We will use the last minutes of each lecture to give you a chance to reflect on the covered material and share your thoughts. Even if you were not able to attend lectures, you will be able to reflect on each week’s material. Your first entry can include a description of why you are taking this course, and what you are hoping to get out of it. You can also voice your biggest concern.
Only six of your submitted entries or reflections will count towards your final grade.
_______________________________________________
Please submit your journal entry or short essay for this week here.
You should include your thoughts and reflections on this week’s assigned readings, additional material, personal experiences, ideas regarding your final project, and concerns.
Please do not exceed 200 words ( We are trying to read them all).
This assignment is graded based on effort. If sufficient effort to reflect on this week’s material is detected, you will receive full credit.
Journal entries:
I want you to keep a journal or regularly reflect on the material covered each week and ask you to submit select journal entries (or short reflections) as an assignment each week. These assignments give you an opportunity to reflect on your learning and provide feedback on the assigned readings, lectures, sections, and additional information posted from each week. You can also discuss ideas related to each week’s material in preparation for your final project. You can also share additional examples or sources that relate to the material covered each week, and submit your reflections in alternative formats (e.g. upload a picture of hand-written notes, draw a diagram, record yourself or relevant content). Journal entries will be graded on effort and I will do my best to provide comments and feedback.
ARE 132: COOPERATIVE
BUSINESS ENTERPRISES
Prof. Kiesel
Lecture logistics
Lectures will be recorded and posted
Lecture slides are posted (including Notetaking
handouts)
We will use icklicker/Reef app for active
participation during live lectures
Click on this button (below assignment text) and log in to iclicker App
at least once
Note: This button is only visible when canvas site is opened in a browser,
not in canvas App!
What do you know about
Cooperatives?
Why study Cooperatives?
What do you want know about
Cooperatives?
10 % of world’s total employment happens through
co-ops (International Cooperative Alliance)
The world’s 2.6 million co-ops count over 1 billion
members, and $20 trillion in assets, and revenue up
to 4.3% of global GDP (United Nations)
Country with the largest total number of co-op
membership (though many don’t know themselves
as such) is the U.S.
80% of consumers would choose co-ops over other
options (2017 survey, Cooperatives for a Better
World)
Co-ops are as old as you want
them to be
Cooperation is as old as economic activities
Rochdale Society of Equitable Pioneers (1844) often
cited as the origin of co-ops
Mondragon as largest, most known worker co-op
“It has been said that cooperativism is an economic
movement that uses methods of education […] This
definition can also be modified to affirm that
cooperativism is an educational movement that uses
methods of economics” Arizmendi (ca 1952)
African Americans have a long, rich history of
cooperative ownership, especially in reaction to
market failures and economic racial discrimination
Cooperatives in Socialism and Communism
Education as key principle of co-ops, but co-ops are
also a good educational tool to understand
economics and business (management)
Co-ops are as old as you want
them to be (cont.)
Co-ops can provide timely
solutions
Cooperatives are more than just a business model
Address a variety of environmental, economic, and
social justice challenges or our time
Co-op movement is a democratic movement
Co-operative ideas influence general business
principles
By the end of this quarter you will have a basic
understanding of the
fundamentals of cooperative business enterprises.
key economic functions of cooperatives.
conditions amenable to cooperative structures.
experiences shared by professionals working in
cooperative businesses
.
We will focus on cooperatives as economic
organizations
No comprehensive textbook available
We are using:
Cooperatives: Principles and practices in the 21st
century. Kimberly A. Zeuli and Robert Cropp,
University of Wisconsin Cooperative Extension,
A1457.
An Introduction to Cooperation and Mutualism.
Michael Boland, University of Minnesota (2017).
(Additional Articles)
Everything for Everyone: The Radical Tradition that is
Shaping the Next Economy, Nathan Schneider. Nation
Books (2018)
Collective Courage: A History of African American
Cooperative Economic Thought and Practice, Jessica
Gordon Nembhard, The Pennsylvania State University
(2014)
Food Co-ops in America: Communities, Consumption,
and Economic Democracy, Anne Mais Knupfer (2013,
posted on canvas)
.
In order to apply the learned material
throughout the quarter, you will complete a
business case study on a cooperative
business of your choice
You will be working on this project in groups of
4-5 students. Groups will be assigned during
the second week of instructions. In a first
attempt, we will match students according to
their interests in certain businesses
15
•
Making mistakes is an important part of learning (Opportunities
for low-stakes mistakes; applications, peer-based learning)
• Use Canvas discussion board, student hours, and FAQ
module for additional questions (email for confidential
concerns)
I am here to help!
Supporting Learning versus Assessment of Skills
Academic Honesty
(Peer-learning vs cheating)
Academic Conduct:
You are an active member of the UC Davis campus and essential in our efforts to create a fair and honest
community. Please review the Code of Academic Conduct. Familiarize yourself with your rights and
responsibilities as you are required to acknowledge them for each of your courses. I encourage you to work
together as I strongly believe it supports the learning process. However, your submitted quiz and exam
answers need to be your own, and any sources used in the preparation of your group project need to be
properly cited (Please refer to additional information on proper citation). Any violation will result in you
receiving no credit for the assignment or exam in question, and me reporting the incident to the Office of
Student Support & Judicial Affairs.
Copyright: My lectures and course materials, including PowerPoint presentations, quizzes and exams,
assignments, and additional handouts, are protected by U.S. copyright law and by University policy. I am
the exclusive owner of the copyright in those materials I create. You may take notes and make copies of
course materials for your own use to support your learning. You may also share those materials with other
students who are enrolled in or auditing this course except when taking quizzes and exams. You may not
reproduce, distribute or display (post/upload) lecture notes, recordings, quizzes and exams, and all other
course materials in any other way — whether or not a fee is charged — without my expressed prior written
consent. You also may not allow others to do so. Any violation will result in me reporting the incident to the
Office of Student Support & Judicial Affairs.
(Information included on Syllabus)
http://sja.ucdavis.edu/files/cac
http://guides.lib.ucdavis.edu/citations
Keep a “Journal”: Opportunity to provide
feedback and comments on the assigned
readings, lectures and sections, and additional
information posted. You can also discus ideas
related to each week’s material in preparation
for your final project.
Turn in at least six weekly journal entries electronically by midnight
each Friday
One weekly quiz posted on Canvas:
Pre-lecture (available 24 hours prior)
7 quizzes total (two lowest scores dropped)
First Pre-lecture quiz next week
(Lockdown browser required)
Practice quiz posted
M 6:00 –7:00pm: Zoom link (on Canvas)
F 8:00 – 9:00am: Zoom link (on Canvas)
Please note that the chosen times allow students in different
time zones to join as well. You will be able to socialize and
work with others in breakout rooms during those times, and/or
ask me anything you would like. Please come with questions
or identify areas you want to talk about. I am happy to talk
and provide feedback, advise you on anything we cover in
class, or have a more personal conversation and provide
advice as best as I can. I will, however, not prepare and
present additional course material during those times.
https://ucdavis.zoom.us/j/91349059030
https://ucdavis.zoom.us/j/94784391763
INTRODUCTION
What is a Cooperative
Cooperative principles
Agricultural Marketing Co-ops
Blue Diamond Growers
Owned by 3,500+ almond growers in
California
Shell, process & market members’ almonds
and almond-based products
Sells packaged and bulk in US and abroad
Sales exceeded $1.5 billion in 2018
Wholesale (Purchasing) Co-ops
Ace Hardware
Owned by member stores that buy most of their
merchandise from the cooperative
4,476member stores–in all 50 states and 60 countries
Record fiscal 2018 revenues of $5.7 billion (an
increase of 6.1 percent from pervious year
Paid record patronage dividends of $145.9 million to
hardware store members
Recognized as one of the “2018 Best and Brightest
Companies to Work For in the Nation” by the National
Association of Business Resources
Consumer Co-ops
REI
Nation’s largest consumer co-op with18 million members
Headquartered in Seattle area, 129 stores
Outdoor sports/recreation equipment & clothing
One-time membership fee ($20)
Record annual revenues of $2.8 billion in 2018, 6 percent
growth
Record $204 million shared with REI members through
annual dividends and credit card rebates
Gave $77 million to employees through
profit sharing and retirement
Invested $8.4 million in 2018 in nonprofits
working on outdoors projects
Worker Co-ops
Cheese Board (Arizmendi)
Owned by its workers (two owners opened a small cheese
store in 1967 and sold their business to their employees)
Employs about 40 worker/owners with an annual revenue
approximately $2 Million
Sell almost 400 different cheeses and an extensive
selection of freshly baked breads and pastries
Pizzeria sells one type of vegetarian pizza each night, using
fresh ingredients, unusual cheeses from the Cheese Board,
all on top of a thin, sourdough crust.
Provide:
Electricity
Telephone
Internet service
Satellite television
Wind energy
Leadership in economic development
Cooperative Banks, Housing Co-ops, Artists Co-
ops, Social services Co-ops…
Source NCB Co-op 100 Statistics, 2019
A cooperative is a business owned and
democratically controlled by the people who use
its services and whose benefits are derived and
distributed equitably on the basis of use.
The user-owners are called members (USDA)
Cooperative principles distinguish cooperatives
from other forms of business
Contemporary or Co-op
Principles (USDA)
User-benefit
Sole purpose is to provide & distribute
benefits to its users on
basis of their use
User-owned
People who own & finance the cooperative
are those who
use the cooperative
User-control
People who control the cooperative are
those who use it
Voluntary & Open Membership
Democratic Member Control
Members’ Economic Participation
Autonomy & Independence
Education, Training & Information
Cooperation among Cooperatives
Concern for Community
What is a Cooperative?
A cooperative is an autonomous
association of persons united voluntarily to
meet their common economic, social, and
cultural needs and aspirations through a
jointly owned and democratically
controlled enterprise. (International Coop
Alliance)
Political Economy and
Common-pool Resources
Olstrom (Nobel-laureate) seven design principles for common
pool resources:
Clearly defined boundaries
Local rules adapted to local conditions and needs
Mechanisms for those affected by the rules to change then
Monitoring of participant behavior
Appropriate consequences for rule violations
Processes for conflict resolution
Free and flexible self-organization,
and additional principle for large systems:
Principle of federation: A pattern of nesting, so that smaller
decisions happen in smaller groupings, which in turn defer to
larger institutions for larger challenges
INTRODUCTION (cont.)
What is a cooperative?
How is it different from other businesses?
Are there commonly agreed upon cooperative principles?
How were they determined?
How have they involved over time?
How valid are they today?
What cooperative principles if followed, will optimally position
cooperatives in the future?
Cooperatives are a unique form of businesses or organization
A cooperative is a business owned and democratically controlled
by the people who use its services and whose benefits are derived
and distributed equitably on the basis of use. (USDA)
User-owned
People who own & finance the cooperative are those who
use the cooperative
User-control
People who control the cooperative are those who use it
User-benefit
Sole purpose is to provide & distribute benefits to its users on
basis of their use
(Narrower USDA definition)
What is a Cooperative?
A cooperative is an autonomous association of persons
united voluntarily to meet their common economic,
social, and cultural needs and aspirations through a
jointly owned and democratically controlled enterprise.
(International Coop Alliance)
Seven Principles
(Broader ICA definition)
Seven Cooperative Principles (ICA)
Voluntary & Open Membership
Democratic Member Control
Members’ Economic Participation
Autonomy & Independence
Education, Training & Information
Cooperation among Cooperatives
Concern for Community
Producers (Farmers) create supply or marketing
cooperatives to help maximize net profits
Market products at better prices
Keep input costs low
Consumers can buy products or use services they
want but cannot find elsewhere at affordable prices
Employees organize bargaining associations and
labor unions to negotiate collectively for increased
wages and benefits, general working conditions and
job security
Example: Reason for Co-ops
among Farmers
1. Pool their (financial) resources
2. Carry out business activities they could not perform
independently as efficiently
Existing businesses/structures have not provided them with
goods and services, they desired
Existing businesses have followed monopolistic practices
Create economies of scope and scale
Application: Local food systems (food hubs and food incubators)
CSA’s
Example: Reason for Co-ops among
Agricultural Producers (cont.)
Benefits include favorable prices, services that would
otherwise not be available, access to
markets
and
assured supply, as well as patronage refunds
Cooperative with $200,000 in revenue and 180,000 in
expenses, has $20,000 left as net income to return to
patrons:
A patron that does $4000 worth in business with the
cooperative receives a refund of proportional share
(4,000/200,000=400 or 3=2%)
Cooperatives provide access to markets and market or
bargaining power to its users*
*Users are patrons; patrons eligible to vote are members
Reasons farmers joined together include:
1. To obtain a fair or efficient price (correct market failure)
2. Reduce costs through economies of scope and scale
3. To provide supplies, and services that are missing or in
danger of being lost, access to markets
4. To pool risks
5. To capture profits from another level (vertical integration)
6. To benefit from increased market power
markets
Cooperatives by primary business activity:
Agricultural Production Cooperatives
Purchasing Cooperatives
Consumer Cooperatives
Service Cooperatives
Finance
Insurance
Electricity
Housing
Healthcare
Cooperatives by market area:
Local Cooperatives
Interregional and national
Cooperatives
International Cooperatives
Classification of Co-ops(cont.)
Cooperatives by ownership structure:
Centralized Cooperatives
Federated Cooperatives
Hybrid Cooperatives
Other business structures
New Generation Cooperatives (NGCs)
Wyoming Cooperative model
Worker-owned Cooperative
Cooperatives are also sometimes called nonprofit
corporations or patron-owned corporations
Firm other than co-ops are often called: noncooperatives,
investor owned, proprietary or profit, private, ordinary,
standard, other corporations or just corporations.
Can get confusing and be misleading
Key difference: Co-ops return net income to users or patrons,
while other firms return net income to investors
We will try to use Co-ops* versus Investor oriented firms (IOF)
* Owned by customers or patrons (few by employees)
Each business has a set of key stakeholders:
1. Owners or investors (controlling or noncontrolling owners)
2. Employees, who work for the business in some capacity (labor
or management)
3. Patrons or customers, who patronize business by using it as
source of supply or service or as an outlet for services they
produce
4. Other stakeholders (e.g. creditors and suppliers)
Any person can be all four types
In Co-ops, roles are closely connected
Stakeholders
Proprietorship is a business owned and controlled by one
entrepreneur who provides the equity capital, makes key
management decisions, and bears unlimited liability for debts
and losses in exchange for the opportunity to receive profits.
Partnership is similar to a proprietorship, except that it is owned
and controlled by two or more people.
Corporation is a legally chartered institution formed by a group
of people or businesses who are granted a s body of one.
Cooperative corporation
Limited Liability Company(LLC) is similar to a partnership but all
partner have limited liability
Legal Forms of Businesses
Basic Legal Business Forms
Proprietorship Corporation Partnership
IOF Corporation Cooperative Nonprofit
BusinessConsumer Employee Nonprofit and government
Goods Services AgriculturalNon-Agricultural
Marketing Supply Service Marketing Supply Service
Comparison of legal forms of doing business (Cobia)
Comparison of legal forms of doing business (cont. )
Comparison of legal forms of doing business (cont. )
+ Easy and inexpensive to organize
+ Owner has complete control
+ Owner receives all income
– Owner has unlimited liability
– Owner is taxed on all business profits
– Not suitable for large or complex businesses
+ Easy to organize
+ Partners share control
+ Partners receive all income
– Some
partners
have unlimited liability
– Partners are taxed on all business profits
– Personality differences may cause problems
+ Easier to organize
+ Democratic control
+ Limited Liability
– Owners are taxed on all business profits
– Too easy for owners to exit
– May be cumbersome with large number of
partners
+ Larger pool of investors and easier to raise capital
+ Business life is perpetual
+ Owners have limited liability
– Double taxation to corporation and stockholders
– Owners have little control
– Complex and costly to organize
+ Business life is perpetual
+ Owners have limited liability
+ Taxed as partnership
– Limit of 75 stockholders
The following concept to enhance understanding of
Co-ops:
1. The primary purpose is economic benefits for members
2. Members are usually patrons
3. Members own and control the Co-op
4. Qualifying patrons receive distribution of benefits
5. Co-ops are private organizations
6. Public policy establishes the institutional framework
Much of controversy stems from whether guidelines are
considered mandatory principles, strongly
recommended policies, or common practices
Discussion questions:
Do economists behave differently? (Frank et al, 1993)
Why are cooperative principles important?
What is the difference between principles, policies, and
practices? (Give an example of each).
What are the advantages and disadvantages of strictly
following a commonly accepted set of principles?
Participation
Surprising Numbers
Learning Objectives
Required Reading
Recommended Reading
Final (Group) Project
Weekly Reflections
Quizzes
Student hours
Utility Co-ops
Cooperative Principles
What is a Cooperative?
