor capital purposes depends on the capital needsof the association, upon practical considerationsfrom the members' standpoint, and (since 1962)on federal income tax considerations. For farm-er cooperatives to qualify for exemption fromfederal income taxes, at east 20 percent of thepatronage refunds must by paid in cash within 81months after the close of the association's businessyear. This requirement has caused many coopera-tives to withhold less than 80 pei.:ent of their netsavings for capital purposes.

Methods of Showing InvestmentsAs evidence of the investment in the coopera-

tive's capital, the organization may issue to thepatron:

- -shares of common or preferred stock.

--certificates of investment or equity.

- -certificates of indebtedness.

--notices of allocated capital book credits.

Some cooperatives issue shares of commonstock for the capital sums retained. This is doneso that all of the capital in a capital stock coopera-tive is put on a revolving basis--including thestock which represents original investments inthe cooperative. Other cooperatives do not re-volve the permanent capital represented by com-mon and preferred stock but restrict the revolve-ment to that accumulated under the plan. (Thislatter capital is called interim capital as distin-guished from permanent capital.) Sometimes onlypreferred stock is issued and revolved leaving thecommon stock on a nonrevolving basis.

Certificates of investment or equity withoutmaturity dates and without any guaranteed interestare issued by 90 percent of farmer cooperatives.(These certificates are variously named - revol-ving fund, per unit retain, capital fund, capitalretains, advance fund, building fund, etc..) Theboard of directors generally decides what rate ofinterest, if any, shall be paid to certificate hold-ers. Over three-fourths of outstanding certifi-cates of farmer cooperatives in this country werenoninterest bearing when a study was made of co-operative financing some years ago. The direc-tors also decide when certificates are to be re-deemed. Since the board of directors is in a bet-ter position to Know the capital needs and financialstatus of the association than the members, thisdiscretionary power should rest with them. Inthe mid-1950's, approximately 40 percent ofequity capital -f farmer cooperatives in the UnitedStates was represented by certificates of equitywithout maturity dates.

Some cooperatives also issue certificates of in-debtedness for capital accumulation. These gen-erally have maturity dates and fixed interest rates.Technically, a certificate of indebtedness repre-sents borrowed capital rather than investmentcapital as a certificate of equity does. It is likea loan and, in reality, should be a part of the li-abilities shown on the balance sheet rather than apart of the ownership capital or net worth. (In

case of bankruptcy, holders of certificates of in-debtedness have a prior claim to the company's

assets over holders of certificates of equity.)However, cooperatives and their accountants dif-fer in their treatment of certificates. Some dis-tinguish between loan capital and equity capital- -that is, between certificates of indebtedness (loans)with due dates and certificates of equity (invest-ments) without any due dates. Others disregardspecific designations and consider the capital pro-vided by the member as an investment and part ofthe net worth in the balance sheet. Certificatesof indebtedness may also be issued without matur-ity dates and without any guaranteed interest ratewith both redemption and interest payment beingleft to the judgment of the directors.

Notices of allocated capital books credits takethe place of issuing certificates to patrons. Suchnot 3s need to be given so patrons will know theamount of their investments and will have the in-formation for making out their personal incometaxes. Since 1966, members must report theamount of money withheld by per unit retains dur-ing the year as personal income for tax purposes--if the members do not report this, then the co-operative must pay a tax on these sums. The pa-tron must consent by written agreement or througha bylaw k :ovision to treat the dollar amount of allper unit retains as a cash payment to him whichhe has reinvested in the cooperative.

RedemptionNot until the first monies withheld are repaid

to the patrons can it be said that the capital re-volves. Usually, the oldest certificates outstand-ing are the first to be retired. Thus, moneywithheld in 1960 might be repaid in 1966, that of1961 redeemed in 1967, and so on. Generallybefore any repayment is made to patrols, longterm indebtedness is paid. Likewise, if commonstock is issued for the retentions, the old originalissues are retired before the new stock certifi-cates are redeemed. Once redemption has begunthis does not terminate the withholding of addi-tional sums. To be on a revolving basis requirescontinuous withholding of funds each year, theiruse by the organization, and the repayment ofthe earliest monies withheld.

The revolving capital plan is often likened toa water wheel in which the water - the patrons'money retained by the cooperative from theirreturns - turns the wheel that runs the coopera-tive's business. At the end of the revolving per-iod, the water is returned to the millstream -that is, the amount of money retained is paid tothe patrons to whom it belongs. See Figure 1.

33

Figure 1. Revolving Capital Plan

The operation of the plan is shown in Figure 2.The chart is based on an association which re-volves both its initial capital and that retainedsubsequently. It is assumed, for simplification,that the association's capital requirements areconstant at $30, 000 a year. The associationstarted in 1941 with $15, 000 of %title capital and$15, 000 of borrowed funds. In 1942, $5000 cap-ital was retained. This was used to reduce thedebt to $10, 000. Capital retentions of $3, 000 in1943; $4,000 in 1944; and $3,000 in 1945 werealso applied toward repayment of the loan. Thismade it possible in 1946 to apply $6, 000 of the$8, 000 retained that year toward retirement ofthe initial capital; $4, 000 and $5, 000 so appliedin 1947 and 1948 retired all of the initially in-vested capital. Therefore, in this illustrationthe capital began revolving after the fifth year(in 1946). The $5, 000 withheld from patrons in1942 was repaid to them in 1949; the $3, 000 re-tained in 1943 was paid back in 1950, and so on.Retention of funds continued after 1949 and sodid repayments of sums withheld in earlier years.

34

$30000 $30000

SorronotFunds

.15 000

BorrowedFoods

$IO 000

11119112

S 000

1111

Indult IturnbunIss

515 000 SIS 000 $15 000 115.000 $15400

£32000

Innal11.1010404

CopanS 9 000

131 000 0310(0

1146

$ 11 000

1001.1

1AnnisortntCop..

S 5 000

1961S 5 000

19115

$ 3 000

19112

$ 5,000

19111 1942 19113 1944

-Frown Cosporaore Sam. Cowry it,. t

OxonMorodentro

CdstdLit 0,000

$ 5,000

19115 1940 19117

Munnthontorolut

GunnS 5.000

S 5,000

534 000

S S

1545$ 3 000

533 000

1952

1951

S 6 000

19502 000

S 1000

1945S 3 510

S 3 000

1541 1969 1950 1951 1952

Figure 2. Revolving Capital Plan of a Farmers' Cooperative*

A modification of this repayment plan 4.,n whichthe oldest outstanding certificates or capital con-tributions are repaid first is the plan in which acertain percentage of all contributions is repaideach year. This is shown in Table 3. (Another

530 000

1953

$ 5 000

1952S 000

1951S 6 00C

Cnt7744.1950

S 2 000andsoran

. ,

1155-$1000

vs:.$ 5000

1967$ 3 000

Nr-

531 000

si 3

S 5 000

Ts..$7000

1945$ t 000

.11.rdenows$ 11.000

1047$ 3400

1953 1954

modification of the revolving plan is the "Adjust-al P Revolving Fund Capital Plan." See FarmerCooperative Service General Report 41, pp. 32-36, March 1958, and General Report Ill, April1963, for description.)

Table 3. A Member's Capital Equity Account in a Cooperative Retiring Capital Contributionson a Percentage of Total Investment Basis.

Year

CapitalContributed

CapitalRevolved (Retired)

Capital InvestmentAt End of Year

1 $ 20 0 $ 20

2 30 0 50

3 50 0 100

4 75 0 175

5 75 0 250

a 40 $50. (20% of $250) 240

7 100 $48. (20% of $240) 292

8 80 $29.20 (10% of $292) 342.80

9 75 $85.7C (25% of $342.80) 332.10

10 eo $83.02 (25% of $332.10) 309.08

36

During the first five years the cooperative'scapital was built up to a desirable level and norevolving took place. During this time the mem-ber contributed varying amounts based on hisvolume of business to a total of $250. In thesixth year the cooperative retired 20 percent ofits capital contributions under the plan and thusretired $50 of this member's investment. Heonly contributed $40 to the capital fund that year -thus his total investment was reduced to $240. Insubsequent years, the amounts he contributedvaried based on his volume of business. Theamounts retired also varied - according' o thedecision of the board of directors. (In some co-operatives, a higher percentage of the most re-cent years' capital contributions is repaid and alower percentage is repaid on the remaining cap-ital investments. This is done particularly tobenefit young farmers who may be short of cashin their farming operations.) It is apparent fromTable 3 that the amounts refunded during a yearhad no relation to the specific amounts withheldin particular previous years.

AdvantagesThe widespread use of the revolving plan sug-

gests that cooperatives have found it workableand meritorious. The advantages include the fol-lowing:

36

1. Patrons contribute capital in proportion tothe use made of the cooperative.

2. Current users of the cooperative help fi-nance its operations.

3. The plan aids persons to acquire ownershipand membership in the organization rela-tively easily.

4. Cost of capital funds can be kept low if nointerest is paid on the revolving fund cer-tificates.

5. The revolving plan is a relatively easy wayto accumulate capital - easier, for example,than to sell stock to patrons.

6. It makes nonmembers who are patrons ofthe cooperative also finance the coopera-tive in propor:Ion to their patronage.

7. It provides a systematic way to retire cap-ital following its use by the cooperative -farmers retiring from fa) ting or movingaway from the community can get their in-vestments repaid.

8. The plan is virtually a forced savings planfor members who may have difficulty sav-ing money.

9. It enables members to use the certificatesas collateral for loans from banks. Somepatrons have also used the certificates topay (often at less than their face value) forfarm supplies purchased from noncoopera-tive dealers.

10. Once the plan is put into operation, it re-quires a minimum of administration.

Disadvantages

Some of the so-called disadvantages of the planare hypothetical and have not caused cooperativesto discontinue using the plan. Instead of callingthese disadvantages, it might be better to referto them as possible weaknesses.

1. The plan is not adjusted to the patron'sability to invest. It may place a heavierburden on the young farmer short of cashthan on an older farmer well-heeled finan-cially.

2. If revolving is delayed a long time - 10 to15 years (the average revolving period forfarmer cooperatives in the United Stateswas about 10 years during the 1950's) -then patrons can suffer from the depreci-ated value of their investments as a resultof inflation. (The reverse would be truewith deflation.)

3. It is difficult to maintain an established andfixed revolving plan on a declining volumeof business. Also, it is necessary to de-viate from an established repayment planif major needs for capital arise - for abuilding program, development of new salesterritories, and the like. Patrons' reac-tions to such changes will depend on howwell informed they are as to the need forchanges.

4. Some members may not regard their con-tributions to the revolving capital fund asinvestments, but rather as operating ex-penses. This can give the cooperative anundeserved bad reputation and suggests theneed for continuing education about the plan.

5. The plan could easily lead to unwarrantedexpansion of the cooperative because of theready availability of funds - "easy come,easy go."

6. Per unit retains, though capital contribu-tions and not income to the cooperative,nevertheless, are taxable As income to thecooperative since 1966 i.nless the patronconsents to include Cieht in his personalincome tax report. Thus, failure to getthe patron's consent would automaticallyincrease the cooperative's tax burden.

7. It would be difficult to revolve capital ob-tained in years of high prices and wide mar-gins during years when prices are low andoperating margins are narrow. This latterperiod would be one with little or no netearnings and, therefore, no deferred pa-tronage refunds. Also, for practical rea-sons the per unit retains may be omittedor reduced. This would undoubtedly cause,in most instances, a longer revolving periodor less repayment.

8. In view of the time value of money, patronsreceiving no interest on their certificateswould experience a loss at time of repay-ment since, for example, $100 receivedtoday by the cooperative would be worth$162.89 in 10 years at 5 percent compoundinterest ($179.08 at 6 percent; $196.72 at7 percent) but only $100 would be revolvedto the patron. However, if annual simpleinterest of 5 percent is paid, then the patronat the end of 10 years would receive $150($100 plus $50 in interest) on his $100 in-vestment ($160 at 6 percent; $170 at 7 per-cent).

9. There is no positive assurance the patronwill get his money back - the cooperativemay go bankrupt, fail, or simply be unableto make payments. This puts patrons in avulnerable position compared to those whoreceive full cash refunds and have no unitretains withheld.

RESERVESReserves are the shock absorbers of a business.

Sudden losses, markdowns in prices, shifting con-sumer demand, obsolescence, competition fromsubstitute products or from new producing areas- these and many other changes are risks whicha business must be prepared to meet. Reservesfor these purposes are very important.

There are two major classes of reserves -valuation reserves for depreciation, depletion,obsolescence, and bad debts; and capital reservesfor expansion of business, ability to meet futurefinancial losses, and enlarging the working cap-

ital. These are either allocated to each patronproportionally or unallocated. In addition tothese two major categories, some businessesset up additional reserves for specific purposes,such as contingency and accrued expense reserves,and show the amounts in their balance sheets.

Although reserves are shown on the books ofthe cooperative for these various purposes, it isnot to be inferred that these monies are isolatedfrom use until emergencies arise to use them.The monies are currently used. Bookkeepingentries show their designation and that provisionshave been made to cover these eventualities in-stead of paying out these monies to patrons orshareholders as dividends or refunds.

Reserves are generated from business opera-tions - either from deferred patronage refunds orper unit retains - and, therefore, depend on thecooperative's business success and on their cre-ation by the board of directors.

Depreciation and obsolescence are hidden ex-penses of doing business and VALUATION RE-SERVES are entered on the books to cover them.Such reserve is built up at about the same ratethat the physical property wears out. Thus, ifa machine is estimated to last 10 years and a re-placement fund is to be built up to purchase a newmachine after 10 years, then 10 percent of theoriginal cost needs to be added to the fund foreach of the 10 years. (Accountants do not onlyuse this straight-line method. They may buildup the reserve fund more nearly in line with theactual depreciation rate of the machine. Thisillustration merely shows the principle involved.)

Some associations call the reserve set asidefor bad debts and other losses a "sinking fund."Livestock shipoing associations build up sinkingfunds to pay losses sustained in shipping livestockto market.

CAPITAL RESERVES are designed principallyto increase the working capital of a firm and toprovide funds for expansion. They should be al-located on a proportional basis to member patronssince these reserves are built up from incomesbelonging to the patrons (either as unpaid patron-age refunds or as per unit retains). In federalincome tax exempt cooperatives, proportionalallocations must be made or the cooperative willhave to pay income tax on the unallocated funds.Valuation reserves, however, are not allocatedsince these cover operating expenses.

Reserves may also be classified as OPTIONAL,those depending upon the board of directors' de-cision as to how much, if any, are set aside; andMANDATORY, those required by state or federallaw. Most credit union laws, federal and state,

37

require that some earnings (usually 20 percent ofnet margins) must be set aside as a reserve orguaranty fund, up to a given percentage of assets.In a number of states, mandatory reserves ofabout 10 percent of net earnings must be set upuntil the total reserve equals 30, 40, or 50 per-cent of the paid-up capital stock. (Although theWisconsin Cooperative Law of 1911 required amandatory reserve of 10 percent of net earningsuntil the reserve fund equalled 40 percent of paid-up capital, amendments to the law in the 1920'seliminated this requirement.) Cooperators and

cooperative leaders generally agree that suchforced action is no longer called for, if it everwas, and that the decision respecting reservesshould be left to the discretion of management andthe directors.

FINANCIAL STATEMENTModern business management uses four resour-

ces - men, money (or credit), materials, andmachines (or capital equipment). The manage-ment of financial resources requires a great deal

ASSETS what is owned

CURRENT ASSETS

CASH on hand and in banks

ACCOUNTS RECEIVABLE Money owed to the cooperative for commodities sold but still unpaid less provision for bad debts.

INVENTORY Commodities on hand ready for sale or in process of preparation and manufacture realistically evaluated at cost ormarket value, whichever is lower.

P 3EPAID EXPENSES Prepaid rent, unexpired insurance, utility deposits, and similar expenses paid for but applicable to operations foradditional periods of time.

NOTES RECEIVABLE Promissory notes to be paid to the cooperative within one year.

TOTAL CURRENT ASSETS Assets normally turned into cash in the near future, usually within a year.

FIXED ASSETS Land, buildings, machinery, trucks and equipment; depreciated to present worth.

OTHER ASSETS

INVESTMENTS Investments in other cooperatives, Bank for Cooperatives, etc.

IOTA L ASSETS Total of what the cooperative has in its possession.

LIABILITIES what is owed to others

CURRENT LIABILITIES

ACCOUNTS PAYABLE Due to suppliers, members, or others for commodities or services furnished.

ACCRUED EXPENSES Taxes, interest, payrolls, expenses, pensions, social security payments, etc., which have accumulated but have

not been paid.

NOTES PAYABLE Amounts owed to banks and others for money borrowed and payable within one year.

TOTAL CURRENT LIABILITIES All debts payable within one year.

LONG-TERM OR FIXED LIABILITIES Mortgages, certificates of indebtedness, and other long-time debts incurred and payable afterone year from the date of the financial statement.

TOTAL LIABILITIES Amount owed the creditors.

NET WORTH OR MEMBERS' EQUITYwhat members have invested in their association; difference between what is owned and what is owed.

SHARES (Common and Preferred); MEMBERSHIPS -- Par value of shares of stock or membership certificates issued and representinginvestment in the capital of the association. ...

PART-PAID SHARES (Stock subscriptions) or MEMBERSHIPS Amounts credited on the books of the association toward shares ormemberships, that is, partly paid shares of stock or memberships.

RESERVES Amounts set up out of savings of the association to meet uncertainties, and to furnish capital.

DEFERRED PATRONAGE REFUNDS, REVOLVING FUND Refunds credited to members in previous years, payable at some future date.

UNDISTRIBUTED SAVINGS Current savings which are available for distribution to patrons, transfer to reserves, etc.

TOTAL MEMBERS' EQUITY Total member investment.

TOTAL LIABILITIES AND MEMBERS' EQUITY Amount owed and invested by members.

Figure 3. Balance Sheet Statement of the Financial Condition of a Cooperative on One Particular Day (Based in Part on"For Study and Action Learning the Language", Cooperative League of U.S.A., Pamphlet 43 (1) Chicago, III.

38

of skill, foresight, and planning especially asbusinesses become larger and more complex.Large companies hire comptrollers for this spe-cialized and technical function. Management usesfinancial analysis as one technique. It examinesthe financial statement prepared by accountantsor bookkeepers which consists of two basic parts- the balance sheet and the income statement(also called profit and loss statement, operatingstatement, or the earnings report).

The BALANCE SHEET presents the financialpicture or position of a firm as it stood at theclose of a particular day - generally, the last dayof the business year as shown in the annual reportof the firm (December 31, August 31, April 20, orwhatever other closing date of the business year).

The INCOME or OPERATING STATEMENTrecords the company's operations for the periodcovered, usually for the 12 months business year.The statement could be for a shorter period suchas monthly, quarterly, or semiannually. Althoughfrequent and timely financial statements are high-

ly valuable for effective management, the highcost of getting an ....dited report oftener than oncea year deters such preparations. However, un-audited reports for interim periods prepared bybookkeepers are most helpful to management,bankers, and others who attempt to keep t'p todate on the firm's operations.

Balance SheetThe balance sheet consists of three parts -

the assets, liabilities, and net worth of a firm ona given date. Ordinarily the assets are shown onthe left side of the balance sheet; the liabilitiesand net worth on the right . Both sides are alwaysin balance because the total resources or assetsof a business equal the amount required to r.ayliabilities plus what remains for the owners. Thebreakdown of the constituent parts of the balancesheet and a brief description of each item followsin Figure 3. A sample balance sheet is shown inFigure 4.

Members Cooperative Oil Company

December 31, 197_

ASSETS LIABILITIES AND NET WORTH

Current Assets Current Liabilities

Cash $ 96,774.96 Accounts Payable $ 49,446.13

Notes and Securities 62,444.99 Accrued Expenses 36,099.32

Accounts Receivable 127,655.61 Patron's Refunds Payable 29,799.02

Inventory 128 206.44 Patron's Credit Balances 1.345.27

Total Current Assets $415,082.00 Total Current Liabilities $116,689.74

Fixed Assets Fixed Liabilities

Land $ 18,245.37 Debenture Bonds $105,610.00

Buildings 96,589.24 Total Fixed Liabilities S105.810.00

Equipment 176,195.15 Total Liabilities $222,499.74

Trucks 33 152 12

Total $325,181.88 Net Worth or Members' Equity

Less Depreciation 104 160.97 Shares Common Stock $ 95,705.00

Total Fixed Assets $221,020.91 Share Credits 17,570.50

Allocated Equity Credits (Reserves) 517,300.87

Other Assets Capital Reserves unallocated 54.892.62

Prepaid Insurance $ 1,562.08 Total Members' Equity M5468.99Investments in Coops 270.30374

Total Other Assets $271,865.82

TOTAL ASSETS $907,968.73 TOTAL LIABILITIES AND MEMBERS' EQUITY $907,968.73

Figure 4. Sample Balance Sheet

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Income and Expense StatementThe income or operating statement records the

income and expenses which have resulted in netearnings or loss during a given period. Its prin-cipal divisions are:

- operating income or net sales.

- cost of goods purchased and sold, or cost ofgoods manufactured and sold.

- operating expenses which may be divided intodistribution costs, administrative expenses,and general expenses.

- other income and expenses.

The money from sales less allowances for re-turned merchandise and less such things as statesales tax leaves net sales - the amount the firmreceived for goods disposed of. To figure the costof goods sold, add the net amount of goods pur-chased during the period to the cost of the inventoryon hand at the beginning of the period and from thetotal deduct the cost value of the inventory at theclose of the period.

The net sales minus the cost of the goods soldleaves the gross margin or gross profit . The ex-penses of operating the cooperative must be paidand the net margin or loss of operation be deter-mined out of this gross margin. The gross marginis also expressed as a percentage of net sales andis one of the very important percentages which anastute manager watches.

The net margin indicates how successful theyear's operations have been from an accountant'sviewpoint. To this net margin are added the pa-tronage refunds received on business transactedwith a central cooperative and other incidentalcr nonoperating revenue (minus incidental ex-penses) to make up the cooperative's total netearnings. If federal or state income taxes arepaid, then these amounts are deducted before thetotal net earnings are shown. T e final net earn-ings (savings or profit) measures the financialsuccess of the firm over that period and indicatesthe skill with which it was managed. The itemsin the operating statement are briefly describedin Figure 5 and shown in the sample operatingstatement, Figure 6.

GROSS SALES Dollar value of products and services sold.

NET SALES Gross sales less returns of merchandise; allowances such as advertising allowances, transportation allowances, and quantity

and cash discounts; and sales taxes.

COST OF GOODS SOLD Beginning inventory at cost plus purchases of goods to be sold minus cost of inventory at close of period,

GROSS MARGIN OR GROSS PROFIT Net sales minus cost of goods sold,

EXPENSES Operating expenses divided into general expenses; sales or distribution costs; administrative expenses or salaries and wages;

plant and equipment maintenance costs; and office and general supplies.

NET MARGIN OR NET OPERATING PROFIT Gross margin minus expenses.

OTHER INCOME Incidental revenue minus incidental expenses plus patronage refunds, dividends, and interest on investments also

called nonoperating income to distinguish from the operating income (from sales less expenses),

INCOME TAXES Taxes that are deducted from net income before taxes,

TOTAL NET EARNINGS OR LOSSES Residual after expenses plus income taxes are deducted 3m all income also called net savings

or net profits.

Figure 5. Income and Expense Statement listing of income, expenses, net margins, other net income, and totalnet earnings.

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Members C000erative Oil ComnanYYear Ending December 31, 197_

NET SALES $845,527.51 100%

COST OF MERCHANDISE SOLD 598.912.76 70.84%

29.16%Gross Margin $246,614.75

OPERATING EXPENSES

Distribution

Salaries and Wages $100,027.65

Payroll Taxes 3,851.96

Truck Expense 12,230.95

Advertising 1.747.23

Total $117,857.79 13.94%

General

Repairs and Supplies $ 4,125.44

Heat, Water, Electricity 2,614.72

Insurance, Bonding 7,117.44

Property Taxes 3,339.87

Depreciation 17,714.26

Miscellaneous 2 691 7°

Total $ 37,603.49 4.44%

Administrative

Legal and Auditing $ 661.03

Directors Fees and Expenses 1,009.59

Telephone, Telegraph 942.84

Travel 500.21

Total $ 3,113.67 0.37%

Total Operating Expenses $151,574.95 18.75%

Net Operating Margin $ 88,039.80 10.41%

Other Income

Patronage Refunds Received $ 38,066.91

Other Revenue $11.649.41

Other Expenses 17585.05

Loss ($5,935.64)

Total Other Income $ 32,131.27 3.8%

Total Net Earnings $120,171.07 14.21%

Figure 6. Sample Income and Expense Statement

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Using the financial statement, comparisons canbe made with previous years as well as with sim-ilar cooperatives. The net working capital (cur-rent assets minus current liabilities) can bedetermined from the balance sheet - as cansuch ratios as the current ratio (current as-sets divided by current liabilities), the ratioof fixed assets to total assets, the fixedassets to net worth, the total liabilities to netwurth, the net worth to total assets, and otherinformative ratios. In addition, ratios based ondata in the operating statement and others basedon figures from both the balance sheet and opera-ting statement are highly useful in appraising thecondition of a cooperative. Ratios are symptomsof good or poor management.

Based on the figures in the balance sheet (Fig-ure 4), the net working capital and above namedratios would be as follows:

Net working capital (current assets minuscurrent liabilities) = $415, 082.00 - $116, 689.74 = $298, 392.26. (This association hasample working capital for the total sales vol-ume of $845,527.51.

Current ratio - $415, 082. 00 + $116, 689.74= 3.56. (For each dollar of current paymentsthat must be made, the association has $3.56of current assets.)

