11

CooperativesCooperatives31113111

Ronald Rainey, Ph.D.Ronald Rainey, Ph.D.Extension EconomistExtension Economist

22

CooperativesCooperatives

I.I. Cooperative: definitions, Cooperative: definitions, principles, structure, and benefitsprinciples, structure, and benefits

II.II. Steps to the development of a Steps to the development of a cooperative organization cooperative organization

33

I.I. CooperativeCooperative

A state chartered business, A state chartered business, organized and operated as a organized and operated as a corporation. It is owned and corporation. It is owned and democratically controlled by the democratically controlled by the people (members) who use its people (members) who use its services and whose benefits are services and whose benefits are derived and distributed equitably on derived and distributed equitably on the basis of use. the basis of use.

44

Capper-Volstead Act of Capper-Volstead Act of 19221922

Federal legislation allowing farmers Federal legislation allowing farmers to “act together”. It provides:to “act together”. It provides:

1)1) It must be operated for the mutual It must be operated for the mutual benefit of its members.benefit of its members.

2)2) It must not deal in the products of It must not deal in the products of nonmembers in an amount greater nonmembers in an amount greater than it handles for members.than it handles for members.

55

Capper-Volstead Act Capper-Volstead Act (cont’d)(cont’d)

3)3) No member of an association is No member of an association is allowed more than one vote allowed more than one vote because of ownership.because of ownership.

4)4) The association does not pay The association does not pay dividends on stock or membership dividends on stock or membership capital in excess of 8 percent per capital in excess of 8 percent per year.year.

66

CCoommppaarriinngg FFeeaattuurreess ooff DDiiffffeerreenntt BBuussiinneessss FFoorrmmss

CCoorrppoorraattiioonn IInnddiivviidduuaall PPaarrttnneerrsshhiipp

IInnvveessttoorr--oorriieenntt CCooooppeerraattiivvee 11.. WWhhoo uusseess tthhee sseerrvviicceess??

NNoonn--oowwnneerr ccuussttoommeerr

NNoonn--oowwnneerr ccuussttoommeerrss

NNoonn--oowwnneerr ccuussttoommeerrss

CChhiieeffllyy tthhee mmeemmbbeerrss

22.. WWhhoo oowwnnss tthhee bbuussiinneessss??

IInnddiivviidduuaall PPaarrttnneerrss SSttoocckkhhoollddeerrss MMeemmbbeerrss

33.. WWhhoo vvootteess?? NNoonnee nneecceessssaarryy

PPaarrttnneerrss CCoommmmoonn ssttoocckkhhoollddeerrss

MMeemmbbeerrss

44.. HHooww iiss vvoottiinngg ddoonnee??

NNoonnee nneecceessssaarryy

PPaarrttnneerrss’’ sshhaarree iinn ccaappiittaall

BByy sshhaarreess ooff ccoommmmoonn ssttoocckk

OOnnee--mmeemmbbeerr,, oonnee--vvoottee

55.. WWhhoo ddeetteerrmmiinneess ppoolliicciieess??

IInnddiivviidduuaall PPaarrttnneerrss CCoommmmoonn ssttoocckkhhoollddeerrss aanndd ddiirreeccttoorrss

MMeemmbbeerrss aanndd ddiirreeccttoorrss

66.. AArree rreettuurrnnss oonn ccaappiittaall lliimmiitteedd

NNoo NNoo NNoo UUssuuaallllyy 88%%

77.. WWhhoo ggeettss tthhee ooppeerraattiinngg pprroocceeeeddss,, pprrooffiittss??

IInnddiivviidduuaall PPaarrttnneerrss iinn pprrooppoorrttiioonn ttoo bbuussiinneessss iinntteerreesstt

SSttoocckkhhoollddeerrss iinn pprrooppoorrttiioonn ttoo ssttoocckk hheelldd

MMeemmbbeerrss oonn aa ppaattrroonnaaggee bbaassiiss

6. Are returns on ownership caip ital limi ted?

77

Cooperative PrinciplesCooperative Principles

Service at costService at cost Financial obligation and benefits Financial obligation and benefits

proportional to useproportional to use Limited return on equity capital Limited return on equity capital Democratic controlDemocratic control Educating it’s members through Educating it’s members through

meetings, training, etc.meetings, training, etc.