Seven Cooperative Principles (ICA)
What is a Cooperative?
What is a Cooperative? (Review)
What is a Cooperative?
Three (Four) classes of principles of cooperatives (Cobia)
Seven Cooperative Principles (ICA)
Why Cooperate?
Why do Farmers Join Together?
Classification
Classification of Co-ops(cont.)
Classification of Co-ops(cont.)
Terminology
Matrix of Cooperative member and patron classification (Cobia)
Stakeholders
Legal Forms of Businesses
Legal Forms of Businesses
Individual Proprietorship
Partnerships
Limited Liability Company (LLC)
C-Corporations
S-Corporations
Key Concepts
Issues and Discussion
AnIntroduction
to Cooperation
and Mutualism
Michael Boland
University of Minnesota
This work is licensed under a Creative Commons Attribution-NonCommerical
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Edition: 1.0 (December 2017)
University of Minnesota Libraries Publishing
Minneapolis, Minnesota
ISBN: 978-1-946135-38-4 (ebook) 978-1-946135-39-1 (print)
Textbook: z.umn.edu/cooperative-textbook
Teaching materials: z.umn.edu/cooperative-textbook-teaching-materials
An Introduction to Cooperation and Mutualism
Copyright © 2017 by Michael Boland
http://z.umn.edu/cooperative-textbook
http://z.umn.edu/cooperative-textbook-teaching-materials
An Introduction
to Cooperation
and Mutualism
Michael Boland
University of Minnesota
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vii
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Chapter One: Cooperatives and Mutuals are Firms . . . . . . . . . . . . . . . . . . . . 3
The success of a firm lies in its ability to have clear property rights . . . . . . . .3
Who owns a firm? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exhibit 1.0 What is the make-or-buy decision? 5
Exhibit 1.1 Dimension of job design in organizations with an
application to a convenience store franchise 6
Corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Exhibit 1.2 What are articles of incorporation? 8
Cooperatives are an example of a closely-held firm . . . . . . . . . . . . . . . 9
Exhibit 1.3 What are bylaws? 9
Exhibit 1.4 What are policies? 9
Exhibit 1.5 Types of business forms 10
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Chapter Two: Cooperatives and mutuals are participatory organizations . . . . . . . 13
Exhibit 2.0 The cooperative is a firm 13
Exhibit 2.1 The mutual company 14
Exhibit 2.2 International cooperative alliance values and principles
of cooperation 15
Exhibit 2.3 The special case of fraternal benefit society 16
Cooperative principles and policies . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit 2.4 Rochdale Equitable Pioneers Society 17
Exhibit 2.5 The cooperative as the competitive yardstick 18
Participation in benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit 2.6 What are examples of credit cooperatives? 19
Exhibit 2.7 What is the difference between a stock cooperative and a
nonstock cooperative? 20
Participation in ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Participation in control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit 2.8 How are directors selected? 21
Exhibit 2.9 Cooperatives and mutuals are not the same as loyalty
programs and buying clubs 22
Principles of cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Formation of cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Chapter Three: Income distribution and equity decisions . . . . . . . . . . . . . . . .29
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Exhibit 3.1 The case of pooling cooperatives 31
Exhibit 3.2 Simplified cooperative income statement 32
Income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Exhibit 3.3 A simplified cooperative balance sheet 33
Choices on distribution of patronage and non-patronage income . . . . . . . 34
exhibit 3.4 Income distribution decision in a cooperative 35
Patronage income distribution choices and cooperative business units . . . . 36
Exhibit 3.5 Sources of equity in a cooperative 37
Choices on tax liability of patronage refunds . . . . . . . . . . . . . . . . . . . 38
Exhibit 3.6 The rationale for why cooperatives have single
taxation of income 39
Equity redemption program choice has implications for the balance sheet . . 40
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Exhibit 3.7 Equity redemption by patron birth year in certain
farm supply and grain marketing cooperatives in the
United States 41
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Chapter Four: Special topics in cooperatives and mutualism . . . . . . . . . . . . . . 43
Limited exemption from antitrust laws . . . . . . . . . . . . . . . . . . . . . . 43
Use in agricultural and community development programs . . . . . . . . . . 43
Pricing strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Why is the number of agricultural cooperatives declining worldwide? . . . . 44
Organizing the governance of cooperatives . . . . . . . . . . . . . . . . . . . . 44
Hybrid cooperative organizational forms . . . . . . . . . . . . . . . . . . . . . 45
The “new generation” cooperative phenomenon in the United States . . . . . 45
Demutualization: a rare but often studied event in cooperatives
and mutuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
The current restructuring of ‘mixed’ or multi-purpose farm supply
and grain / oilseed marketing cooperatives in the United States . . . . . . . . 47
Collective farming movements . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Economic impact of cooperatives and mutuals . . . . . . . . . . . . . . . . . . 48
The role of faith in cooperative development . . . . . . . . . . . . . . . . . . . 48
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Chapter Five: Summary and conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . 51
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
About the author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
AN INTRODUCTION TO COOPERATION AND MUTUALISM vII
»Preface
When I was growing up, as the oldest of 12 children, my parents did a lot of
business with the “co-op.” In this case, the co-op was Farmers Union Coop-
erative Oil Association of South St. Paul, which later became River Coun-
try Cooperative and remains a thriving business in east central Minnesota.
It was the only business where my parents had credit. My parents had actu-
ally purchased common stock in the co-op in the late 1960s, which, as I
discovered later, is unusual since most members are allowed to earn their
way into a farm supply cooperative without having to formally purchase
common stock. Our family had no credit cards and no home equity line of
credit in the 1960s and 1970s. The fact that we lived from one paycheck to
another meant that having credit at the co-op was a blessing, provided the
account was paid off promptly every month, which it was. The co-op was
where we purchased gas and where the car got fixed. Tires, batteries, oil
filters, dog food, and other goods were bought at the co-op. And every year
my family received a patronage refund. The co-op had operations in three
counties and the nearest location was almost 15 miles away.
We banked with a credit union and insurance was done with a
mutual insurance company. My cousin, on whose farm we worked, was
a member of three farm supply cooperatives and his insurance was in a
township mutual insurance company. Childhood photos would invari-
ably have someone in my family wearing a red Cenex (now part of CHS,
Inc.) or green Land O’Lakes ball cap. Both were cooperatives. I worked
at the co-op for four years; my brother later worked there, and ultimately
became General Manager at a farm supply cooperative in Washing-
AN INTRODUCTION TO COOPERATION AND MUTUALISMvIII
ton state. My Aunt Maureen (known as Peg) was an executive secretary
at what was then the St. Paul Bank for Cooperatives, and would relate
her experiences there over a 30-odd year career. As children, we did not
understand what a cooperative or mutual was. We knew that gas might
be less expensive just down the road and did not require a 15-mile drive to
get there! But it was just the way things were done at our house.
As I attended graduate school at the University of Minnesota and then
Purdue University, and began a career in academia at Kansas State Uni-
versity and now back at the University of Minnesota, I began to work
within a network that involved frequent engagement with cooperative
directors, managers, employees, and other stakeholders, including aca-
demics, accountants, attorneys, lenders, and state cooperative council
leaders. I began to better understand the network of agricultural and con-
sumer cooperatives and mutual insurance firms in our economy. None of
my undergraduate classes in the business school discussed cooperatives.
In fact, for one of my classes in which I was required to discuss a compa-
ny’s annual report, I chose to discuss a firm that happened to be a coop-
erative. My professor intoned in a professorial voice that “Cooperatives
were a socialistic idea” and promptly gave me a C. Historically, colleges
of agriculture, rather than colleges of business, were home to collegiate
courses on cooperatives.
Cooperatives and mutuals are just a different form of business. Once
you start looking closely, you begin to appreciate the extent to which they
exist throughout the world. Like any business, they exist to make a profit
and make their members—who are customers—better off by providing a
product or service. The differences lie in how income is distributed, how
they are financed, and how they are owned by members. All of these con-
cepts are discussed in this book.
For a number of years, I have been asked to write a textbook on coop-
eratives and mutuals. I have chosen to write an introductory textbook.
Over the past ten years, we have seen many retirements of faculty who
taught courses on cooperatives and provided many educational programs
to directors and employees. The popularity of such courses has resulted
in new faculty being hired who do not have the deep institutional knowl-
edge that other instructors had developed over a long career. There are
also new courses being taught in colleges and universities where there
was no such course taught previously. Thus, I have chosen to write some-
thing for students who are taking their first course in cooperatives. An
extensive set of teaching materials with detailed lessons plans, case stud-
ies, and information, accompanies this textbook; these materials should
be useful for instructors and students.
IxPREFACE
I owe a great deal of gratitude to my parents for exposing my siblings
and I to the cooperative and mutual form of business. My colleagues in
the U.S. Department of Agriculture USDA NCERA 210 Multi-State Coordi-
nating Committee of Land Grant University Faculty Focused on Research
on Cooperatives have been a valuable sounding board for me. In particu-
lar, Phil Kenkel and Greg McKee have been great sounding boards for this
textbook. I owe a lot of thanks to my long-time friend and colleague from
Kansas State, David Barton, who was involved in the last textbook written
on cooperatives in 1989 and kept a set of materials available for others to
use over the years. And I owe much to my co-instructors who help teach
the law school class on cooperatives and mutuals at the University of Min-
nesota. Chris Kopka, Tom Pierson, and Dave Swanson have deepened my
knowledge of mutuals and cooperatives.
Most importantly, I am deeply indebted to the thousands of direc-
tors, managers, employees, and stakeholders of cooperatives and mutu-
als who have educated me about their businesses over the past 25 years.
This education has occurred through programs offered by state coopera-
tive councils, cooperative annual meetings, regional workshops such as
the Farmer Cooperatives conference and California Center for Cooper-
ative Development education program, and the activities of the National
Council on Farmer Cooperatives. I have had the opportunity to lecture
or work in more than 100 countries, with much of this work related to
cooperatives or mutuals. The issues are the same no matter where one
goes! The relationships among all of these individuals have helped make
my career very rewarding. My job involves a great deal of public-private
partnerships with these individuals and I am very blessed with this net-
work. I also want to thank to Jerry Ryan and the employees and producers
of Arrabawn Co-op in Nenagh, Ireland, who provided my students and I
an up-close look at Irish cooperatives as part of their study tour. I have
led more than a dozen student agricultural study tours in Latin America,
Australia and New Zealand, and South Africa, and cooperatives were an
important stop for my students.
Cooperative leaders had the foresight to create various endowments
at a number of universities to ensure that faculty teach courses in coop-
eratives and create new knowledge about cooperatives. In that spirit, the
CHS Foundation and CoBank have graciously helped provide funding in
the development and editing of this book and its materials. I could not
have done this without their help. Finally, I would remiss if I did not thank
Kansas State University and University of Minnesota for allowing me to
teach, research, and conduct extension and outreach programs on coop-
eratives as part of my career. It has been a great career choice for me.
AN INTRODUCTION TO COOPERATION AND MUTUALISMx
AN INTRODUCTION TO COOPERATION AND MUTUALISM 1
»Introduction
The purpose of this textbook is to introduce the ideas of cooperation and
mutualism. Consequently, it is likely to be used in an introductory course
on cooperatives and mutuals as opposed to a graduate seminar course. As
an economist, it stands to reason that much of my discussion is written
through the eyes of economics. After all, a cooperative or mutual will not
survive unless it achieves an economic purpose. Another goal I have with
the book is to make it accessible, affordable, and easy to update.
I began with roughly 320 pages of double-spaced text. As I tried to sep-
arate what should be in the teaching manual relative to the text, it gradu-
ally dawned on me that, with the many kinds of materials publicly avail-
able, I was making the book too unwieldy. No class is the same; some are
taught once a week, some twice, some three times. The number of stu-
dents differs, as does the classroom itself, with some courses taught in
traditional lecture halls and others in active student learning classrooms.
The real value to the instructor and reader is the teaching materials and
how they are used. Virtually all instructors supplement a textbook with
their own materials and the same will be true with this book as well.
I thus looked at the materials and decided to make the book much
smaller and more focused. Student feedback was overwhelmingly posi-
tive! This process resulted in moving much of the original material into
the teaching manual and creating a shorter textbook. A number of my
colleagues have contributed to the lesson plans in the teaching manual
and I want to acknowledge their help and contributions.
The last cooperative textbook, which was edited by David Cobia in
1989 and includes chapters written by various cooperative scholars, made
an outstanding contribution by creating a consistent set of cooperative
terminology. I have tried to follow their practice, with the exception of
one term: investor-oriented firm, or IOF, is a term I understand as an aca-
demic, but I believe it is confusing for readers in an introductory class.
AN INTRODUCTION TO COOPERATION AND MUTUALISM2
I have thus chosen to use the terms cooperatives and non-cooperative
corporations. Finally, mutuals have never been discussed within previous
textbooks on cooperatives and there is no widespread literature on them.
Because there is so much overlap, and because many people who belong
to a cooperative also belong to a mutual insurance firm and likely do not
even realize it, I have chosen to add mutualism as an idea in this textbook.
In keeping with the idea of making the book easily readable, I have
chosen not to use explicit citations like those used in an academic journal
article. Rather, I have compiled endnotes with information on the sources
for particular concepts or ideas. I have tried to acknowledge original
sources wherever possible, and to recognize individuals who helped pop-
ularize those concepts and ideas.
The first chapter introduces the idea of a firm and how it is defined and
organized. I then introduce the idea of property rights and governance. For
the vast majority of students, this is the first time they will be exposed to
this concept. Because a cooperative is a firm, it is important that students
are grounded in these concepts. The formation of cooperatives and mutu-
als is introduced within the context of the firm’s Make or Buy decision.
The second chapter defines cooperatives as participatory organizations
in which members participate in economic and social benefits, ownership,
and control. I introduce the importance of a cooperative using a business
strategy to recognize that members are first and foremost customers, and
lay out the various types of cooperatives. I also introduce some of the rea-
sons why cooperatives have been used so widely in agriculture.
The third chapter lays out cooperative accounting and finance con-
cepts. Students taking a course in cooperatives may have little or no back-
ground in accounting, but such knowledge is needed to understand the
ways in which members participate in their cooperative.
The fourth chapter introduces several topics unique to cooperatives and
mutuals, including policies, economic development, pricing strategies, and
current issues in cooperatives. Chapter Five ties these concepts together.
AN INTRODUCTION TO COOPERATION AND MUTUALISM 3
»Chapter One
Cooperatives and Mutuals are Firms
The purpose of a firm is to decide what to produce, how to produce it, and
how to distribute what is produced. Legal forms of organizations include
for-profit corporations, non-profit organizations, partnerships, and sole
proprietorships. The majority of business organizations in the U.S. are
corporations, and are referred to as C corporations because such organi-
zations tax the corporation differently from the owners of the corporation.
A number of these corporations are publicly traded, which means they
issue stock that can be bought and sold by buyers and sellers in an orga-
nized stock exchange. Stock owners include institutional investors such
as mutual funds, pension (private and public) funds, and life insurance
companies. Cooperatives are a special case of corporations.
This chapter describes how a firm is organized. Market economies such
as those found in the U.S. and in many other parts of the world operate
efficiently when firms are organized in the ways discussed in this chapter.
The next chapter describes the organizational characteristics of a coop-
erative, while the third chapter describes the accounting and financial
characteristics of a cooperative or mutual, with the economic transaction
clearly showing why a cooperative is different from other forms of busi-
ness. It is important for the reader to understand what a firm is in order to
fully understand the concepts underpinning cooperation and mutualism.
The success of a firm lies in its ability to have clear property rights
A property right is a legally enforced right to select the uses of an economic
good produced by a firm. Private property rights are those assigned to an
individual person, while an alienable property right is one that can be given
or transferred to someone else. For example, the government employs
a police force and legal system to enforce these rights. Ownership of the
property right includes the use of that right and its alienability or ability to
AN INTRODUCTION TO COOPERATION AND MUTUALISM4
give or transfer that right. These rights are separated such that, for example,
a person can rent an apartment but cannot sell the apartment.
Market economies have the ability to be highly efficient in organizing
economic activity if the property rights are clearly known and assignable
to individuals, and if the contracting costs such as search and information
costs, bargaining and decision costs, and drafting, policing, and enforce-
ment costs are known. Specific knowledge is important in decision-making,
and individuals make more productive decisions when property rights are
known and assignable. Firms exist because there are contracting costs to
using markets, and these costs may be lower when done by firms.