Ratio of Fixed Assets to Total Assets =$221, 020.91 + $907,968.73 x 100% = 24.3%.(Roughly, one-fourth of all the assets are re-presented by land, buildings, trucks, andequipment. This cooperative had slightlymore than this invested in other cooperatives($270,303.74) from which it obtains supplies.)

Ratio of Fixed Assets to Net Worth = $221, 02C.91 4. $685, 468.99 x 100% = 32.2%. (Fixed as-sets represent only one-third of the net worth- a relatively high degree of solvency is shown.

Ratio of Total Liabilities to Net Worth =$222, 499.74 + $685, 468.99 x 100% = 32.5%.(Another indicator of solvency since the li-abilities or obligations of the association areonly about one-third of the owners' equitiesor net worth.)

Ratios of Net Worth to Total Assets =$685,468.99 + $907,968.73 x 100%= 75.5%.(A further indicator of high solvency sincethe members' equities equal three-fourths ofthe total assets and only une fourth is heldby creditors.)

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KEEPING THE MEMBERS AND PUBLIC INFORMED

Two principles established by the Rochdalepioneers in 1844 dealt with member educationand information - first, a definite percentage ofprofits should be allocated to education; and,second, frequent financial reports should be givento members. In 1966, the International Coopera-tive Alliance reiterated this principle as follows:

"All cooperatives shoud provide for the educa-tion of their members, officers, employees,and the general public in the principles andtechniques of cooperation."

Most cooperatives profess a belief in these prin-ciples. However, their implementation of theseprinciples varies from little or nothing to elabo-rate member and public relations staffs.

Cooperative information programs have usuallyinvolved several distinct areas: member rela-tions, public relations, and employee relations.Training programs for directors, managementstaff, and employees are sometimes included.New programs are constantly being developedand old ones dropped or modified to meet chan-ging situations. A new term, cooperative com-munications , is now used to describe all coopera-tive information and education programs.

NEED FOR EDUCATIONPROGRAMS

Cooperatives have special communication andeducation needs because of their unique organi-zation. These are:

1. Since those who do business with the co-operative usually own and control it, mem-bers or patrons must be well informed tomake sound decisions.

2. Directors are generally selected from themembership and patrons of the cooperative.Thus, many new and inexperienced directorsneed to be informed and educated about thecooperative business.

3. Cooperative management is generally hiredand not associated with investment and own-ership so they need to realize the uniquenessof cooperatives.

4. Cooperatives frequently must communicateand decide major policy actions in a publicenvironment and not behind closed doors.

5. As owners, members often expect morefrom their cooperatives than from otherbusinesses. They feel that it is even moreimportant that cooperative practices andpolicies should be in the public interest.

PAYOFF IN MEMBERCOMMUNICATIONS

Money spent on well-planned and carefully eval-uated member communications programs is agood investment. Goodwill and understandingcan be banked in members, as money is storedin a bank, and can be drawn on in time of criseswhen loyalty and support are needed.

A well-informed member who understands theorganization, its policies and actions, generallywill remain more loyal, have fewer complaints,and take a greater interest. He will patronizethe cooperative when given a choice, stay withthe organization when the going is rough, andoffer more constructive criticism and suggestions.He will inform his neighbors about the organiza-tion in terms they undJrstand, serve as an effec-tive salesman for the organization, help promotenew products and services, and be easier to dobusiness with. He will meet his obligations andpay his bills to the cooperative. An educatedmember will help stop rumors; defend the coopera-tive; and develop a favorable climate of under-standing between members, employees, and direc-tors. He will promote a progressive attitude andbuild member confidence in the cooperative andits management. A knowledgeable member willdevelop a pride among members and within thecommunity in the cooperative as a business or-ganization - and he will inform the community ofthe cooperative's contribution to the local econ-omy.

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NEW EMPHASISON COMMUNICATIONS

In recent years, cooperatives have had a re-newed interest in communication programs.This has been partly due to the passing of controlfrom first to second generation cooperative mem-bers, to the rapid growth of many cooperatives,and to a general realization by many cooperativesthat education programs have been neglected foryears.

The New GenerationCooperatives in Northern Europe have a com-

mon saying that "a coopSative without an educa-tion program will last for a generation and a half."For many American cooperatives the last halfgeneration is already here. This task of educa-ting new and younger members and developingnew leadership is continuous. These new mem-bers need to know the value of the cooperative,why it was formed, what has been accomplished,and its future goals. John Gardner, in his bookExcellence, describes the second generationproblems of any organization as follows:

"...when a group forces its way to the top -their most precious asset is their drive, theirsense of purpose, their indomitability. Andthat is the asset they cannot easily pass on.They can pass on wealth and their knowledgeand their influence, but they cannot pass on thememory of hardships, the will to win, thefierce determination born of struggle."

The cooperative member of today and tomor-row is different from his father or grandfather.He is better informed, has more financial re-sources at his command, appraises his coopera-tive's performance more analytically, and is lessswayed by promises and exhortations.

His interests are primarily oriented towardeconomics and less towards altruism, communitywelfare, and emotionalism. Even though mostAmericans will enjoy a shorter workweek, thedemands on the member's time will be evergreater. A communications program must bevery carefully considered if it is to command theattention of such members.

Research has shown that younger cooperativemembers have different attitudes from oldermembers. Younger members are more inter-ested in getting a return now, not sometime inthe future. They are less patient with coopera-tive shortcomings and depend less on their localdirector for information than do older members.In many instances they feel the cooperative has44

not let them participate and work up to leader-ship positions. These attitudes have often ledthem to participate less in cooperatives than doolder members.

The modern farm family often operates as amanagement team. The husband is responsiblefor most of the physical work while the wife par-ticipates in decision making and office manage-ment. Yet, many cooperatives have neglectedthe member's wiic as a potential part of the co-operative. For example, annual meetings oftenhave separate programs for women--and veryfew boards of directors include women in theirmembership.

Cooperative GrowthAs cooperatives have grown, communication

has become more complex. Bigness contributesdirectly to the problem because the rate of par-ticipation goes down as size goes up. For manycooperatives the growth problem is how to bebig businesswise but seem small to members.In other words, the organization must be largeenough to operate efficiently and bargain effec-tively in the market place, but must appear smallenough for the local member to feel effective.

Cooperative ImageOne of the most important reasons for having

a communications program is to maintain a fa-vorable cooperative image. Unfortunately, co-operatives often h .iot had a good image inthe eyes of the public. Some of this has been dueto deliberate mislea mg of the public by those whoare against coopers V2._ and some has resultedfrom coo; eratives i t a to keep the public in-formed.

Some people conside , -meratives undemocra -tic, socialistic, unfair co,.. (-Lit.P.,n, poorly man-aged, only for the poor, ta. k dgi -:..s. or perhapsthey never had enough inforn..1 -, v- form anykind of opinion. Businessmen . -.. ' .equently un-informed about cooperatives. It is not uncommonfor local cooperatives to be the largest local tax-payer in rural communities, yet this fact may notbe known by the general business community.

In recent years many cooperatives have devel-oped programs to inform the public.

PREREQUISITES FORSUCCESSFULCOMMUNICATIONS

To have a successful communications program,internal or external, several conditions must bemet. These include a board and management com-mitted to a communications program, good busi-ness management, excellent products and services,a well-planned communications program, and op-portunities for feedback.

Cooperative CommitmentManagement and the board of directors must

be committed to a cooperative communicationsprogram if it is to be successful. In addition tomoral backing, they must provide an adequatebudget; a well-trained staff; and guidance in plan-ning, control, and evaluation. Programs shouldoperate continually; not just when the cooperativehas a problem.

Evaluation, or the measuring of results, is oneof the most important and often neglected areas incommunications. It should be a part of the totalcommunications program and should be includedwhen planning communications. Periodic evalu-ation should be required for all ongoing programs.

ManagementA communications program is not a substitute

for adequate management. Basic operating dif-ficulties should not be concealed from members.When the deception is discovered members willdistrust the board and management and mayleave the cooperative or may want to eliminateor curtail communications programs. Thiscould be worse on the cooperative than if prob-lems were freely discussed. In other words, acommunications program should not be used tofrost a rotten cake.

Products and ServicesProducts and services that are just as good as

or better than the competitors' are a desirableback up for communications programs. As withmanagement, communications programs are nota substitute for performance.

PlanningBefore starting a communications program,

the cooperative should do some preplanning.The planners should gather information about themembers, market, competition, and the general

economic situation. Information about membersshould include their age, income, education, geo-graphic location - and, though not as easy tomeasure, their attitude toward the cooperative.All of this information should be used in planningmember relations and education programs.

Opportunities for FeedbackCommunication is a two-way street. To be

successful, information should flow from man-agement to the members and from the membersto management. A system that does not allowfor feedback is merely an information dissemi-nation system, not a true communications net-work. All effective cooperative communicationsprograms have ample opportunities for memberfeedback through personal contact with employ-ees, written letters and other messages, :ndparticipation in cf.- -erative programs.

WHAT TO COMMUNICATEAn important step in any communications pro-

gram is the amount and type of information togive members. A sample overall criterion is:Will dissemination of this information help attainthe objectives and goals of the cooperative and bewithin the policy guidelines? If the answer ispositive, a program may be developed to trans-mit the information to the members. Since theamount of information maagament wishes tocommunicate will usually be greater than exist-ing communications staffs and budgets can handle,priorities will be needed.

One procedure is to list all the types and ldndsof information which would be helpful to members.The list could then be used as a basis for measur-ing the members' information level. Educationalefforts could be increased in deficient areas.This approach is time consuming, costly, andmay not give the answers neeeed by many cooper-atives.

A simpler approach takes into account othersources of information and posts discerningquestions in several general areas - cooperative,technical and economic.

Cooperative InformationDo members know and understand what a cooper-

ative is and what the objectives, goals, policies,and philosophies of their cooperative are? Dothey know what legislation enables cooperativesto organize and operate, and also what restraintsare imposed upon cooperatives?

Are they familur with the organizational struc-

45

ture and the operation of their cooperative? Dothey know where to get information and where totake their problems? Do members understandhew they are represented on the board of direc-tors?

Do they recognize the types of firms competingwith the cooperative? Are they aware of the mar-ket structure and relative power position of tleirorganization? Do members realize the necessaryrequirements to provide a price or service advan-tage to members and how these advantages can beobtained or maintained? Do they appreciate themarketing system for their products - the amountof processing needed, the wholesale and retailoutlets, the margins and profits in the system?

Do members understand the cooperative's fi-nancial statement, the policy on retained earn-ings, and the taxes paid by the cooperative? Dothey know the amount of information they shouldexpect from the cooperative so they can be in-formed without helping competitors. Are theyfamiliar with the background and history of theircooperative, and the different member programsoffered by the cooperative?

Technical InformationAre members getting correct information on

varieties, expected yields, fertilizer levels, andrecommended pesticides? To what extent aremembers dependent on the cooperative as a sourceof technical information readily available fromother sources? Can arrangements be made withother agencies to distribute their technical infor-mation and thereby reduce distribution costs ?Are members currently using their resourcesefficiently? Are the products produced by mem-bers as high quality and uniform as those of non-members ? Are the members fully informedabout price levels, gross margins, expensesproduct price, and total price (cash, pool, re-funds)?

Economic InformationWhat about the business climate in general?

Do the members understand the effects of busi-ness trends on the cooperative? Are they awareof general government policies and regulationsthat could affect their business? Is this infor-mation readily available elsewhere or should thecooperative provide it?

Do members have a ready source of generalinformation about changes in the industry in whichthe cooperative operates - dairy, fertilizer, farmmachinery, etc. ? Can the cooperative rapidly46

communicate specific industry changes to themembers?

As for consumer information, do the membersunderstand how to be good shoppers? Are theyaware of stores where cooperative labeled pro-ducts are available?

COMMUNICATIONS METHODSThere are many ways to communicate with

people. These include personal contact, writtenmessages, and electronic communication suchas radio and TV.

The most effective form of communication isthe one-to-one personal contact. Small groupdiscussions are slightly less effective. In bothcases there is opportunity for instant feedbackand reaction. Even in moderate sized 11cture-discussions there is some opportunity for instantfeedback. In most cooperatives, personal con-tact is limited to that between employees andmembers. The general manager and his staffare often located many miles away.

As cooperatives have grown larger and thedistance between member and management in-creased, other types of communication have beenused (see Figure 7). One of the most effective isthe newsletter. Newsletters may be a singlemineographed sheet or a magazine of severalpages. In a number of research studies, mem-bers have listed the newsletter as their mostimportant source I. ;%formation about their co-operative. Whateve, the form of the newsletter,all information must be clearly and conciselypresented, interest the members, and be sentout regularly.

A few ioperatives are effectively using TVand movies in their communications programs.Several large regional organizations have filmedparts of the annual meeting for lat3r presentationto members who could not attend. Anotherapproach is to transmit the annual meeting onclosed circuit TV to different geographic areasfor members to view directly.

Some cooperatives have made good use of mass

media - radio, TV, and newspapers - in theircommunications programs. Mass media can (1)keep the public informed about the cooperative;(2) keep members aware of what the cooperativeis doing; and (3) build up the interest of nonmem-bers.

Meetings directed toward local audiences areoften more effective than the large annual meet-ing. Most cooperatives that cover a fairly largearea divide their territory geographically. Eachdivision usually has its own annual district meet-

ing. These meetings present a good opportunityfor members to meet with management, givefeedback directly to the management, and to be-come well informed about their association.

Employees can be one of the most effectivegroups in any cooperative communications pro-gram. In most cooperatives, employees oftenmake the greatest impression on members. Thisis true because the member usually has frequentperson-to-person contact with one or more em-ployees. It can be the checkout girl in the fooddepartment, the man who pumps the gas, the

Xdu

ANNUALMEETING

FIELD-DAYS,OPEN-HOUSE,

TOURS

MEMBERCOMMITTEES

clerk in the credit union, the milk hauler orfieldman, the tank truck driver, or the generalmanager who is "my cooperative" in the eyes ofthe individual member.

Consequently, educating employees with co-operative as well as techtical information cannotbe overemphasized. Every organization needsgood employees. Cooperatives need even betteremployees since employees should understand co-operative principles and practices.

ss. MEDIA

COMMUNITYMEETING

MANAGEMENT,DIRECTORS,EMPLOYEES,

MEMBERS

NEWSLETTERS,MEMBER

MAGAZINES

ec,

PERSONALLETTER

44.014

DIRECTMAIL

TRADESHOWS,FAIRS

TELEPHONE

COOPERATIVEINFORMATION

ANNUALREPORT

<IFO

+4,

CONFERENCECALLS

i

CARTRIDGEFILMS

CLOSEDCIRCUITTELEVISION

16 MM. FILMS,SLIDES,RECORDS,TAPES

RADIO,TELEVISION

NEWSPAPERS

TRADE(FARM)JOURNALS

CHANNELS

P.

3).0202

3in

CIx>22m1-cn

Source: Richard Vilsoup and Frank Groves, "CooperativeCommunications Techniques", University ofWisconsinExtension, Madison, Wisconsin 1971.

Figure 7. Channels of Cooperative Information

47

WHEN TO COMMUNICATEThe board, management, and communications

staff are caught between opposite positions indisseminating information to members. On theone hand, members need current informationabout the cooperative and impending policy deci-sions. On the other hand, information that couldhelp competitors should remain with the boardand management until final decisions are made.

While each cooperative has to decide what in-formation to release, two guidelines may help:

1. If the information will help competitors,keep it with the board, management, andkey staff.

2. The more controversial an issue is, thegreater the need for factual and reliableinformation from the cooperative.

Adding a new product or changing store hoursmay require only a routine announcement in thecooperative's newsletter. However, a proposedmerger, closing of existing facilities, or a changein the way members are represented may requiremuch additional information before the issue isresolved. To minimize controversy and insure asmooth transition, those affected by the changeneed facts to dispel rumors and fears. A rule ofthumb could be to provide members with enoughinformation tc make intelligent decisions.

48

KINDS OF COOPERATIVES -CLASSIFICATION BY STRUCTURE

Cooperatives could be classified in many dif-ferent ways because their characteristics differso much. If you were to classify people, youcould use many different bases - height, weight,color of hair, pigmentation, income, occupation,religious affiliation, and many others. So it iswith cooperatives. The purpose in mind, nodoubt, becomes the criterion as to which basisto use. An outline of the principal types of co-operatives follows.

I. By Size

A. Volume of business done - sales, amountof loans made, etc.

B. Number of members or pt...rons served.

H. By Area Served (where members reside -not where sales are made)

A. Local - market area about a single com-munity.

B. Regional - large area of one state or ofseveral states.

C. National - members residing in manystates.

D. International - members in two or morecountries.

III. By Type of Membership Affiliation

A. Locals - persons or firms of a singlelocality are members.

B. Centralized associations - persons re-siding in an area much larger than asmall locality such as a state or region.

C. Federated -

1. Local associations are members ofcentral associations.

2. Central associations are affiliatedwith national cooperatives.

D. Hybrid type - individuals and locals aremembers of the central company.

IV. By Legal Status

A. Unincorporated - a multiple partnershiparrangement.

B. Incorporated - a legal entity created bylaw or sanctioned by it.

V. By Financial Arrangement

A. Capital Stock - shares of common stockand sometimes also preferred stock areissued.

B. Nonstock or Membership Type - no stockissued; membership is nonassignable andnot transferable to otho.s.

VI. By 'Who" Constitutes the Membership

A. Producers - such as farmers, fishermen,foresters who have products to sell orsupplies to purchase.

B. Consumers - purchasers of consumptiongoods or services.

C. Workingmen - self-employed; operatorsof their own plants.

D. Businessmen - to purchase merchandisefor sale and/or buy supplies for use intheir private businesses.

VII. By Principal Functions or Business Activities

A.B.C.D.E.

Production associations.Processing associations.Marketing associations.Purchasing associations.Service associations.

Each cooperative may fall under several clas-sifications. Thus, the Great Lakes CooperativeWool Growers' Association is a producers' mar-keting association, marketing wool for its mem-bers. It is a centralized, regional, incorporatedassociation, nonstock, single commodity type,which pools its patrons' wool and returns patron-age refunds to its members and nonmembers.

CLASSIFICATION BY TYPE OFMEMBERSHIP

Local AssociationsOf all the types of cooperatiies, the local as-

sociation is the most common. There are manyamong the producers of almost every type of ag-ricultural commodity that is marketed cooper-atively. Local associations are also the grassroots organization of cooperative purchasing as-

49

sociations, credit unions, rural electric cooper-atives, local telephone cooperatives, and manyother organized associations.

A local association generally serves a relativelysmall number, all of whom have similar interests.This may be as few as 20 to 30 members of a co-operative cheese factory to as many as 500 or1000 members or more of a credit union. Thesemembers usually live within a relatively smallarea, or, as in a credit union, may be employedby the same firm. Membership control runsfrom the individual to the local. Members electa board of directors and the directors hire a man-ager to run die association.

A local marketing association is primarilyconcerned with the efficient assembling, process-ing, grading, and shipping of farm products. Theprincipal function of dairy plants is to processmilk and cream into marketable products such asbutter, milk powder, and cheese. A local asso-ciation is not engaged in a comprehensive salesprogram; does very little advertising, if any; andordinarily does not store members' products totry to get higher market prices through delayedsales. It is ordinarily financed by membersthemselves and through loans. It is strictly lo-cally owned and controlled, but may join otherlocal groups to form an overhead organizationsuch as the federated sales association. Gener-ally, products of nonmembers are handled aswell as those of member::. The products areordinarily delivered to the local plant, localwarehouse, or local shipping point to be received,weighed, graded, inspected, and prepared forshipment. Members might receive increasedservices or higher net returns, depending on thesuccess of the local association.

Farm supply or urban consumers' cooperatives,nay realize gains through lower net cost, higherquality goods, or superior services. In produc-tion credit associations, loans are made at com-petitive rates; and in rural electric. cooperatives,members control the electric service.

The FederationOne type of organization in the central market

is the federation. The purpose of a marketingfederation is to sell the products for a number oflocal associations. It renders marketing servicesconnected with the handling and selling of goodsproduced by the members of the local associationfor sales in central or terminal markets. A pur-chasing federation serves as a wholesale buyingcompany for the local retail cooperatives affiliatedwith the central.

The membership of a federation consists of50

local cooperatives. Sometimes locals are mem-bers of district associations or exchanges, andthese in turn are members of the central federa-tion. The locals' members, as mentioned before,are farmers in the community which the localsserve. Figure 8 shows graphically a federatedorganization.

Local associations own had control the centralorganization of a federation and provide part orall of the capital needed to run it. The localselect a board of directors who, in turn, electofficers from their number. The board alsohires the manager and, frequently, otl.er keyemployees.

For nu rketing cooperatives, the central organ-ization operates primarily in central or terminalmarkets at a wholesale house. It is an interme-diary between the country markets and the mar-kets further down the marketing channel (thesemay be purchasing departments of chain stores,central processing plants, jobbing and distribu-ting firms, and large-scale retail units). Forfarm supply and consumer cooperatives, it servesas a wholesale purchasing unit in the centralmarkets standing between the manufacturer andthe local retail cooperatives. Land O'Lakes,Inc. is a federation for marketing dairy and otherproducts, and the Farmers' Union Central Ex-change (St. Paul, Minnesota) is a federation ofpurchasing associations.

The products which the local association hasto sell are shipped by the local to the marketdesignated by the central sales manager. Ordi-narily, local associations agree by contract tosell all of their produce through the federationalthough there are many exceptions to this.

A federation or central association may pro-vide physical facilities, such as processing andpacking plants, warehouses, and sales rooms,in order to handle the products wholesale. Tech-nically, the headquarters of the federation arecomparable to the business agencies found inthe wholesale market for agricultural commod-ities or for farm and consumer supplies.

The marketing federation may act as an ordi-nary wholesale receiver, jobber, or broker inthe whole,iale produce trade through its ownsales and distributing departments; or it maylimit selling to established processors, jobbers,or through brokers. It may also grade andstandardize the products, establish brands, ad-vertise, and sell in different markets in compe-tition with other handlere. In addition to estab-lishing a price policy and a sales program, thefederation often finances local associations bypermitting the local to draw sight drafts againstthe federation (receive advance payment) at the

CENTRALIZED COOPERATIVE

NATIONAL COOPERATIVE

MANUFACTURINGSUBSIDIARIES

EGIONAL OR DISTRICT COOPERATIVES

MANUFACTURINGSUBSIDIARIES

STRUCTURE OF A CENTRALIZEQ COOPERATIVE. PERSONS ARE MEMBERS OF THE REGIONAL ORDISTRICT COOPERATIVE THE REGIONALS MAY BE AFFILIATED WITH AND OPERATE A NATIONALSUPPLY OR MARKETING ORGANIZATIONS. THE LOCAL SERVICE UNITS OR RECEIVING STATIONS AREOWNED AND OPERATED BY THE REGIONAL COOPERATIVE NOT BY THE MEMBERS RESIDING IN THE

IMMEDIATE AREA.

FEDERATED COOPERATIVE

NATIONAL COOPERATIVE

PROCESSING MANUFACTURINGSUBSIDIARIES SUBSIDIARIES

MANUFACTURINGSUBSIDIARIES

''17x

STRUCTURE OF A FEDERATED COOPERATIVE, PERSONS HAVE MEMBERSHIP IN LOCAL ASSOCIATIONSTHE LOCALS BAN WITH ONE ANOTHER TO ESTABLISH REGIONAL OR DISTRICT COOPERATIVES WHICH IN

A WHOLESALE CAPACITY SERVE THE LOCALS REGIONALS MAY GET TOGETHER TO ORGANIZE ANDOPERATE NATIONAL SUPPLY OR MARKETING COMPANIES: BOTH THE REGIONALS AND NATIONALS MAYOPERATE PROCESSING, MANUFACTURING, REFINING, AND OTHER PLANTS, GENERALLY AS SUBSIDIARY

COMPANIES.

Figure 8. Structures of Centralized and Federated Cooperatives 1

leased on Figure 1 in Farmer Cooperative Service Bulletin No. 1 page 12,"Farmer Cooperatives in the United States", U.S.D.A., Wadtington, D. C.1S(15.

51

time of delivery of the products.Usually a federation is established after a

number of local associations already in existencehave voluntarily agreed to set up a central sellingagency. However, many times successful fed-erations have been conceived and set up at thesame time local associations were organized.This has been the case several times when gen-eral farm organizations helped set up a cooper-ative marketing system which included both localand central sales organizations. After the fed-eration has been established, it may organizenew local associations which affiliate with itafter their organization.

The Centralized AssociationAnother type of organization in the central mar-

ket, in addition tc the federation, is the central-ized association. The centralized association isessentially a gI..atly expanded local association(see Figure 8). The differences between it and afederation are mainly in organization and rela-tionship to its members. Around 1920, certainleaders of cooperative marketing in the UnitedStates advocated strongly the centralized type ofassociation. Centralized associations, as thename suggests, centralize into one organizationthe marketing activities of a large number offarmers who reside over a widespread area. Thefarmer belongs directly to the central organiza-tion which may have its headquarters far fromwhere the farmer lives.

The farmer producer has a marketing contract,if such is used, with the central association rath-er than with a local association as in the case ofthe federated type. Only one contract is usedcompared to two or three in federations.

The centralized association may provide physi-cal facilities for the local assembling, grading,packing, and shipping of the members' products,but such local plants or warehouses are control-led by the officers of the central headquarters,rather than by the farmers in the communitywhere such local plant is located. (The GreatLakes Cooperative Wool Growers' Association,Waukesha, Wisconsin, is an example of a cen-tralized cooperative for marketing wool.)

The products which the farmer has to sell areordinarily delivered to a local warehouse or pro-cessing plant selected and operated by the centralorganization. These products are sold by theheadquarters of the centralized association.