88

Service at CostService at Cost Acting together gives the advantage Acting together gives the advantage

of economies of size and bargaining of economies of size and bargaining powerpower

Cooperative attempts to fulfill Cooperative attempts to fulfill member needs at lowest possible costmember needs at lowest possible cost

It is necessary to charge competitive It is necessary to charge competitive market prices to cover costs and meet market prices to cover costs and meet operating capital requirementsoperating capital requirements

Operations are reduced to at cost Operations are reduced to at cost basis at end of year when surpluses basis at end of year when surpluses are returned to membersare returned to members

99

Financial Obligation and Financial Obligation and Benefits Proportional to UseBenefits Proportional to Use

Members gain direct and indirect benefitsMembers gain direct and indirect benefits Direct benefits are an assured source of Direct benefits are an assured source of

supply and markets for productssupply and markets for products Indirect benefits include policing markets Indirect benefits include policing markets

leadership development, business leadership development, business knowledge, and social recognitionknowledge, and social recognition

The amount of benefits received depends The amount of benefits received depends on the members level of participationon the members level of participation

1010

Limited Return on Equity Limited Return on Equity CapitalCapital

The primary purpose of cooperatives The primary purpose of cooperatives is to get a needed service, not is to get a needed service, not monetary returnmonetary return

Limiting payment for operating capital Limiting payment for operating capital supports the principle of distributing supports the principle of distributing benefits proportional to usebenefits proportional to use

The basic idea is that users finance The basic idea is that users finance the cooperative in proportion to usethe cooperative in proportion to use

1111

Democratic ControlDemocratic Control

Voting is one method cooperative Voting is one method cooperative members use to exercise controlmembers use to exercise control

In most cases, Member-Owners have In most cases, Member-Owners have one vote regardless of their investmentone vote regardless of their investment

Proportional voting is based on the size Proportional voting is based on the size of the patronage the member does with of the patronage the member does with the cooperative. Examples are: dollar the cooperative. Examples are: dollar volume, acreage, units marketed, etc.volume, acreage, units marketed, etc.

1212

Member EducationMember Education Leadership DevelopmentLeadership Development Cooperative Organizational and Cooperative Organizational and

Management SkillsManagement Skills Economic and Community Economic and Community

Development TrainingDevelopment Training Production techniques/practicesProduction techniques/practices Training for the cooperative board of Training for the cooperative board of

directors, management and membersdirectors, management and members

1313

Cooperative’s PurposeCooperative’s Purpose The primary purpose for a cooperative’s The primary purpose for a cooperative’s

existence is to provide existence is to provide servicesservices for it’s for it’s membersmembers. An underlying rational is to . An underlying rational is to increase income, but this goal is increase income, but this goal is attained through the specific services attained through the specific services provided by the business modelprovided by the business model

Members are the cooperative’s Members are the cooperative’s foundation and the organization serves foundation and the organization serves the members “the members “planned economic planned economic need”need”

1414

Cooperative MembersCooperative Members Members are the primary users Members are the primary users ANDAND

the owners of the businessthe owners of the business Members elect a board of directors Members elect a board of directors

who set policies and run the businesswho set policies and run the business Members benefit in two ways from Members benefit in two ways from

the cooperative’s existence: the cooperative’s existence: 1) utilize the cooperative’s 1) utilize the cooperative’s services 2) earnings are services 2) earnings are allocated proportional to use allocated proportional to use (patronage refund)(patronage refund)

1515

Cooperative StatisticsCooperative Statistics Currently there are more than 48,000 Currently there are more than 48,000

coops serving over 120 million Americanscoops serving over 120 million Americans Two out of every five people (40%) in the Two out of every five people (40%) in the

U.S. belong to a cooperativeU.S. belong to a cooperative Roughly 30% of farmers products are Roughly 30% of farmers products are

marketed through cooperativesmarketed through cooperatives There are more than 3,000 agricultural There are more than 3,000 agricultural

cooperatives in operation in U.S.cooperatives in operation in U.S. 2000 net business volume of agricultural 2000 net business volume of agricultural

cooperatives was $99.7 billioncooperatives was $99.7 billion

1616

Arkansas CooperativesArkansas Cooperatives

In 2001 there were 53 agricultural In 2001 there were 53 agricultural related cooperatives within the state related cooperatives within the state of Arkansasof Arkansas

11 of the cooperatives were primarily 11 of the cooperatives were primarily involved in marketinginvolved in marketing

42 of the cooperatives were involved 42 of the cooperatives were involved in farm supply and servicein farm supply and service

1717

Cooperative ClassificationCooperative Classification

Geographic Territory Served Geographic Territory Served (local, regional, and national)(local, regional, and national)

Governance System (centralized, Governance System (centralized, federated, and mixed)federated, and mixed)

Functions (marketing, Functions (marketing, purchasing, and service)purchasing, and service)

1818

Types of CooperativeTypes of Cooperative MARKETINGMARKETING: enable members to realize : enable members to realize

additional services (and profits) through additional services (and profits) through processing, distribution, and sale of processing, distribution, and sale of productsproducts

PURCHASINGPURCHASING: allow members to gain : allow members to gain access to volume discounts and quality access to volume discounts and quality control for production suppliescontrol for production supplies

SERVICESERVICE: developed to serve specific : developed to serve specific member (farmer) needs including member (farmer) needs including credit, health insurance, electricity, etc.credit, health insurance, electricity, etc.