This is easy to understand in a business such as a proprietorship, where
one person makes all decisions and signs all contracts. But it is more com-
plex in a firm such as a cooperative or mutual. A considerable amount of
research suggests that firms are actually a connection of a group of con-
tracts. The firm signs contracts with 1) suppliers to purchase inputs to
create something, 2) employees to help provide services with their labor,
3) lenders, bondholders, preferred stockholders, or others who provide
capital to the firm, 4) buyers who agree to purchase the products or ser-
vices made by the firms, or 5) any other entity doing some form of busi-
ness with the firm.
In a cooperative, however, some of these contracts exist with owners
and employees of the firm. In a consumer cooperative, the goods and ser-
vices provided by the cooperative are consumed by the members, while
in a producer cooperative the cooperative markets products supplied by
the members. Cooperatives are successful if they are able to make some-
thing for their members either through purchasing supplies or providing
inputs rather than having members do this in the market as individuals
with no ownership. This Make or Buy decision has been widely studied
within the context of the contractual arrangements that make up a firm.
The concepts of ownership, property rights, and purpose of a firm are key
to understanding the unique nature of a cooperative.
Who owns a firm?
An owner of a firm is someone who has the right to control the firm
and the right to any residual earnings after the firm has contracted its
expenses with its suppliers, employees, lenders, and others with whom
it has a contractual arrangement. These two rights—control and residual
claimant on earnings—are linked together or are obtained jointly in a
corporation and are the fundamental basis of ownership. There are costs,
however, associated with these two rights. For example, one key cost with
regard to the right to residual earnings is the issue of risk and the firm’s
CHAPTER ONE: COOPERATIVES AND MUTUALS ARE FIRMS 5
strategy choice. More business units in a firm has may lead to greater
diversification, which can reduce risk as long as the correlation between
earnings in each of the business units is negative or close to zero.
For the right to control the firm, there are costs of controlling man-
agers and costs of collective decision-making. Monitoring the actions of
management is difficult when there are many owners, as is often the case
with cooperatives and mutuals. Owners can ensure that outside audits are
conducted and internal controls are in place. In addition, they attempt to
ensure that the board of directors is composed of individuals with the best
knowledge possible to monitor management. As seen in the next chapter,
cooperatives are limited in this regard because their directors must come
from members. The costs of collective decision-making may be high if
owners have differing opinions arising from different needs with regard to
the cooperative’s products and services. The greater these differences, the
greater the costs of collective decision-making.
ExHIBIT 1.0 What is the make-or-buy decision?
Can consumers
or producers
obtain benefits
of volume pre-
miums, volume
discounts, or
missing prod-
ucts or services
on their own?
If the answer is
yes, is vertical
coordination
of the activities
in the supply
chain easy? If
the answer is
no, then buy
the product or
service.
If the answer is
no, would a sup-
ply agreement
or alliance or
similar arrange-
ment work?
If the answer is
yes, is mutual
benefit a solu-
tion to coordi-
nation rather
than detailed
production or
marketing con-
tracts? If the an-
swer is no, then
buy the product
or service via
contracting.
If the answer is yes, create a
supply agreement or alliance
or similar arrangement to
contract and buy the product
or service. If the answer is no,
then vertically integrate as
a consumer or producer to
make the product or service.
If the answer is
yes, then verti-
cally integrate
as a consumer
or producer to
make the prod-
uct or service.
AN INTRODUCTION TO COOPERATION AND MUTUALISM6
Corporate governance
Knowing the governance of a firm is important in understanding how it
functions. In an organization such as a C corporation, decision rights are
allocated between those internal to the firm such as shareholders, boards
of directors, senior managers, and those external to the firm such as out-
side auditors, regulatory agencies, analysts, and other stakeholders. Orga-
nizations are designed to create jobs that address certain tasks which must
be accomplished, and these jobs include varying levels of authority to
decide how to best complete those tasks.
Think about this concept in regard to a convenience store that sells
refined fuels such as gasoline and diesel fuel, a limited selection of grocery
products, convenience foods, and similar products. This store has two
cash registers. Consider point A, where there are few tasks to accomplish
and limited authority to make decisions. This job might be a clerk who
is contracted to run the cash register and has limited authority to make
decisions. Point B has more tasks to perform but limited decision-making
authority. An example might be a shift leader who runs the cash register,
is the supervisor for the other clerk, and may do certain jobs within the
store such as stock shelves, but who has limited authority to make other
ExHIBIT 1.1 Dimension of job design in organizations with
an application to a convenience store franchise
B: shift leader
D: franchise
owner
A: cashier or clerk C: store manager
Ta
sk
s
to
a
cc
om
pl
is
h
Authority to make decision
CHAPTER ONE: COOPERATIVES AND MUTUALS ARE FIRMS 7
decisions. Point C involves more tasks and more authority. This would
be the store manager who has supervisory responsibilities for all employ-
ees in the store and is responsible for inventory control. Point D involves
many tasks and more authority to make decisions. The store owner or
franchise owner who owns this store and perhaps other stores has the
responsibility to make decisions regarding pricing, but is subject to the
franchise contract with regard to brand selection, services being offered,
and choice of suppliers.
Organizations are complex as they grow in size. Managers with more
and more responsibility thus find that the tradeoff between the author-
ity to make decisions (decision rights) and the required tasks is complex,
because now the manager is responsible for many employees who are
themselves assigned tasks and decision rights. Achieving the right align-
ment between tasks and decision rights is difficult in larger organizations.
The authority to make decisions can be broken down into a series of
steps. An organization 1) seeks proposals to use resources such as capital,
labor, and structure contracts to assign the resources to the appropriate
user, 2) makes a decision to choose the appropriate proposal, 3) imple-
ments the decision, and 4) monitors the performance of the implemented
decision, and rewards accordingly. Steps 1 and 2 are often called decision
management while steps 3 and 4 are called decision control.
The design of a corporation’s governance is crucial, and it is good prac-
tice to separate decision management from decision control. Otherwise,
those making the decisions may choose what is best for themselves rather
than for the organization. Many organizations have a board of direc-
tors that is responsible for monitoring the performance of the individual
managing the firm, such as the Chief Executive Officer (CEO). The board
has decision control, while the CEO has decision management. This sep-
aration of decision management from decision control leads to a hierar-
chical structure, as managers have decision management responsibilities
in their job and decision control responsibilities over others below them
who themselves have decision management responsibilities.
Organizations are evaluated on their governance system through
three different methods: 1) the motivation of value-maximizing decisions,
2) protection of assets from unauthorized use, and 3) financial statements
that comply with legal requirements. Because much of the ownership of
publicly-traded corporations is by institutional investors who own a small
amount of stock in the firm, there is separation of ownership and control.
This is in contrast to a small business, where the manager owns and con-
trols the business and has direct incentives to be very efficient with the use
of assets.
AN INTRODUCTION TO COOPERATION AND MUTUALISM8
There are many benefits to organizing a firm as a corporation. Access
to equity capital can occur through sales of stock to investors. The cost
of equity is less because these investors own diversified portfolios, so the
premium paid to them for the risk associated with uncertainty in the cor-
poration’s cash flows is less. The corporation serves as the center of many
contracts and is always one party to these contracts signed with buyers,
suppliers, employees, lenders, and other entities. These contracts specify
the decision rights to each party. The corporate charter, which includes the
articles of incorporation and bylaws, specifies the rights of shareholders.
The top-level authority in a corporation is divided between sharehold-
ers, the board of directors, and senior management. The decision authority
of shareholders includes the right to elect directors to a board, ratify the
choice of an independent auditor, and be involved in other issues specified
in the charter or bylaws including mergers, issuance of additional shares
of stock, or changes in legal structure. Before an annual meeting, share-
holders are sent information from the corporation that describes various
proposals that require their vote, such as elections of directors to the board.
Management, subject to board approval, makes recommendations to the
shareholders regarding these issues. Shareholders are the residual claim-
ants to the corporation in the event of dissolution. Thus, their voting con-
trol is often linked proportionally to their ownership interest.
The primary legal authority for managing a corporation lies with its
board, although it may delegate much of this to professional managers
hired for that purpose. The board has top-level decision control to oversee
the corporation and ratify important decisions. These decisions include
recruiting, interviewing, hiring, evaluating, and compensating the CEO.
Large capital expenditures require board approval. Boards have legal
indemnification from lawsuits provided it can be shown that they were
ExHIBIT 1.2 What are articles of incorporation?
The articles of incorporation lay out the basic framework of the firm and are broader than
its bylaws. In the case of a cooperative, the articles of incorporation describe the type of
organization (non-stock cooperative, stock cooperative, cooperative association, etc.),
purpose of the business, number of shares of common stock and any preferred stock that
might be issued, number of directors and how a member votes on those directors, legal
definition of membership, location of the headquarters (the legal address for the cooper-
ative), and asset disposal upon liquidation. These articles are filed within the state where
the cooperative is incorporated and any amendments to them must be voted on by the
membership and refiled with the state. This can be tedious and expensive in time and
treasure. Thus the most basic information is presented in the articles.
CHAPTER ONE: COOPERATIVES AND MUTUALS ARE FIRMS 9
acting prudently. Corporate boards generally have 9–12 directors, and
usually include several members of senior management. A committee
structure is used to handle nominating, compensation, audit, and other
issues that are under the purview of the board. The CEO is the senior most
individual in the corporation. The job of the CEO is to focus on the broad
issues affecting the firm and develop, implement, and monitor its strategy.
The CEO delegates decision rights among senior level managers.
Cooperatives are an example of a closely-held firm
Thus far, the discussion has focused on investor-benefit firms whose stock
is traded on exchanges. However, there are other forms of corporations
whose stock is not publicly-traded. Family-owned firms account for a large
number of corporations in the food economy. There are non-family owned
ExHIBIT 1.3 What are bylaws?
Bylaws are the rules or policies that explain how any organization, including a cooperative,
operates. For example, the bylaws of a cooperative define the purpose of the coopera-
tive and its geographical location. The bylaws define who a member is and what rights
are associated with membership. Bylaws specify a member’s responsibilities with the
cooperative and what the role membership plays in setting the policies. The governance
of a cooperative lies within the responsibilities of membership in voting on a board of
directors and the committee structure used by the board and officers. Bylaws also address
disputes that might occur, how a membership may be terminated, how an organization
can change its rules and policies, how a meeting of the membership is to be held, and
what can occur at that meeting. In general, the bylaws and articles reflect cooperative
principles, and the legal statutes in each state reflect these principles. The nature of the
business relationship between the members and the cooperative are typically contained
in the bylaws, which is not the case for non-cooperative corporations. Bylaws contain
information that is most likely to be updated periodically.
ExHIBIT 1.4 What are policies?
A policy is a wise or expedient rule of conduct or management. Policies are created by
boards of directors to help guide the direction of the cooperative. In contrast to arti-
cles of incorporation or bylaws whose changes are voted on by the members, policies
are voted on by just the board of directors, chosen by the membership. Policies must
change with conditions to allow and encourage organizations such as cooperatives and
mutuals to effectively fulfill their essential purposes. Policies should reinforce or at least
be compatible with the cooperative definition and principles. Policies often reside in
standard operating procedure documents, such as board of director policy manuals, or
reflect decisions made by boards and contained in the minutes.
AN INTRODUCTION TO COOPERATION AND MUTUALISM10
firms that are also privately held but whose shareholders are venture capital
funds or similar entities whose members include management. In addition,
there are many families who control the governance of a company through
different classes of common stock with differing control rights.
In a broad sense, firms can be thought of in three ways. A non-profit
firm is organized to benefit the public. Its governance is volunteer-based
with no ownership by anyone since it rarely has any assets. It is not taxed
on its income, since non-profits are not designed to maximize profits. In
a mutual-benefit firm—the subject of this book—income distribution
is tied to members’ participation through use of the cooperative. Own-
ers generally have one vote per member on governance issues, and the
income from these types of organizations is either taxed once at the coop-
erative or mutual level or the income distributed to its members is taxed.
Investor benefit firms link income distribution and governance with the
proportion of ownership investment, are taxed on their income, and own-
ers are taxed again on any dividend income.
Summary
Cooperatives are firms with the same structure and property rights as cor-
porations or other types of firms. It is necessary to understand why firms
exist to understand why cooperatives exist and why they are a special case
of a corporation. Because the organizational structure of a cooperative is
different with regards to the two property rights of control and residual
claimant on earnings, it is important to understand these concepts. The
ExHIBIT 1.5 Types of business forms
Public benefit
non-profit
Volunteer governance
No ownership
Income tax exempt
Investor
benefit
C corporation, LLCs, etc.
Income distribution tied to
ownership investment
Governed by investors in
proportion to ownership
Taxed as firm and as
investors
Mutual
benefit co-ops
& mutuals
Income distribution tied to
participation in use
Owners are users who have
one vote per member
Taxed as firm or qual-
ified member
CHAPTER ONE: COOPERATIVES AND MUTUALS ARE FIRMS 11
survival of the cooperative depends upon its ability to achieve an eco-
nomic purpose. Thus, it is crucial to understand how ownership and man-
agement of the firm are important aspects of corporate governance. The
next chapter discusses why cooperatives have a formal governance struc-
ture just like other organizations, and describe the origins of that structure.
References
The discussion on the design of organizations and corporate governance builds upon
concepts presented in Managerial Economics and Organizational Architecture, by
James Brickley, Clifford Smith, and Jerold Zimmerman, and upon Henry Hansmann’s
The Ownership of Enterprise. The Make or Buy Decision Tree is adapted from David
Besanko, David Dranove, Mark Shanley, and Scott Schaefer, Economics of Strategy. The
Make-or-Buy decision was first raised by Ronald Coase and published in “The Nature
of the Firm,” Economica 4, 16(Nov. 1937):386–405. The Coase Theorem was published
in “The Problem of Social Cost” Journal of Law and Economics 3,1(1960):1–44. Others,
most notably Oliver Williamson, have further studied and written about this concept.
Two papers by Williamson that are accessible to a lay reader are “The Theory of the Firm
as Governance Structure: From Choice to Contract,” Journal of Economic Perspectives 16,
3(2002): 171–195, and “The Economics of Governance,” The American Economic Review
95,2(2005):1–18. Both Coase and Williamson have been recognized with the Sveriges
Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for their work in this
area. Information about Coase and Williamson and summaries of these articles can be
found at http://tinyurl.com/yaa7n3h9 and http://tinyurl.com/ybq272yu.
The exhibit on job design is modified from Managerial Economics and Organizational
Architecture by James Brickley, Clifford Smith, and Jerold Zimmerman.
Exhibit 1.5 is based on an earlier figure done by Tom Pierson.
Eugene Fama and Michael Jensen’s work is used as basis for the discussion on decision
management and rights in “Agency Problems and Residual Claims,” Journal of Law and
Economics 26(1983): 327–349. Fama was recognized with the Sveriges Riksbank Prize in
Economic Sciences in Memory of Alfred Nobel; information about him can be found at
http://tinyurl.com/y7zyxb9y.
The discussion on articles and bylaws comes from a variety of conversations with coop-
erative attorneys over the years, but my colleague, attorney David Swanson, has had the
most impact on me in this discussion.
Information on legal statutes on cooperatives can be found at tinyurl.com/y8e8crw2.
There are a number of sources for roles and responsibilities for directors. Probably the
most succinct can be found at tinyurl.com/y74c86x2.
A broad introduction to cooperatives is available at tinyurl.com/y8lyhgw8.
http://tinyurl.com/yaa7n3h9
http://tinyurl.com/ybq272yu
http://tinyurl.com/y7zyxb9y
https://tinyurl.com/y8e8crw2
https://tinyurl.com/y74c86x2
https://tinyurl.com/y8lyhgw8
AN INTRODUCTION TO COOPERATION AND MUTUALISM12
AN INTRODUCTION TO COOPERATION AND MUTUALISM 13
»Chapter Two
Cooperatives and mutuals are
participatory organizations
The U.S. Department of Agriculture defines cooperatives as “user-owned
and controlled business from which benefits are derived and distrib-
uted equitably on the basis of use.” This definition implies that coopera-
tives are owned by users who are customers. These users are also mem-
bers, in general, and because they derive the benefits of membership, they
are also called patrons because the economic benefits derived from the
business done by them as a customer of the cooperative—referred to as
patronage—are distributed proportionately based on that patronage. This
gets complicated! Being a customer implies that you are also a patron
(participate in economic benefits), owner (participate with equity invest-
ment), and member (participate in setting policies and governance).
The overall purpose of a cooperative, which is often embedded in its
mission statement, is to meet the needs of the customer using the cooper-
ative. Patronage, ownership, and control are
means to the end. The International Coop-
erative Alliance (ICA) defines cooperatives
as, “an autonomous association of persons
Many cooperative bylaws say that a
cooperative must do no more than
50% of its business with non-members.