So that local farmers may control and havejurisdiction ver a large centralized cooperative,the entire membership is districted. Each dis-trict elects delegates to represent it at the co-operative's annual meeting. The delegates elect52

a board of directors who have charge of manage-ment. No autonomous local associations exist inthis type of association.

Centralized associations are more commonamong agricultural marketing associations thanamong farm supply and consumers' (purchasing)cooperatives which are organized as local co-operative associations. To obtain the serviceswhich a centralized association may provide,local purchasing cooperatives organize into fed-erations with central offices at terminal markets.Some consumers' cooperatives.in large cities (asin London, England) have so large a membershipresiding throughout the city that they have manybranch stores to serve their members; but theseare owned, run, and controlled by the one city-wide organization. Such set-up is for all practi-cal purposes a centralized cooperative and is theexception rather than the rule.

Combination Form ofOrganization

Some cooperatives combine certain features ofcentralized associations and of federations. Inthese cases, the membership of the central asso-ciation consists of both local cooperatives (as ina federation) and of individuals (as in a centralizedtype). The locals are independent and run theirown affairs. Both locals and individuals own stockin the central association, and the bylaws providefor representative voting.

Local rail shipping associations were once im-portant for shipping livestock to central markets.No single farmer ordinarily had sufficient stockto ship a full rail car (except some ranchers andlarge cattle and sheep feeders) so the local asso-ciation provided essentially an assembly and ship-ping service.

However, since the 1920's truck hauling hasincreased, sales to buying stations has becomemore common, and local auction sales' facilitieshave been made available. As more interiorpackers and ioncentration yards appeared in pro-ducer territories, more and more farmers couldtruck directly to them and to their cooperativesales associations without requiring the servicesof a local association. Other producers convertedtheir associations from rail shipping to truckshipping and continued their affiliation with thecentral sales association. The latter now alsohas individual members unaffiliated with any local.Thus, a combination form of organization devel-oped in line with major changes in livestock pro-duction, hauling, and selling. The Equity Co-operative Livestock Sales Association of Baraboo,Wisconsin is an example of this. Such structuralorganization is shown graphically in Figure 9.

NATIONAL COOPERATIVE

6 6 6 6 6MANUFACTURING

SUBSIDIARIES

6 (54 6 6 6MANUFACTURING

SUBSIDIARIES

REGIONAL OR DISTRICT COOPERATIVES

L

LOCAL

COOPERATIVES

MEMBERS

Figure 9. Structure of a Combination Type Cooperative. In This Structural Arrangement Some Members Belong to LczalAssociations Which in Turn are Affiliated With a Regional Cooperative While Other Members are DirectlyAffiliated With the Regional Central Organization. This Structure Has Aspects of a Federated Cooperative and aCentralized Cooperative.

National Associations

During 1929 to 1932, the Federal Farm Boardtried to organize national marketing associationsbecause of the national character of the markets,for most farm products. Each national associa-tion brought together, into one nationwide organ-ization, cooperatives which were handling similarproducts, but were serving restricted areas.Thus the Texas cattleman is in the same organi-zation with the Wisconsin livestock producer -the National Livestock Producers' Association.

Members of nationals are either federated orcentralized associations already set up to marketthe products of their respective members in lim-ited producing areas. Ordinarily, a contract is

signed between the national association and itsmembors. The national performs certain ser-vices which relate to sales policies, pricing pol-icies, meighership relations, trade relations,publicity, research, and general problems. TheNational Wool Marketing Corporation, Boston,Massachusetts is such an association.

53

CLASSIFICATIONBY FUNCTIONS

In the preceding pages, cooperatives wereclassified by type of membership. Anotherworthwhile classification is based on the functionsof the cooperatives. The classification by func-tions followed by examples is shown to provide ageneral perspective of the five functional classi-fications. Many cooperatives are multifunctionaltoday and could, therefore, be classified underseveral of the headings.

Classification by Function

I. Production Associations - employee ownedand run - self-employment.

A. In the extractive industries.Cooperative farms, coal mines, forests,fisheries.Example, kibbutzim in Israel.

B. In secondary and tertiary industries.Cooperative factories (plywood, cigar,glove).Example, 24 cooperative plywood facto-

ries in the United States on west coastin 1968.

II. Processing Associations - principal emphasisupon processing products.

A. Local cooperative processing plants.Cheese fact.k.ries, cotton gins, creameries

B. Central processing plants operated by oneor several cooperatives.Example, cooperative slaughtering plants

at Denison and Ida Grove, Iowa andGarden City, Kansas.

III. Sales Associations (or Marketing Associa-tions) - performing numerous marketingfunctions or only a limited number.

A. Commodity marketing associations -performing many functions.Example, Land O'Lakes, Inc., Golden

Guernsey Dairy Cooperative of Milwau-kee.

B. Collective bargaining associations - es-sentially bargaining only (price, salesterms, etc.).Example, Milwaukee Cooperative Milk

Producers.C. Cooperative commission companies (or

sales agencies) - only a commissionservice.Example, Equity Cooperative Livestock

Sales Association of Baraboo, Wis-consin.

54

IV. Purchasing Associations - through whichpatrons purchase goods or supplies.

A Farmers. fishermen, and other produ-cers' purchasing associations dealingin production goods.Example, farm supply cooperatives at

retail and wholesale levels.B. Consumers' cooperatives dealing in

consumers' goodsFood, fuel, clothing, pharmaceuticals.books, meals.Example, Consumers' Cooperative As-

sociation of Eau Claire, Wisconsin.C. Businessmen's purchasing associations

1. Production goods for personal use intheir stores - shopping carts, paperbags, cash registers, and other storesupplies bought cooperatively.

2. Groceries and other merchandise forresale purposes carried as inventorystocks.Example, Certified Grocers' Cooper-ative of Madison, Wisconsin - a co-operatively operated wholesale,owned and operated by nearly 200private grocery stores in southernWisconsin and northern Illinois.

V. Service Associations - essentially provideservices rather than handle products.

A. For farmers primarily:

1. Finance associations - ProductionCredit Associations, Federal LandBank Associations.

2. Insurance associations and insurancebrokerage cooperatives.Example, Farmers' Mutual Insurance

Companies.3. Irrigation cooperatives4. Rural Electric cooperatives (REC).5. Rural telephone cooperatives (RTC).6. Cooperative transportation and

trucking associations.7. Artificial breeding associations.8. Dairy herd improvement and cooper-

ative farm management associations.

B. For urban consumers primarily:

1. Cooperative housing associations.2. Financing associations - credit unions.

C. For people generally, urban or rural:

1. Medical, pharmaceutical, optical,and hospital associations.

2. Recreation cooperatives.

3. Burial associations4. Auditing cooperatives.5. Miscellaneous cooperative service

companies.

D For Businessmen:

1. News collection and distribution -Associated Press.

2. Clearing corporations for banks andcommodity exchanges.

3. Realtors' multiple listing agencies.4. Credit bureaus operated by merchants.5. Florists telegraphic delivery service

agency.6. Transport and delivery services.

Production AssociationsThere are very few workingmen's cooperative

production associations in the United States.Such self-employment cooperatives were onceadvocated as the principal form of organizationfor workers (Robert Owen, Charles Fourier,Louis La Blanc, John Stuart Mill). This has nothappened. Laborers have organized unions tobargain with plant owners and managers ratherthan to put their money in plant ownership andshoulder the responsibilities of plant management.The operation of 24 cooperative plywood factoriesby their employees in Washington, Oregon, andCalifornia in the mid-sixties is an exception,however. Despite the success of the first ply-wood cooperative in 1921, no other plywood co-operatives were organized for almost 20 years.Three were started in 1939-41 and 21 during1949-56.

In Israel, the kibbutzim are modern day illus-trations of cooperative farming and communalliving. A kibbutz is an agricultural village - avoluntary collective settlement or commune - inwhich all property, with minor exceptions, iscollectively owned and in which work as well asliving arrangements, including the rearing ofchildren, is to a great extent collectivized. Over90 percent of the land is nationalized and leasedfor life to farmers. There is no private property- all is held in common except personal possess-ions. All members are entirely supported by thecommunity. In 1970 there were about 250 kib-butzim or collec.tivss settlements with a total pop-ulation of about 100,000,

In addition, there were about 300 moshavimwith a population of 110,000. The moshav is acooperative settlement - not a collective - estab-lished originally by disenchanted members of thefirst kibbutzim. It has individual land holdings;privately owned buildings, tools, and implements;

joint ownership of large agricultural machinery:and considerable cooperation in the sale of farmproducts and purchase of farm supplies. Thebasic unit in the moshav is the working family -in the kibbutz, it is the collective body of the en-tire commune. The moshav stresses mutual help:the kibbutz, collective responsibility.

A halfway development between a kibbutz and amoshav is the moshav shitufi - a combination ofcommunal farming with private family life. Eachfamily maintains its private home life, but, as inthe kibbutz, the farm is operated cooperatively.

Besides these, many Arab villages and about100 freehold Jewish farming villages in Israelare largely built on privately owned land, operatedas conventiongl farming establishments,_and areoften served by cooperative marketing and pur-chasing cooperatives.

Other cooperatively owned farms are found invarying but usually small numbers in Pakistan,Mexico (ejidos), Canada, Italy, India, Cyprus,and Spain. These cooperative farms differ ma-terially from the government-owned and-operate\collectives in Russia and China where thousandsof farm families are involuntarily forced intocommunes without property rights in the collective,except for small parcels of ground individuallytilled and cared for.

Processing AssociationsIn processing cooperatives, the main emphasis

is on converting raw materials into finished orsemifinished form even though these processedproducts also need to be sold. For this reason,skilled processing technicians are usually hiredto run the plants. Thus, cheese factories g-rdi-narily have skilled and licensed cheesemakers asgeneral managers rather than rn-rketing special-ists. Butter factories hire licensed butter makersas managers. As companies get larger and per-haps more diversified (La',-.e to Lake Dairy Cooper-ative, Manitowoc, Wisconsin), a general managerwith special skill in marketing may be as impor-tant to the firm as a skilled and licensed pro-cessing technician.

Sales or Marketing AssociationsAgricultural marketing cooperatives are among

the most numerous of farmer cooperatives. Theyvary greatly as to the number and kinds of func-tions they perform. Some receive, grade, pack,label, brand, store, advertise, sell, and mer-chandise products. Others do not physicallyhandle the products but simply bargain overprices and terms of sale. Still others perform

55

a very limited function such as selling at auctionor on a commission basis the products farmersconsign to them.

Purchasing AssociationsPurchasing associations fall into three catego-

ries. Farm supply cooperatives deal primarilyin goods to help farm production. Consumers'cooperatives handle consumption goods of allkinds for ultimate consumers. And businessmen'scooperatives sell merchandise wholesale to re-tailers to sell in their stores. Businessmen'scooperatives in the wholesale grocery, drug,hardware, automotive supplies, furniture andfurnishings, shoes, lumber and building materials,bakery, and fish and seafood trade have increasedsales extensively during the past decades. Co-operative grocery wholesalers alone did morethan 7.5 billion dollars business in 1969. Otherbusinessmen's cooperatives purchase collectivelysupplies and raw materials needed to operatetheir plants just as farmers look to their supplycooperatives for production goods.

Service AssociationsService cooperatives vary both as to the kind of

service provided and as to the persons primarilyinvolved. The oldest cooperative in the UnitedStates was an insurance society. Today cooper-atives provide many different kinds of insuranceas well as financial service, electric service, co-operative housing, telephone service, auditing,pharmaceutical, transportation, and news collec-tion and distribution, to name a few. Some are ofprincipal value to farmers, others to urban resi-dents, and some to businessmen.

56

THE LEGAL BASIS FOR COOPERATIVES

Cooperatives were organized in this country aswell as abroad before the enactmea of enablinglegislation. The Hochdalians in England were asuccess for eight years before the first cooperativelaw was passed. This law, the Industrial andProvident Societies Act, was the first cooperativelaw of any country and was enacted in England in1852. It legalized business organizations operatedby and for its member patrims. Since that timemany countries, states, and provinces have enactedlegislation permitting cooperatives to function asbusiness entities.

The development of legislation permitting andfacilitating the organization and operation of co-operatives was relatively slow by the federalgovernment and in most states. Now, however,cooperatives in all 50 states operate under ex-plicit federal and state statutes.

Four considerations are important in describ-ing the rights and powers that a cooperative pos-sesses in its relations with the business worldand with its members. Cooperatives are subjectto:

- federal and state laws.- regulations issued under these laws.- court decisions.- bylaws, and contracts between the cooper-

ative and its members.

Laws relating to cooperatives are importantfor they provide a legal basis, as distinct froman economic or social basis, for cooperativeorganization and operation. They permit incor-poration, especially under state enabling acts;spell out the rules and guidelines that associationsmust follow; and promote cooperatives by specif-ically authorizing their existence. They also re-lieve them from certain prohibitive restrictionswhich other laws may call for.

Before cooperative corporation laws were en-acted, associations had three alternatives. Theycould operate as unincorporated associationswith all the risks which such multiple partnershiparrangement involved. They could incorporateunder laws legalizing nonprofit associations suchas fraternal groups, which likewise wasn't verysatisfactory. Or they could incorporate undergeneral corporation laws governing ordinary

commercial business corporations. The latter,of course, was quite unsatisfactory since theselaws fail to recognize the specific character ofa cooperative and its nonprofit member-userorientation.

FEDERAL LAWSIn addition to the fact that status as an unincor-

porated association or as a corporation under thegeneral corporation laws of a state was highlyunsatisfactory, the federal and state antitrustlaws threatened the very existence of such col-lective aggregations as cooperatives.

The original Sherman Antitrust Act of 1890contained no reference to cooperatives. It pro-vided that every contract, combination in theform of trust or otherwise, or conspiracy in re-straint of trade or commerce among the severalstates or with foreign nations was illegal. Thethreat of a lawsuit by competitors on the groundsthat the mere act of combining to conduct businesscooperatively was in restraint of trade and, there-fore, illegal jeopardized the standing of farmers'marketing associations.

During 1890-1910, officers and directors ofmarketing cooperatives in five states were indict-ed under state antitrust laws, and in one stateunder the Sherman law. In 1895, an Illinois co-operative milk association sued to recover pay-ment for milk sold and delivered, but was deniedpayment on the grounds that the association wasillegal under the Illinois antitrust law, being con-sidered a combination in restraint of trade by thecourt. In 1897, the Texas antitrust law was heldunconstitutional since it exempted agriculture.In 1902, the Illinois antitrust law, similar to thatin Texas, was also held unconstitutional in thefamous Connolly case for much the same reason.

The precarious position of cooperatives waspartially corrected at the federal level with thepassage of the Clayton Amendment (1914). Thisprovided, among other things, that agriculturalor horticultural organizations instituted for mutualhelp and not having capital stock nor conducted forprofit were not illegal combinations in restraintof trade under the antitrust laws. This amendmentexempted the nonstock, nonprofit, cooperative

57

marketing associations, but did not clarify thestatus of the capital stock associations.

Agitation, spearheaded by milk-marketingcooperatives that had indictments ,-)rought againstthem, naturally arose fur federal legislation toalso exempt capital stock associations partic-ularly since numerous states had already passedspecial laws legalizing such cooperatives and ex-cluding them from state antitrust laws. Publicpolicy was changing to favor farmers' cooperativeassociations as indicated by state enabling actsand favorable court decisions.

Capper-Volstead Act of 1922The Capper-Volstead Act affirmed the right of

farmers to unite and market their agriculturalproducts cooperatively without violating the anti-trust laws. It made clear that eliminating com-petition between agricultural producers by theircollective action in a marketing cooperative inand of itself did not constitute a violation of theSherman Act and its amendments.

The principal provisions of the Capper-VolsteadAct are

1. It authorizes association of producers ofagricultural products.

2. The members of such association mustbe "engaged in the production of agricul-tural products as farmers, planters,ranchmen, dairymen, nut or fruit grow-ers."

3. The cooperative may collectively process,prepare for market, handle, and marketin interstate and foreign commerce.

4. Cooperatives must operate for the mutualbenefit of the members as producers.

5. One cooperative may join with others to1ave marketing agencies in common, i.e.,federated associations are permissible.

6. The cooperative may be incorporated orunincorporated.

7. Cooperatives may have marketing con-tracts with their members.

8. They may be organized with or withoutcapital stock.

9. Cooperatives must conform to one orboth of the following requirements:

- No member of the association mayhave more than one vote, or

- The association may not pay divi-

68

dends on stock or membership cap-ital in excess of 8 percent per annum.

10. The cooperative must not deal in theproducts of nonmembers greater in valuethan those handled by it for members.

11. If the Secretary of Agriculture believesthat an association monopolizes or re-strains trade so that the price of anyagricultural product is unduly enhanced.he_may start an administrative proceed-ing against the association. He can or-der the cooperative to cease and desistif he finds that the facts bear out his sus-picion. And if the cooperative continuesto monopolize or restrain trade, the At-torney General may start court proceed-ings to enforce such order.

This law has not been amended during the past50 years (up to 1972). Proposals for additionsand change have been suggested, but no congress-ional action has been taken. Since some personsseem to read more into the Act than is actuallythere, it may be well to list some things it doesnot do.

It does not regulate agricultural productionnor establish marketing quotas.

It does not prevent cooperatives from mono-polizing the marketing of an entire cropthrough internal growth. (The Clayton Actmay prevent such monopolization if done viamerger or through external growth.)

It does not give cooperatives special immunityfrom antitrust or other laws which would notapply to other business firms under similarsituations. (Congress did not intend to exemptcooperatives completely from the antitrustlaws nor to exclusively empower the Secretaryof Agriculture to supervise their conduct.This was brought out in a number of courtcases decided by the Supreme Court, AppealsCourt, and the lower courts.)

It does not apply to purchasing or serviceassociations, but is exclusively restrictedto farmers' marketing cooperatives.

It does not prevent price increases, but un-due price rises might invite prohibitory ac-tion by the Secretary of Agriculture and/orthe Justice Department.

It does not enable cooperatives to incorporateunder it.

It does not permit members to buy productsand then sell them through the associationas dealers or speculators - it is restrictedto members as producers of the productsmarketed.

It does not automatically grant eligibility toborrow from Banks for Cooperatives. Thesehave their own criteria for making loans.

It does not require cooperatives to incorpo-rate to qualify under the Act.

It does not grant exemption from payment offederal or state income taxes.

It does not prevent pooling of products, ex-penses, sales receipts, and net earnings.

Other Federal LawsFederal laws that mention cooperatives may

relate to antitrust action, organizing cooperatives,financing operations, taxation of net income, reg-ulatory measures that call for special treatmentof cooperatives, and t., miscellaneous aspects ofcooperatives. These categories and the laws per-taining thereto follow:

- Antitrust action and restraint of competition.Clayton Act, 1914; Capper-Volstead Act,1922; Robinson-Patman Act, 1936 (relatingto price discrimination).

- OrganizationClayton, 1914; Capper-Volstead Act, 1922;Cooperative Marketing Act, 1926; Agricul-tural Marketing Act, 1929; Fishery Cooper-ative Marketing Act, 1934; Rural Electrifi-cation Act, 1936; District of Columbia Con-sumers' Cooperative Act, 1940.

Financing and credit facilitiesFederal Farm Loan Act, 1916; War FinanceCorporation Act, 1918 and 1921; FederalIntermediate Credit Act, 1923; AgriculturalMarketing Act, 1929; Farm Credit Act,1933; Federal Credit Union Act, 1934; Ru-ral Electrification Act, 1936; Federal Hous-ing Act, 1948; Farm Credit Act, 1953.

- Taxation of net savingsWar Revenue Act, 1898; Revenue Acts andtheir amendments from 1913 throogh theRevenue Act of 1962.

- Regulatory measuresPackers and Stockyards Act, 1921; FutureTrading Act, 1921; Grain Futures Act,1922 (title changed to Commodity ExchangeAct in 1936); Motor Carrier Act, 1935; Bi-

tunimous Coal Conservation Act, 1935;Robinson-Patman Act, 1935; AgriculturalMarketing Agreement Act, 1937.

- Miscellaneous aspectsAgricultural Adjustment Act, 1938 and itsamendments; (a number of references tocooperatives); appropriation acts that call-ed for research and extension activitiesamong farmer cooperatives; TennesseeValley Authority Act, 1933 (preferentialtreatment of cooperatives in sale of sur-plus power - also authorized in acts au-thorizing the Bonneville Dam and Fort Peckprojects).

Generally, cooperatives are chartered or in-corporated under state enabling acts However,federal land bank associations (FLBA's), pro-duction credit associations (PCA's), and theBanks for Cooperatives are chartered only underfederal laws. Credit unions are chartered eitherunder the state or federal laws. (In mid-1970there were 13,171 federally chartered and 10,726state chartered credit unions in the United States.)Consumers' cooperatives in the states may becharte :ed under their respective state cooperativelaws, or, as the consumer cooperatives in theDistrict of Columbia do, under the District ofColumbia Consumers' Cooperative Act of 1940.

The federal laws which affect cooperatives witha brief descriptive note about each follow.

Federal Legislation Affecting Cooperatives

1890 Sherman Antitrust Act - combinations inrestraint of trade and conspiracies weredeclared illegal.

1898 War Revenue Act of 1898 - first tax lawto specifically exclude farmers' cooper-atives (the stamp tax did not apply tofarmers' local cooperatives).

1909 Corporation Tax Statute, Section 38 -exempted agricultural and horticulturalassociations from income tax.

1913 Income Tax Statute - exemption granted to"labor, agricultural, or horticultural asso-ciations."

1914 Clayton Amendment - amended the Sher-man Antitrust Act and legalized nonstockagricultural or horticultural cooperatives.

1916 Revenue Acts of 1916, 1918, 1921, and1926 - Act of 1916 and 1918 exemptedmarketing cooperatives serving as salesagents from federal tax. The 1921 Act

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also exempted farm supply cooperatives.The 1926 Act eliminated the requirementthat cooperatives serve only as agents forits members.

1916 Federal Farm Loan Act - created federalland banks and federal land bank associt.-lions (the latter were formerly called na-tional farm loan associations, NFLA's) tomake long-term mortgage loans to farmers.

1918 War Finance Corporation Act - (as amend-ed in 1921) - could make loans to farmers'cooperatives.

1922 Capper-Volstead Act - basic federal en-abling act for farmers' marketing cooper-atives of either capital stock or nonstocktype.

1923 Federal Intermediate Credit Act - providedfor the 12 Intermediate Credit Banks.These banks do not make loans to cooper-atives now as they originally did but selltheir debenture bonds to the investing pub-lic to provide f. _Js for the PCA's andsome Banks for Cooperatives.

1926 Cooperative Marketing Act - created thedivision of cooperative marketingin the United States Department of Agri-culture for research, education, and ser-vice work with farmer cooperativec'. To-day the Farmer Cooperative Service hasreplaced the earlier Division of Cooper-ative Marketing.

1929 Agricultural Marketing Act provided fora Federal Farm Board and a $500 millionrevolving fund to make loans to cooper-atives, stabilize farm prices, and assistcooperatives generally.

1933 Farm Credit ."ct - created 12 regional and1 central Bank for Cooperatives to makeloans to cooperatives; and establishedProduction Credit Associations

1934 Fishery Cooperative Marketing Actlegalized fithermen's cooperatives. Com-

parable to the Capper-Volstead Act exceptapplis:s to marketing fish and aquatic pro-ducts. Administered by the Secretary ofInterior.

i934 Federal Credit Union Act - to chartercredit. unions under federal law.

1936 Rural Electrification Act - established theREA, a loaning agency to rural electriccooperatives, rural telephone companies

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(Oct. 1949 amendment to REA Act of 1936),and other utilities serving rural areas.

1940 District of Columbia Consumers' Cooper-ative 4ct - allowed consumers' cooper-atives in the District or elsewhere to in-corporate.

1962 Revenue Act of 1962, 1966 - most recenttax law to apply to cooperatives. Exemptcooperatives must pay at least 20 percentof net savings in cash to members and ob-tain "consent" from member-patrons forthe remainder. In 1966, Congress amend-ed Sub-chapter T of the 1962 Act to con-form the tax treatment of "per unit retains"excluded from the 1962 Act to that of pa-tronage refunds.

1970 Act creating a National Credit UnionShare Insurance Fund - to insure shareaccounts of members of local credit unionsup to $20, 000 per account.

Acts that refer to cooperatives,exempt them from their provi-sions, or otherwise modify theirapplication to cooperatives

1921 Packers and Stockyards Act - refunds ofcooperatives are not rebates which areprohibited by the Act.

1922 Groin Futures Act - replaced the 1921Future Trading Act and since 1936 is call-ed Commodity Exchange Act Patronagerefunds were not the same as rebates andcould be made by cooperatives to patrons.Also an exchange could not deny member-ship to an organization because it was acooperative.

1927 Act to Prevent Discrimination AgainstCooperative Associations by boards oftrade. Membership and trading privilegescould not be denied farmers' cooperativeseven though they declared patronage re-funds as long as other rules, regulations,and qualifications for membership weremet.

1935 Motor Carrier Act - inapplicable to motorvelicles controlled and operated by farmercooperatives.

1935 Bituminous Coal Conservation Act - re-pealed but replaced by the 1937 Act. Itdid not prohibit sales to nor through farm-ers' cooperatives that did or did not de-clare patronage refunds.

1936 Robinson-Patman Act - cooperatives canmake patronage refunds to customers andnot he guilty of price discrimination -Section 4.

1937 Agricultural Marketing Agreement Act-has provisions stating how and when co-operatives can act for individual farmersin voting, pooling of returns, and serv-icing producers under marketing agree-ments and orders.

1948, 1950, 1961 Federal Housing Acts - FHAcould insure long-term, high percentage,mortgage loans to nonprofit housing co-operatives at modest interest rates.