1919

Marketing ServicesMarketing Services Negotiating prices and terms of sale Negotiating prices and terms of sale

with buyerswith buyers Assemble production into larger Assemble production into larger

quantities for sale to further quantities for sale to further processors, wholesalers or retailersprocessors, wholesalers or retailers

Add further value to member Add further value to member production by processing or production by processing or manufacturing member products manufacturing member products into other higher valued productsinto other higher valued products

2020

Marketing CooperativesMarketing Cooperatives

Riceland FoodsRiceland Foods Producers Rice MillProducers Rice Mill Land O’ LakesLand O’ Lakes

2121

Purchasing ServicesPurchasing Services

Reduce member costs and Reduce member costs and strengthen their purchasing power strengthen their purchasing power through bulk purchasesthrough bulk purchases

Reduce costs through direct Reduce costs through direct ownership of facilities and equipment ownership of facilities and equipment that members utilizethat members utilize

2222

Purchasing CooperativesPurchasing Cooperatives

Arkansas Electric Cooperative Corp.Arkansas Electric Cooperative Corp. Feed, seed, farm equipment, Feed, seed, farm equipment,

fertilizer companies, etc.fertilizer companies, etc.

2323

ServicesServices

Provides specific, specialized Provides specific, specialized services for membersservices for members

Services include insurance, financing, Services include insurance, financing, education, etc. education, etc.

2424

Service CooperativesService Cooperatives

Farm Credit ServicesFarm Credit Services Wilbur D. Mills Educational Services Wilbur D. Mills Educational Services

Cooperative (15 regional educational Cooperative (15 regional educational cooperatives in the state)cooperatives in the state)

Credit UnionsCredit Unions

2525

Benefits of CooperativesBenefits of Cooperatives Access to quality supplies and services Access to quality supplies and services

at reasonable costat reasonable cost Increased clout (bargaining power) in Increased clout (bargaining power) in

the marketplacethe marketplace Share in the earnings, gain access to Share in the earnings, gain access to

larger marketslarger markets Political actionPolitical action Local economy enhanced and Local economy enhanced and

protectedprotected

2626

II.II. Steps to Developing a Steps to Developing a Cooperative BusinessCooperative Business

2727

Steps to Developing a Steps to Developing a CooperativeCooperative

Determine if there is an economic Determine if there is an economic need.need. Initial exploratory meetingInitial exploratory meeting Select a steering committeeSelect a steering committee

Examine if the cooperative structure Examine if the cooperative structure is a viable solution.is a viable solution. Member surveyMember survey Feasibility analysisFeasibility analysis Marketing researchMarketing research

2828

Steps to Developing a Steps to Developing a CooperativeCooperative

Determine the level of potential Determine the level of potential member interest and commitment.member interest and commitment. Second exploratory meeting Second exploratory meeting Member capital, business volume, etc.Member capital, business volume, etc.

Begin planning to evaluate the Begin planning to evaluate the feasibility of the cooperative.feasibility of the cooperative. Prepare a business planPrepare a business plan Draft legal papers, bylaws and incorporate.Draft legal papers, bylaws and incorporate.

2929

Steps to Developing a Steps to Developing a CooperativeCooperative

Formally organize the cooperative.Formally organize the cooperative. Third exploratory meeting Third exploratory meeting Members finalize bylaws and articles of Members finalize bylaws and articles of

incorporation. Once membership has incorporation. Once membership has finalized the papers, file the papers with finalized the papers, file the papers with the Secretary of State’s Officethe Secretary of State’s Office

Hold First Annual Meeting.Hold First Annual Meeting. Approve the bylawsApprove the bylaws Elect the Board of DirectorsElect the Board of Directors

3030

ResourcesResources Rural Business and Cooperative Services (RBCS) Rural Business and Cooperative Services (RBCS)

www.rurdev.usda.gov/rbswww.rurdev.usda.gov/rbs Agricultural Marketing Resource Center (AgMRC)Agricultural Marketing Resource Center (AgMRC)

www.agmrc.orgwww.agmrc.org

USDA Rural Development – Tim Smith USDA Rural Development – Tim Smith Little Rock, Arkansas Little Rock, Arkansas

Ph: (501) 301-3280 or Ph: (501) 301-3280 or Tim.smith@ar.usda.govTim.smith@ar.usda.gov

U of A Cooperative Extension Service – Ronald U of A Cooperative Extension Service – Ronald RaineyRaineyLittle Rock, Arkansas: Little Rock, Arkansas: www.uaex.eduwww.uaex.edu

Ph:501-671-2175 or Ph:501-671-2175 or rrainey@uaex.edurrainey@uaex.edu

3131