ExHIBIT 2.0 The cooperative is a firm
Members pro-
vide supplies to
the cooperative
to produce or
market
The cooperative
is a firm whose
members are
jointly customers,
patrons, owners,
and members
Members pur-
chase goods and
services that the
cooperative sells
AN INTRODUCTION TO COOPERATION AND MUTUALISM14
ExHIBIT 2.1 The mutual company
While many cooperatives are formed from a desire to improve a market failure
situation, improve bargaining power, or create community-ownership, the formation
of a mutual company has its roots in a desire to prevent something bad from hap-
pening. In many cases, these companies provide property and casualty insurance and
life insurance.
Mutualism has its roots in meeting a common need for a resource, such as life insur-
ance or property insurance. Early mutual insurance companies were created around the
idea that people living in a common geography who were likely to be friends would all
collectively suffer if one of their homes caught on fire, because the fire would spread
and all would be impacted. A home or business fire could literally wipe out a person’s
wealth. Thus, mutual insurance was a concept whereby all of your neighbors would
contribute insurance premiums to a common pool which would be used in the case of
a fire. The owners were the policyholders. Members desire to keep the costs of insur-
ance premium contributions and fees for management of this pool as low as possible.
Creating a volunteer fire department in which everyone participates is another way of
keeping fees low.
Many of these mutual insurance companies were able to achieve scale in cities
because of population density. In the latter half of the 19th century, when kerosene
lamps were used for light and fireplaces for heat and cooking, fires were a common
problem. In certain areas of the U.S., primarily the Upper Midwest, fire insurance mutual
cooperatives were formed in rural communities, often at the township level. Commu-
nity-based or township-based insurance recognized that, since there was no safety net,
an individual’s loss from a fire had larger repercussions for the broader community. With
fire insurance, individual consumers have specific needs and, within a group, similar
risk profiles.
As a result, a group of fire insurance companies called “class mutuals” evolved to
address the needs of specific groups of consumers. These organizations— such as a
creamery and cheese factory mutual, or a farmer-based mutual in a township— lim-
ited themselves to these groups. This form of organization resulted in expertise in the
specific types of risk, the nature and validity of claims, and risk-prevention techniques,
and they experienced a higher level of group cohesion. This allowed mutuals to flourish;
non-mutual insurance companies had higher insurance premiums because they did
not understand these risks.
Today there is more data to assess these types of risks, and with consolidation many
of these organizations have been incorporated into bigger insurance firms. Life insur-
ance was slightly different. Mutuals flourished because they were able to provide a
product for the entire life of the individual, similar to a savings account, and price it in
a way that an average person could purchase such a policy; non-mutuals, in contrast,
were providing mostly short-term policies. This changed over time. The International
Cooperative and Mutual Insurance Federation reported more than 200 members from
74 countries in 2015. Examples of well-known mutual insurance firms include North-
western Mutual (USA), CountryFinancial (USA), State Farm Insurance Company (USA),
and Länsförsäkringar (Sweden).
Globally, the mutual insurance market share was just over 26% in 2015. Many countries
in Western Europe have mutual insurance market shares of over 45%.
15CHAPTER TWO: COOPERATIVES AND MUTUALS ARE PARTICIPATORY ORGANIZATIONS
ExHIBIT 2.2 International Cooperative Alliance values and principles of cooperation
The International Cooperative Alliance advocates and promotes the cooperative business
model in almost 100 countries. In 1995, it developed a values and principles statement
for cooperatives. Cooperatives are based on the values of self-help, self-responsibility,
democracy, equality, equity, and solidarity. In the tradition of their founders, cooperative
members believe in the ethical values of honesty, openness, social responsibility, and
caring for others. The co-operative principles are guidelines by which cooperatives put
their values into practice.
VOLUNTARY AND OPEN MEMBERSHIP Cooperatives are voluntary organizations, open
to all persons able to use their services and willing to accept the responsibilities of mem-
bership, without gender, social, racial, political, or religious discrimination.
DEMOCRATIC MEMBER CONTROL Cooperatives are democratic organizations con-
trolled by their members, who actively participate in setting their policies and making
decisions. Men and women serving as elected representatives are accountable to the
membership. In primary co-operatives, members have equal voting rights (one member,
one vote), and co-operatives at other levels are organized in a democratic manner.
MEMBER ECONOMIC PARTICIPATION Members contribute equitably to, and demo-
cratically control, the capital of their co-operative. At least part of that capital is usually the
common property of the cooperative. Members usually receive limited compensation, if
any, on capital subscribed as a condition of membership. Members allocate surpluses for
any or all of the following purposes: developing their cooperative, possibly by setting up
reserves (part of which at least would be indivisible), benefiting members in proportion
to their transactions with the co-operative, and supporting other activities approved by
the membership.
AUTONOMY AND INDEPENDENCE Cooperatives are autonomous, self-help organiza-
tions controlled by their members. If they enter into agreements with other organizations,
including governments, or raise capital from external sources, they do so on terms that
ensure democratic control by their members and maintain their cooperative autonomy.
EDUCATION, TRAINING, AND INFORMATION Cooperatives provide education and
training for their members, elected representatives, managers, and employees so they
can contribute effectively to the development of their co-operatives. They inform the
public, particularly young people and opinion leaders, about the nature and benefits
of cooperation.
COOPERATION AMONG COOPERATIVES Cooperatives serve their members most
effectively and strengthen the cooperative movement by working together through local,
national, regional, and international structures.
CONCERN FOR COMMUNITY Cooperatives work for the sustainable development of
their communities through policies approved by their members.
AN INTRODUCTION TO COOPERATION AND MUTUALISM16
ExHIBIT 2.3 The special case of fraternal benefit society
Fraternal benefit societies, a type of mutual insurance company, were founded on
the basis of a “common bond,” a characteristic that members shared —geographic
area, ethnicity, religion, profession, or gender. Among the common bonds of the
fraternals, the strongest were religion, ethnicity, and geography, and these were
the common bonds most understood by members of cooperatives. A fraternal
benefit society is an organization that has the following four characteristics.
First, fraternals must have a lodge system with local chapter organizations that
meet regularly, have elected officers, and bind the members to the organization
through both the financial contributions of the benefit products and time spent
in philanthropic, charitable, or social activities. The lodges also provide “social
outlets for those who [attend] regular meetings of the lodge.” Second, members
of the organization must have a regular opportunity and a defined process to
voice concerns or issues and to elect officers, ensuring that the strategic direction
of the organization is consistent with the wishes of the member-owners. Third,
the organization must pay some form of insurance benefit to its members. That
benefit initially took the form of a lump-sum payment, or “death benefit,” to pay
burial expenses at the time of a member’s death, but it evolved into a more fully
developed life insurance product that was an actuarially based insurance product.
Over time, fraternals started offering health insurance and, in some cases, a port-
folio of financial products and services. Fourth, the organization must not operate
on a for-profit basis.
More informally, members of a fraternal are supposed to share a “common bond,”
something that brings members of a group together. Examples of common bonds
include faith (e.g., Lutherans, Catholics), ethnicity (e.g., Croatian Fraternal Union
of America, Association of the Sons of Poland), a particular location (i.e., western
Pennsylvania), women-only associations (i.e., Unity of Bohemian Ladies), profes-
sions (e.g., Railwaymen’s Relief Association of America), or any combination of
these categories. The first fraternal dates back to 1868, and the industry experi-
enced explosive growth in the latter half of the 19th century. During this time, frater-
nals served a variety of purposes, both formal and informal. Formally, they offered
a life insurance product in communities where residents were mostly economically
disadvantaged, and hence provided an early form of social safety net. This safety
net was reinforced by the lodge system, which would frequently take a collection
for a member in need and provide help to organized communities of similar peo-
ple who looked to help each other. The lodge system created places where recent
immigrants could celebrate their cultural heritages, find out about employment
opportunities, or simply have a place to socialize. As such, lodges contributed to
the development of group identities along the lines of bonding social capital. In
the period around 1900, fraternals provided roughly as much life insurance to
individuals as did commercial providers, with about five million people organized
into approximately 600 fraternal organizations. Thrivent Financial and the Knights
of Columbus are the largest fraternal benefit societies today. Both are faith-based
fraternals, and that bond appears to be the most prevalent in surviving fraternal
benefit societies today.
17CHAPTER TWO: COOPERATIVES AND MUTUALS ARE PARTICIPATORY ORGANIZATIONS
united voluntarily to meet their common economic, social, and cultural
needs and aspirations through a jointly owned and democratically con-
trolled enterprise.” This definition is wider than the U.S. Department of
Agriculture definition in that it encapsulates social and cultural purposes
for cooperatives. Another way to think about the relationships implied in
this definition is to consider how members participate in the cooperative.
Cooperatives and mutuals are participatory organizations.
Cooperative principles and policies
A principle is described as a governing law of conduct, a general or funda-
mental truth, or a comprehensive or fundamental law. Many state coop-
erative incorporation statutes reflect principles. Many laws are based on a
state’s view of appropriate principles. For example, one widely supported
principle is democratic control. In some people’s views and according to
some state laws this means “one member, one vote” with regard to control.
For other people and state laws it means voting by members where voting
power per member may include voting proportional to use of patronage.
ExHIBIT 2.4 Rochdale Equitable Pioneers Society
Cooperatives as they are known today trace their roots back to a cooperative formed in
England in 1844. Others had formed prior to this, but were not as influential. The Rochdale
Equitable Pioneers Society was envisioned as a multipurpose consumer cooperative that
sold consumer products to its members. Sugar, flour, oatmeal, butter, and tallow candles
were the first products sold, and market prices were charged to members on a cash basis.
In addition, the society sought to improve the welfare of its members through a mutual
self-help organization that would help improve the lives of its members. This cooperative,
like others formed around that time, limited transactions to those who were members
(and anyone could join regardless of political, religious, or other affiliation), and paid a div-
idend from the net income (referred to as surplus) generated from the member’s business
(referred to as patronage). This dividend was paid based in proportion to the amount of
patronage business done with that member. Voting on policies that affected members
was done on a democratic (one-member, one-vote) basis. Members were required to con-
tribute to equity capital through an initial investment followed by weekly contributions to
until a minimum threshold was reached. The cooperative started a library to help educate
its members, and women were allowed to join as members. As other cooperatives were
started, they formed a wholesale distribution network to supply these consumer cooper-
atives and ensure that the food they were purchasing was safe and unadulterated. Food
fraud was a common problem in the mid-19th century before standards and regulations
were passed. All cooperatives today derive their operating principles from these early
principles, which have been modified over time to allow proportional voting and use of
credit for doing business. Their principles have become the foundation for the ICA princi-
ples described in Exhibit 2.2.
AN INTRODUCTION TO COOPERATION AND MUTUALISM18
Substantial flexibility exists in following practices that help achieve
the objectives of the business while simultaneously remaining compatible
with the cooperative definition, principles, and policies, and recognizing
the need to achieve an economic purpose. However, guidelines that are
called cooperative principles are generally applicable to
all cooperatives and are compatible with the definition of a
cooperative and its ability to provide the benefits desired by
members who are customers. Many of these principles have
their roots in early cooperatives formed in the United King-
dom in the early 19th century.
Participation in benefits
Customers who use the cooperative or mutual are expected
to share in the economic benefits derived from their busi-
ness with it. These benefits may include an overall cost effi-
HEALTH CARE COOPERATIVES
are a lot like mutual
insurance firms in that
their objective is to pool
risk across its members
and provide health care
with lower fees. Examples
of health care cooperatives
include HealthPartners and
Group Health Cooperative.
ExHIBIT 2.5 The cooperative as the competitive yardstick
The cooperative as a competitive yardstick is a well-known analogy for justifying why
cooperatives are often thought of as promoting competition. The main tenets underlying
the cooperative yardstick are:
A. Cooperatives must establish organizations with bottom-up democratic cooperative
philosophy and with an informed and participating membership. This type of struc-
ture is difficult to achieve as a business because it involves collective action, but it has
long-run benefits.
B. Cooperatives are an integral segment of existing capitalistic systems, and designed
not to displace other types of businesses but to supplement them as an alternative
form of business.
C. Cooperatives help build the efficiency of total economic systems or value chains
because of their transparency regarding costs.
D. Cooperatives should control a minimum share of the commodity, supply, or service
market segment in order to achieve economies of size and scale.
E. Cooperatives help keep other forms of business competitive by being as
cost-efficient as possible.
F. Cooperatives should preserve individual producer freedom of decision making
because the cooperative is a vertical extension of the farming enterprise.
G. Cooperatives should be organized only if competitive influence is necessary because
the market has failed or because countervailing bargaining power is needed..
19CHAPTER TWO: COOPERATIVES AND MUTUALS ARE PARTICIPATORY ORGANIZATIONS
ciency or bargaining power through the vertical extension of a farming
operation or household through the cooperative; the opportunity to buy
from the closed supply channel or sell to the closed marketing channel;
and the benefits of competitive markets arising through the role of the
cooperative’s competitive yardstick. Many of these reasons are embedded
in business strategies designed to improve a farmer’s income
by lowering production and transactions costs to improve
market power and lower the variability of annual net farm
income. The move to closer supply chains built on market or
production contracts has resulted in greater differentiation
by cooperatives which are using business strategies to add
value to a farmer’s products.
For most consumers and producers, however, the most
tangible economic benefit is the opportunity to share in
any distributions of income from the cooperative based on
the proportional share of business done as a member of the
cooperative. These are commonly referred to as patronage
refunds or per unit retains, which is why customers using
the cooperative are often called patrons. Doing business on
a patronage level with customers implies that the supply
or marketing channel is closed because cooperatives are,
respectively, supplying products and services to only cus-
tomers using the cooperative or only marketing the prod-
ucts and services of these users. A cooperative may have
customers who may not have a membership in the cooper-
ative because they do not legally qualify (e.g., a government
entity) or because they do not wish to have a membership
A WORKER COOPERATIVE is a
business entity owned and
controlled by members who
are laborers and work in
the business. The number of
workers is defined and linked
with a physical measure such
as hours worked. The cooper-
ative may have laborers who
are not members, and the CEO
is not a member. An upfront
equity investment is needed
before a worker can become
a member, and patronage
refunds are based on hours
worked. Probably the oldest
and most studied worker
cooperative is the Mondragón
Corporation in Spain, which is
a cooperative whose members
are other worker cooperatives.
ExHIBIT 2.6 What are examples of credit cooperatives?
Credit unions were formed to receive deposits from members, provide lower-fee financial
services such as checking (called share drafts), and provide loans to their members for
homes, vehicles, or other consumer products. Like fraternal benefit societies, credit unions
have a common bond such as geography, employer, religion, or unions membership. The
Farm Credit System was formed to create associations to sell securities and provide oper-
ating loans to agricultural producers, and operating and term loans (e.g., land or housing)
to cooperatives owned by farmers or others living in rural areas. The members of these
credit cooperatives are farmer and rural consumers. For the case of associations who lend
to cooperatives, the member may be a cooperative owned by farmers. The National Coop-
erative Bank lends to cooperatives who are not eligible to borrow from the Farm Credit
System or from rural electric utility banks.
AN INTRODUCTION TO COOPERATION AND MUTUALISM20
(e.g., a customer from another geographic region who makes a purchase
at a food cooperative).
Participation in ownership
As members, customers who use the cooperative are expected to have
ownership in the cooperative. In economic terms, this means that the
equity of the cooperative is owned by the members. The easiest way to
think about equity investment is direct investment through purchase of
equity shares. As discussed in the next chapter, most members accumu-
late equity investment through the retention of patronage refunds or per
unit retains in a year, which may be redeemed in the future subject to pol-
icies set by the board of directors. This is why customers are often called
equity holders. The equity can only be properly valued upon liquidation,
an outcome the cooperative members do not intend to
have happen as long as the cooperative is achieving its
economic purpose and satisfying its customers.
Participation in control
Customers participate in control by setting policies,
including the governance structure of the cooperative.
These policies are embedded in the bylaws of the orga-
nization, which include 1) classes of membership and
their qualifications, 2) the governance system, including
the role and responsibilities of the board of direc-
tors and how they are elected, and 3) rules for certain
ExHIBIT 2.7 What is the difference between a stock cooperative
and a nonstock cooperative?
Prior to 1922 when the Capper-Volstead Act was created to formally allow cooperatives
a “right-to-exist,” there were a number of efforts to create legal entities in state statutes
that got around efforts by those who were against the formation of cooperatives. In a
stock cooperative, capital is divided into shares of common stock owned by members,
which is specified in the articles of incorporation. Some stock cooperatives issue preferred
stock and other forms of equity, such as membership certificates, which may or may
not be owned by members. The articles of incorporation do not allow stock transfer to
non-qualifying member-patrons. One share of common stock is often a requirement for
membership with small par value. A nonstock cooperative, called a membership coopera-
tive, uses membership certificates that are given to members upon payment of member-
ship fees. Capital certificates were sometimes created to sell directly to members or issued
as a patronage refund.