1955 Farm Credit Act 1955 - provides for re-tirement of government capital in Banksfor Cooperatives.

1964 Civil Rights Act presumably cooperativescannot deny membership for reasons ofcolor, race, religion, or political beliefs.Very likely those that receive federal fi-nit, .ial assistance or services from fed-eral agencies would not be permitted todiscriminate on these grounds.

1968 Agricultural Fair Practices Act of 1967-(became law on April 16, 1968). Prohib-its unfair trade practices affecting produc-ers and associations of producers, Admin-istered by the Farmer Cooperative Serv-ice, United States Department of Agricul-ture.

STATE LAWSFrom 1865 when the first state cooperative law

was passed (in Michigan) to 1920, passage of statelaws was slow. (The 1865 Michigan law is gen-erally considered the first cooperative marketinglaw. However, in 1857 New York legalized mu-tual town cooperative fire insurance companies.Ohio passed a similar law that same year whichwas amended in 1862 and again in 1877. Ohio alsopassed. in 1867, a law providing for creation andregulation of cooperative trade associations andfor the creation of cooperative purchasing associ-ations.) Only about 10 states had enacted specialcooperative laws by 1910 - the number of cooper-atives were also relatively few. After 1920 andespecially during 1920 to 1930, numerous lawswere passed and many laws passed in earlieryears were amended and revised. All states nowlave cooperative statutes and although they differin r-ticulars, there is a high degree of uniform-ity among them. Many were patterned after onesin Wisconsin, Nebraska, and Kentucky.

Wisconsin enacted its first cooperative law in1887. The provisions included limited liability,sales to nonmembers for cash only, and shares ofstock to cost not less than $1 nor more than $5.Members, not shares of stock, were the basis ofvoting; no proxies were allowed; and one associ-ation might own shares in other similar associa-tions up to a one-third interest and one vote. In1911 Wisconsin passed a largely revised cooper-ative law. It was copied by 16 states. Wisconsinrevised its cooperative law again in 1921 and in1955. The 1955 Act is, perhaps, the most com-plete codification of law covering cooperativeassociations in any state, and is the product ofa state-wide committee of cooperative leaders.nd of legal counsel.

The principal provisions of the 1955 Act withminor amendments are:

Five or more adults may form a cooperativewith or without capital stock.

Promotion expense is limited to 5 percent ofpaid up capital stock or membership fees.

Each member entitled to vote shall have onevote, but local associations affiliated withcentral associations may vote on the basis ofnumber of members the local has, or on theamount of business transacted with the cen-tral organization.

Proxy voting is not allowed but voting by mailis permitted.

A quorum must be present to legally transactbusiness.

The business and affairs of the cooperativeshould be managed by a board of directorsof at least 5 persons (3 in associations withless than 50 members).

harketing contracts are permitted but can-tilt exceed five years duration.

Remedies for defection of a contract are liq-uidated damages, injunction, and specific per-formance. The contract may be filed togetherwith a list of its signers with the local regis-ter of deeds to give notice to all third partiesof the equitable interest of the cooperativeunder the contract.

Once annually the directors shall determineand distribute the net proceeds after all oper-ating expenses are met and reasonable andnecessary reserves are set aside - not over5 percent of net proceeds may be set asideas an educational fund.

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Officers or employees or both may receivea share of the net proceeds (as bonuses).

Dividends may be paid on shares of capitalstock (no maximum limit set but no impair-ment of capital may result from such pay-ment); and the remaining net proceeds shallbe paid as patronage refunds either to mem-ber patrons only, or to member and non-member patrons alike, or to nonmember pa-trons at a lower proportion than to memberpatrons.

The books of a cooperative may be examinedby a member or stockholder at any reasonabletime and for a proper purpose upon writtenapplication.

An association organized under the coopera-tive law (Chapter 185) does not have to file astate income tax return.

Only cooperatives may use the term "cooper-ative," or any variation thereof as part of itscorporate or business name.

Whenever a corporttion has discriminatedagainst an association doing business in thisstate, its charter may be vacated or its li-cense to do business may be revoked.

The statute also authorized the organizationof hospitals and sickness-care associationson a nonprofit basis.

Chapter 186 of Wisconsin statutes relates to theorganization and operation of credit unions. Sincecredit unions as savings and lending institutions area distinctive type of cooperative akin to banking,they are subject to this special legislation. Farm-ers' town mu .al insurance companies are organ-ized under Chapter 202. No special state cooper-ative law exists under which consumers' cooper-atives incorporate, so if they desire, they can bechartered under Chapter 185. (The District ofColumbia Consumers' Cooperative Act, 1940, isa federal law under which consumers' cooperativesmay incorporate.)

Several Wisconsin laws have special provisionsapplicable to cooperatives. Chapters 118.01 (8),118.19 (6), and 37.29 require the teaching of co-operative marketing and consumers' cooperationin high schools, technical schools, and the Uni-versity; and adequate instruction in cooperativesas a prerequisite for granting a teacher's certif-icate for teaching economics, agriculture, orsocial studies. Chapter 76.48 states that electriccooperatives shall pay a license fee of 3 percentof gross revenue in lieu of general property andincome taxes. And Chapter 93.06 (6) authorizes

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the State Department of Agriculture to requireuniform systems of accounting, to investigatemanagement of cooperatives, and to obtain reportson specific practices of associations. Chapter196.605 includes a paragraph about regulatingtelephone cooperatives.

A cooperative of whatever size and for whateverpurpose should be incorporated to avoid the riskto members of unlimited legal liability. It is alsowell to hire a lawyer familiar with the law, courtdecisions, tax rulings, and other matters thataffect cooperatives at the time of organization orwhen bylaws are amended. Cooperatives have nospecial immunity from antitrust laws - they canbe prosecuted for violating these laws just as wellas noncooperatives. Also, the Capper-VolsteadAct and the state cooperative enabling acts givecooperatives the same right that other business-men have to organize large groups for legitimatebusiness purposes - and impose on them the samerules that other businesses are subject to with thesame penalities.

TAXATION OF COOPERATIVESGenerally speaking, cooperatives are subject

to the same taxes at the same rates as regularcorporations with certain exceptions. Thus, co-operatives pay social security, real estate, sales,personal property, Pxcise, franchise, and othertaxes which other corporations pay. However,both state and federal laws make some specialprovisions for tax treatment of cooperatives.

In Wisconsin, any cooperative incorporatedunder Chapter 185 of Wisconsin Statutes is exemptfrom paying Wisconsin corporate income tax. (In1972 this tax varied from 2.3 percent on the first$1, 000 of taxable income or any part thereof to7.9 percent on all taxable income in excess of$6, 000.) Electric cooperatives organized tinterChapter 185 pay annual license fees of 3 percentof gross revenues from the sale of electric ener-gy to members in lieu of all other general proper-ty and income taxes. Private companies provid-ing electric power are taxed instead on the asses-sed valuation of their properties.

Under the federal Internal Revenue Code, co-operatives qualify as either exempt or nonexemptcooperatives. Farmer cooperatives that qualifyunder Section 521 of the Code are organized andoperate so as to have little or no taxable income.These exempt farmer cooperatives, upon meetingthe restrictive provision of the IRS, do not haveto pay an income tax on net earnings whether de-clared as cash or as deferred patronage refundsprovided that a preexisting mandator/ obligationto refund exists. Nor do they pay income tax on

dividends declared on capital stock (8 percentmaximum); nor on net revenue from nonpatronageoperations such as from rent, interest, and bus-iness done with the federal goverm. ent.

Net earnings not allocated to patrons are tax-able to the cooperatives. Details of the restric-tions imposed upon farmer cooperatives to qual-ify for exempt status are not listed here. Theyare, however, sufficiently inclusive that manycooperatives deliberately decide not to crialifyfor exemption and, instead, operate as nonexen tassociations.

Nonexempt cooperatives are subject to regularcorporate income taxes except that patronage re-funds made pursuant to a preexisting contract torefund net earnings to the patron are deductiblefrom taxable income. To be deductible, suchamounts must be allocated on a patronage basis.A nonexempt association is subject to a tax onstock dividends and on nonpatronage income suchas income from rents, interest, dividends, andbusiness with the federal government.

It is apparent that an association which operateson a cost or nonprofit basis has no income to taxat the corporation level. Farmer patrons, how-ever, who receive dividends on stock and patron-age refunds must, of course, record these amountsin their personal income tax returns. The incomeis taxed at the member-recipient level and thusdoes not escape taxation as might be inferred.

Patronage refunds from consumer cooperatives- grocery stores, hardware stores, oil stations,and other consumer goods associations - however,are not income to the patron. Instead they repre-sent savings on purchases and are not, therefore,to be included in the patron's tax return

Farmer cooperatives are not automaticalexempt from paying federal income taxes. Theymust request a "letter of exemption" by filingForm 1028 with the District Director of InternalRevenue Service and providing the informationcalled for by the IRS. Once the "letter" is grant-ed, it is not necessary to renew the request unlessthe organization and operating methods changesubstantially. Annual returns must also be madeto the IRS on the col ms !.rovided.

MARKETING CONTRACTSOne legal instrument that ties the member to

his association is the marketing contract. Sincemarketing ,.ontracts involve many legal consid-erations, contracts are discussed here ratherthan in the section dealing with membership re-lations. Chapter 1b5. 41, 185. 42, and 185.43 cfthe Wisconsin Statutes should be read to notewhat Wisconsin law states concerning ,-,00perative

contractsThe marketing contract (widely used in market-

ing organizations, but seldom used in purchasingand service associations) specifies the conditionsunder which members' products are handled bythe association. It states in writing the rightsand duties of the signer and the association, themarketing services and charges to be made, andthe remedies for breaking the contract, Manylarge-se :de marketing associations have contractswith their members, and some small local asso-ciations have also found them advisable. The pre-vailing practice now is to use the contract duringti-e early years of the association, but to discon-tinue its use as the organization becomes estab-lished.

PurposeA marketing contract practically assures the

association of the continuous support of its mem-bers and a fairly definite volume of business. Itcuts down the cost of soliciting member patronage;improves the standing of the association in theeyes of bankers, farmers, and the trade; andindirect, strengthens the status of the associa-tion through its improved borrowing ability. Itprotects the loyal majority by providing legaln$4ins to coerce a disrupting minority, as wellas restrains outside interference. The contractstates the duties of members so that no misunder-standing need arise concerning delivery, handling,and market charges. It also prevents nonmembersfrom using the association as a threat over localbuyers. Further, it helps create buyers confi-dence in the association since they are fairly wellassured of receiving products sold to them.

Types of ContractsTwo types of contracts are used by marketing

associations - agency, and purchase and sale.These contracts have different legal implications,although in actual practice one finds little differ-ence between the two. If the first is used, thecooperative acts as agent handling products forthe producers. Under the second, the cooperativebuys the products for resale and thereby takes titleto them. It agrees to pay the producer the pricereceived upon resale less the handling charge.Remedies for breach of contract are the same forboth types. Banks and credit institutions havefavored the purchase and sale contracts sincethese contracts permit management to exerciseits judgment more freely regarding the sale of theproducts. Under purchase and sales contracts,

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cooperatives have title of (own) the products;whereas under an agency contract, the cooperativemerely handles products for the owner producer.

Duration of ContractsContracts in Wisconsin vary from 1 to 5 years,

the maximum permitted by state cooperative law.They may terminate at the end of the contract, orbe self-renewing for an additional period (not toexceed five years) if so provided in the contract.Today, most contracts include a clause permittingthe member to withdraw from the association dur-ing some specified time each year - usually a one-month period at the close of the marketing year.

The minimum length of the contract logicallydepends on the time it takes to market productsand upon the extent of capital investments. Acontract in a livestock shipping association mayvery well last one year at the start, and for con-venience sake, be self-renewing for longer periods.Livestock shipping associations rarely requirecapital investment, and all of the business is prac-tically completed with each shipment - hence,there is less need for a long contract.

A cooperative that must provide a plant and ex-pensive equipment, or one whose marketing oper-ations are not always completed in a year, needsa longer contract than one year. Associationsmarketing tobacco ordinarily use a self-renewingfive-year purchase and sale contract, It is a goodpolicy to start with as short a contract as is eco-nomically expedient.

-Remedies for Breach

Contracts are not always fulfilled, and thus causea financial and moral loss to the association. TheWisconsin statute provides three types of remediesfor breach (failure of member to deliver products)or contemplated breach. Liquidated damages upto 30 percent o: the value of the products that arethe subject of the breach may be provided. Thelaw also reads, "In the event of breach of a con-tract authorized by s.185.41 by a member, theassociation shall be entitled to an injunction to pre-vent the breach or further breach thereof, and toa decree of specific performance." Such injunctionmay restrain members from selling outside theassociation, as well as preventing bur ers fromtrying to get members to violate their contract.64

Filing ContractsThird Party Notice

A clause in the cooperative statute permits anassociation to file in the office of the register ofdeeds of the county in which the contract signerslive, a cory of the contract, together with a swornlist of the signers. The statute also prohibitsthird parties from interferring with the fulfill-ment of a contract between a member and hisassociation. If an outside rurchaser buys thecontracted commodity from a member. that pur-chaser becomes liable for damages to the cooper-ative.

"The filing constitutes notice to all personsof the association's rights under the contract.The filing also constitutes such notice that aninterest in the title to all rroducts agreed tobe sold by the member-maker of such contractto the association during the term of such con-tract is vested in the association. In case ofa purchase of any such product thereafter byany party other than the association, fromany party other than the association no inter-est of any nature shall pass to such other pur-chaser; the association may recover the pos-session of such products from any person inwhose possession they may be found, may ob-tain an injunction to prevent any attemptedp irchase, receipt, or transfer not permittedby the contract or may enforce its rights inany ncrnmer permitted by law."

ContractsNo Substitute for Efficiency

A word of caution may be in order. Some co-operative leaders believe that the membershipproblem is solved if a contract is used. This isfar from fact. A contract does not replace loyal-ty - it is no stronger than the will of the majority.A contract is valuable and serves a useful pur-pose, but it should not be relied upon too heavily.Operations must still be efficient; competitionmust be met; and members must be well informedif the cooperative is to succeed.

HISTORICAL DEVELOPMENTOF COOPERATIVES ABROAD

Society, since the beginnings of civilizatic-has embraced elements of both cooperation andcompetition. Men have always found it necessaryto work together to survive, and have alwaysstruggled to gain advantages and personal advance-ment. It is not known where cooperation for sur-vival or production originated. Even in ancienttimes associationism promoted greater progressthan sheer individualism. Cooperation in thesense of working together for a common goal is,no doubt, as old as civilized society itself.

But the modern business phases of cooperativedevelopment have comparatively recent origins,both in the United States and abroad. Cooperativesstarted about the middle of the last century andnow have some 250 to 275 million members. To-day, cooperatives are found in nearly all countries

in the less developed nations as well as in thehighly advanced.

BEGINNINGS IN ENGLANDEarly cooperation in Great Britain undoubtedly

influenced the nature and growth of cooperativesin the United States and other countries, especiallyconsumers' cooperatives.

Prior to the industrial revolution (about 1750 to1850) most families were largely self-sufficient.Then the industrial revolution introduced the fac-tory system of production. It gradually replaceda domestic system of cottage industries and homecraftsmanship; congregated workers in largecities; and made workers dependent on others forprovisions, housing, and other necessities. Acommercial economy was ushered in. Wages,prices, money and credit, transportation, sales,and employers and employees as distinct classesemerged.

The succession of remarkable inventions fol-lowed one another so fast that chaotic socialconditions resulted as well as some economicimprovements. (Some of the inventions that re-volutionized industry were: Darby's process forsmelting iron with coal instead of charcoal, early18th century; Kay's flying shuttle, 1733; Har-greave's spinning jenny, 1764; Arkwright's spin-

ning frame, 1769; Watt's steam engine, 1769;Compton's "spinning mule," 1779; Cartwright'spower loom, 1785; and Eli Whitney's cotton gin,1793.) The widespread poverty, unemployment,distress, aNd social deterioration in the wake ofthe indust ria. revolution stimulated a demand forlegislative inctuatrial, and social improvements.

Not only was there a revolution in industry,but one had already been underway in agriculturebefore the 17th and 18th centuries. Scatteredfield strips and land previously cropped weremade into large estates enclosed by hedges topasture sheep and other livestock - extensiveinstead of intensive agriculture. Changes inland ownership, the kinds of crops grown, meth-ods of cultivation and preparation of land, thetools, implements, and machinery used accom-panied the enclosure movement. Between 1760and 1843 nearly 7 million acres of land were en-closed in England so that large numbers of smallfarmers were driven off the land. Serfs, villeins,tenants, and freeholders moved to burgeoningtowns and cities only to discover that jobs werenot easy to find in the new factories or trades.

Also during this period (roughly 1750 to 1850),there was a growing tendency for persons to dis-sent, to publicly express themselves, and to takeissue with the status quo. They question0 leg-islation which forbade people to move from oneoccupation to another or from one district toanother, and deplored the social and economicstatus of workingmen. In short, there was arevolution in ideas and a demand for personalrights. Adam Smith writing in 1776 became thegreat advocate of laissez faire laissez passer(a noninterference principle) which helped accel-erate the three revolutions - in industry and com-merce, in agriculture, and in ideas. As a resultof this freedom of expression, Owenism, Chart-ism, Teetotalism, Socialism, Reformists, andAnti-Corn Law Leaguers became very active inthe 1840's.

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Action to Alleviate DistressTo alleviate the depressed conditions of the

masses, for these were the years that culminatedin the "Hungry Forties," the government of Eng-land passed the completely inadequate and gener-ally badly administered Poor Laws as a publicrelief measure. Philanthropists also aided bypurchasing flour and meal and distributing it atwholesale prices to the poor; by operating cornmills at cost or without charge; and by supplyingfuel, clothing, and the barest staples at cost oras contributions to the poor. Such help, desir-able as it was, was totally inadequate.

In addition to these measures, workingmenhelped themselves:

1. Their guilds - associations of merchants,artisans, craftsmen, and others with mu-tual interests which set up rules and regu-lations binding their members in their pro-duction or business operations - sopportedthem financially during sickness, familyhardship, or other crises. Friendly Soci-eties - health and life insurance associationslegalized by the Rose Act of 1793 - suppliedmember families with funds and assistanceduring illness and death from dues collectedpreviously.

2. Workers organized labor 'anions to bargainwith employers and to promote more favor-able labor legislation such as the TradeUnion Act of 1871.

3. They tried political action to improve theirlot. The Chartists, 1838-48, wanted thereforms called for in the Peoples' Charter- universal adult male suffrage; vote byballot and one-man, one-vote; annual meet-ings of parliament; payment of memberselected to parliament; equal electoral dis-tricts; and abolition of property qualifica-tions. Chartism as a political party endedin 1848 with the death of its leader. Alsothe Anti-Corn Law League appealed moreto cooperators than Chartism and this con-tributed to its demise.

4. Workers organized cooperative associationsfor the production of commodities, purchaseof consumption goods, and to provide cooper-ative housing.

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Early Cooperative SocietiesCooperation existed in business prior to tl e In-

dustrial revolution, the most successful att-mptsbeing in insurance. There are records of mutualfire insurance companies in London and Paris asearly as 1530, but the first highly successful oneon which definite information is available is theAmicable Society, organized in England in 1705.

Cooperative or quasi-cooperative industrial en-terprises occurred in England at least as early as1760. Most of these early cooperatives apparentlywere c-msumer-controlled organizations for flourmilling and baking.

The Weaver's Society at Fenwick, Scotland, be-gan by clubbing together to buy necessaries asearly as 1769. Probably isolated purchasing co-operatives existed in most of the West Europeancountries before 1800. These organizations failedto attract much attention until the early 19th cen-tury when a prominent industrialist named RobertOwen began to advocate the establishment of co-operative communities to alleviate the sufferingof industrial workers. Between 1825 and 1830 anumber of cooperative journals were circulatedbut their life spans were short. Cooperative con-gresses advocated and promoted cooperation -the first in 1830 at Manchester, the second in 1831at Birmingham, and the third in 1832 in London.Owen's influence and rhetoric exerted itself inthese and later congresses, as is shown by thefact that the Third Congress went on record that"the grand ultimate object of all cooperative soci-eties is community on land." Cooperative cornmills for grinding flour also appeared in a numberof cities shortly after the turn of the 19th centuryin order to cut the cost of flour and prevent itsadulteration by covetous millers.

The OwenitesThe cooperative movement in a real sense,

however, began with Robert Owen - a factoryreformer, a Utopian Socialist, a pioneer of in-dustrial cooperation and trade unionism, and inadvocate of communal living. Owen (1771-1858)envisaged villages including farm lands and small-scale industry, all operated cooperatively by thecitirens of the villages who would live communally.

Owen's communities were originally conceivedas a cure for unemployment but later as a way toreplace private capitalism and competition withself-employment and with conditions that shouldprovide utiNersal happiness. He planned thatsuch communities would consist of about 1000people, 1501 acres of land, with common build-ings and apartments for individual families; and

would cost between $200,000 and 250,000.Wealthy sympathizers of Owen's schemes wereto finance such projects rather than the inhabi-tants of the communal villages. Such villageswere attempted at New Harmony, Indiana (1825-27); and at Orbiston, Scotland; Ralahine, Ireland;and Queenswood, England. All failed.

This failure, however, did not keep Owen frompreaching cooperation as the best solution to man-kind's problems. Because of the stimulus of histeachings cooperative societies, labor exchanges(where handicrafts were exchanged presumablyon the basis of the amount of labor involved intheir making), trade unions, and magazines forworkingmen started about 1820 and afterwards.Most lasted only a short time, but the seed wassown for a later harvest of cooperatives.

Owen was an idealist more than a realist,visionary rather than practical and an auvocateof industrial cooperation, not of consumers' dis-tributive cooperation. In fact, in 1836 he wrote:

"To my surprise I found there six or sevenCooperative Societies in different parts ofthe town, doing well, as they think, that is,making some profit by joint stock retail trad-ing. It is, however, high time to put an endto the notion very prevalent in the public mindthat this is the social system which we con-template, or that it will form any part of thearrangements in the New Moral World."

And in 1839 he neglected to reply to Charles Ho-warth's urgent request to come to Rochdale, Eng-land to discuss cooperative organization plans -probably because he had little time for cooperativetrading companies such as Howarth and the Roch-dalians were thinking about.

Owen had more grandiose ideas, encompassingagricultural and industrial production, education,housing, and commercial distribution the wholegamut of economic activity on a cooperative basis.No doubt, Owen (called by some the Father ofCooperation) believed it far more important forpersons to increase their incomes, to improvetheir living conditions, and to free children fromdebilitating factory employment than to save afew pennies on retail buying.

Dr. William King Fatherof Distributive Cooperation

Dr. William King (1786-1865) of Brighton, Eng-land was a social reformer and a realistic advo-cate of consumer cooperation. He learned aboutRobert Owen and accepted much of Owen's socialphilosophy although he differed with him as to how

to achieve its ends. King was a physician and soonbecame interested in improving the welfare of theworking people of Brighton. To this end he be-came involved in organizing an Infants' School(1823), the Brighton Provident and District Soci-ety (1824), the Brighton Mechanics' Institute(1825), a Subscription Library (1826), the Co-operative Benevolent Fund Association, and theBrighton Cooperative Trading Association (1827).Some of these lasted only a short time.

Beginning in May 1828 and continuing for twoyears, Dr. King published at his own expense asmall magazine called "The Cooperator." Its28 issues contained King s important contributionto cooperative thought (Hid were a source of in-spiration, information, and instructions on co-operation in general and cooperative shopkeepingin particular

King was much more realistic and far moreunderstandable about cooperation than Owen.His plan was relatively simple. He urged theworkers to:

- save their money,

- invest their money in their cooperative retailstore,

- pay cash for merchandise,

operate democratically,

- publicize the cooperative movement so itmight grow and become effective,

reinvest the "profits" or net earnings in thestore to enable the store to emplor its ownmembers who would make things to be soldin the store or to other buyers.

King taught that cooperatives should start smallwith members supplying the original capital (Owenrelied on wealthy outside investors to supply thefunds for large-scale operations). He also be-lieved that cooperatives should not pay a patron-age refund but that the net earnings should be putin a reserve fund and used for the good of all themembers so as to enlarge the cooperative's activ-ities in production, crafts, and provide employ-ment. He did not object to Owenite self-sustain-ing cooperative communities provided they wereset up with the members' own capital and restric-ted to Christians. (King was a deeply religiousman who believed that the spirit and ethics of theGospel were those of cooperation also.)

In many respects Dr. King was more responsiblefor the extension of the cooperative idea and forthe organization of many cooperatives than RobertOwen ever was. King was truly the "Father ofDistributive Cooperation," the real inspirer of

consumers' cooperative stores in England where-as Owen encouraged self-employment and com-munal living and started no stores. King's littleperiodical was distributed throughout England.It advocated the kind of cooperation within reachof the common man in its realistic, albeit opti-mistic, proposals. His was a grass-roots, bot-tom-up, simple scheme of organization contrastedwith the far more expensive top-down plan of Ro-bert Owen. As a result, the movement grew froma few societies in 1826 to around 300 shops in1830 - many patterned after King's Brighton Co-operative Trading Association. (King's ideasmay also have influenced American cooperation -a Mr. William Bryan, treasurer of a cooperativeat Brighton, England came to New York in 1829and helped organize a consumers' tmoperativestore in that city in 1830.)

After Dr. King discontinued his active role inthe cooperative movement (necessitated by hisneed to give more attention to his medical prac-tice which was suffering from the criticisms,false accusations, and other snide remarks ofcontemporaries in Brighton; and also because ofpoor management and internal problems in indi-vidual stores), the movement was for all practicalpurposes dead by 1840. Regrettably, King was aforgotten man, and editors and pamphleteers inthe 1840's and 1850's either never heard of himor completely ignored him. "The evil that mendo lives after them - The good is oft interred withtheir bones" (with apologies to Shakespeare) -no it was with King.