A number of dairy cooperatives
manufacture cheese, butter and
powdered milk. All sugar beets
are processed through sugar beet
cooperatives such as American
Crystal Sugar. Nor-Pac processes
vegetables into canned and frozen
packages. Minnesota Soybean
Processors crushes soybeans into
co-products such as oil and meal
and manufactures soy-diesel.
21CHAPTER TWO: COOPERATIVES AND MUTUALS ARE PARTICIPATORY ORGANIZATIONS
actions such as annual meet-
ings, bylaw amendments, or
dissolution. Members who
are eligible to vote are called
voting members. Membership
in a cooperative implies that
a customer has applied and
been accepted by the board of
directors as a member of the
cooperative. Different cooper-
atives have different rules on
membership but, in general,
Ace Hardware and True Value Hardware are
WHOLESALING COOPERATIVES which are independently-owned
hardware stores. They are able to negotiate better prices, pur-
chase much larger volumes of hardware and related products,
and distribute them to their members, who could not obtain
these savings on their own. A number of fast-food restau-
rant franchise owners have formed purchasing cooperatives,
including United Foodservice Purchasing Cooperative, which is
owned by Yum! Brands franchise operators, and Independent
Purchasing Co-operative, which is owned by Subway franchi-
sees. Independent grocers have formed purchasing cooperatives
such as Associated Wholesale Grocers and Wakefern Foods.
ExHIBIT 2.8 How are directors selected?
The manner in which C corporate directors are chosen is straight-forward. Any natural
person can be selected to the board. The board has created policies whereby directors
are assumed to have some core of knowledge such as accounting or finance, governance,
human resources, or strategy. The board desires a broad diversity of background in core
areas of knowledge plus additional attributes such as diversity including age since many
boards have a policy that directors must retire at age 72, gender, and background. The
use of internal or external board evaluations are used to help the board assess itself. In
addition, two members of management, which include the CEO and another senior leader
often serve on the board. Nominating committees are used to help identify directors with
certain skill sets. Thus, directors are chosen at-large subject to meeting the needs identi-
fied by the board. Shareholders in the firm vote for the board based on their proportion of
shares with number of votes linked with their share of equity. Votes are cast for the entire
slate of directors as opposed to each director separately. Director compensation is often
linked with the responsibilities of the directors and size of the firm.
Many cooperatives follow similar practices as those described above. However, coopera-
tives have one important difference in selecting directors over non-cooperative corpora-
tions. Namely, directors are selected from their customers who are members. Some coop-
eratives use similar tools to identify directors in an effort to identify suitable candidates
for the board. However, because of their unique nature, directors are often chosen based
on geography whereby the cooperative creates districts based on the population of its
members. Thus, nominating committees considers the pool of directors in that geograph-
ical district. Board elections in a cooperative ask each member to vote for each director
individually rather than a slate of directors that is presented to the membership. In some
cooperatives with a broader purpose, the board may have informal policies that result in
a director representing a commodity or line of business in the cooperative. A number of
cooperatives with smaller geographic base elect directors at large. Mutuals tend to elect
directors similar to corporations at-large based on qualifications although some region-
ally-based mutual may use geographic districts.
AN INTRODUCTION TO COOPERATION AND MUTUALISM22
cooperatives tend to have a low threshold on membership qualifications.
In many cases, cooperatives use a one member, one vote principle, which
is often called democratic control. Control is typically evidenced by the
ownership of a share of common stock in the case of a stock cooperative,
or by a certificate of membership in the case of membership or non-stock
cooperatives. Cooperatives thus use a voting process to select directors for
the board or make changes in their articles or bylaws; this differs from a
non-cooperative corporation, which is based on investment ownership
(as described in Chapter One).
Principles of cooperation
The U.S. Department of Agriculture defines the three principles of coop-
eration as user-owner, user-control, and user-benefits. Users must own and
finance the cooperative and are responsible for the control of the cooper-
ative, and benefit from their use of the cooperative. Note that these are all
joint decisions, That is, becoming a member of a cooperative to participate
in the benefits also means participation in ownership and control.
Some customers of a cooperative do not participate in these three roles,
but do business with the cooperative as a non-member. The percentage of
ExHIBIT 2.9 Cooperatives and mutuals are not the same as
loyalty programs and buying clubs
Cooperatives and mutuals are not the same as loyalty programs because customers or
users of the loyalty program do not participate in control or ownership. They do receive
economic benefits, but these are not linked with the profitability and, hence, the earn-
ings of the business. Early loyalty programs featured tokens or trading stamps given to
a customer based on a certain volume of sales. These trading stamps were then used to
acquire certain products from the retailer distributing the stamps, and value was linked to
the number of stamps. Firms such as tobacco companies used trading stamps, while con-
sumer packaged goods firms such as General Mills used box tops; other firms began sim-
ilar programs. By the end of the 20th century, a number of similar programs were in place
including frequent flier programs and points with credit card companies. Rebates also
exist when paying by cash instead of credit card. Other loyalty programs include those at
hotels offering one night free after a certain number of paid nights, or reward programs at
fast food restaurants. The advent of cellular telephones has meant that customized apps
can be used to provide rebates or coupons electronically to members of a loyalty program.
Clubs based on membership with an application fee are used by some retailers such as
Amazon (Prime membership), Wal-Mart’s Sam’s Club, and CostCo. An annual membership
fee entitles members to shop at the store or use certain services such as free delivery.
Membership in these loyalty programs and clubs is not the same as being a member of a
cooperative because members do not participate in the same way. They receive an eco-
nomic benefit, but it is not linked with control, ownership, and earnings.
23CHAPTER TWO: COOPERATIVES AND MUTUALS ARE PARTICIPATORY ORGANIZATIONS
non-member business is quite small in most cooperatives because boards
of directors recognize that these members are free riders in the sense that
they benefit from the cooperative’s presence in the market place but are
not members. Thus, cooperatives tend to use pricing strategies that dis-
courage producers from not being members.
Formation of cooperatives
Firms such as cooperatives are formed through collective action by indi-
viduals to solve a common problem. Cooperatives work best when the
solution created by collective action leads to benefits being provided
only to members, and when these benefits are unique. In doing so, the
cooperative is often formed because the costs of the Make or Buy decision
are lowest if the rights of ownership are assigned
to those who use the cooperative as a customer.
Some cooperatives may be examples of social
entrepreneurship in that they help solve social,
cultural, or economic issues. Most cooperatives
are formed to address an economic objective or
purpose. Because cooperatives are composed of
members, however, there is often a social purpose
many members desire in being a member of a
cooperative. This is no different from the reason
why people join social clubs such as country clubs
or professional trade associations.
This social and sometimes cultural purpose is
often linked with the formation of a cooperative.
Examples of these social purposes might be eth-
nicity, geography, or religion. Rural utility coop-
eratives were formed based on geography. Credit
unions were formed around a common bond such
as geography, and fraternal benefit societies often
had a common bond of religion or ethnicity. Food
cooperatives often include members who want
to patronize locally-owned businesses and have a
desire to be part of something in their community.
All of these are mechanisms to collectively orga-
nize for mutual benefit. Cooperatives are a means
to an end, which is meeting the needs of users.
The social purpose of cooperatives can best be met
by ensuring that the cooperative understands and
succeeds in its economic purpose.
A MARKETING AGENCY-IN-COMMON is a
cooperative whose members are other
cooperatives who have joined to jointly
market the products of all members.
The rationale for doing so is that the
costs of each co-op individually devel-
oping and marketing an industrial or
consumer product can be significant.
Typical marketing agencies-in-common
exist for products such as sugar beet
co-products or dairy products.
BARGAINING COOPERATIVES negotiate with
processors and other first handlers for
a collective price and terms of trade
for their members. These cooperatives
represent contract growers selling to
processors, or growers performing
production management functions
for corporate integrators. Examples
include many dairy cooperatives who
bargain in milk marketing orders. Other
bargaining cooperatives include the
California Canning Peach Association,
Prune Bargaining Association, Walnut
Bargaining Association, Olive Council
Growers Council of California, Cal-
ifornia Tomato Growers Association,
and Raisin Bargaining Association.
AN INTRODUCTION TO COOPERATION AND MUTUALISM24
Cooperatives that quickly understand their commonality of purpose
(based on an economic purpose for their members) and position them-
selves on that purpose are able to create long-lasting value to their members.
Cooperatives are often formed by a desire to improve something. For
example, many farm input supply or marketing cooperatives were formed
by individuals who wanted to see reform in agrarian economy and were
associated with the Populist, Farm Bureau, Farmers Union, Grange, or
Equity movements.
Cooperatives that supply products to consumers, farmers, and busi-
nesses are often formed to obtain the economic advantages of purchasing
supplies or providing services in bulk and passing along the volume dis-
counts to their members. In doing so, the members are vertically integrated
“backwards” through the cooperative. For example, farm-
ers may not be able to finance agronomy equipment that
is needed to apply crop protectants seasonally or purchase
crop nutrients at a favorable price because their individual
volumes are too small. Forming a cooperative that can
obtain the economic benefits of purchasing size and scale
has value to these farmers. Similarly, consumers may wish
to purchase certain types of food products such as organic
or locally-grown, and do so through a food cooperative.
Services such as electricity or credit are more cost effec-
tive for a cooperative to provide than for a consumer or
producer to obtain on their own.
Marketing the output of a consumer, farmer, or busi-
ness enables a cooperative to obtain premiums associ-
ated with volume, and members are integrated “forward”
from the cooperative. The same is true for services. In
addition to volume premiums, cooperatives can provide
services such as constructing storage for a farmer’s feed
grain or oilseeds. Members may also integrate forward
by forming a corn-ethanol cooperative to market their
corn or a soybean crushing plant to process soybeans
into oil and meal products.
The same is true for marketing information such as
supply variables (including the bearing age of trees and
vineyards, rate of tree pull outs and replantings, and
varietal selection of fruits and nuts) and adoption rates
for mechanization technologies; these are useful for bar-
gaining cooperatives that negotiate a price for a crop such
as peaches.
ELECTRIC UTILITY COOPERATIVES
exist in most rural areas as, to
a lesser extent, do telephone
cooperatives. Electric utility
cooperatives were developed in
the 1930s to provide electricity.
In the 21st century, many are
providing internet capability
through satellites or broadband.
Cooperatives have been formed
to provide recordkeeping services
and testing of milk through dairy
herd improvements associations.
A HOUSING COOPERATIVE owns the
land, facility, and common areas
such as indoor or outdoor recre-
ational equipment and common
meeting space. Members buy a
share in the cooperative, which
is an ownership interest in a unit
within the housing cooperative.
There are many different types of
housing cooperatives. Members
pay a monthly fee for budgeted
expenses such as operating
costs and capital investments to
maintain the cooperative’s assets.
25CHAPTER TWO: COOPERATIVES AND MUTUALS ARE PARTICIPATORY ORGANIZATIONS
As discussed earlier, this integration decision is called the “Make-or-
Buy Decision.” Strictly speaking, members of cooperatives are not verti-
cally integrated through a cooperative because there is no common own-
ership of the farm or household by the cooperative. Nevertheless, there is
collective ownership of the cooperative and alignment of the cooperative
business model with the consumer or farmer.
Many agricultural marketing cooperatives were formed to help pool
risk from all producers and manage this risk within the cooperative. In
the northern hemisphere, for example, a marketing year generally starts
September 1 or October 1 in one year and is finished 12 months later, on
August 31 or September 30. The crop is harvested in September or October,
and over the course of the year the value of the crop becomes known as
the cooperative discovers its value during the marketing year. Because
many agricultural products are perishable, the price is always lowest at
the beginning of the market year when supplies are greatest and tend to
increase over the marketing year as the supply decreases and more infor-
mation (e.g., quality) is known about the crop. The cooperative bears the
price and quality risk by purchasing the farmers output at the beginning of
the marketing year, and pays the farmer a competitive price at harvest. The
members finance the capital needed by the cooperative to build storage and
processing assets to add value to the crop throughout the marketing year.
Most farmers cannot manage this price risk on their own and instead
manage it through their membership in a cooperative. In doing so, they
also obtain additional marketing margin, and have increased bargaining
power to countervail the bargaining power held by buyers who could buy
the crop at its lowest price at harvest when supplies are greatest, and to
manage the crop inventory throughout the year to obtain more favorable
prices. As consumers or farmers integrate backwards or forwards, the
cooperative becomes the competitive yardstick in an industry.
Summary
Cooperatives are participatory organizations in that customers partici-
pate in ownership, control, and benefits. As such, a cooperative is a closed
marketing channel. Each of these participatory roles carries responsi-
bilities. Membership in a cooperative has implications for benefits and
responsibilities, use of the cooperative, and the transactions undertaken
with it. Thus, cooperatives are uniquely structured to: 1) distribute bene-
fits such as patronage in proportion to use, 2) align their business strategy
on their customers who are selected to the board of directors to control
the cooperative, and 3) make decisions based on the long-term goals of
their members who own the cooperative.
AN INTRODUCTION TO COOPERATION AND MUTUALISM26
The cooperative business model exists in many industries around the
world. Cooperatives have unique common bonds that underlie their for-
mation and often have an economic and social purpose. Principles of
cooperation are embedded in state incorporation statutes that underlie the
charter of a cooperative, which includes its articles of incorporation and
bylaws, which are based on historical use. The benefits of participating
with a cooperative and its social purpose are likely the easiest to explain
relative to the benefits of participating in ownership. Thus, constant edu-
cation is needed with members who are customers. Cooperatives were
formed because there were economic reasons why it was easier to vertically
integrate forward or backwards for all of the cooperative’s members. There
are many reasons why cooperatives form but, in a broad sense, the coop-
erative is able to obtain volume discounts and pass those discounts back to
members, or to obtain volume premiums and market members’ products
throughout the marketing year to obtain better prices for larger volumes of
similar quality. The concept of a marketing year is crucial in understanding
the operations of agricultural cooperatives.
References
The discussion of cooperative formation begins with concepts from Mancur Olson’s clas-
sic book The Logic of Collective Action.
Additional information on cooperatives as participatory organizations can be found at
tinyurl.com/ycvp2wnz.
The notion that a cooperative acts as a “competitive yardstick” is associated with Edwin
Nourse, and is described in “The Place of the Cooperative in Our National Economy,”
available at http://tinyurl.com/yazt5377. The discussion on principles and policies
is adapted from David Barton’s chapter in Cooperatives in Agriculture, David Cobia,
ed., 1989.
The fraternal benefit society’s discussion is taken from Jim White, a former doctoral stu-
dent of mine, and can be found in “Fraternal Benefit Societies,” Journal of Cooperatives
31(2016):1-31, available at http://tinyurl.com/yaxpx237. I have benefited immensely from
conversations with Chris Kopka on this topic.
There is a great deal of information on the “Rochdale Pioneers;” my discus-
sion comes from Weavers of Dreams by David Thompson, which can be found at
http://tinyurl.com/yb7xb2sk and Brett Fairbairn’s The Meaning of Rochdale, available at
http://tinyurl.com/y7hampak.
Much of my exposure to worker and housing cooperatives come from Tom Pierson, who
has researched and studied worker cooperatives in depth.
https://tinyurl.com/ycvp2wnz
http://tinyurl.com/yazt5377
http://tinyurl.com/yaxpx237
http://tinyurl.com/yb7xb2sk
http://tinyurl.com/y7hampak
27CHAPTER TWO: COOPERATIVES AND MUTUALS ARE PARTICIPATORY ORGANIZATIONS
The history of loyalty programs and clubs comes from a variety of sources and there is no
one single reference piece that I am aware of now.
The USDA definition of a cooperative and of the three principles of cooperation were cre-
ated in the early 1980s by a national task force of cooperative scholars, and have been
widely disseminated. One place to find them is the USDA Cooperative Information
Report 11 entitled “Co-op Essentials: What They Are and the Role of Members, Directors,
Managers, and Employees,” which can be found at http://tinyurl.com/ycvp2wnz. The ICA
principles in relation to these principles can be found at tinyurl.com/y93j4zg2.
The marketing year has been well studied. My earliest exposure to it was through publi-
cations read in graduate school and authored by agricultural economists associated with
the Giannni Foundation of Agricultural Economics and based at the University of Cal-
ifornia campuses at Berkeley and Davis. Much of this work was later summarized in a
chapter by Richard Sexton and Julian Alston entitled “The Giannni Foundation and the
Economics of Collective Action in the Marketing of California Farm Products,” which
was published in 2009 in Foundation Contributions to California Agriculture, and is
available at http://tinyurl.com/ybonm6wp.
The information on commonality of purpose is presented in many previous textbooks
on cooperatives. The examples cited are ones used by my colleagues Chris Kopka, Tom
Pierson, David Swanson, and myself in a class we teach in the University of Minnesota
Law School.
Very little has been formally written about mutualism within the context of mutual
insurance. The information presented here comes from discussions with my colleague
Chris Kopka as well as work done with Jim White. One of his essays on a certain type of
mutual can be found in a joint publication in “Minnesota Township Mutual Fire Insur-
ance: Determinants of Survival, 1974–2010,” Journal of Cooperatives, 28(2014):1-26, avail-
able at http://tinyurl.com/ydg9q3ft.
There appears to be no one who has articulated the neoclassical economic theory of
mutualism; it would be a good research topic for a graduate student.
http://tinyurl.com/ycvp2wnz
https://tinyurl.com/y93j4zg2
http://tinyurl.com/ybonm6wp
http://tinyurl.com/ydg9q3ft
AN INTRODUCTION TO COOPERATION AND MUTUALISM28
AN INTRODUCTION TO COOPERATION AND MUTUALISM 29
»Chapter Three
Income distribution and equity decisions
The first chapter described the features shared by cooperatives and
mutual and non-cooperative corporations, while Chapter Two discussed
features that are unique with regard to how members participate in ben-
efits, control, and ownership. This chapter focuses on participation in
benefits and how cooperatives distribute income, because that is how
most members think about their membership in a cooperative. Cooper-
atives and mutuals must be competitive like any business and aligned on
customer needs. They must be managed as businesses that can compete
in a capitalistic and highly competitive market economy. Many cooper-
atives operate simply to allow producers to achieve economies of scale
and increased bargaining power in purchasing inputs and marketing
their commodities. The same can be said about consumer cooperatives
and mutual insurance firms.
Irrespective of its purpose and role, a cooperative should strive to be
as profitable as possible and then distribute those profits to its patrons. A
core principle of the cooperative and mutual business model is service
or operation at cost. This does not imply that the cooperative or mutual
should set prices to eliminate the opportunity for a profit. Instead, a coop-
erative should implement this principle by being competitive in the mar-
ket place, making as much profit as possible, and then distributing profits
and residual cash to patron-owners. Profits should be distributed in a way
that maximizes the long-run benefits to members, keeping in mind that
members have heterogeneous interests due to their unique places in their
business and personal life cycles. This distribution of patronage refunds
or per unit retains implements the service at cost principle of cooperatives.
Patron-owners get what is left over through a combination of cash patron-
age payments (e.g., immediate redemption), cash equity redemption pay-
ments, and cash payments of net marketing proceeds. A member’s life cycle
AN INTRODUCTION TO COOPERATION AND MUTUALISM30
encompasses their use as a customer of the cooperative, which differs as
they age and begin, expand, or contract their business or household.
As mentioned in Chapter Two, cooperatives are participatory orga-
nizations. Two of the three ways that members participate include ben-
efits and ownership. The easiest way to understand these concepts is to
observe their impact on the income statement and balance sheet. The
three ways in which members participate in a cooperative comprise an
interrelated set of decisions that influence each member and provide
unique challenges for boards of directors and management to develop a
business strategy that takes into account the impacts on a cooperative’s
balance sheet.
Introduction
Cooperative firms are unique in that they create equity when they pay
patronage refunds in the form of common stock, and they destroy equity
when they redeem previously issued equity for cash. Cooperatives should
actively manage their balance sheet when making decisions on income
distribution and equity redemption. A cooperative must position and
protect the business for short-run and long-run sustainability by adhering
to a balance sheet management philosophy that manages both liquidity
and solvency. Adequate risk capital must be provided by retaining and
managing equity as an element in the overall business strategy. Then the
cooperative should pay out to patron-owners any residual cash as cash
patronage refunds and equity redemptions. As discussed in Chapter One,
owners, as residual claimants, get what is left over in any business.
The evaluation and choice of alternative strategies must be done within
an integrated and comprehensive finance, strategy, and risk management
framework. For cooperatives, this should include both the patron-pro-
ducer or patron-consumer perspective and the cooperative business per-
spective. In other words, a cooperative can be viewed as an extension of the
patron’s business, such as a farm or house, or as an independent firm that
attempts to prosper in a market economy. Both perspectives are important.
Most members of agricultural cooperatives are unique in that they
seek to remain farmers in their own geography. That is, a member will
not typically sell their farm and move to a geographic region or country
to begin farming again. With that in mind, a member utilizes a coopera-
tive to receive goods and services at a lower cost than they could by doing
it themselves. Thus, a cooperative should align itself on the needs of its
customers who are its members and owners, and help make them profit-
able and cost efficient so they can achieve the goal of remaining farmers in
31CHAPTER THREE: INCOME DISTRIBUTION EQUITY DECISIONS
that geography. Many remain in multi-generational farming families and
patronize the cooperative over generations.
Generally accepted accounting principles (GAAP), and the basic struc-
ture and rationale of income, cash flow, statement of changes in equity,
and balance sheets look the same for cooperatives as for other business
ExHIBIT 3.1 The case of pooling cooperatives
For many agricultural crops processed as ingredients into other food products or processed
into a consumer product, the value of the crop grown by the producer as a raw material
for these ingredient and consumer products is not known at harvest but becomes known
over the next 12 months as the supply of the crop is processed and before the new harvest
occurs. This 12-month period is known as the marketing year, and in the northern hemi-
sphere typically begins September 1 or October 1 in the current year, which is harvest when
the supply of the crop is greatest, and ends August 31 or September 30 of the next year.
These cooperatives will pay the member an advance payment at harvest corresponding
to some percentage—often enough for the producer to pay the operating loan needed
to plant that crop—of what the cooperative projects the total value of the crop to be
once all the products have been created and sold. This is a delayed pricing situation. The
cooperative commits to purchasing 100 percent of the members’ crop or whatever per-
centage the producer has committed to the cooperative, as some of these cooperatives
have multi-year written marketing agreements to purchase a certain volume or acreage
of volume from the member. This allows members to pool their risk, provides “a home” for
all of the members’ products, and creates opportunities for greater shared sales reve-
nue and income.
As such, the cooperative may not know what that volume will be because of unique
growing conditions in that year. For example, many marketing cooperatives in California
grow crops such as figs, almonds, peaches, prunes, raisin grapes, oranges, lemons, and
other crops in a localized region. Climatic factors such as lack of rain, too much rain or
frost, or too much heat can cause a decrease in volume. Similarly, certain orchard crops
such as apples and pears, some stone fruits such as apricots and plums, and certain table
olives may exhibit alternate bearing tendencies, with a large volume one year followed
by a small volume the next year. All of these issues affect the value of the crop over the
marketing year. As the value becomes known over the course of the marketing year, the
cooperative provides another payment to producers, generally 4–6 months after harvest,
and a final payment at the end of the year when the total value of the crop is known and
that year’s pool is closed. The cooperative deducts the operating expenses needed to
process the crop.
In this way, the cooperative has essentially little or no net income at the end of its fiscal
year, which is typically on August 31. The board creates equity for asset investments by
deducting or withholding a portion of the value of the crop and assessing each member
a per-unit capital retain based on the members’ volume of business, according to the
process described in the cooperative bylaws.
AN INTRODUCTION TO COOPERATION AND MUTUALISM32
entities. However, cooperative principles are embedded in these state-
ments just like in legal statutes. They reflect the nature of transactions
being done with members. It is important to have an understanding of
accounting and finance to fully understand how a member participates in
benefits and ownership. A good way to do this is to understand the impact
of the economic transaction a member does with the cooperative as a cus-
tomer, and observe its impact on the income statement and balance sheet.
Income statement
The income statement begins with gross receipts which, for a farm supply
or consumer food cooperative or service cooperative, are the sum of all
products or services sold by the cooperative multiplied by their respec-
tive prices. In the case of a marketing or pooling cooperative, this is the
sum of all products bought from the members and sold at the competitive
market price. For a processing cooperative, this is the total sales from, for
example, selling corn-ethanol and its co-products or soybean meal and
its co-products. Gross receipts was traditionally used because it denoted
receipt of value of sales done with members. Many cooperatives have
moved to a more traditional language, referring to these as gross revenues
or total sales. Costs of Goods Sold or Costs of Sales are variable costs and
subtracted from these gross receipts.
For a farm supply cooperative these variable expenses include the costs
of buying raw material products such as crop nutrients, seed, and crop
protectants; energy products such as refined
fuels and propane; raw material inputs such
as corn to manufacture animal nutrition
products; and the technology and labor
needed to provide services associated with
these products. An electrical utility coopera-
tive has similar costs in purchasing electric-
ity and supplying that electricity, whereas
a consumer food cooperative has variable
costs in purchasing food products and mer-
chandising that food to members. Note that
the conversion of these raw material inputs
into a product purchased by producers
and consumers is a production function or
technology.
The difference between the gross receipts
and these variable costs is often called Gross
Margin or Gross Profit Margin. Virtually
ExHIBIT 3.2 Simplified cooperative
income statement
Gross Revenues
Less: Cost of Sales
Gross Margin
Less: Operating Costs
Operating Income
Plus: Interest Income
Plus: Patron Finance Charges
Plus:
Patronage Refunds
Received
Patronage Refunds
33CHAPTER THREE: INCOME DISTRIBUTION EQUITY DECISIONS
all cooperatives develop a pricing strategy based on operating at a fixed
margin per unit because they are “price takers,” so the Gross Margin is
an important measure to understand, and it does not change regardless
of changes in input or output prices, which change the value of total sales.
Operating costs, which are fixed in nature, must be subtracted from this
margin. These costs are typically selling and administrative costs, which
are typically salaried employees(with benefits) whose wages cannot be
attributed directly to the product or technology sold by the cooperative.
These costs also include purchase of new assets such as equipment.
The difference between Gross Margin and Operating Expenses is Oper-
ating Income, which includes interest income received by the cooperative,
finance charges from operating loans made to members (Patron Finance
Charges), and any other expenses or revenues received by the coopera-
tive. Cooperatives often do business with other cooperatives and receive
Patronage Refunds as income. The difference between these items and
Operating Income is called Patronage Refunds. Sometimes the phrase
net savings, net margin, net proceeds, or net surplus is used to denote any
income left over after the cooperative has received all of its revenues in that
year and paid all of its costs in that year. The correct terminology, however,
is Patronage Refunds, also called patronage dividends, which are amounts
paid to patrons from the net income of the cooperative on the basis of
quantity or value of business done with these members. These refunds can
be made in cash or retained as equity in the cooperative.
ExHIBIT 3.3 A simplified cooperative balance sheet
Assets Liabilities
Current Assets Current Liabilities
Fixed Assets Patronage Refunds Payable
Investment in other Cooperatives Term Debt
Members’ Equity
Common Stock
Allocated Equity
Unallocated Equity
AN INTRODUCTION TO COOPERATION AND MUTUALISM34
Balance sheet
A balance sheet summarizes the book value of the assets of a corpora-
tion; its liabilities, which are debts that must be repaid; and the member
or owners’ equity or net worth. The accounting identity is that the assets
must equal or be balanced by the sum of liabilities and owners’ equities.
The assets on the cooperative’s balance sheet looks much the same as for a
non-cooperative corporation, but there is one key difference: Investments
in Other Cooperatives reflects any equity a cooperative has in another
cooperative. For example, a cooperative that borrows from a cooper-
ative lender such as CoBank has equity in CoBank. This equity comes
from the patronage refunds retained by CoBank as equity. It is an asset
on the balance sheet for the cooperative and equity on the balance sheet
for CoBank. Patron Refunds Payable is a liability a cooperative must doc-
ument to account for the cash portion of patronage refunds that are being
paid to members. This term is Dividends Payable in a non-cooperative
corporation.
The members’ equity section of a cooperative’s balance sheet is
the biggest difference in terminology relative to the non-cooperative
corporation. Common Stock or Membership Fees is the value of the mem-
bership fee paid by each member. These are fees for a share of purchased
common stock in a stock cooperative or the value of membership cer-
tificates in the case of a non-stock cooperative. Allocated Equity, some-
times called Patronage Ledger Credits, Retained Refunds, Capital Retains,
or Revolving Capital, is the value of the patronage refunds retained by
the cooperative equity. The word allocated is used to denote that this is
equity, which has been allocated to the member on the basis
of patronage. Unallocated Equity, which can be thought of
as unallocated, retained earnings, or Unallocated Reserves
or Surplus, is equity not allocated to the member based on
patronage. For most cooperatives, this is non-patronage
income or any other income on which the cooperative has
paid corporate income tax. In a worker cooperative, this is
called Collective Account. All of this is Retained Earnings in
a non-cooperative corporation. Some food and farm supply
cooperatives issue purchased stock, which is Preferred Stock,
but this is an uncommon practice.
Choices on distribution of patronage
and non-patronage income
A board of directors hires an auditing firm to conduct an
audit. As part of the audit process, the board is informed as
Organizations such as
school districts or similar
government organizations
may not be eligible for mem-
bership in a cooperative.
Similarly, some agricultural
cooperatives may not be
able to extend membership
to non-farmers. The cooper-
ative, however, can provide
patronage refunds based on
their patronage levels. This
is common in cooperatives
with an energy business unit.
35CHAPTER THREE: INCOME DISTRIBUTION EQUITY DECISIONS
to the dollar value of income derived from business done with members
on a patronage basis and the dollar value of income derived from business
that was not done on a patronage basis. The board, with input from man-
agement, has to decide how to distribute these two types of income, and
has many options from which to choose.
The easiest decision is the distribution of business that is not derived
from patronage done with members. An example of this might be pur-
chases done at a convenience store, such as fuel or in-store purchases. The
cooperative owns the convenience store and members may do business
there on a patronage basis, but it would be expected that nonmembers do
business there as well. This income from nonmembers is not derived from
ExHIBIT 3.4 Income distribution decision in a cooperative
Net
income
Qualified
Cash
patronage
refunds
Retained patron-
age refunds
Non-
qualified
Non-
qualified
Non-
qualified
Non-
qualified
Allocated
Unallocated
Unallocated
Allocated
Patronage-
sourced
Non-
patronage
Source
of income
Allocation
of income
Tax deductibility
of income
Distribution
of income
AN INTRODUCTION TO COOPERATION AND MUTUALISM36
patronage and is consequently the same as income of a non-cooperative
corporation. Thus, the tax treatment is the same. The cooperative pays
corporate taxes on this income and retains it as equity in the form of
retained earnings in the same way as a non-cooperative corporation. In
this case, the cooperative retains it as Unallocated Equity. A board could
choose to distribute this income to its members as dividends just like a
non-cooperative corporation would do. In that case, the income would be
taxed twice—as corporate income and as individual income. A common
practice by boards of directors is not to allocate this nonmember income
and to retain it as equity.
The board has many choices on how to distribute income derived from
members on a patronage basis. The goal is to implement the service at cost
principle because that is how the member participates in the benefits from
the cooperative. These Patronage Refunds are allocated distributions of net
income to members in proportion to the value or quantity of
their patronage. The distribution process is often referred to
as the allocation decision. Allocating income to members as
patronage refunds is especially compelling for income that
arises from patronage business with members. The board
must make a decision on how to allocate this income in the
form of Patronage Refunds.
Patronage income distribution choices
and cooperative business units
A board’s choice must take into account the business units of
the cooperative. Consider a cooperative that has one line of
business, which is buying milk from its members and man-
ufacturing it into liquid milk and some butter or cheese
products for consumer consumption. Member are vertically
aligned with the cooperative in one way through milk from
their cows. The cooperative is using one raw material prod-
uct, milk, to create several types of products. As such, it is rea-
sonable to assume that the cooperative agrees to pool all of
the income derived from the sale of these products into one
patronage pool. All dairy producers share equally, despite
the fact that milk from different members might have differ-
ent end uses. This is equitable from the members’ perspective
because the overall operation of the plant has similar costs of
processing the raw material product into different end uses.
Each member thus participates equally because of the simi-
lar costs of manufacturing the milk into processed products.
UNALLOCATED EQUITY is
sometimes referred to as
permanent capital and is
similar to retained earn-
ings in a non-cooperative
corporation because it is
permanently on the balance
sheet as equity until the
corporation is dissolved. It
is equity which will never
be subject to redemption by
the board of directors, while
their allocated equity may
be redeemed. The amount
of unallocated equity, as a
percentage of total equity,
has been increasing in most
cooperatives in recent years
for a number of reasons,
which include advice from
cooperative lenders who
are required because of
financial regulations to
have additional permanent
capital and are requiring
the same of their members.