The Rochdale PioneersDuring this early period of cooperative develop-

ment, one of the societies which had sprung up in1833 and failed in 1835 was at Rochdale, England.Dr. King's writings might have influenced thisearly Rochdalian cooperative because JamesSmithies, one of the leaders among the 28 Roch-dalians, was inspired by King's "The Cooperator"and showed it to the Rochdalians. A nucleus ofthis determined group continued to work activelyfor social reform. From the work of this nucleus,the cooperative movement in Great Britain wasable to achieve outstanding success. The founda-tion of this success was not new. It was basedupon the intelligent combination of various ideaswhich had been tried by previous cooperatives.The failures of the past became the warning sig-nals of later years so that firmer foundationscould be laid.

A consumers' cooperative store, started inRochdale, England in 1844, and continuing to thisvery day, provided the organizational and oper-

68

THE ORIGINAL TOAD LANE STORE, FIRST HOMEOF THE ROCHDALE PIONEERS.

Sketch Taken From "The History of Cooperation" byGeorge Jacob Holyoake

sting pattern that became the prototype for otherconsumers' cooperatives, both at the retail andwholesale levels, the world over. These 28Rochdalians had high hopes and aspirations.They hoped not only ..o establish a store for thesale of provisions but also to acquire homes inwhich their members might live; to manufacturearticles that the society's members might needas well as to provide employment; to acquire landon which to produce products needed by members;and to employ those members out of work or thosewhose wages were very low. They wanted to"establish a self-supporting home colony of unitedinterests" and to "arrange the powers of produc-tion, distribution, education, and government" inthe interests of its members. And finally, "forthe promotion of sobriety a temperance hotel[was] to be opened in one of the Society's housesas soon as convenient." This was, indeed, anambitious program, and how different it was fromthe purposes which cooperatives today state as

their reasons for organizing.The business practices (later called Rochdalian

principles) which these pioneers laid down foroperating their little store on Toad Lane werenot individually novel but the combination of allof them was essentially new. These practiceswere:

1. Capital should be of their own providingand bear a fixed rate of interest. (Limitedreturn on equity capital.)

2. Only the purest provisions procurable shouldbe supplied to members (to do away withabominable adulteration of food).

3. Full weight and measure should be given.(Provide honesty in weighing.)

4. Market prices should be charged, and nocredit given nor asked. (Cash trading; nocharge accounts; charge prevailing prices.)

5. Profits should be divided in proportion tothe amount of purchases made by each mem-ber (patronage refunds).

6. The principles of "one-member, one-vote"should prevail in government, and the equal-ity of the sexes in membership (democraticcontrol).

7. Management should be in the hands of offi-cers and a committee elected periodically.(Representative government and control ofthe cooperative.)

8: A definite percentage of profits should beallotted to education. (Provision for edu-cation in cooperation.)

9. Frequent statements and balance sheetsshould be presented to the members (mem-ber information).

10. No inquiry should be made into the politicalor religious opinions of those who apply formembership. (Political and Religious neu-trality.)

Note that these Rochdalian rules were devisedto run a small grocery store and although theyhave wide application, they are not necessarilyappropriate for all types of cooperatives in alllocations. Such principles as democratic controlby member-users, limited dividends upon equitycapital, and operations at cost (with its corollarythat if gross margins or incomes exceed costs,refunds will be made on a patronage basis) arealmost universally followed. But cash trading,charging prices that other dealers charge, send-ing out frequent statements and balance sheets,

or even setting aside a part of the new savings inan educational fund are not adhered to by all as-sociations. The success one might add, thephenomenal success - of the Rochdalians was byall means the shot in the arm that the cooperativemovement needed in its doldrum days of the mid-forties. Rochdale became the beacon for othersto follow.

The Christian SocialistsThe revival of interest in cooperatives toward

the late 1840's and early 1850's is due, in nosmall measure, to the work of a small band ofreformers called the Christian Socialists. Owen'sattack upon individualism, the family, competi-tion, private property, the profit system, andupon organized-religion alienated many peoplefrom cooperation and heaped upon him and hisfollowers the condemnation of churchmen andothers as well. There were about 70 membersin the Christian Socialists' group which held to-gether for about 6 years from 1848 to 1854. Thisgroup was led by a half dozen eminent clergymenof the Church of England and by brilliant membersof the legal profession. Two also taught in theUniversity of Cambridge. These men wished toarouse the church to its social responsibilitiesand attempted to "Christianize the Socialists andSocialize the Christians," as one wag put it.

This group published its ideas in a weekly news-paper and later in a journal. It advocated asso-ciationism instead of competition and self-helpinstead of legislation to reform society. To thisend the leaders started about three-dozen self-governing workshops of tailors, shoemakers,printers, bakers, smiths, builders, and othersbut these all failed within 2 to 3 years. Suchchance aggregations of workmen without anyorganizational or business experience were vir-tually doomed to failure. To remedy this situa-tion, a Workingmen's College was started in 1854where voluntary teachers taught night classes.

However, it was not the self-governing work-shops nor the evening classes that gave fame andworld renown to the Christian Socialists. Rather,it was their work in getting the first cooperativelaw of any country passed in England in 1852 -the Industrial and Provident Societies Act.

Prior to the enactment of this cooperative law,registration of cooperatives was under the Friend-ly Societies Acts of 1834 and 1846, but these actswere designed for sick-benefit and assistancegroups and not for business firms engaged indaily trade. Hence, the cooperative stores didnot have the proper legal protection essential tobusiness enterprises, nor could they sell to other

69

than their members. Also, it was too costly toregister under the Joint Stock law as noncooper-atives did.

Therefore, the 1852 law was a most significantand major development in the cooperative move-ment. It protected the property of the societies,gave binding force to their rules, safeguardedthe savings of investors, and provided legal statusso that an association could sue fraudulent officials.It authorized dividends on purchases, limited div-idends on shares of stock to 5 percent, and per-mitted sales to nonmembers. Although therewere still unlimited liability for debts, sharelimits of £100 per member, and only one acre ofland could be held by the societies, these couldbe rectified in later amendments to the law. Thiswas done with the passage of the Industrial andProvident Societies Act of 1862.

This 1862 law, besides limiting the legal lia-bility of members to their shares of stock andincreasing tof 200 the permissible shareholdingsof members, permitted one cooperative to investin the shares of another cooperative. This madepossible the legal framework for the English co-operative wholesale which was organized the nextyear and is to this day one of England's largestmercantile establishments. The dedication of theChristian Socialists to the cooperative movementwas relatively short-lived but their impact wasgreat.

COOPERATIVE CREDIT INGERMANY

In 1848, just four years after the founding ofthe famous Rochdale Cooperative in England, fa-mine and extreme hardship spread throughoutEurope. Many workers were unemployed in thegreat cities of Europe and even in many ruraldistricts people were underfed because of cropfailure. Conditions were particularly bad inGermany. Large numbers of workers and peas-ants died from undernourishment, and many ofthose who managed to live were in abject want.

At this time F. W. Raiffeisen, a sincere human-itarian, was mayor of a group of villages in North-ern Germany. In an effort to alleviate sufferingin his community, he founded a cooperative soci-ety at Coblenz for giving potatoes and bread to thepoor. Raiffeisen soon realized that charity alonecould tot solve the problems of poor farmers,that what they needed was the means to help them-selves by controlling their own money and makingit work flr them.

Accorcingly, he organized a loan society whichembraced various cooperative features. The first70

societies were, for the most part, efforts to helpthe needy by those who were more fortunate. Nev-ertheless, Raiffeisen continually taught the needfor self-help which he saw work so well in cooper-ative banks organized by Herman Schulze of De-litzch, Germany. Finally, in 1862, Raiffeisenhelped the peasants of the little town of Anhausenorganize a truly cooperative loan society. Creditunions throughout the world base their organiza-tions upon principles laid down by Raiffeisen.

Meanwhile, in 1850, Herman Schulze-Delitzschhad founded a somewhat similar credit institutionamong artisans, in Eilenburg. From this originalcooperative bank he evolved an institution peculiar-ly adapted to the credit needs of artisans and small-scale industrialists.

Both the Raiffeisen and Schulze-Delitzsch typesof cooperative banks spread rapidly across Europe.While considerable rivalry and antagonism devel-oped between them in Europe, Desjardines, Filene.and others adopted features of both in the formationof credit unions in North America. (Incidentally,the Credit Union National Association's headquar-ters building, Madison, Wisconsin was called"Raiffeisen House" for a number of years - andlater "Filene House" in honor of Mr. Filene, thegreat Boston merchant, who did so much for thecredit union movement in the United States.)

DANISH COOPERATIVES- MARKETING AND

FARM SUPPLYThe origins of cooperative marketing in Europe

appear to be later than those of cooperative pur-chasing and credit. While cooperative marketingagencies probably were organized in Germany, theUnited States and some other countries before theywere organized in Denmark, their early and strik-ing success in Denmark has led to its being gen-erally considered the cradle of farmer market-ing cooperatives. This early success probablysprang largely from the role of the Folk HighSchool, peculiar to Denmark, which at first edu-cated only young farmers and later farm girls aswell.

These schools arose from the work of a prac-tical philosopher and clergyman, Bishop NikolaiFrederick Severin Grundtvig (1783-1873), andof Kristen Kold, an educator. The first folkhigh school was established at Rodding in 1844by Grundtvig, but the one started by Kold in 1851proved more successful and the impetus for manyothers. Grundtvig had the ideas for the schoolsbut it was Kold who popularized them and made

them realistic for the common farmers' sons.The folk high schools, which developed slowly.

have furnished rural Denmark with a homegrowntrained leadership. They brought the countrypeople together in a homelike atmosphere wherethey came to know and trust each other. Theseschools opened their minds to new worlds outsidetheir experience. The students developed a will-ingness to think together, work together. playtogether - in short, to cooperate Yet, theseschools, of which there were 54 in 1970, are notvocational schools nor training schools for co-operatives, but rather liberal arts schools. Thisspirit of cooperation produced in the educationalprocess has been, without doubt. an importantfactor in the growth of Denmark's cooperativemovement.

The first cooperative creamery in Denmarkwas founded in 1882 at Hjedding. It was estab-lished on a sound economic basis and effectedsome distinct improvements, such as assemblingand manufacturing a quality product standardizedas to grade and pack at the point of production.The high quality butter made in the creamerieswas marketed under the government supervised"Lur Brand," denoting the acme in butter quality.

The first cooperative creameries had greatsuccess. They were organized on sound princi-ples of cooperation and were well financed Andefficiently operated. News of the success andpopularity of the first cooperative creamerysoon spread to other rural sections of Denmarkand many others were organized throughout thecountry. These local cooperative creamerieshave federated to form wholesale export associ-ations.

Cooperation in Denmark is not, however, re-stricted to dairymen nor to rural reas consu-mers' cooperatives in urban centers also flourish.The first cooperative store was organized in 1886by the Rev. Hans Christian Sonne, a Lutheranpastor, in the little town of Thisted in North Jut-land. It operated according to Rochdalian prin-ciples and became the forerunner of about 1750similar stores years later. Other firsts were:

1851 - first credit society, Jutland1871 - first central cooperative wholesale

society1879 first horse-breeding association1884 - first cooperative bull association1887 first cooperative bacon factory at

Horsens1894 - first pig-breeding association1895 - first cow-testing association

The extent and dig ersit% of the total cooperativemovement in Denmark may he seen from accom-paming data-

In 1970 there were 509 cooperatike creameries(900 fewer than in 1930) that handled approxi-mately s6 percent of all milk. In addition. co-operath es slaughtered about ss percent of allhogs in 62 bacon factories: 43 to 50 percent 01all poultry in 4 poultry slaughter plants. 40percent of the slaughter cattle: and marketed45 percent of the eggs through about 100 localegg-marketing associations Approximately42 percent of the fertilizer and to 50 per-cent of the feed-stuffs were handled by around1500 fertilizer and 1700 feedstuff cooperativesin 1970. About 40 percent of the Danish con-sumers are members of 1s00 consumers' co-operatives and the supply about 12 to 14 per-cent of all consumer goods sold in Denmarkto their members. Other cooperatives. suchas agricultural machinery. laundry. water-works. land credit, and societies that handleseeds, vegetables, fruits, and potatoes arcalso part of the extensive movement.

These developments took place without govern-ment assistance or subsidy. No special cooper-ative law was passed to incorporate cooperatives- common law principles and practices are thelegal basis for organization and operation. Mem-ber-marketing contracts are universally used toobligate members to deliver their pigs, mill.,poultry, and other products to their associations.An unusual obligation is that each member signsa guarantee to cover present and future debts ofthe cooperative - this peraonal and unlimitedlegal obligation still operates in most locals.Membership is open to anyone with a reasonableinterest in joining. Limited dividends are paidon ownership capital. The principle of one-manone-vote is followed in locals. Net earnings aredistributed on a patronage basis and sales re-ceipts are pooled.

Traditionally, the Danish cooperative move-ment consists of a large number of specializedlocal associations dairies, bacon factories,egg sales, purchasing or farm supply cooper-atives, and consumers' associations organizedas independent, autonomous, self-managed andcontrolled bodies. In addition, a number of cen-tral organizations, usually federations, coverthe entire country each representing a particularcommodity field or functional activity. Todaythe trend is toward greater centralization andintegration of local and terminal market activity.This impinges on local autonomy but recognizes

71

the technical and economic progress in marketingand production with which local associatio,, bthemselves cannot compete successfully

l'o ach ance the many interests of tarmers gen-erally, and ol their cooperati\ e in particular,farmers operate The Federation of Danish Farm-ers' Union. The Federation of Danish CooperativeSocieties. The Federation of Danish Small Hold-ers' Unions. the Danish Agricultural MarketingBoard. and the Agricultural Council the latter.a central representative body for all Danish agri-culture since 1919.

COOPERATIVESIN OTHER LANDS

Northern Europe has a very large number 01cooperatives These are of long standing as wellas conspicuously successful

Both urban and rural societies flourish in Swe-den. No less than SO percent of the sales of agri-cultural products there are handled by farmers'cooperatives, and practically all farmers belongto one or more marketing. supply. or serviceorganizations. In 1963 cooperatives handled 20percent of all retail business: 30 percent of theretail trade in foodstuffs: 1:- percent of all petro-leum products: 25 percent of new dwelling unitsproduced: 10 percent of the life insurance sold:80 percent of the output of agriculture and fisher-ies: and 30 percent of the trees felled in logging.Cooperatives manufactured 45 percent of the pot-tery, china and earthenware: 35 percent of theflour; 30 percent of the light bulbs: 25 percent ofthe margarine; 10 percent of the bakery products:and 7 percent of the meat products.

In France, 1 out of every 10 grocery stores isa cooperative and approximately one-seventh ofthe population are members. In that countrywhere 1.5 million farmers belong to cooperatives,80 percent of the grain. 45 percent of the fertili-zer, 42 percent of the commercial dairy products,25 percent of the wine, 25 percent of the feed-stuffs, 20 percent of the fruits and vegetables.and 15 percent of the sugar beets were handledcooperatively in the mid-sixties.

In Spain. cooperatives processed and sold 45to 50 percent of the wine in 1968.

Norway for years has been a stronghold of co-operatives. In 1964-65, 55 percent of farm pro-duction was sold cooperatively - 72 percent of thedairy products, 75 percent of the meat. 70 per-cent of the eggs, 60 percent of the meat animalsslaughtered, and 45 percent of the garden pro-ducts. Farm supplies purchased cooperativelyinclude 60 percent of all feed concentrates and72

4:, percent of commercial fertilizers. N )rwegiancooperatives also exported 100 percent of allmeat and butter exports. 92 percent of the Curs.6: percent of the wool, and 50 percent of all hides

Cooperatives also play a significant role in thefood processing and marketing business in Finland.In the mid-sixties almost 100 percent of the butter,cheese. and milk powder was processed in cooper-ative plants; and 90 percent 'of the meat, 75 per-cent of the eggs, and 50 percent of the furs weremarketed cooperatively. Cooperatives also do25 percent of the hotel and restaurant trade

In Australia, cooperatives market 83 Percent01 the dairy products, 67 percent of the wheat,and 50 percent of all grains. About one-fourthof the population belong to associations In an-other down-under country, New Zealand, almostnine-tenths of the dairy products were sold by co-operatives in 1964-65. And in the Netherlands,nearly three-fourths of the dairy products wereso processed and marketed.

One indication of the popularity of cooperativesis the proportion of the population that belongs tothem. This, as can be expected. varies fromvirtually nil to a sizeable percentage. Table 4reveals the interest in countries where cooper-atives are common it does not !:st the 100 or socountries which less than 10 percent of the popu-lation belong to cooperatives.

Table 4. Percent of Population Belonging toCooperatives, 1960. 1

Country Percent Country Percent

Finland 77 Sweden 17.5

Denmark 32 Czeckosloyk la 16.0

Israel 30 USSR 16.0

Rumania 29 Cyprus 16.8

Australia 27 Switzerland 14.0

Great Britain 25 France 13.5

Bulgaria 21 Norway 11.5

Iceland 18 United States 10.3

Canada 18 Italy 10.0

1. From Reports of the Intonations Cooperative Alliance.

In the late 1960's, the International CooperativeAlliance reported the percentage of the nationalretail trade in food and nonfood items sold by co-operatives in 10 European countries (Table 5).When one compares these figures with the appro-priate country's figures in Table 4, it is appa entthat cooperative members buy nth of their food,and even more of their nonfood items, from otherthan cooperative stores.

Table 5. Cooperative Trade as a Percentage of NationalTrade in 10 European Countries, about 1967.1

CountryPercent ofTotal Sales

Percent ofFood Sales

Percent ofNonfood Sales

Finland 35 43 21

Sweden 18 25 9

Great Britain 10 15 6

Norway 10 14 6

Switzerland 10 18 6

Denmark 9 14 3-4

Austria 5 7 3

Netherton( 3 3-4 8 0.3

Germany 3-4 6 0.8

France 3 4 0.6

1. Report by Committee on Retail Chstnbution of the Intimations(Cooperative Alliance.

According to the Statistical Abstract-1970, co-operatives handle slightly more than 1 percent ofthe total retail trade in the United States. Thebulk of this is by retail farm supply cooperatives- feed, fertilizer, petroleum, chemicals, andseeds. Except for credit unions, urban consumers'cooperatives have not multiplied anywhere near asfast in the United States as in Europe.

The illustrations of cooperative developmentpoint to the extensiveness of the movement inEurope, the universal character of the movement,its diversity and prominence in some countries,and its absence or insignificant growth in others.Cooperatives in 60 countries consisting of593,000 associations with 255 million memberswere affiliated with the International CooperativeAlliance in 1970. This further indicates theworldwide magnitude of the movement.

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HISTORY OF COOPERATIVES IN THE UNITED STATES

As each section of the United States was settled,pioneers cooperated in a real se...:,e. Cooperationwas essential to the development of communities.Most of this activity, however, was informal anddid not involve commercial transactions. Therewere beef rings, barn raising bees, cheese rings,husking bees, bull rings, exchanges of labor dur-ing harvest and planting, and community socialactivities. In the South, plantation owners ex-changed slave labar to get their work done. Agri-cultural fairs, which were held infrequently, ri p-resented a good deal of cooperation among parti-pants and provided excellent opportunities foreducation and social contacts. as well as for buy-ing and selling. Agricultural societies, datingback to the one in Philadelphia in 1785, werrural organizations for educational and socialpurposes that preceded in hundreds of countiesthe , ire businesslike and commercial orginiza-timid- that appeared later.

SPORADIC BEGINNINGS I

id10-1870As early as 1810, a cooperative dairy wat,

started in Goshen, Connecticut. And in 1841,Anne Pickett made cheese in her home at nookLake, Wisconsin (near Lake Mills) fron Le milkproduced on a number of dairy farms near hers.However, a mutual insurance s^f.iety, founded in1752 in Philadelphia with Benjamin Franklin asa director and its first chairman, is generallyconsidered the oldest cooperative in the UnitedStates.

During 1810 to 1870, isolated local groups offarmers attempted to solve their marketing prob-lems on a self-help basis. Cooperative process-ing plants for cheese and butter emerged in mostdairy regions (over 400 by 1867). A cooperativegrain elevator started in Madison, Wise.....-In in1857. A fruit marketing cooperative began in1867 in New Jersey; and wool, cotton, and live-stock marketing associations appeared in differ-ent producing areas. Most of these associationswere unincorporated but those that were incorpor-ated were done so under the general incorporationlaws or under acts legalizing fraternal and non-74

profit associations, such as libraries and cerne-tary associations.

Buying clubs through which farmers pooledtheir orders and purchased farm supplies werealso started in th?, 1850's. These clubs wereusually loosely organized with little or no capitalstock, no buildings, and no equipment. Some-times they also served as social and educationalassociations.

These buying clubs either developed into bus-iness organizations with capital and facilities,employing personnel and giving regular service,or tended to fade out. Usually the clubs tried tooperate on a very narrow gross margin. Theymade no provision for handling credit nor fortaking care of unclaimed orders. All too oftenthe local leaders in these buying clubs furnishedthe money for the gro 1p purchases, and servedwith lirle or no pay. Naturally, such arrange-ments p oved to be temporary. The systenide-manded too great a sacrifice by a few individuals.

Enabling legislation legalizing cooperativesappeared as early as 1857 in Ohio and New Yorkfor mutual insurance companies. The laws in:Vichigan (1865) and in Ohio (1867) were the firstI. , provide for the creation and regulation of co-operative trading associations. The first cooper-ative law in Wisconsin was enacted in 1887 but amore inclusive act was not passed until 1911.

GENERAL FARMORGANIZATION INFLUENCE

Farmers were hard pressed after the CivilWar - especially in the southern states. Prob-lems were no longer simply local and confinedto improving production and battling pests anddiseases of crops and livestock. Instead, manywere national and encompassed the whole gamutof political, econon _:, and social issues disturb-ing farmers. They included such things as taxes,roads, markets, interest rates, monopolies,tariffs, free lands, transportation, and education,etc.. It was in this environment that the firstgeneral farm organizations appeared to correct,if possible, the abuses, market imperfection. ,

and causes for discontent that plagued farmers

everywhere. The first of these organizationswas the Patrcns' of Husbandry, commonly calledthe Grange, and the other was the Farmers'Alliance.

The Grange was not started in 1867 by itsfounder, Oliver Hudson Kelly, to promote co-operatives, but rather as a secret organization(patterned after lodges and fraternal societies)to consider all kinds of issues causing discontentamong farmers. However , within a short time,in response to the demands of the members itbecame actively involved in cooperative buyingof farm and household supplies, selling of farmproducts, and serving its members. After arelatively slow growth the first tnree years, newlocal Granges appeared so rapidly that by 1875there .ere about 24,000 of them in more thantwo-dozen states. The local Granges affiliatedwith State Granges and these in turn with theNational Grange.

In many localities local Granges bought farmsupplies in pooled orders at discounted pricesfrom wholesale suppliers or from (or through)their stats Grange business buying agent. By

1874 there were 26 different state Granger busi-ness agents. Soon Granger stores started whichcarried farm and household supplies. In a num-ber of places feed mills, hemp factories, andpork packing plants were run for members.Some state Granges even began manufacturingfarm machinery - au ill-advised venture thatproved ruinous for the state Granges involved -while others organized three Granger banks andsimple l.'s !nsurance companies.

The first Grange was organized in Wisconsinin 1871, and by 1875 there were several hundred.The subordinate Granges made collective buyingof farm supplies their major undertaking. Thestate Grange appointed a state purchasing agentin 1871 and established a central buying agencyin Milwaukee in 1876.

The Grange organized numerous buying clubsin Wisconsin, practically all of which have goneout of existence. Many o: these clubs made bulkpurchases of sugar, flour, or feed However,when prices dropped after orde .., were placedand before deliveries could be made, some ,atronsrefused to accept their orders, except at the low-er current market prices. With little or ra capi-tal or reserves, these buying clubs were, ofcourse, not able to meet such financial distress.Despite their many failures, these clubs andGranger stores taught farmers a valuable lessonin what they could, and could not, do well in anorganized way.

One of the real sore spots as far as Grangermembers were concerned was the monopoly ofthe railroads and the totally indifferent attitudeof their owners toward the transportation interestsof farmers. High freight and passenger rates, in-equitable charges for freight service to the detri-ment of rural and western shippers, lack of state-...ontre. over the railroads - these and other grie-vances led to what is commonly called Grangerlegislation. In Wisconsin, the state Grange wasresponsible for getting the radical Potter Lawenacted in 1874 which fixed freight and passengerrates, created a three-man railroad commission,and vested the commission with sweeping regula-tory powers. Two years later the law was repeal-ed. In other states less drastic antirailroad leg-islation was passed largely through the determinedefforts of Granger members. And in 1877, theUnited States' supreme court ruled that states hadthe right to regulate railroad services and charges,a principle for which the Grangers fought sostrongly,

The decline of this farmer movement set inafter its peak in 1875. In many states the Grangehad overextended itself. It suffered financiallosses, became involved in expensive lawsuits(on alleged infringement of patent rights on farmmachinery), and failed to meet the high expecta-tions of many members. The fundamental condi-tions that gave tse to the Grange were still aFlu rce of discontent during its eclipse - lowfarm prices, high freight rates, wide middlemen'smargins, excessive interest rates, and monopolyof manufacturers, distributors, and the railroads.The vacuum thus created by the substantial declinein Granger membership and activities gave riseto the Farmers' Alliance in 1880.

The Farmers' Alliance as a national farm or-ganization came from welding together a numberof small regional farmer organizations that hadexisted for several years in several states, espe-cially in the South and Southwest. This generalfarm organization was principally concerned withthe prices farmers received and had to pay. Al-liance stores started in the 1880's in a number ofsouthern states. In 1887-88, the Texas state mar-keting and purchasing Exchange of the Alliancefoundered on the rock of unwise extension of credit.