37CHAPTER THREE: INCOME DISTRIBUTION EQUITY DECISIONS
The physical unit of raw material, pounds of milk, is easy to measure, and
the cooperative would link the patronage refund with the quantity of milk
each member sold to the cooperative.
Many cooperatives have just one line of business and it is relatively easy
to treat each member equitably by pooling income from all products into
one patronage pool and, thus, into one level of allocation. Some coopera-
tives, however, particularly in the farm supply business, have multiple lines
of business including supply of products such as crop nutrients, crop pro-
tectants, animal nutrition, refined fuels and related energy products, and
various services associated with agronomy, grain and oilseeds, and energy.
ExHIBIT 3.5 Sources of equity in a cooperative
Total Equity
Unit
retains or
patronage
refunds
Retained
earnings
Common
stock
Common
stock
Retained
earnings
Preferred
stock
Allocated
Unallocated
Unallocated
Allocated
Patronage
income
Nonpatron-
age income
Purchased
AN INTRODUCTION TO COOPERATION AND MUTUALISM38
Each of these products and services has differing costs and net margins,
and there are different risk profiles associated with each product based on
the tools available to the cooperative. In addition, not every member needs
or purchases all of these products and services, and many supply coop-
eratives also market a members’ feed grains and oilseeds. It thus makes
sense to create multiple patronage pools in order to be equitable with each
member in allocating income from that line of business to the member.
In this example, the physical units are different. Crop nutrients are sold
and measured in tons, crop protectants and refined fuels are measured in
gallons or liters, and grain and oilseeds might be measured in bushels or
tons. Furthermore, services are often bundled with the sale of the product.
A cooperative might have one price for nitrogen fertilizer and application
services and a different price for the purchase of that fertilizer alone. All
of these products likely have different costs and different net margins per
physical unit, and there is likely sharing of variable costs such as labor and
fixed costs such as management. A members’ participation in the benefits
from each product may thus be difficult to determine. Some products may
not have physical units such as a farm equipment tires or credit (in the
case of a financial services cooperative). In such a case, the board would
typically create a patronage pool based on total value rather than phys-
ical units, and patronage allocated to the member could be linked with
the members’ proportion of the total value of these types of products. The
board may elect to allocate some of the income derived from members’
patronage into unallocated equity. In doing so, the cooperative must pay
corporate taxes on that income. This choice is not common, but may be
used if the board decides it needs that equity on its balance sheet.
In summary, the board of directors, based on input from management,
makes a decision on the distribution of income. In doing so, it has sev-
eral choices on handling patronage-sourced and non-patronage sourced
income. Virtually all cooperatives choose to pay corporate taxes on the
non-patronage sourced income and retain it as unallocated equity. On
patronage-sourced income, the board decides how many patronage pools
to operate and how to distribute income from those pools to members.
These choices can be thought of as dividing the income into corporate
taxes, patronage refunds, and retention as unallocated equity. The board
should do what is in the best interest of the member which is to maximize
the after-tax income available as patronage refunds. Operationally, what
boards tend to do is retain the non-patronage sourced income as unallo-
cated equity by paying corporate taxes upon it and distribute the patron-
age-sourced income as patronage refunds.
39CHAPTER THREE: INCOME DISTRIBUTION EQUITY DECISIONS
Choices on tax liability of patronage refunds
When patronage refunds are properly made in accordance with U.S.
Internal Revenue Service tax regulations, they are referred to as qualified
and are deductible for corporate income tax purposes. Thus, coopera-
tives do not pay corporate taxes which are based on income on qualified
patronage refunds. As described earlier, a non-cooperative corporation is
taxed twice—at both the corporate and individual level—upon distribu-
tion of dividends. The majority of boards of directors choose to allocate
patronage-sourced income as a qualified distribution.
A board of directors may choose to allocate the patronage-sourced
income as nonqualified patronage refunds. This is the reverse of distrib-
uting patronage refunds as a qualified distribution in that the coopera-
tive pays the corporate income tax on a nonqualified patronage refund.
The member does not pay income tax on this patronage refund until it is
received in cash from the cooperative. Single taxation continues to exist
with nonqualified refunds.
The patronage-sourced income not paid in cash is called a retained
patronage refund, which is the noncash portion of qualified or nonquali-
fied patronage refunds. These patronage refunds are placed on the balance
sheet as allocated equity and members are notified in writing of the value
ExHIBIT 3.6 The rationale for why cooperatives have single taxation of income
The idea that marketing and purchasing cooperatives were not required to pay U.S.
income tax on net income distributed as patronage refunds is based on the concept that
members are extensions of the members’ business through the cooperative, as shown
in the Make or Buy decision. The principle of single-taxation ensures that a coopera-
tive’s net savings are taxed at the cooperative level or the patron level, but not at both.
Non-cooperative corporations have double-taxation, as the net income is taxed at the
corporate level as corporate income and upon distribution to shareholders as corporate
dividends. Business done with nonmembers is treated the same as non-cooperative
businesses and taxed by the cooperative. This taxation of farmer cooperatives, as well as
of other corporations operating on a cooperative basis, is defined in subchapter T of the
Internal Revenue Code. This difference reflects cooperatives’ distinct way of distributing
net margins to their patrons based on use, rather than to investors based on investment.
It was the intent of policymakers to have single taxation because the patronage refunds
or dividends were either rebates to patrons of a part of the price initially paid by them on
purchases made through a cooperative or an additional cost paid by a marketing coop-
erative to patrons for products sold to the cooperative. The U.S. Internal Revenue Service
Subchapter T applies to “any corporation operating on a cooperative basis” except mutual
savings banks, mutual insurance companies, and cooperatives engaged in furnishing
electric energy or telephone service to rural areas. Cooperatives can exclude from their
taxable income certain distributions of net income or allocations paid patrons.
AN INTRODUCTION TO COOPERATION AND MUTUALISM40
of these patronage refunds allocated but not paid in cash. Remember that
the accounting identity states that equity is equivalent to the difference
between assets and liabilities. Thus, these retained patronage refunds
represent investments in new assets or reinvestment in existing assets to
maintain them in good condition to provide the products and services
desired by members to satisfy them as customers. Remember also that
total equity is the sum of allocated equity and unallocated equity. His-
torically, boards of directors have chosen to have as much of their equity
as possible in allocated equity relative to unallocated equity, although in
recent years boards have chosen to increase their unallocated equity.
Equity redemption program choice has implications for the balance sheet
Patronage refunds retained by a board of directors may be redeemed in
the future if the board decides it no longer needs that equity. Allocated
equity is created through retention of patronage refunds, while redemp-
tion of retained patronage refunds can be thought of as destroying allo-
cated equity. This has implications for a cooperative’s balance sheet.
There are two situations in which a board must have a policy to han-
dle retained patronage refunds. The first is when a member stops being
a member. Cooperatives universally operate on the philosophy that if a
member stops being a member, any equity that member has in the form
of retained patronage refunds should be redeemed. In general, consumers
are no longer members of a cooperative if they move geographically from
the community or some period of time elapses in which they no longer
patronize the cooperative. Farmers are no longer members of an agricul-
tural cooperative if they retire or exit their farming operation. Obviously,
consumers and farmers are no longer members when they die. The second
situation is a determination of much equity is needed by the cooperative.
If a cooperative continues to create allocated equity each year by retaining
patronage refunds, the cooperative may have excess allocated equity that
may not be needed for asset investment or replacement of existing assets.
Boards of directors have set up various practices to handle these situ-
ations. First, a board must determine whether it has the ability to redeem
this allocated equity without disrupting its existing loan covenants or
asset expenditures. If a member dies, the board of directors typically
redeems the allocated equity, which is that member’s retained patronage
refund. This might be done monthly or annually. For a member who is
alive but no longer a member, the board creates a policy to redeem that
equity. A common policy is to redeem a portion of the allocated equity
over a period of time, which could be four or five years in the future.
41CHAPTER THREE: INCOME DISTRIBUTION EQUITY DECISIONS
The second situation is where the board considers redeeming retained
patronage refunds for a member who is still an active member. Once the
board makes the determination that it does not need additional equity,
boards must create a policy to handle this situation. The universal practice
is to redeem the allocated equity based on the birth year of the patronage
refund, with the oldest equity being redeemed first. This practice is fair
since there is no dividend being paid on the allocated equity which was
created when the patronage refund was retained. There is no trigger to
redeem the equity, but in practice, many boards of directors try to man-
age member expectations by redeeming the retained patronage refunds in
a timely manner with a pattern of behavior. For cooperatives that operate
on a pooling basis where the deduction of a per capita retain is analogous
to the retained patronage refund, these deductions may be significant,
and the board seeks to have a rapid redemption period in perhaps five to
ten years. In cooperatives where the retained patronage refund may not
be as high, a redemption period may be longer. For example, a member of
an electrical utility cooperative may have a redemption period of decades,
since the member uses electricity for the span of their lifetime. In gen-
eral, however, boards of directors try to redeem these retained patronage
refunds as quickly as possible without compromising the balance sheet.
Summary
Two of the three ways members participate in a cooperative or mutual
are through benefits received and physical ownership. The impacts of
ExHIBIT 3.7 Equity redemption by patron birth year in certain farm supply
and grain marketing cooperatives in the United States
For various reasons related to a competitive environment, taxes, the nature of their rela-
tionship with wholesale supply cooperatives, and desire to provide a retirement income,
many farm supply and grain marketing cooperatives in the early 1960s chose to redeem
retained patronage refunds at a trigger point, based on the birth year of the member. A
common practice was to redeem allocated equity when a member turned 65 years of age,
because it was assumed that the farmer would retire from farming. This practice helped the
cooperative’s cash flow at first, since few farmers were that old. However, because many
farmers were of similar age, it became a major problem. In addition, young farmers did not
like the idea of having patronage refunds retained for decades until redemption. In mul-
tigenerational farming families, the oldest member has an incentive to purchase all of the
products and services in that member’s name to have their equity redeemed faster, which
results in the younger member being-under invested in the cooperative. The majority of
cooperatives practicing this method have transitioned off these programs to a revolving
fund whereby the oldest equity is redeemed first.
AN INTRODUCTION TO COOPERATION AND MUTUALISM42
these on an individual member can be seen by observing the impact of
the economic transaction between the member and the cooperative or
mutual. These impacts can be traced through the income statement and
balance sheet, and the decisions of the board of directors who are elected
by the members and management are observable. Boards of directors cre-
ate policies regarding income distribution and equity generation, which
are embedded in principles contained in legal statutes and accounting
standards. It is important for members to understand these concepts to
fully understand the role of their membership in a cooperative or mutual
and their impact on the decision-making by the board and management.
Members participate in the control of the cooperative by electing directors
who make these decisions on ownership and benefits on their behalf.
References
Some of the material in this chapter is taken from a publication of mine entitled “Cooper-
ative Finance and Equity Management,” which is available at http://tinyurl.com/y88n2k4e.
I am indebted to David Barton for an introduction to cooperative accounting and
finance as I began my academic career. In addition, I have benefited from conversations
with Phil Kenkel on various accounting and finance issues. A number of people have
written on this topic over the years, and a literature review can be found in “Overview of
Research on Cooperative Finance,” Journal of Cooperatives 27(2013):1–14, which is writ-
ten by David Barton and myself and available at http://tinyurl.com/yc7xunzl. Jim Baarda,
David Barton, David Cobia, Don Frederick, and Phil Kenkel have written widely about
equity management and finance decisions by a board.
While the relationship of cooperative principles to legal and tax statutes has been widely
discussed by many cooperative thought leaders, Jim Baarda and Don Frederick have
written the most in this area. An example of tax treatment summary may be found in
Don Frederick’s “Income Tax Treatment of Treatment of Cooperatives,” U S Department
of Agriculture Rural Business Services Cooperative Information Report 44, Part I, which
can be found at http://tinyurl.com/y8peseg6.
Thanks to Dan Sumner and Jeremy Murdock at the University of California, Davis, for
clarifying which types of olives were alternate bearing.
http://tinyurl.com/y88n2k4e
http://tinyurl.com/yc7xunzl
http://tinyurl.com/y8peseg6
AN INTRODUCTION TO COOPERATION AND MUTUALISM 43
»Chapter Four
Special topics in cooperatives and mutualism
The previous chapters discuss cooperatives as firms, member participation
in cooperatives or mutuals, and how participation is carried out through a
cooperative’s financial statements and board decisions. This chapter intro-
duces a number of current topics in cooperation and mutualism.
Limited exemption from antitrust laws
Many countries with market economies have laws designed to ensure
certain fair business practices are followed. One practice is to prohibit
restraints or attempts to monopolize trade or commerce by businesses.
This includes investigation of mergers that might lead to restraints or pos-
sible monopolies of trade or commerce. Price fixing is one practice that is
illegal. Because farmers are individual businesses, the formation of a coop-
erative to collectively set a price at which the cooperative might sell the
members agricultural products was considered price fixing. Legislation
such as the Capper-Volstead Act in the U.S. was created to enable coop-
eratives to engage in certain practices—to collectively market and bargain,
set prices, cooperate with other cooperatives, create contracts with buyers
and suppliers, or limit membership. Cooperatives have this exemption
only if they have members who are agricultural producers, cannot engage
in predatory pricing, and cannot attempt to create a vertical supply curve
by engaging in practices to limit the supply of members’ products. These
laws are unique to cooperatives. Baseball has a limited exemption from
antitrust, and other industries have legal protections for manufacturer-im-
posed dealings or requirements contracts.
Use in agricultural and community development programs
Many international development programs that operate in agriculture
and rural development promote the cooperative structure of business. The
AN INTRODUCTION TO COOPERATION AND MUTUALISM44
rationale is that, because of its foundations in principles associated with
democracy and collective decision-making, the structure is appealing to
economic development at a grass roots level. It has been widely used to cre-
ate food marketing cooperatives in such products as cocoa, coffee, dairy,
and certain types of vegetables, and in many African, Southeast Asian, Oce-
ania, and Latin American countries. Many countries have adopted favor-
able practices to encourage the development of cooperatives, including
public investments in applied research, technical assistance, and studies on
the economic impact of cooperatives and mutual insurance firms.
Pricing strategies
The cooperative principle of “service at cost” was widely used as an idea of
how cooperatives should operate. While it sounds reasonable, its applica-
tion as a management strategy has problems if taken literally. Some mem-
bers interpret it to mean that cooperatives should operate as non-profits,
with zero or close to zero patronage refunds each year. Others see it as a
requirement to follow an average cost or uniform pricing strategy and set
the price the same for all of their members, regardless of size or volume.
When cooperatives are first formed, often times the members are con-
sidered homogeneous in that the farms are of similar size or scale and with
a similar social purpose. Neither of these practices, however, will lead to a
cooperative achieving an economic purpose and surviving. In the first case,
there will never be any income to reinvest in the cooperative’s assets. In the
second case, there is a better and more equitable pricing strategy, which is
equal margin pricing, which recognizes that there are differences in pro-
viding a product or service and as long as the cooperative charges the same
margin per member, volume discounts or premiums are justifiable.
Why is the number of agricultural cooperatives declining worldwide?
Much has been written about the declining number of cooperatives and
membership in cooperatives, especially in agricultural cooperatives in
the U.S. and Western Europe. However, when compared to the number
of agricultural producers, data suggest that the number of producers has
declined more rapidly than the number of cooperatives. Public data on
cooperatives in the U.S. suggests that by far the most common reason for
the decline in numbers is mergers or unifications between cooperatives,
and this consolidation is expected to continue.
Organizing the governance of cooperatives
Globally, cooperatives have organized themselves in one of three types of
membership structures: centralized, federated, and a combination of cen-
45CHAPTER FOUR: CURRENT ISSUES IN COOPERATIVES AND MUTUALISM
tralized and federated. There is no right or wrong structure. A centralized
structure is one in which members are individuals. This model works well
when members are in close geographical proximity to the cooperative,
and has the advantage of communication about the cooperative’s pur-
pose and ability to operate as a true democratic form of governance sys-
tem. Directors are elected from the membership based on geographical
districts or chosen at large. Some wholesaling cooperatives have central-
ized their structure entirely by merging some or all individual cooperative
members into one cooperative. In federated cooperatives, each member
is a cooperative. This resembles a republican form of government such as
the U.S. and its 50 states. Directors are chosen from among the members
of the cooperative, can include managers, farmers, or consumers, and
often reflect proportional voting based on business volume.
Some wholesaling type cooperatives have a combination of the two
structures. There is no right or wrong answer, but members should
choose the structure that best fits and communicates the cooperative’s
economic purpose, and consider its impact on the three ways members
participate in the cooperative: 1) governance (which structure provides
the best qualified directors), 2) benefits (which structure creates the
best customer transaction and after-tax cash flow to the members), and
3) ownership (which structure creates the best equity structure that takes
into account the member’s life cycle and ensures that they are invested
proportional to their use in the cooperative).