The Alliance leadership (1889) believed thatfarmers and city workers had a common causeagainst capital, and that the best solution forfarmers' problems was in the political arena.Therefore, the Alliance united with the Knightsof Labor to form the Farmers' Alliance and In-dustrial Union. It was soon actively involved inpartisan politics and became the principal influ-

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ence in the People's Party formed in 1891.The People's Party advocated the abolition of

national banks, free coinage of silver, expansionof the currency, 2 percent interest on treasury-loaned money, restrictions on ownership of land,prevention of future trading in agricultural pro-ducts, state control of railroads, etc. Althoughthere were some minor political successes, thedefeat of its presidential candidate, James B.Weaver, in 1892 and that of William JenningsBryan in 1896, whom it supported, spelled thedownfall and destruction of the Alliance.

The American Society of Equity, organized in1902 in Indiana, was another general farm organi-zation that did much to promote cooperation. Itsbasic purpose was to have farmers uontrol mar-kets and thus pr ovide "The Third Power" its or-ganizer envisioned - labor and capital were theother two. It established a State Union in Wiscon-sin in 1903 - by 1906 there were state organiza-tions in 13 states.

The society was the prime mover in setting uplocal cooperative market' units throughout thestate, especially grain elevators and livestockshipping associations. Some of these local organ-izations are still active although the parent organ-ization no longer exists. Purchasing associations,often called Equity Exchanges, were also startedin many parts of the state. Emphasis on cooper-ative marketing and purchasing, rather than onfarm production, characterized this movement.

The Equity's "dollar" wheat campaign in theNorthwest enticed farmers to join the society.And its very active campaign in Kentucky on be-half of tobacco growers - not without its violence,destruction, and embittered "Night Riders" -put the Equity in the thick of things soon after itsorganization. (Wheat was selling at around 70cents a bushel, a very low price, and tobaccoas low as 5 and 6 cents a pound. In order to geta better price for tobacco, Ecriity members de-cided not to produce tobacco in 1908. Thosemembers and nonmembers who failed to go alongwith the Equity's decision were visited by armed"Night Riders;" were treated roughly, intimidat-ed, and had their tobacco sheds burned and to-bacco fields destroyed. Tobacco prices improvedmeasurably and the E..ity society claimed thacredit for it, but it also brought disgrace uponitself by its overzealous members.)

Division within the organization, its loss ofstatus in Kentucky and in tobacco states, itsheavy financial lfisses in Wisconsin, and loss ofits members to the Nonpartisan League in NorthDakota-brought about the disintegration of thismilitant farmer organization. In 1934, the Wis-

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consin Society of Equity united with the statebranch of the Farmers' Educat:onal and Cooper-ative Union of America, more familiarly knownas the Farmers' Union.

The Farmers' Educational and CooperativeUnion of America was organized in Texas in 1902several months before the Equity was started. Itfollowed on the heels of the Farmers' Alliance.From its very beginning, the Farmers' Unionstressed organizing cooperative business asso-ciations. In its earlier years it shied away frompartisan political entanglements which spelled".the d'OOin of its predecessor. After a number ofyears of making little headway among southernfarmers whose exp:xtations about increased cot-ton prices had not always been met, the Unionexpanded its organizational activities in Kansas,Nebraska, Missouri, and Iowa; and later in Northand South Dakota, Montana, Wyoming, and Colo-rado.

Local cooperaties for marketing of grain,livestock, and dairy products were started inthese states, as well as terminal grain-handlingand livestock commission companies. Farmers'Union retail stores and statewide cooperativewholesale establishments served farmers in adozen states or more during the 191G's and 1920's.Many of these cooperatives are operating success-fully to this day an serve both members and non-members. The Farmers' Union Central Exchangeof St. Paul, Minnesota is one of the large, suc-cessful, wholesale distributors of feeds, seeds,petroleum products, and many other itemsthrough Farmers' Union local affiliates here inthe Midwest.

The Smith-Lever Act in 1914 created a countyagent system under a tripartite control - theUSDA, state agricultural extension services, andlay contributors consisting of farmers and agri-business firms. This indirectly gave rise tocounty farm bureaus and state federations of thesebureaus (nine federations existed by 1919). Thecounty farm bureaus worked closely with countyagents and helped pay the expenses of the countyagricultural extension offices. In 1919, countyfarm bureau representatives of 12 states met atIthaca, New York to organize a national federa-tion which became the American Farm BureauFederation. Farm bureaus were not only inter-ested An improving farm production, but also hadeducation, legislation, and economics programs.The latter became their central concern.

The Bureau's Committee of Seventeen for mar-keting grain, the Committee of Fifteen for mar-keting livestock, the Committee of Eleven fordairy products, the Committee of Twenty-one for

fruits and vegetables, etc. all recommended thatthere should be separate marketing programs forI ach commodity. The federation sponsored thecooperative marketing associations for the indi-vidual commodities but did not become the oper-ating agency. As a result of the committees'proposals for single commodity marketing p -o-grams, terminal livestock commission firmswere established on about a dozen central live-stock markets, and several national associationswere founded including the United States GrainGrowers, Inc., Chicago; the National LivestockProducers' Association, Chicago; and the Fede-rated Fruit and Vegetable Growers, Inc., NewYork City. Besides commodity-marketing com-panies, the Federation sponsored cooperativepurchasing associations at the local and statelevels which have had outstanding success. TheIndiana Farm Bureau Federation of Indianapolisand F. S. Services, Inc., Bloomington, Illinoisare two of the large regional Federations servingmany local supply cooperatives buil. by countyFarm Bureaus,

The National Farmers' Organization (NFO) ofCorning, Iowa, 1955, is primarily a bargainir.,'cooperative. It is chiefly interested in imptov r.,?;farm prices through bargaining wit 1 processorr.To give force to its demands, it has ence.:.agecits members on several occasions o withholdproducts from the market tr 'isil prices by re-ducing the supply temporar. Althou;;h someconsider that this organizatior '3 not a generalfarm organization such as the arange, the Farm-ers' Union, or the Farm Bureau Federation; nev-

ertheless, others do and for that reason it is in-cluded here. The organization has members ina dozen states or more in the heart of this country,and its aggressive and simplistic approach tomajor marketing and pricing problems has appar-ently appealed to many farmers discouraged bylow farm prices.

PERIODS OF COOPERATIVEDEVELOPMENT

The history of agricultural cooperatives in theUnited States can be broken down into periodsbased on the kind and amount of activity duringthe years involved. In some respects the historymay be simgly divided into two parts before1920 and after. As we shall see, 1920 was inmany respects the end of one era and the begin-ning of another. However, the 150 years of co-operative experience can be subdivided into short-er periods for a better understanding of whattranspired during this century and a halt.

Although it is impossible to get a complete re-cord of the organization of cooperatives in thiscountry - few records are available for the earlyyears and no official registration is requiredeither state or nationwide - Table 6 (based on therecords of 20,697 active, and inactive associationsit. the files of the Division of Cooperative Market-ing of the Federal Farm Board in 1932) givessome idea of the number of farmers' cooperativesthat were formed each decade from the 1860's to1930. Since the data are incomplete, especiallyfor the years prior to 1900, many more cooper-

Table 6. Number of Farmers' Cooperatives Organized in Various Decades, by Commodity Groups, 1863-1931. 1

Decade CottonDairyproducts

Fruits andvegetables Grain Livestock

Poultryend eggs

Wool,mohair

Misc.selling 2

Misc.buying Totals 3

1863-1869 4 4 - -- - - - 1 5

1870-1P/9 16 1 1 1 1 10 30

1881-16a9 3 118 8 18 3 2 7 159

18b0-1899 7 549 70 81 4 _ _ _ _ 2 10 33 756

1900-1009 93 778 242 1,039 52 3 11 44 182 2,444

1910.1919 110 1,368 866 2,885 1,162 26 74 402 1,254 8,147

1920-1929 177 896 1,451 968 1,496 233 96 518 1,151 6,986

1930-1931 5 10 23 76 86 23 18 17 36 107 396

Total 400 3,752 2.714 5,078 2,741 280 202 1,011 2,745 18,923

1, Ellsworth, R. It, and staff, "Statistics of Farmers' killing ant Buying Associatons, United States, 19631931," Bulletin 9, p. 4, Division of Cooperative

Marketing Federal Fenn Board, Washington, D. C., June 1932.2, Including forage crops, nub, tobacco, and miscellaneous product,

3. Including subsidlaries and semckations not engaged in sailing or buying.

4. 7 years.

L 2 yams.77

vir

atives were started than the table indicates. Itis apparent from the table that the three decades,1900 to 1930, were the most active ones through-out the 68 years.

Before 1870 isolated Locals,Trial and Error Period

The first recordea cooperative in the UnitedStates was an insurance company in Philadelphiain 1752. A cooperative dairy was started in 1810in Goshen, Connecticut; a grain elevator in Madi-son, Wisconsin in 1857; and another in Iowa in1867. By 1867, 400 cooperative dairies process-ed milk and sold to established handlers. Farm-ers producing wool, fruits and vegetables, cotten,and livestock also started associations; and col-lective buying of farm supplies was begun. Thewnole period was characterized by independentgroup efforts and informal organization, lackingcoordinated leadership and restricted to localcommunity cooperation. Many associations wereshort-lived - only a few, undoubtedly, had heardof the Rochdalian plan of organization.

1870-1900Granger and Alliance Influence

The Grange and Farmers' Alliance organizedhundreds of marketing and purchasing cooper-atives, both formal and informal, during thisperiod. Although Table 6 lists only 950 process-ing and marketing cooperatives organized inthese three decades (549 of which were dairy co-operatives started during the 1890's), the listdoes not include hundreds of buying clubs andfarm supply stores that also operated in this in-terval, albeit, in many cases for a short timeonly. Granger and Alliance stores and statepurchasing agents were very active during thefirst two decades of this period, especially inthe Midwest and Southwest. These general farmorganizations led the organizational activities offarmers and through their state agents extendedthe sphere of cooperation from local communitiesto central markets as well. Even though theGrange began its decline after 1875 and the Alli-ance after its ill-fated political aspirations inthe early 1890's, they had started enough suc-cessful cooperatives to show that farmers couldorganize self-help business firms and run themfor their benefit. All was by no means lost withthe eclipse of the parent organizations, sincemany associations kept operating and farmersunaffiliated with the Grange and Alliance contin-ued for form associations, particularly dairy co-

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operatives in the 1890's.A new development during the 1890's which

affected cooperatives for many years was -thepassage of the Sherman Antitrust Act of 1890and the antitrust acts of different states. (Seesection on "The Legal Basis of Cooperatives.")The legal status of cooperatives was consequentlysomewhat in jeopardy, and this led years later tothe passage of both state and federal laws approv-ing their status.

1900-1920 Expansion,Governmental Approval,and Encouragement

This 20 years was one of rapid expansion ofmarketing, purchasing, and service cooperativesin nearly all states. Over 10, 500 processing andmarketing cooperatives started in these two de-cades. By 1920 there were 10,588 active market-ing and purchasing associations; 1,944 farmers'mutual fire insurance companies; hundreds ofdairy herd improvement associations, irrigationcooperatives, federal land bank associations, ur-ban consumer cooperative stores and miscellane-ous cooperatives - approximately 14,000 cooper-ative all told.

Most of these were, of course, local associa-tions but some federations of locals were started,particularly by California producers and by Wis-consin cheese producers (1914). Centralized as-sociations among tobacco growers, wool producers.poultry and egg, lima bean, and almond growersappeared around 1909-1910.

The Texas Farmers' Union (1902) and the Amer-ican Society of Equity (1902) were most activeduring these years organizing sales and purchasingassociations. President Theodore Roosevelt en-dorsed farmers' cooperatives in 1909 on the basisof the Country Life Commission's report. Begin-ning around 1915, Mr. Aaron Sapiro, one of thenation's leading organizers of cooperatives, gavemuch legal aid to California cooperatives.

Soon after President Woodrow Wilson was in-augurated in March 1913, he appointed a UnitedStates Commission to study cooperatives gener-ally, but especially cooperative credit in Europe.This commission's report and that of a sistercommission, the American Commission, approv-ed strongly a cooperative credit system for Amer-ican farmers and indirectly paved the way for theFederal Farm Loan Act in 1916. Also, the Smith-Lever Act (1914), providing for the agricultural

4--

extension system, stimulated farmer cooperativesin many states.The organization of the Cc,perativeLeague of the USA under the leadership of Dr.James Peter Warbasse (1916) - a trade associa-tion which provided information, education, andleadership - was of special significance for theconsumer cooperative movement in this period.

These two decades, 1900 to 1920, witnessednot only the extension of cooperatives in central-ized, federated, and terminal market organiza-tions and in new areas such as cooperative finance;but it also was a time when many organizationsbecame firmly established, were conspicuouslysuccessful, and proved to members and skepticsalike that farmers could organize-and run busi-nesses to their advantage.

Decade of 1920's One of theMost Active in CooperativeHistory

This decade can be described as one of super-activity as related to cooperatives. Table 6 indi-cates that 6,986 marketing and purchasing asso-ciations started during this period - many others,no doubt, also began for which no records wereobtained. This was the decade of orderly market-ing, commodity marketing, "California plan" oforganization, "Sapiroism" and cooperative legal-ism. By 1929 about 3 million farmers belongedto thousands of associations that did more than$2.5 billion of business.

A quick summary of significant events duringthis eventful decade includes the following:

Wisconsin cooperative law was drasticallyrevised in 1921 and the Bingham Act passedin Kentucky (1922) - both served as modelsfir many state laws during this decade.

The Capper-Volstead Act, the principal lawlegalizing farmers' cooperative marketingassociations engaged in interstate and foreigncommerce was passed in 1922.

Many favorable court decisions approved mar-keting contracts with member producers andestablished that cooperatives were not in vio-lation of antitrust laws.

Significant federal cooperative legislation wasenacted: the Federal Intermediate Credit Actof 1923; the Cooperative Marketing Act of1926; the Agricultural Marketing Act of 1929;and ether legislati 4-1 that exempted cooper-atives from ce't in provisions of these laws -the Grain Futures' Act of 1922, and the Pack-ers' and Stockyards' Act of 1921.

The American Institute of Cooperation organ-ized in 1925 became, in a sense, the educa-tional arm of the farmers' cooperative move-ment in the country.

The National Council of Farmer Cooperativesbegan in !929 to serve farmer cooperatives onmany different issues.Colleges of agriculture that had not startedgiving courses in cooperatives or conductingresearch in this area during the previousdecade did so in increasing numbers.

The Joint Commission of Agricultural Inquiry(1921) endorsed cooperatives by farmers, in-cluding their legalization, as one way to im-prove the economic status of agriculturalproducers.

Businessmen's commissions inquiring intothe depressed conditions of agriculture alsorecommended cooperatives to alleviate thedepression.

Many bulletins and books about cooperativesappeared during this dem- - examples beingthe USDA Bulletin 1266, "pgricultural Co-operation in Denmark," by Chris L. Christen-sen in 1924; E. G. Nourse's book, The LegalStatus of Agricultural Cooperation (1927);Herman Steen's "Cooperative Marketing -the Golden Rule of Agriculture," in 1923; andtextbooks on Cooperatives by 0. B. Jesness,Mears and Tobriner, and H. Clyde Filley.

The American Farm Bureau Federation, al-though organized in 1919, became very activein organizing cooperatives during this decadepursuant to plans proposed by several FarmBureau committees.

Widespread attention was given to cooperativesby farm leaders, the agricultural press andnews media, political parties, educators, thecourts, businessmen, and citizens in general.

"Sapiroism," a method of organizing cooper-atives promoted by Mr. Aaron Sapiro, wasenthusiastically adopted by many farmers andtheir leaders and was also vehemently de-nounced by its critics. (Sapiro recommendedorganization on a single c mimodity basis re-stricted exclusively to farmers who sign long-term marketing contracts becoming effectivewhen a high percentage of producers sign thecontracts. The products were to be pooledand sold on sound merchandising principlesand with an orderly marketing plan. C .izations were to 'le centralized ron a nonstock basis. By 1923 JIG cia-

79

tions had been set up by Sapiro, many ofwhich had to be reorganized or ceased oper-ations within a few years.)

Many of the centralized and federated associa-tions operating in terminal or central marketstoday were begun in this decade - Land O'Lakes,Inc.; Equity Cooperative Livestock Sales Asso-ciation; Great Lakes' Cooperative Wool Growers'Association; Midland Cooperatives, Inc. to namethose with which Wisconsin farmers are affiliated.Both marketing and purchasing, as well as servicecooperatives, set their roots deeply during thisexcitir.g period.

After 1930 Growth,Diversification, Bigness, Mergers

Marv- significant developments 1:ollowed after1930. The Federal Farm Board, which began tofunction in 1929, did much to organize nationalmarketing associations in the early thirties sothat local, terminal, and regional associationsmight be welded into unified pr-igrai- , of action.(.4 outstanding importance to rural America wasthe passage of the Rural Electruicaticn Act, 1936,which made possible the organizaton and opera-tion of rural electric coope-rItives C ingress alsocnacted in 1933 the Farm C edi% At 'I,hich created12 regional and 1 central Bank Jr ":".00peratives.Tne Act also established Production rlredit Asso-ciations, all of which are ;1..fwtioning to this day.In the credit union field, the fe-loral Credit UnionAct, 1934, was most important .Jecause it madeit possib,e to organize credit ur, t:3 especially instates not having state enabling legislation. TheFishery Coope-ative Marketing Act, 1934, gavefishermen's cooperatives a legal stard"rts; such asthe Capper-Volstead Act gave farmer3 dark .ir.gcooperatives.

During the early 1940fb, cooperatives felt thepinch of a war time economy as did other comme-cial sectors. After 1945, many associations re-activated - the forward thrust into handling manycommodities, providing numerous services, anddeeper market penetration was underway. Theincreased capitalization of associations, the largeannual business volume running in the millions formany firms, and the cooperatives' general trendtoward bigness and growing market power alsostimulated opposition to cooperatives on a nationalscale under the accusation that cooperatives failedto pay their fair share of federal income taxes.Opposition on these grounds has not subsided tothis date.

Farmers' marketing associations increasedbusiness from $1.7 billion in 1939-40 to $7 billion80

in 194 -50; farmers' purchasing associationsfrom $358 million to $1.6 billion - increases of400 percent in the decade (partly due to inflation).Such growth was little less than phenomenal andshowed the solid foundation on which farmers hadbuilt in previous decades.

Mergers, consolidations, and acquisitions gotunderway during the fifties, increased during thesixties, and thus far in the seventies have contin-ued to involve large numbers of associations.The Associated Milk Producers, Inc. (AMP"), aMerger of 43 dairy cooperatives from Texas toMinnesota and from New Mexico to Pennsylvania,involving about 42,000 farmers in 20 states as ofearly 1971, is just one of the mergers of farmercooperatives during this period. That of LandO'Lakes Creameries, Inc. with "Fe leo" of Ft.Dodge, Iowa in 1970 is another significant mergerinvolving Wisconsin dairy cooperatives.

During the fifties and sixties, farmers' market-ing and purchasing associations in the UnitedStates increased their business volume by about$9 billion, but the number of associations declinedfrom 10,000 to 7,500. This reduction in numberswas partially caused by mergers, by discontinu-ances, and by technological developments thathave influenced many. industrial and commercialcorporations.

CONSUMER COOPERATIVERURAL

AND URBAN DEVELOPMENTS/round 1798 the Shakers, a communal society

at tiew Labanon, New York, started a buying clubto pool purchase orders by their members. Thiswas followed by many similar clubs. Such earlybuying clubs preceded the more formal cooper-ilve stores.

As early as 1830, however, a cooperative storewas started in New York City by William Bryan,the former Treasurer of a Brighton, England co-operative. John G. Kau lback, a tailor, was in-strumental in starting a cooperative store inBoston in 1845 after having had success with abuying club for his labor union in 1844, the sameyear the Roc& lalians opened their Toad Lanestore. The Boston store of 1845 lasted longerthan the New York store and, nerhaps for thisreason, is considered by some as the beginningof the consumer cooperative store movement inthis country.

Cooperative stores for purchasing householdsupplies have had a most erratic experience inthe United States - many were started, lasted afew years, and then succumbed for a variety of

reasons. Many Granger and Farmer's Alliancestores of the 1870's and 1680's carried consume'items as well as farm production supplies. Thesefarmers' stores were one of several waves of co-operative store activity. Another was that startedby labor unions in the seventies and eighties -namely, by the Knights of St. Crispin, Knights ofLabor, and the Sovereigns of Industry. The Mor-mons also promoted such stores (1864-1893), andmany independent associations started during1860-1900. Few of these stores lasted after theinitial enthusiasm wore off and when difficult man-agement and operating problems arose.

By mid-1970, out of 236,000 stores handlingmeats and groceries in the United States, only730 were cooperatives. At no time have cooper-ative food stores ever handled more than a minutefraction of the retail trade in foodstuffs, and foryears most of this consisted of trade with farmersin rural communities.

In 1916 Dr. James Pe. r Warbasse, a New Yorksurgeon and physician, was the principal organi-zer of the Cooperative League of the USA, a tradeassociation of consumer cooperatives which hasprovided information, educational materials andleadership for consumer cooperatives in thicountry.

Cooperative wholesalers, which have &id im-pressive business successes over the plst 25 to50 years, have also helped retail associationsoperate successfully in hundreds of communities.Except for a few very large supermarkets, co-operative food stores are generally small single-unit establishments found mostly in small townsand villages. (For an excellent account of thehistory of consumer cooperative:. in the UnitedStates, see Florence E. Parker's book, The First125 Years, 1956, available from The CooperativeLeague of the USA, Chicago, Ill.)

COMMUNAL SOCIETIES -LIVING, WORKING,

WORSHIPPING-TOGETHEROne movement, possibly important to the devel-

opment of trisiness cooperatives in this country,was the establishment of 128 communal societies.These societies were patterned in some respectsafter the communal societies of Robert Owen ar--ICharles Fourier, ly most had different object . vs.Most were promoted by religious enthusiasts,some by social reformers, and others by follovreroof leaders of one type or another. The teachingsof Fourier and Robert Owen either directly or in-directly stimulated some to live in isolated soci-

eties. Religious persecutions abroad caused oth-ers looking for a haven of peace and rest to startsuch communes. And the back-to-nature philos-ophy of disenchanted urbanites encouraged stillothers to try this mode of living.

Members of these communes (also called colo-nies and conthiunistic societies by some writers)shared the work, the wealth that was produced,the food that was served (often in common diningrooms), and the pursuit of a fullness of life thatthe members hoped for. A few started before1800, nearly half during 1840 to 1850, and almostnone after 1900. Some of the ventures were con-spicuously successful and others were short-lived.Only a few exist today, generally on a reorganizedbasi:, with modified social, religious, cultural,and economic objectives.

Wisconsin had several such communes. TheWisconsin Phalanx at Ceresco (Ripon, Wisconsin),a Fourierite colony of about 180 persons, lastedsix years, 1844-1850, and was dissolved by mutualconsent after apparently successful operation.Two other Wineousin groups were the ChristianSocial Asse...;ation of 48 members which startedin 1896 and terminated in 1900, and the SpringFarm Association of 10 families, a Fourieritegroup, operating from 1846-49. The Shakers,Rappites, Zoarites, Amana Society, Icarians, andHarmonists are just a few of the 128 communalsocieties that once existed in this country.

In retrospect, it appears that these societieswere organized largely on a religious basis orsectarian philosophy, were dominated by someauthoritarian person, and demanded strict con-formity to srz..-ific living patterns. Generally,members gave up private property rights, sharedthe wealth produced by the group, and lived isola-ted from society. Many of these communes weremore closely related to medieval religious ordersthan to business cooperatives since relatively fewwere organized to solve social problems of lowwages and incomes, high clnsumer prices, inad-equate services, and quest onable quality of "er-chandise. Still the esprit c e corps of these groupsmay ha...e served as steppb ; stones to businesscooperatives.

81

STATE AND NATIONALORGANIZATIONS -COUNCILS,LEAGUES, INSTITUTES,TRADE ASSOCIATIONS

Not all problems of cooperatives are businessproblems. Some relate to providing informationabout cooperatives to members, the public, legis-lators, and others; some to suggesting laws tobenefit cooperatives; and some to providing quo-rums for discussion of mutual issues.

Since many of these issues concern all cooper-atives and their solution is beyond the sphere ofa single organization, it is logical that state andnational associations were established to dealwith them. General farm organizations such asthe Grange, Farmers' Union, and Farm Bureaudevote much attergion to issues affecting farmersgenerally, including also those bearing upon co-operatives. However, the cooperative trade as-sociations, state federations or councils of co-operatives, and educational institutes deal spe-cifically and almost exclusively with problemsfacing cooperatives.

The National Coma of Farmer Cooperatives,Washington, D. C. is an organization of about 100farmer marketing and purchasing cooperativesplus 33 state associations. Organized in 1929,it is principally interested in federal legislativematters that might affect farmers' associations.Reports of special committees - transportation,legal, tax, research, education, bargaining, etc.- are presented at annual meetings, and policy*resolutions are adopted. Meinber dues supportthe organization, and a small staff headed by anexecutive vice-president keeps members inform-ed of current developments and activities.

The Council is a member of the InternationalFederation of Agricultural Producers which hasoffices in Paris and Washington and publishes"IFAP News" monthly and "World Agriculture"quarterly. IFAP is, in many respects, the voiceof the farmer and of his cooperatives in interna-tional affairs.

The Cooperative League of the USA was organ-ized in 1916 to promote the Interests of consumercooperatives in the United. States. Many kinds ofcooperatives - credit, housing, electric, foodstores, health, recreation, farm supply, etc. -from all parts of the country belong to the League.Perhaps as many as 75 percent of the membersof the cooperatives affiliated with the League anefarmers or rural residents. The League main-tains headquarters in Washington, D. C. and abranch in C'icago. It does many things for its

62

members - publishes and distributes cooperativeliterature; provides speakers at annual meetings,conferences, workshops, and clinics; carries ona public relations program; lobbies for or againstproposed legislation; and, in general assists co-operatives.

The American Institute if Cooperation was or-ganized in 1925 as a national educational organtzation sponsored by farmer cooperatives and agri--culturai leaders. Each year it holds an instituteat a Land Grant college during which lectures,panel discussions, symposia, and reports on co-operatives are given. These prepared papers arethen published in a proceedings volume calledAmerican Cooperation These volumes, in manyrespects, have become the best compendium ofinformation on farmers' cooperatives to be foundin the United States.

The Institute does not engage in legislationactivity on either the federal or state level, nordoes it adopt resolutions and policies for futureaction. Farmer cooperatives support the Insti-tute voluntarily. Its office is in Washington,D. C. and its staff works closely with educationalinstitutions in putting on seminars, workshops,and educational meetings for members, directors,officers, and managers of cooperatives. Its workwith 4-H, FFA, and other youth and teenage or-ganizations has received major emphasis foryears.

The National Rural Electric Cooperative Asso-ciation (NRECA) is a service or trade associationof rural electric cooperatives, headquartered inWashington, D. C. It was organized in 1942 toserve its member associations with inform Mon,insurance programs, research, and legislativerepresentation. It has provided techni:dans andengineers to foreign countries interested in devel-oping cooperative electric service. The NRECAhas been especially involved in legislative activ-ities since the opponents of rural electric gener-ating and distributing cooperatives have beenquite active in their opposition, and since anannual congressional appropriation to the RuralElectric Administration calls for considerablelobbying. This organization is also maintainedthrough the voluntary dues paid by its members.

In addition to the electric cooperative tradeassociation just mentioned, there are other na-tional commodity and service organizations in-terested in educational, legislative, and infor-mational services for -heir affiliated members.Cooperatives handling one particular product orproviding a specialized service have banded to-gether in trade associations to protect and furtherthe interests of their e r.stituents. Included in

these are: the National Milk Producers' Federa-tion, the National Federation of Grain Cooper-atives, and the National Telephone CooperativeAssociation - each headquartered in Washington,D.C. - and the National Livestock Producers'Association, Chicago, 111. ; and Credit UnionNational Association (CUNA), Madison, Wiscon-sin. None of these associations buys or sells,processes, or stores, or in any other way handlesfarm commodities or renders electric, telephonic,credit, or similar services. Theirs is a tradeassociation service of which lobbying is generallyan important part.

State councils (federations or associations) arestate-wide trade associations of cooperatives.They are organized to solve mutual problems oftheir members, to assist cooperatives to becomemore efficient, to be a public spokesman for co-operatives, to show the public generally that co-operatives are legitimate and constructive insti-tutions in our capitalistic system, and to enhancethe interests of the member associations.

For many years, Wisconsin was the only statewith two such organizations. However, since1968, only one organization - the Wisconsin Fed-eration of Cooperatives, Madison, Wisconsin -serves several hundred diversified cooperativesin the state.

Most state councils have similar objecth es asservice institutions for their affiliates. Ytt, theydo differ in types of associations admitted to mem-bership, in their budgets and methods of financingtheir operations, in the size of staff employed, inthe programs they sponsor throughout the year,and in their general activity on behalf of and fortheir members. Most state councils are alsomembers the National Council of Farmer Co-operatives and of the American Institute of Co-operation. In 1970, there were 39 state councilsand 1 in Puerto Rico.

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4

EXTENT OF COOPERATIVE BUSINESS

Few of the man; farmer cooperatives set up inthe later decades of the past century under thestimulus of the Grange, Farmers' Alliance, andindependent groups of farmers survived for morethan a few years. In 1913 the United States De-partment of Agriculture made a survey of farm-er cooperatives and reported 3, 099 marketingand r?..:_n supply associations. This listing, how-ever, was far from complete. In the years fol-lowing, the numbers grew rapidly to a peak of12, 000 active associations in 1929 after whichthe number declined to 7,747 in 1968-69.

Membership in marketing and farm supply co-operatives grew from 651,186 reported in 1915to a peak of 7,731,735 in 1955-56. After that adecline to 6,363,555 in 1968-69 set in. In thislatter year, associations averaged somewhat over800 members. In view of the fact that in 1968-69there wet approximately 2 3/4 million farmers- and not all of these belonged to cooperatives -it is apparent that many farmers belonged to 3,4, or Inure associations. While the number ofassociations dropped 35 percent by 1968-69 fromthe peak in 1929-30, largely because of mergersof small, local associations into larger units,membership increased more than 100 percent Sur-ing this same time.

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In 1915, farm supply cooperatives had only 9.1percent of the membership in marketing and farmsupply cooperatives - in 1968-69, 50 percent ofit. The gross volume of business of both market-ing and farm purchasing associations has grownfrom less than $1 billion in 191r to $22.7 billionin 1968-69 - 74 percent is done by marketing as-sociations, 25 percent by farm supply cooperatives,and somewhat over 1 percent by related servicecooperatives. When intercooperative business isexcluded from the gross volume, the net volumeof the three types was $17.3 billion divided on a77,21, and 2 percent basis between marketing,farm supply, and related service associations.Table 7 show the number of associations, theirmembership, and their net volume of business(exclusive of intercooperative transactions) forselected years from 1915 to 1968-69.

Table 7. Number of, Membership, and 3usiness Volume of Farmer marketing and SupplyAssociations. 1

_ Yews

Number ofAssociations

Estimated Numberof Members

Volume ofBusiness

1915 5,424 651,186 0 635,839,000

1921 7,374 1.256,214,000

1930.31 11,950 3,000,000 2,400,000,000

194041 10,600 3,400,000 2,280,000,000

1950512 10,064 7,091,120 8,147,137,000 3

196461 9,163 7,202,805 12,409,133,000

1968 89 7,747 6,363,555 17,2)6,221,000

1. Fanner Cosomorativo Sonde Ilsorrolt Report 111, and Genesi Awe 125.2. Del for the yen before 1161 ore not entirely wettable welt those of War yews berme of retied statistical

droaoshows. Alto, des pier to 1161 did not Vest remind mere cooporinies toparesfy from tho nerkeino and farmcosporsties se they did in arbosessnt vim Sudo noised sondes cooporodtos Mends troches, warehousing,

eyes sod sloes, sonde orgonizadons but not inourante flosocino, dome. DFI1A, and other or wisdom.2. Ilebioning in 115041, the not seem of borings If doom sondosivo or inisrameorativo betimes.

4

In addition to marketing and farm supply asso-ciations, farmers have also organized many asso-ciaticns in insurance, finance, irrigation, electricand telephone service, artificial breeding, anddairy herd improvement. The number of andmembership of these principle types of businessesare shown in Table 8. Since registration of co-operatives is not mandatory in the United Statesas it is in many foreign countries, the data pro-bably understate the magnitude of cooperativebusiness in this country.

California, Minnesota, Iowa, Illinois, and Wis-consin did the largest volume of cooperative busi-ness in 1968-69, accounting for 36 percent of thetotal marketing and farm sipply business. Thestates with the largest number of members wereMinnesota (559,465), Iowa (429, 890), Indiana

(428, 095), Missouri (409, 330), Illinois (401, 345),and Wisconsin (392,670).

The leading farm products marketed in 1968-69in the United States were dairy products (34.5 per-cent of the total dollar value), grains and soybeansand soybean produc., (19.8 percent), livestock andproducts (13.8 pc.. .:ent), and fruits and vegetables(12.6 percent) - a grand total of 80.7 percent ofthe. $13.4 billion of sales. Among farm suppliespurchased cooperatively, the leading iroductswere feed, petroleum products, fertilizer, spraysand chemicals, and building materials - these ac-counted for 80.7 percent of $3.6 billion of pur-chases.

Table 8. Major Types, Number, and Memberships of Farmer Cooperat ves.15

Type Year or period Associations

Estimated membershipsor participants

Number

Marketing and farm supply:

Marketing I 1968-69 4,773 2 3,141,245

Farm supply I 1968-69 Z793 3 3,189,460

Miscellaneous services 1.4 1968-69 181 5 32,850

Service:

Federal ;and bank associations 6 June X, 1970 628 369,279 7

Production credit associatior s 6 June 30, 1970 446 526,654

Banks for cooperatives 6 June 30, 1970 13 3,556,000 6

Rural credit unions 9 Jan. 1, 1970 790 275,000

Rural electric cooperatives 10 Jan. 1, 1970 901 11 5,738,961 12

Rural telephone cooperatives 10 Jan. 1, 1970 231 579,241

Farmers' mutual fire insurance companies 9 Jan. 1, 1970 1,225 2,7t.B4O04:

Production:

Mutual irrigation companies 9 Jan. 1, 1970 7,500 161,000

Dairy herd improvement associations 13 Jan. 1, 1970 1,267 59,629

Dairy cattle artificial breeding assocations 131

1969 21 242,100 14

1 Farmer Cooperative Service, USDA.2 When ameistions nwketino farm products but principally engaged in providing eonsa other son em are included, the total is 5,400.

3 When aleociations purchasing farm supplies but principally engaged in providing some other services are included, the total is 6,273.

4 includes general trucking, a ow, grinding locker plant, and ollw services5 When associations providing mitsellamous services but principally engalsid in marketing or farm supply activities ere included, the Mai is 5;45.

9 Farm Credit Administration.7 Represents the number of Federal Land Bank loans ouetenthng ea of Arne 30, 1970.

Estimated 2,679 cooperative alsociadons were borrowers from Bade for Cooperatives.

9 Farmer Cooperative Service, USDA estimesse.

19 Rued Electrification Administration, USDA.11 includes 1100CiOtielli that are REA :weld borrowers.

12 includes only memberships of essociations financed by REA.

13 Dehy Cattle Resemsh Branch, Aviculture' Ressaidi Service, USDA.

14 Number of herds serviced by cooperatives

15 From: "Statistics of Farmer Cooperatives 156669" F01 Resew* deport No. 16 December 1970, U.S. Department of Agriculture, rashington, D.C.

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URBAN CONSUMERCOOPERATIVES

Cooperatives run by urban consumers conductonly a small proportion of the total cooperativebusiness in the United States with one exception- credit unions. The Department of Commercein the U. S. Census of Business reports that co-operatives do slightly less than 1.5 percent ofthe total retail trade in the United States. Ofthis amount, most is done by farm supply cooper-atives. A much smaller fraction is done by citycooperative grocery stores, hardware stores,oil and gasoline stations, and other establishmentsretailing consumer merchandise. Housing co-operatives (of which there were about 2, 276 as-sociations g 1968 with 141,000 members) and

cooperatives providing rooms, meals, and med-ical care are nearly all conducted by nonfarmers.

er, cooperative tPlenl../ne companies, in-surance associations, electric power cooperatives,building supplies, and petroleum associations oftenlisted as though they were urban consumers' co-operatives are almost entirely restricted to farm-er members.

Table 9 shows the number of predominantly ur-ban consumer cooperatives, their approximatemembership, and their ousiness volume as of thelate 1960's. These data together with that inTable 8 indicate the extent of rural and urban co-operatives in this country on the dates indicated.

Table 9. Numbers, Members, and Volume of Business of Cooperatives with Principally Urban Membership in the UnitedStates About 196970.1

Kind of CooperativeI Purposeof

AssociationsNumber ofMembers

ValuNumber e ofBusiness

Consumer goods Food am; home supplies 430 (stores) 450,000 $500,000,000Credit Unions 2 Thrift ancricredit 23,710 23,000,000 $ 12,509,000

(loans)

$ 18,487,000(assets)

Fishing Marketing, Supply purchasing 79 12,000 N.R.Group Health Plans Prepaid health care 200 7,250,000 $300,000.000Housing Homes, dwellings 700 200,000 $250,000.000Insurance Financial security 39 15,000,000 5950,000,000(excl. farmers' mutuals) (premiums)

Memorial societies Last rites 101 300,000 $ 1,300,000(estimated savings)

Nursery schools Pre-school child care 1,440 72,000 $ 6,840,000

Students' cooperatives Room, board, books 400 400,000 $ 29,660,000

1 From "Cooperatives USA Facts and Figures, 19119" The Cooperatis s League of the USA, Chicago, Illinois. Data for the former cooperatives included inthe original table are °swilled since them are shown in Table 8.

2. Data for March 1971.

In contrast to the relatively small urbajn con-sumer cooperative business in the United States,urban consumer cooperatives in most westernEuropean countries do an appreciable share ofthe total volume of retail and wholesale trade,especially in food sales (see Table 5). However,noncooperatives dominate the sales of nonfooditems, such as clothing, furniture, appliances,hardware, and the like. The highest proportionof cooperative retail trade occurs in the Scandi-navian countries, Great Britain, end Switzerland.

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COOPERATIVESIN WISCONSIN

A study by the Wisconsin Department of Agri-culture in 1971 revealed that there were 1,828cooperatives in the state - 890 chartered underthe state's cooperative law (Chapter 185); 766credit unions (Chapter 186); 141 town mutual in-surance companies organized under Chapter 202of the statutes; and 31 production cr dit and fed-eral land bank associations operating under fed-eral charters. These associations (exclusive ofthe mutual insurance and credit unions) had almosta million members, hired about 12,000 employees,did $1.8 billion of business in 1971, had $500 mil-

lion invested in the organizations, paid $79 mil-lion in wages and salaries, $6.5 million in pro-perty and income taxes, and showed a net worthof $362 iaillion ("Economics and Geography ofWisconsin Cooperation," Bulletin 617-71, Wis-consin Department of Agriculture, 1972, Madison,Wisconsin.)

These cooperatives are distributed quite widelythroughout the state, except in the southeasterncounties. The marketing and processing of milkand dairy products and the sale of livestock leadall other products in numbers of associations,membership, and dollars of business. Feed, seed,fertilizer, sprays and chemicals together with pe-troleum products constituted the principal farmsupplies bought cooperatively. Only 18 consumers'general merchandise stores (groceries, dry goodshardware, meats, fuel, health and beauty aids)existed and most of these were in the northerncounties.

The record shows a great diversity of cooper-ative activity in the state. It also reveals thatmajor wholesale marketing and farm supply com-panies are active in the state. These includeLard O'Lakes, Inc.; Ocean Spray Cranberries,Inc.; Associated Milk Producers, Inc.; CentralLivestock Association, Inc.; Equity CooperativeLivestock Sales Association; Great Lakes Co-operative Wool Growers' Asiociation; MidlandCooperatives, Inc.; FS Services, Inc.; Farmers'Union Central Exchange; and Fox Cooperatives,Inc..

sok-4-_

87

BENEFITS FROM,COOPERATIVES

It 1.3 not by accident that about one-fourth ofthe farm products in the United States are mar-.keted cooperatively, that almost a fourth of thefarm supplies are purchased in this manner, andthat 1 out of every 10 persons belongs to a creditunion. Up to 90 percent of some products arehandled cooperatively. Such volumes by cooper-atives acting in a highly competitive economy re-flect the general satiafacition and favorable atti-tude of member patrons toward their companiesand the apparent soundness, efficiency, and sat-isfactory performance of the associations.

It is self-evident that cooperatives which yearafter year provide benefits for their patrons mustbe well organized, well financed, well managed,well run, and well supported, they must be pro-gressive, changing with the times and flexibleand responsive to thetr members' needs, Manyare also, pacemakers iather than mere followers'in the marketplace - innovators as well as con-ventional performers. Some, to be sure, havenot improved over' noncooperative operations.

Benefits to member patrons and to the commu-nity as/a whole are both tangible and intangible.Tangible benefits may be seen immediately inimproVed services, better pricing, and reduced

whereas it may be some time before theble values of orgabizing become apparentns. In many instances benefits apply not

only to member patrons but to nonmembers aswell through the competition which the cooperative

° preVides.Since cooperatives are generally organized in

response to an economic need, it is perhaps cor-rect to assume that the greater the need, thegreater possibility of doing good for members.Vice Versa, the 'less economic need, the lesslikelihood of material gain over` noncooperatives.Consequently, many conditions need to be consid-eredwhen appragifig the possibilitiesmachieve-Meats, and limitations of cooperatives.

What are some of these factors? The list iii-eludes the following:

How much competition eidsts in the market-place?

How firmly are Institutional organizations

88

and practices rooted?

To what extent can individualism be subordi-nated to groupism 9 That is, how readily canpersons accept the regimen of are group?

How well are members informed about thepurposes, organization, principles, and oper-ations of cooperatives and what is their exper-ience with them?

Is there the necessary enabling legislaticpermit cooperatives or are there prohihh.against certain types of cooperatives?

Is the economic status of persons conduciveto membership or not?

Do government and regulatory bodies favor orare they against cooperatives?

Are the services to be performed highly per-sonalfzed or more generaIlLed?

Nothing is inherent in 'a cooperative to makeit succeed U it does not have top management,adequate financing, sufficient volume, capableemployees, competitive prices or returns, anda membership convinced of its merits. Cooper-ation is voluntary - its adherents must be wonover and not coerced into membership.

BENEFITS TO MEMBERSMembers benefit from sound and prosperous

cooperatives by improving thierincomes and byobtaining services that were reviouely either,unavailable or available only at high cost. Theyalso get intangible returns such as developingleadership, self-reliance, and confidence insolving problems on a self-help basis. In short,'they benefit by elevating their plane of living.

'Cooperatives have improved members' incomeby getting better prices, lowering unit operatingcosts, strengthening bargainingpower, and pen-etrating marketing channels more deeply, Normaltrading profits of the usual middlemen and pro-cessors are diverted to the patrons of coopera-tives. More dire& channels of distribution haveoften been instituted. About $400 million savings

annually have been added to the incomes of farm-ers from patronage refunds alone - that frern im-proved prices or lowered cost: might easily ex-ceed this figure.

Cooperatives have often helped their patronmembers get better prices for their productsthrough improved product quality; careful grading,branding, and packaging; and through energeticsales promotion. Likewise, collective actionhas helped lower the costs of farm supplies andneeded services. Supplies, such as fertilizersand feeds, have been prepared to meet the farm-ers' needs rather than the sellers profit margin.

Credit services by agencies operated for and byfarmers are another way to cut production costs.And mutual fire insurance companies have savedtheir members millions of dollars-annually onpremiums. Collectively farmers have a bargain-ing power which no individual could exert by him-self in the marketplace.

Credit unions have taught millions of familiesthrift= and management of family finances and haveloaned them money for useful purposes whichcould not have been borrowed as easily elsewhere.Housing cooperatives have provided apartmentsand homes at reasonable costs for many thousandsof low to medium income urban families,

Besides the tangible benefits, many farmersli'ave also experienced intangible benefits. Theexperience of thousands of members each yearas committee members, directors, and officershas developed leadership qualities in many ofthem as well as the ability to work with and forothers. Cooperatives have encouraged membersto rely on themselves to solve economic and socialproblems instead of on the government. Manymembers have been educated through their houseorgans and other media. Quality improvementprograms, adoption of new production technology,and a better understanding of modern businessmethods and of our capitalistic system are a fewmore of the intangibles many members derivefrom their organizations.

Cooperatives have provided a feeling of securityfor some members, particularly producers of periahable products - members knov; that the associ-ations provide continuing markets from which pa-trons will not be cut off on short notice. Thecomfort and satisfaction that comes from ruralelectric service and from modern telephone ser-vice are not measurable in dollars and cents, yetthe great majority of farmers in many localitiesdid not experience these until cooperatives pro-vided them. Many urban and rural families owetheir better living to their cooperatives. This isnot only true here but in many other ,countries aswell.

COMMUNITY WELFAREMany persons and firms help build the local

community as a fine place in which to live, work,educate the family, trade, and retire. The localgrocer, the plumber, the attorney down the street.the editor of the local paper, the banker andpreacher - each in his own way may be helpingto make Hometown, USA a better place to live.So likewise, cooperatives can be and are com-munity builders, extendin their contributionsto more than just the members.

Agricultural cooperatives help farmers whoare not members by improved prices and costreductions made possible by he competition co-operatives give local traders. Cooperatives fre-quently exert a different competitive force thanthat provided by just another middleman. Thisis due to the emphasis on price, quality, andservice in the Interest of the patron Father thanupon the prpfit interest of the middleman. As aresult, in a number of places and in some indus-tries, cooperatives have been pacesetters withtheir products, servicesa and prices from whichmembers and nonmembers alike have benefited.

Savings of cooperatives declared as patronagerefunds are disbursed among, many persons andnot concentrated in the hands of a few as profitsof noncooperative businesses generally are. Inaddition, such refunds are kept and spent in thecommunity.

Electric cooperatives have not only made ruralliving far more pleasant and Made electric poweravailable for many rural industries and business- .

es but have built a market for electrical appliancesthat did not previously exist - a $1 billion marketannually.

As business enterprises, many cooperativeshire the most employees, have the largest par.-rolls, and pay the most taxes in the rural townswhere they are located. It is estimated that CO-operatives 'nave put business ownership in thehands of one-third of the American families.Such ownership adds stability to communities,diffuses wealth and investments =ow its citizens,Ind brings about a greater understanding of theAmerican free enterprise system.

It is not uncommon for cooperatives in one fieldto become the nucleus for cooperatives in other.fields, generally to the advantage of-the community.Thus, a supply cooperative may generate interestin a marketing cooperative, a PCA, a processingplant, a rural telephone company, and in otherjointly owned projects. For example, Williston,North Dakota, population 12,000 (1970), has 11cooperatives with payrolls totaling more than$400,0o& sad Savings for member patrons exceed-

139

ing $400, 000 annually. The count" of which it isthe county seat nas 23 cooperatives,

It is difficult to muasurc in dollars and centsthe benefits of farmer cooperatives, since thesebenefits fail to reflect the intangible effects ofimproved bargaining power, keener competition/and concerted efforts to develop new markets,However, it is believed that these collectiveforts of farmers have increased net farm in_omes-

he years. Patronage dividends, lar ase toil for all cooperatives may be, ;...re not aI measure 61 the cooperatives' financial bene-

or patrons. Cooperatives have reduced mar-gins in marketing, have increased producers'bargaining power, and have been a force for cor-recting market imperfections. They have like-wise benefited the public generally and, in omiinstances, foreign countries as well.

LIMITATIONS OF MARKETING, PURCHASING,AND SERVICE COOPERATIVES

The limitations of marketing, purchasing, andservice cooperatives are similar to those con-fronting other businesses operating in the samefields. They are not peculiar to cooperatives.However, some are cdscussed here because mem-bers of cooperatives sometimes expect miraclesfrom their association; which they do not expectfrom private business. It is well to point out theimpossibility cf meeting some of the demandsmade upon cooperatives.

In all-too many instances, farmers support acooperative on the grounds that the associationwill be able to do such things as control prices,secure production costs, or eliminate the middle-man, These aims formerly attracted the supportof large mimbers of farmers.

Experience demonstrates conclusively that suc-cessful cooperation is not founded on these ac-complishments. Members who join with such ob-jectives in mind are likely to become dissatisfiedand lose faith in the enterprise. In organizingan association, it 18 better to promise too littlethan too much. An informed membership, as a

aneral rule, is modest in Its demands upon thessociation. An uninformed membership may

expect the impossible.

PRICE CONTROLFew cooperatives have enough control over the

supply of farm products to give them price-fixingpower. Fewer still have any control over pro-duction to regulate supply. What to produce andhow much to-produce are still the prerogativesof each farmer, although this is somewhat mod-ified today under the agricultural price - supportprograms. Even though a cooperative could com-mand a controlling portion of the available supplyof a product and set high prices, he effect mightbe short-lived since the attractive prices wouldInduce members. as well as nomnembers, to increase their production. Higher prices mightalso stimulate the use of substitute preducte. Itis one thing to fix a price on a product and quiteanother to get consumers to buy the product atthat price. The prices oinsumers will pay de-

pend on consumer incomes, the prices of similarbut competing products, and upon the availabilityand prices of substitutes.

PRODUCTION COSTSFor generations, farmers have hoped to receive

prices sufficient to cover the cost of production.This is a legitimate expectation. Yet the problemis not one that can be solved successfully by co-operative marketing organizations. Cooperativesmay assist in securing greater returns to farm-ers, but they cannot guarantee that these returnswill equal the production costs of all their mem-bers.

Tice cost of producing milk in Wisconsin mayeasily range from $3.50 to $7.50 per 10 polinds.If the price were set on the basis of the average

(approximately $4.90), then some may lose money.ff it were set higher, say at a price that wouldcover the cost of all producers, productiOn wouldprobably increase to such an extent that the addedsupply would deprestEthe market. Hence, a pricebased on cost of production, like any other price

set above supply and demand levels, cannot bemaintained successfully without machinery tocontrol production. ,

A fixed cost-of-production price, like any otherfixed price. must take into acceunt the willingnessof the consumer to buy. For instance, it may mat)a majority of Wisconsin dairymen $4.90 per 100pounds to produce milk. But the consumer may -

not be willing at times to pay this price for enoughmilk to keep all the Wisconsin dairymen in busi-ness. Hence the price would have to be loweredor less milk marseted.

Cost of production is not an infallible index to

value. The value'of an article or commodity de-pends just as much on the amount the consumer iswilling to pay for it as it does on the cost to pro-duce the article. One may manufacture jumping-jacks at the cost of $1.00, but if buyers are notwilling to purchase them at any price, the juirining -jack's value is zero: ,

91

The ability to secure a cost-of-1, t ionprice depends on the ability to regulate produc-tion and to induce consumers to buy at the priceset. Cooperatives do not control either of theseessentizils.

ELIMINATIONOF THE MIDDLEMAN

This plea is generally based on the assumptionthat the profits of private dealers and handlersof farm products are sufficient to support andjustify an association. While cooperatives maysave part of the profit margin going to privatetraders,_ most successful marketing associationsowe their success to their ability to perform ser-vices more efficiently than the private dealer;to lower operating costs by handling larger vol-

. umes of products; and to improve the quality ofproducts offered for sale.

The marketing of farm products requires theperformance of certain tasks regardless of whoperforms them - a private agency or a cooper-ative one. Asseciationa_may eliminate somemiddlemen by integration. Retail chain storesoften buy direct from producers and manufactur-ers and sell to the final consumer, thus perform-ing the services of the assembler, broker, com-mission merchant, wholesaler, and retailer.

Cooperative 'marketing associations must notonly discharge these fimeticms at costs whichcompare favorably with the charges of othet s forthe same service, but must do more and better.The elimination of middlemen is not the impor-tant consideration. A cooperative is not set upto "get" anyone, but to serve. Most Importantis to.do the job better than ft was being done be-fore. The cooperative must do for its membersall that private initiative did for them, pia.Emphasis should be placed on the plus.

CONTROL OFAGRICULTURAL SURPLUSESIt is sometimes suggested that farmers should

do as manufacturers do - produce only the quan-tity that can be sold at an acceptable price. It isnot clear that mamdacturers are able to do this.Few, if any, control the total supply as industry-wide inventory accumulations and business re-cessions indicate. But farmers through their co-operatives have never been able to exert muchinfluence on quantities produced. Farming ishighly competitive. It staples are producedover wide areas by a large number of totally in-dependent operators.

92

Moreover, the supply of any particular product(or any one year is quite beyond the farmers' con-trol beause of the hazards of weather, disease,and insect pests. Itts true that some cooperativeshandling milk fur city markets do influence milkproduction in limited areas. That is, throughtheir payment plans, they encourage farmers toproduce more milk in winter than would lrdittarilvbe produced, alai less milk in summer, so thatsupplieslluctuate less throughout the year. In

this manner, supplies are made to correspondmore closely with consumer demands, but this isnot easily poSsible for most other farm products.

Since cooperative, cannot control product vol-ume, and since volumes offered for sale influenceprices, it is not reasonable to expect that cooper-atives can guarantee patrons the equivalent ofparity price.., (farm prices which give the fatmerthe same purchasing power that he averaged dur-ing each year of a base period). Even the govern-ment with its vast resources has not been able todo this at all times.

In the foregoing paragraLths it has been pointedout that marketing cooperatives cannot controlagricultural production - not even that of their ownmembers; that they cannot fix prices arbitrarilyhigh and expect to sell all of their sepplies or meetcompetition; and that they cannot guarantee thatthe prices they are able to get will cover the pro-duction costa of their members. However, throughskillful merchandising, product differentilatiorequality control, and deep market penetration,the associations may get top market prices andpossibly also premiums thus enlarging returnsto producers.

OTHER LIMITATIONSCooperatives also have some other limitations,

obligations, and extra marketing expenses thatnoncooperatlyes do not have. These bear uponthe performance of cooperatives and how wellthey compare with competitors. Marking co-operatives generally must kindle all the productsits members supply whereas dealers are underno such compulsion. On a declining, sluggishmarket with inventory stocks accumulaftng, thecooperative runs the risk of unfavorable pricecomparisons and higher operating costs..

Cooperatives must keep many records - allpurchases and salmi need to be recorded andtallied if patronage refunds are to be distributedproperly. Also, the very act of computing pat-runage refunds, writing checks for and distributingthe refunds, involve further costs which a non-

cooperative does not face. Such costs In alarge company are sizeable.

Many local cooperatives are dominated largelyby conservative people, and therefoter are gen-erally market-followers rather thin market lead=ers. Oftentimes, local cooperatives are organi-zed by people with low incomes. These peopleand their elected representatives on the boardsof directors are generally cautious, often skepti-cal, and frequently slow to try new ideas, newtechniques, new ways of doing things, and to spendtheir members' hard-earned dollars.

The semipublic character of cooperatives makesthem particularly vulnerable to criticism and at-tack by competitors and enemies. Detailed finan-cial information, valuable as it is to keep baem-bers properly informed, may also lead to- internalbickering and hard leggings among members. Non-cooperatives are under no obligation to revealtheir financial affairs to their customers or to thepublic and, consequently, do not do so.

Cooperatives often provide services to theirmembers which private firms generally do notface, such as cashing checks, publishing monthlyhouse organs, printing annual reports, holdingAnnual meetings, and providing tours throughtheir plant* for members, studentr, anti others.These services add to their costs. (Some nonco-operative meat packing plants, banverjes, andfood processing plants also arrange plant tours;and some firms cash cheeks, get out a monthlymagazine for their stockholders, and put outrancy annual reports - but the number that do thiscompared to the number of cooperatives which donot is very small indeed.)

It is also apparent that cooperatives largely de-pend on member financing for their permanentequity capital and cannot tap the public for inves-tor's funds as a standard corporation can. How-ever, Cir investing public can provide workingcapital by buying bonds through the fiscal agentmaintained by the land banks, intermediate credit

banks, and Banks for Cooperatives - but sharesof common and preferred stock are not sold tothe public through this agent nor on the stock ex-changes.

Cooperatives must likewise look primarily tomembers for their business and can rely much'less on business from nonmembers: This captivemarket is, essentially, a handicap if.it is small;a blessing if it is large.

Since managers are quite naturally interestedin their positions, salaries, and continued em-plornent - possibly even more than in tne welfareof member patrons - some cooperatives becomemanagement-oriented instead of member-orientedas they should be. Opposition to mergers and con-solidations, especially among local companiessometimes refleetsais management attitude.

Atother task confronting cooperatives whichstandard corporations do not have is to establishgeirgne membership interest and responsibility.Some members are indifferent, lackadaisical,uninterested, and opportunistic as membershiprelations studies show. To keep members inter-ested nr t only as customers but as owners oftheir own businesses involves meetings, publi-cations, hoe se organs, field service - all extraitems of cost:

Cooperatives face the further fact that they can-not retain the full benefits of cooperative activity

for their member patrons only - nonmembersshare in more realistic pricing, reduced margins,and enlarged services as a result of the competi-tion given by the cooperative.- This is good fromthe community's standpoint. However, it disturbssome cooperatives when it adversely affects in-terest in membership and patronage.

These remarks do not mean to suggest that thespecial problems and extra costs cooperativesface are insurmountable. In fact, some of thesecosts are directly related to improved servicesand great satisfaction for patrons - benefits ofan intangible character.

GLOSSARY(Words and terlINS commonly used m cooperative writing.)

acquaint) - one firm purchasing another; a typeof merger.

advances - partial payments made to patrons ofmarketing associations upon receipt of theirproducts before the products have leen soldand the final settlement price is determined.

allocated capital book credits - retained Patron agerefunds and/or per unit retains for capitalpurposes for which notification of allotment ismade to the patrons.

antitrust iron - laws declaring trusts and combi-nations in restraint of trade illegal (both stateand federal laws).

articles of incorporation - a legal document filedwith the Secretary of State or Cernmiesioner ofCorporations showing the purpose, capitaliza-tion, address, and names of the incorporatorsof a company.

asset - that which is owned, such as property,money, goodwill(

association - an organization of people with a com-mon purpose united in a formal structure.

audit - an examination and verification of the re-cords and financiri accounts. An unqualifiedaudit is an audit prepared by a qualified account-ant or auditor using generally acceptable ac-counting procedures, which audit he reports tobe accurate without reservation as to the bal-ance sheet and operating statement.

balance meet - a statement showing the assets,liabilities, and net worth (or owner equity) of^ business on a specified date, usually the endof the year.

link for Cooperatives - a bank owned and opera-ted by farmer cooperatives, subject to federalcontrol, which makes loans to farmer cooper-atives. There are 12 regional and 1 centralbank.

bogNigeg cooperadree - a cooperative whose soleor principal function is to bargain for terms of

94

sale. It does not handle the actual products asan operating cooperative does.

Bingham Cooperative Marketing Act - Kentucky'scooperative marketing act enacted in-1922 andnamed after Judge Robert W. Bingham, the un-mistakable leader of cooperative marketingamong burly tobacco growers. This act incor-porated almost entirely the draft of a cooper-ative law by Aaron Sapiro and was called thestandard cooperative marketing act" becauseof its adoption by many states.

blues -sky laws - laws that regulate the issuanceand sale of securities by corporations. In theabsence of specific statutory exemption, thesecurities issued by cooperatives would besubject to the blue-sky laws.

book value of stock - refers to the dollar valueof common stock certificates. It equals theappraised value of all assets of a business lessliabilities and value of preferred stock dividedby the number of shares of stock, outstanding.

bond - a certificate representing indebtedness ofthe issuer and bearing a fixotfi maturity date aswell as fixed interest.

beaker - an agent-middleman who receives a fee(brokerage) for his selling or purchasing ser-vice. He does not physiially handle the pro-duct.

bylaw - a standing rule, not included it the con-stitution or articles of incorporation, whichspecified operational practice and policy.

capital - money, or dollar value of property, usedin a business whether supplied by owne-rs and/orborrowed.

capital stock - boos value of the investeel moneyin a company represented by the total sharesof stock in a corporation in cloding those fullyeleven as partially paid for and those unissued.

CappwValdead Act - the 1922 federal law legal-izint farmers' marketing associations engaged

in interstate and foreign commerce. It is some-times referred to as the magna charter of farm-ers' cooperatives in this country.

.centralized association - an organization of mem-bers residing over a large geographical area,such as a state or region, as contrasted with alocal association whose members live in a relatively small area about a trading center. Pro-ducer members hott membership directly inthe central zsociation.

certificate - a paper which certifies the condition,status, obligation, rights, etc. of the holdet ofthe paper.

certificate of membership - sets forth the rightt,privileges, and conditions of membership in anonstock cooperative. It is given to the mem-ber when he pays his membership fee.

certificate of apdty, of investment, revolvingfund certificate - usually err certificate without

a maturity date issued as evidence of retain-ed patronage refunds or per unit retains.These retained funds legally constitute an in-vestment in the capital of the cooperative and,therefore, are part of the association's networth.

cvtifi cates of indebtedness - are also issuedas evidences of deferred patronage refundsor per unit retains but generally have a re-demption, maturity, or due date and are con-sidered loans to the cooperative. These,therefore, legally constitute a liability of thefirm.

charter - the articles of incorporation under whicha corporation is legally organized. It consistsof the powers, rights, and liabilities of a cor-poration granted tc the incorporators. In brief,it is the authority to proceed as a corporation -subject to the constitutiori and laws of the statewhere the incorporation. took place_.

Christian Socialists - a group of about 70 clergy-men, lawyers, and others who became greatlyinterested in social, commercial, and economicreforms during 1848-1854 in England. Theywere largely responsible for the enactment ofthe first cooperative law in any country (theIndustrial and Provident Societies Act, 1852)as well as the formation of several short-livedcooperative asaociations.

Gayle. Act -- a federal law passed in 1914 toamend the Sherman Antitrust Act. Among otherthings, it Planted the orgedzation of agricul-tural or hortieningal associations'instituted

[or mutual help and not having capit,1 stock norconducted for profit.

common stock - ownership capital in a corpora-tion divided into shares or stock certificateswhich cern' voting rights, unless otherwiseindicated, and which are eligible to receivedividends. There is no due date on such stockand it carries-all the risks associated with theinvestment. Sometimes common stock is di%id-ed into Class A common stock which has votingalights and Class B common stock which doesnut.

conglomerate fkm - a business firm which com-bines different and dissimilar enterprises with-in a single company. The products are corn-p;etely di4similar, are sold in different mar-kets, pass through different marketing chan-nels, and are not directly competitive. Exam-ple, a firm that has acquired an air line, ameat packing firm, and an electronics companyall under one central control and management.

consolation - a merger of two or more corn-ch, for example, companies A,

C are liquidated and a new company,s organized to replace the first three

consumer cooperative - a pirchasing associationwhich sells primarily consumption goods -food, clothing, fuel, household goods, furniture,etc. It may also provide services for consum-ers. Both urban and rural people may be mem-bers.

contract, agency - a marketing contract underwhich the cooperative does not take title toproducts delivered by members to the associ-ation but handles them on an agency basis.

contract. marketing - a legal agreement betweenthe farmer and his cooperative under which thefarmer agrees to market his salable productsmentioned in the contract through the associa-tion, and the association agrees to market theproducts for the farmer. A local associationmay also contract to market its productsthrough a central marketing cooperative.

counsel, purchase and lair - a rnarkefing c in-tract under which the cooperative purchasesthe products from tRe member upon deliveryto the association, takes title to the products,and pays as the purchase price the resaleprice less authorized deductions.

COOPerathr - a business voluntarily owned andcontrolled by its member patrons and operatedfor them and by them on a nonprofit or coat

masts, It is an association with an e:onomic ob-jective owned and run by the people who use itand operated for their mutual benefit.

corporation - a legal entity created under the cor-poration laws of a. state (or sometimes underfederal law) whose powers, liabilities, andrighti are seoarate and distinct from those Ofthe indk 'duals constituting he corporate body.

credit-open line - a maximum amount of creditextended to a borrower, with or without collat-eral, for a given time, usually a Year. Theborrower may use none or any amount of thecredit up to the maximrn agreed upon as 'hesees fit and pays interest only on-the amountactually borrowed.

credit union- a cooperative organized to promotethrift and savings among its members, to createa source of loanable funds for useful purposes,and to educate its members in the wise use ofmoney; a thrift and loan association.

CUNA- a national organization of credit unionswith its headquarters in Madison, Wisc..nsin(formerly called Credit Union National Associ-ation) .

damages (liquidated) - a payment made to the co-operative by a member who violated his market-ing contract. Such payment for defection, gen-erally based on the value of the product inquestion, is to reimbiirse the association forlosses sustained as a result of the nondeliveryof products. Wisconsin cooperative law speci-fies a maximum liquidated damage of 30 per-cent,

debentures - certificates of indebtedness of a com-pany backed by promise to pay and the generalcredit of the firm rather than by collateral pro-WM-

delinquent loan - an unpaid loan that is more than30 days beyond the due date.

director - one of several persons electeci by themembers to govern or control dig affairs ofthe cooperative,

dividend - a sum of money paid on investments toshareholders (common and preferred stockhold-erg) of a corporation out of earnings.

equity - the ownership interest of members orstockholders of a company as distinguishedfrom that of bond holders or lenders; investmentrights in a company; the total assets less thetotal liabilities.

96

exempt cooperative - a farmers' cooperativewhich is not required to pay federal incometaxes upon satisfactorily meeting the provisionsof the tax law, the regulations thereunder, andthe restrictive requirements of the InternalRevenue Service.

Farm Credit Administration an agency of thefederal governmel created in 1933 to superthe farm credit 4Trattem in the United Stateswhich includes the federal land banks and thelocal federal land bank as:,ociations, the inter-mediate Credit Banks and the production creditassociations, and the Banks for Cooperatives.

farm supply cooperative - a purchasing coopera-tive through which its patrons obtain farm sup-plies such as feed, seed, fertilizer, gasoline,chemicals, appliances, and other productiongoods.

federal intermediate credit bank - one of 12 re-gional banks which discounts farmers' noteslargely to production credit associations (PCA's)and in lesser volume to other agricultural fi-nancing institutions.

federal land bank one of 12 regional banks_ ownedby farmers which discount mortgage notes oflocal federal land bank associations.

e,federal land bank association - (FLBA) an associ-

anon of farmers from whio$ money is borrowedon a long-term basis for purchasing land andother real-estate (formerly called national farmloan associations. NFLA).

federation - an association of local cooperativesin which the local associations elect a boardof directors, to govern the central associationwith the locals retaining their autonomouscharacter. Farmers are members of localsand locals (or regionals) are members of thecentral association.

con margin - the difference between the sellingprice and buying pilee,.generallyindleated asa percentage of the sellini; price.

incorporating - the act of setting up a corporationby filing incorporation papers with the Secretaryof State or Commissioner of Corporatien.s forhis approval or sanction.

injunction (related to marketing contracts) - acourt order obtained by an association to en-join a member or a third party from furtherviolating a marketing contract. Such injunctionmay be against third parties interferiag withdelivery of products to the cooperative and/or

against member contract signers from furtherdefection of the contract.

integration - the act of bringing two or mare likeunits (such as retail stores) or two or moresuccessive bargaining units (such as processor,wholesaler, and retail store) under one centralcontrol and management; bringing two or moreunits into a whole.

(integration, horizontal - the act of combining twoor more like production units or marketingagencies under one central oentrol and manage-ment, as for example, two or more retail stores.

integration, vertical - successive bargaining unitsin the marketing channel brought under one cen-tral control and management. Example, whole-sale and retail units owned and operated by onefi

rm-%

interest payment for the use of borrowed money.

King, Dr. William - English cooperator; the"Father of Distribetive Cooperation"; advocateof consumer cooperatives; author of The Co-operator in 1829-1830. 11786 - 1865)

liabilities - amounts owed by a business to itscreditors, either short- or long-term - alsodesignated as current liabilities (payable with-in a year and fixed liabilities (payable after a-Year).

limited liability - in a corRoration, the stockholder as an investor is liable for the debts of thecorporation only to the extent of the value of theshares be owns.

loan generally a sum of money lent at interestto a borrower. (Other physical objects mayalso be lent.)

member - each of the persons composing an as-sociation. In a capital stock association a per-son-murt have purchased at least one share ofcommon voting stock to fully qualify as a mem-ber. In a nonstock or membership association,he must pay a membership fee.

membership weeniest an,agreement betweena person and a cooperative under which theperson agrees to oecome a member of a cooper-ative (sometimes confused with a marketing _

contract).

mernberthip certificate - (see certificate, mem-bership.)

membership fee or membership capital - theamour or fee paid by a member for member-ship in a nonstock association Or in an unincor-

porated coopdrative.

merger - two or more companies brought togetheras one in which the acquiring company continuesbut the acquired one is liquidated, (See acquisi-tion, consolidation.)

middleman - a business firm which physicallytransfers and exchanges title to products intheir passage through the marketing channelfrom producer to ultimate donsumer,

net farm income - total sales receipts of farmproducts minus production costs.

net minis- gross margin minus the operatingexpenses; same as net earnings, profit, netrevenue, or net savings from business opera-,

net enmeiiig capital - total current assets minustotal current liabilities.

net worth - owners' equity in a business firm.It is the excess a the value of-assets overliabilities.

nonexempt cooperative - a cooperative which doesnet qualify, for exersiption from paying federalincome taxes.

nonprofit anocirion - a cooperative associationwhich is not organized and operated to profitat the expense of its patrons. It is nonprofitbecause the net savings or "1 ofits" are notretained by the association per se but must bedistributed to the patrons on a patronage basis.

nonstock cooperative - a membership ciganiza:tion formed without capital stock.

open membership - an unrestricted membership .policy of a cooperative; a very liwith few restrictions as to admission of mem-bers.

operating Statement - an itemization of businessincome and expenses for a given period of time,usually a year.

Owes, Robert - an early English advocate and en-thusiast for cooperation among workingmen,sometimes called the "Father of Cooperation."(1771-1858). He suggested ownership of land,homes, and factories by the workers.

pm value (ad stock) - the dollar :value of a shareof common or preferred stock which-,is statedon the stock certificate. This value may beequal to, greater, or less than its marketvalue which reprecents the amount for whichthe stock can actually be sold.

parity price - that p rice which would give farmcommodities the equivalent purchasing powerover articles and services as in an earlierbase period. The base period ftir many agri-cultural products was the five years, .August1909 to July 1914.

partnership two ur more persons Jointly carr -ing on a business without being incorporated.Each is fully responsible for the debts, commit-ments, and obligations incurred by any unr ofthe partners. In a "limited partnership" theobligations of the partners vary as prearranged.

past due loan a loan which has not been paid onthe due date.

patron - one who trades at or uses the service ofa cooperative; a customer.

patronage refund - net savings (or net earnings,net margin, or net revenue) returned to patronsnr allocated to them in proportion to the volumeof business done With the cooperative or usagemade of the cooperative's services; also spokenof as patronage dividends.

patronage refugia! deferred patronage refundswhich are not paid in cash immediately follow-ing the year in which they were earned but areinvested in the cooperative and to be paid atsome later date.

PCA (production credit aaociation) - an assocta,--._tion owned and operated by farmers to proaldoloans for agricultafral production, usually foraa short to intermediate time.

Plunkett, Sir Horace - outstanding Irish leaderend advocate of-farmers' processing and mar-keting associations; sponsor of the Irish Agri-cultural Organization Society and founder otthe Horace Plunkett Foundation, an educationalagency. (1854-1932.)

pooling - an averaging process; a method of hand-ling pr-ducts whereby lots of the same productfrom different producers are combined bygrade and contributors receive average netpayments. (Each grower's products lose theiridentity and are treated collectively as one hugelot by grades. All producers receive the sameaverage price for the specific grade.) Products,sales receipts, expenses, and net earnings arepooled.

preferred stock - a stock which has a preferencewith respect to dividends, and, in the event of

'bankruptcy, to assets also. Such stock is an

investment in the cuoperativu, camel= no votingrights as common voting stocK dues, and earnsa fixed dimiend payment.

proxy voting - a wr,tten authoanother person -to vote for and act or behalf ofa member. SuCh proxy voting is prohibited 1A-V.'isconsin cooperative law and by laws f-n r andstates.

purchasing cooperative a cooperative throughwhich both production supplies (seed. teed,fertilizer, chemicals, farm appliancea, etc.)and consumption goods (groceries, clothing-,fuel, home appliance., etc.) are acquired.

quorum - the number of members required to hepresent in person to traps act busieess legally.Wisconsin Cooperative Law states that thismust be 10 percent of the first la0 membersplus 5 percent of additional member's (but notover 50 nor less than 5 members) or a rnajoriaof all members, whichever is smaller, unlessthe bylaws fix a larger number.

Raiffeisen, Friedrich Wilhelm - "father of thecredit union nuwement"; German advocate andorganizer of credit societies; world renownedcooperator. (1818 - 1888.)

REA (rural electrification administration) - agovernmental agency which makes loins chieflyto rural electric cooperatives. Also refers toa local rural electric association which distilbutes electricity in rural areas.

tor.ltr..... (rural electric cooperative) - a local cooper -

atime will:_,11 distributes elect in rural areasto farmers ann others alike.

c-ooperative - a cooperative ;..-,rving mum-hers in a relatively large-gographicai a' ea,usually involving_a_fairly large section of astate or evensei..-feral stales as distinguishedfran'a-ld traland national cooperatives. alostfederated and centralized associations servea memberahipla a regional area.

reserve - amount set aside from net savings tohe kept in the business permanently. Unillo-cated reserves become U e property of the firmand po pro rata allocation is made to patrons ormembers. An allocated reserve consists ofpatronage refunds retained in the business forindefinite periods, that are allocated on a prorata basis to patrons, and evidenced tither bycertificates or allocated capital book ereditsto the patrons. Reserves may be set asi e fordifferent purposes such as valuation reserves

depreciation and obsolescence, contingenetreserves for bad debts, and capital resertestor business expansion.

retain (per unit) - funds withheld from patrunsto' build up capital u er a revolt' ing capitalplan of financing (al called capital retaInsi.

resolving capital plan of financing - a financingplan in which capital funds are obtained frommember patrons through capital 'retains orretentiomiul patronage refunds, are used for

_ne by the cooperative and later repaid tothe member patrons; a plan for rotating all orpart of the capital funds of an association.

Rochdaiians - twenty-eight p sons of Rochdale,England w) in 1844 organ a cooperativegrocery store that was highl successful.Their fame rests on the fact at they fol-lowedpractices of organization and eration whichwere so successful that they ar wn to thisday as the Rochdaiian principles of cooperation.

Sapiro, Aaron - American cooperative evangelist;advocate of centralized commodity- marketingassociations; drafter of a cooperative market-ing act enacted in part or wholly in many states(1884-1959).

Schulze-Delitzsch, Herman (1*_sii8 -1883) - organi-zer cf urban credit societies or people's banksin Germany _which served pr-ocipallv smallmerchants, craftsmen, artisans, and trades-people; a contemporary of Raiffeisen who wasswayed largely by humanitarian principleswhereas Schulze-Delitzsch was chiefly concern-ed about economic considerations in his organi-zation and operation of the people's banks.

service cooperative - a cooperative that dealssolely or primarily in the rendering of servicesas distinguished from handling commodities(services such as housing, financing, insurance,

!,000 94 1k 3[1633

arservIcei.

eding, electrivityl, and tole

Sherman Antitrust Act a federal law enacted tr.1890 that declared illegal ever contract, _conk 7.

bination in the form of trust or otherwise. or-_onspirac in restraint of trade or commerci?.

sight draft or-bill of exchange - n- unconditionalorder in IA riting addressed by one person calledthe drawer to another called the drawer .requir-ing him to pay on demand or on sight to a third,person called the payee a certain sum in money.A tune or king bill of exchange is payable at afuture date arranged by the drawer and drawee.

sole proprietorship a business or firm ownedby one individual.

specific performance - a court order compellinga contract signer to perform his contract as hehad agreed to when he signed it. Many statelaws entitre ar association ''to an injunction toprevent the further breach-of the contract andto a decree of specific performance thereof."The other remedy for breach of contract, name-ly liquidated damages,- is also included in thelaws.

stock or share - a certificate showing investmentin the cooperative as well as ownership rights.

Warbasse. Dr. James Peter - founder of the Co-operative League of the USA; strong advocateof c-onsumers' cooperatives; author of severalbooks on cooperation including his classicCoopera twe Democracy (1866-1957).

wholesskr - a merchant middleman operatingbetween the processor (or manufacturer) fromwhom he buys and retailers to whom he sells..He frequently buys carload lots or full truck-load lots,

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