Hybrid cooperative organizational forms
Some cooperatives have organized themselves into so-called hybrids by
retaining their cooperative governance as much as possible but allowing
outside investors to invest in the cooperative. In the U.S., these blend ele-
ments of mutual-benefit companies and investor-benefit firms, especially
limited liability companies. These are rare in the U.S. relative to tradi-
tional cooperatives. In all cases, members control the board of directors
with a supermajority and retain the board chairmanship; non-members
are allowed on the board of directors. In certain countries in the Euro-
pean Union, legislation states that members of employee unions or man-
agement may be on the board of directors.
The “new generation” cooperative phenomenon in the United States
The so-called “new generation cooperatives” began occurring in the U.S.
in the late 1990s, with producers vertically integrating into processing
cooperatives such as corn-ethanol, durum wheat for pasta, sugar beets
for sugar and co-products, and other commodities. These cooperatives
AN INTRODUCTION TO COOPERATION AND MUTUALISM46
were referred to as “new-generation” because they differed from previous
types of cooperative formation. The membership was defined and linked
explicitly through contractual marketing agreements with the capacity of
the processing plant. For example, a 50 million gallon corn-ethanol plant
might require 18 million bushels of corn. Thus, the cooperative would sell
18 million delivery rights linked with physical units such as bushels, and
commit members to physically deliver 18 million bushels of corn.
These delivery rights might require a minimum investment such as
10,000 bushels, in which case the membership would be defined as no
more than 1,800 members (18 million bushels divided by 10,000 bushels).
The total cost of the processing plant would be determined through a
business plan and members would be required to invest up to a certain
amount, which might be 70% of the total cost. If this corn-ethanol plant
had a cost of $35 million, then $24.5 million would be required before
the business plan would be implemented. The upfront cost per producer
would be $1.36 per bushel ($24.5 million divided by 18 million bushels)
or a minimum investment of $13,611 ($1.36 multiplied by 10,000 bushels).
Thus, a member would be entitled to a patronage refund obtained from
the processing of corn into ethanol and its co-products.
This patronage refund would be expressed in dollars per bushel and
would be the value obtained above and beyond the market price of corn
received when the cooperative purchased the corn from the member.
A new generation cooperative had a defined membership with defined
responsibilities of each member, including a contractual delivery right
and corresponding share in control through participation in governance.
Data from the U.S. Department of Agriculture suggests that more than
200 business plans were written for investments in processing assets,
with less than half actually conducting membership drives for invest-
ment and perhaps 75 actually building a processing plant. Sugar beet pro-
cessing and corn-ethanol plants had government policies, which helped
their formation and economic viability. Several others had great success,
including U.S. Premium Beef and Dakota Growers Pasta, but they demu-
tualized and were acquired by outside investors. Others, such as South
Dakota Soybean Processors and a number of corn-ethanol cooperatives,
converted to different forms of closely held organizations. In 2017, there
are estimated to be less than 30 cooperatives who have maintained their
“new generation” cooperative status.
47CHAPTER FOUR: CURRENT ISSUES IN COOPERATIVES AND MUTUALISM
Demutualization: a rare but often studied
event in cooperatives and mutuals
When members of a cooperative or mutual insurance company decide
to sell their cooperative or convert to a publicly-held company, which is
referred to as demutualization, it gets a lot of attention. Historically, this
is a very rare event, with less than 0.01% of the cooperatives tracked over
time by the U.S. Department of Agriculture voting to be acquired by a
non-cooperative corporation or to demutualize. Cooperatives that were
acquired by other firms include Birds Eye Foods, U.S. Premium Beef, and
Dakota Growers Pasta. Examples of demutualization include Diamond
Walnut Growers, California Avocado Cooperative, FCStone, and Gold-
kist. A number of processing cooperatives formed in the late 1990s and
early 2000s converted from cooperatives to limited liability partnerships
because of tax issues; these are not demutualizations since they are still
held by members. Common reasons why cooperatives may experience
internal conflict among their membership include free ridership, differing
time horizons among members with regard to investments in long-term
assets, differing tolerance for risk among asset investments, issues in con-
trol with regards to information between management and members, and
influence costs as the complexity grows in an organization with more lines
of business units. These problems are more likely as a cooperative becomes
larger and more complex. Despite these issues, cooperatives have flour-
ished in the U.S. and worldwide. The fact that most cooperative members
come from multi-generational farming families is likely a reason why there
are so few bankruptcies or demutualizations in U.S. agricultural cooper-
atives. The very few that have happened can trace the reasons to one or
more of the issues above; many were wholesaling type cooperatives.
The current restructuring of ‘mixed’ or multi-purpose farm supply
and grain / oilseed marketing cooperatives in the United States
Farm supply and grain marketing cooperatives in the U.S. have made bil-
lions of dollars in asset investments since 2004. This is the biggest change
in this particular cooperative sector since these cooperatives were first
formed. There are various reasons for this level of investment. Crop vol-
umes have increased in the U.S. as crop yields in corn and soybeans have
increased through improvements in seed varieties and planting technol-
ogies (such as narrower rows resulting in increased seed densities per
acre). In addition, cropping patterns have changed as corn and soybean
seed varieties have been developed for geographic regions that historically
could produce only small grains such as wheat and barley. Finally, reduc-
tions in the average planting and harvesting times, which have almost been
AN INTRODUCTION TO COOPERATION AND MUTUALISM48
halved due to greater horsepower being used by farmers, have placed a
strain on logistics.
Collective farming movements
Communal ownership of agricultural land exists in different places in the
world. One well-known example is the kibbutzim in Israel, which collec-
tively owned agricultural land and were governed much like a coopera-
tive. Hutterite colonies in North America follow a similar process, with
the exception that women have no role in governance. Communal owner-
ship of land did exist in Eastern Europe and the former Soviet Union with
the collectives and communes. Members, however, did not participate in
governance, so strategic decisions such as what to plant and what machin-
ery to purchase were not made by the board in a manner associated with
democratic control. Furthermore, the development of these structures
was not voluntary. Other countries with communist or socialist govern-
ments experimented with similar type structures during the 20th century.
Economic impact of cooperatives and mutuals
The University of Wisconsin at Madison conducted a multi-year research
project to document the economic impact of cooperatives, including
mutuals, in the U.S. economy. This extensive and well-done research has
resulted in greater understanding of the role cooperatives play in the U.S.
economy. For the year 2013, they report that nearly 30,000 U.S. coopera-
tives operated at 73,000 places of business throughout the country, with
more than $3 trillion in assets generating over $500 billion in gross rev-
enues. The study reported almost 340 million consumer co-op member-
ships and another 10 million agricultural cooperative memberships.
The role of faith in cooperative development
Religious neutrality has been a hallmark of cooperative principles re-
garding membership. Despite that, various faith-based organizations have
played key roles in several countries with the development of cooperatives
and mutuals. For example, the Catholic Worker Movement helped form
manufacturing type worker cooperatives in the greater Mondragón region
in Spain. Similarly, in the Emilia-Romagna region in Italy, the Catholic
Worker Movement helped form a broad collection of consumer cooper-
atives engaged in various retail businesses. The Knights of Columbus is
based in Catholic parishes and provides a strong set of community-based
volunteer efforts. Thrivent Financial was formerly a fraternal benefit mu-
tual insurance with membership limited to Lutherans. It has since broad-
49CHAPTER FOUR: CURRENT ISSUES IN COOPERATIVES AND MUTUALISM
ened its membership to a broader set of Christians and is active in commu-
nity volunteerism, especially Habitat for Humanity.
Summary
Cooperatives and mutual continue to thrive globally. These forms of col-
lective action are not the solution to every economic or social problem.
Changes in how various forms of collective action utilize these models
is to be expected and, as discussed earlier, cooperatives that move from
strictly a social purpose to an economic purpose tend to succeed over
time. It is important to maintain some social purpose within the collec-
tion action to help members understand their membership roles and
responsibilities. Periodically, some academics and practitioners become
concerned that cooperatives and mutuals are outdated or have lost their
way. The measurable evidence is quite clear that this is not the case. Legal
business forms change over time as policy and legislation change often in
response to tax treatment of income. Mutual benefit organizational forms
such as cooperatives and mutuals continue to play an important role in
the global economy.
References
Michael Cook has helped inform many educators and researchers, including myself, by
introducing concepts from the organizational economics literature and applying them to
the cooperative business model. The discussion on demutualization and reasons coop-
eratives might fail can be found in his paper entitled “The Future of U.S. Agricultural
Cooperatives: A Neo-Institutional Approach,” American Journal of Agricultural Econom-
ics 77,5(1995):1153–1159.
Additional information about new generation cooperatives can be found at tinyurl.
com/y7akyd8c.
Information on Capper-Volstead is available at tinyurl.com/y8mrz56h.
Elinor Ostrom has written widely about common pool resources and how they can be
used to solve problems such as collective ownership of forests, irrigation systems, and
other similar resources. Her Nobel Prize in Economic Sciences address can be found at
http://tinyurl.com/ybjkd7va.
The University of Wisconsin Center for Cooperative economic impact studies, led by
Brent Hueth, can be found at http://tinyurl.com/yddmon88.
https://tinyurl.com/y7akyd8c
https://tinyurl.com/y7akyd8c
https://tinyurl.com/y8mrz56h
http://tinyurl.com/ybjkd7va
http://tinyurl.com/yddmon88
AN INTRODUCTION TO COOPERATION AND MUTUALISM50
AN INTRODUCTION TO COOPERATION AND MUTUALISM 51
»Chapter Five
Summary and conclusions
Cooperatives and mutuals are firms. The choice of organizational form is
based on a number of issues. As discussed in these chapters, these choices
depend on the economic costs of the Make or Buy Decision and the own-
ership structure desired, which may include consumers, investors, pro-
ducers, suppliers, and workers. Cooperation and mutualism are based on
the desire to Make something which is owned by consumers, producers,
suppliers, and workers, but not by investors. These owners have chosen
to vertically integrate their business or household through a cooperative
or mutual. Social reasons may underlie why they decide to do so but ulti-
mately, in a market economy, the economic transaction by a customer will
determine the success of the cooperative or mutual.
A number of thought leaders, including Nobel Prize Laureates, have
been recognized for their contributions into understanding this Make or
Buy decision. A cooperative or mutual is collectively owned, in most cases,
by a large group of consumers, producers, suppliers, and workers. A large
ownership structure helps create an equity structure on a balance sheet
that enables the cooperative or mutual to survive business shocks and
cycles. For example, in an agricultural cooperative with highly perishable
perennial crops, the concept of a marketing year is important. Building an
ownership structure that enables the cooperative to simultaneously help
its owners survive each year and add value to their agricultural commodi-
ties over the coming marketing year when the full value is not known until
12 months after harvest is crucial. Similarly, a mutual insurance firm must
have an ownership structure that enables it to insure the risk profile of its
members, which may not be fully understood but yet allow it to offer com-
petitive premiums to purchase the insurance.
This decision to Make something must be understood within the
context that ownership structure also includes those who patronize the
AN INTRODUCTION TO COOPERATION AND MUTUALISM52
cooperative or mutual and share in its economic success based on the vol-
ume of business transacted with the cooperative or mutual. These own-
ers participate in the control of the cooperative or mutual through their
election of directors who monitor their ownership and through their
direct participation in certain activities as presented in their articles of
incorporation and bylaws. This control function, which is part of corpo-
rate governance, may be accomplished through democratic voting (one-
member-one-vote), proportional voting based on business volume, or a
combination of the two.
Members in a cooperative and mutual thus participate in the eco-
nomic benefits, ownership, and control of the firm. Because of this par-
ticipation, an important function of cooperatives and mutuals is educa-
tion of their members. This education includes knowledge on the three
ways of participation and the roles of responsibilities of membership. As
a closed buying or supply channel, cooperatives function best when the
majority of their business is done with members. The financial decisions
of a cooperative are probably hardest for any member to understand due
to economic and social issues.
There is no evidence to suggest that the cooperative or mutual form
of business is no longer a viable business model. Indeed, many examples
of successful cooperatives and mutuals exist globally. Certainly industry
conditions may change, and if a cooperative or mutual does not change
its strategy to reflect changing industry conditions, the economic viabil-
ity of the business may be called into question. Furthermore, if issues of
property rights are not clarified, members may become dissatisfied with
remaining a member of the cooperative or mutual and may seek to demu-
tualize. Such incidences are rare but widely studied by academics.
References
These Nobel Prize laureate thought leaders include Ronald Coase, Oliver Hart, Bengt
Holmström, Douglass North, Elinor Ostrom, and Oliver Williamson. Information
about Hart, Holmström, and North can be found at http://tinyurl.com/y9tlpkmh, http://
tinyurl.com/ybkzq25t, and http://tinyurl.com/ybuljxxu.
http://tinyurl.com/y9tlpkmh
http://tinyurl.com/ybkzq25t
http://tinyurl.com/ybkzq25t
http://tinyurl.com/ybuljxxu
53GLOSSARY
Glossary
The accounting identity states that Total Assets is equal to the sum of Total Liabili-
ties and Total Equity.
Allocated equity is sometimes called Patronage Ledger Credits, Retained Refunds,
Capital Retains, or Revolving Capital, and is the value of the patronage refunds retained
by the cooperative equity. The word allocated is used to denote that this is equity, which
has been allocated to the member based on patronage.
Articles of incorporation for a cooperative describe the type of organization,
purpose, number of shares of common stock and any preferred stock, number of direc-
tors and how a member votes on those directors, legal definition of membership, loca-
tion of the headquarters (the legal address for the cooperative), and asset disposal upon
liquidation.
Bargaining cooperatives negotiate with processors and other first handlers for a
collective price and terms of trade for their members.
Bylaws are the rules or policies that explain how any organization, including coopera-
tives, operates. The bylaws of a cooperative define the purpose of the cooperative and its
geographical location, who a member is and what rights are associated with member-
ship, how disputes are addressed, how membership may be terminated, how the organi-
zation can change its rules and policies, how a meeting of the membership is to be held,
and what can occur at that meeting.
The cooperative as a competitive yardstick is a well-known analogy for jus-
tifying why cooperatives are often thought of as promoting competition because they
allow members to join together to obtain marketing power to negotiate on behalf of
their members.
Cooperation refers to businesses formed for mutual benefit, controlled by users who
are customers, and operated principally to provide benefits to users. The benefits are
provided to users based on participation, not ownership, and include the purchasing or
selling business transactions customers have with the cooperative and the profits earned
by the cooperative on those transactions that are returned to the users.
In a consumer cooperative, the goods and services provided by the cooperative are
consumed by the members.
AN INTRODUCTION TO COOPERATION AND MUTUALISM54
Electric utility cooperatives were developed in the 1930s to provide electricity. In
the 21st century, many are providing internet capability through satellites or broadband.
Free rider problem exists when the value of membership is diluted because non-
members can share in benefits without having to be a member.
Health care cooperatives are a lot like mutual insurance firms in that their objec-
tive is to pool risk across members and provide health care with lower fees.
A housing cooperative owns the land, facility, and common areas such as indoor
or outdoor recreational equipment and common meeting space. Members buy a share
in the cooperative, which is an ownership interest in a unit within the housing coop-
erative. There are many types of housing cooperatives. Members pay a monthly fee for
budgeted expenses such as operating costs and capital investments to maintain the coop-
erative’s assets.
Governance is a system of system of processes by which a company is directed and
controlled. Governance of cooperatives involves balancing the interests of the members
with the goals of the cooperative as a business.
Make-or-buy decision refers to a decision by a producer or consumer to make a
choice of vertically integrating through their membership in the cooperative to produce
a product or simply buying it from the market.
A marketing agency-in-common is a cooperative whose members are other coop-
eratives who have joined together to jointly market the products of all members.
Marketing year For many agricultural crops that are processed as ingredients into
other food products or processed into a consumer product, the value of the crop grown
by the producer as a raw material for these ingredient and consumer products is not
known at harvest but becomes known over the next 12 months as the supply of the crop
is processed and before the new harvest occurs. This 12-month period is known as the
marketing year and in the northern hemisphere typically begins September 1 or October
1 in the current year, which is harvest when the supply of the crop is greatest, and ends
August 31 or September 30 of the next year.
Mutualism is often linked with mutual insurance firms which are owned by their poli-
cyholders, and income is retained to reduce future insurance premiums.
Participation describes how a member uses the cooperative to share in its benefits.
Investor-benefit businesses do not require participation in the business as a customer.
Patronage refund is analogous to net income, but is income from doing business
with members which is linked with a members’ participation in the cooperative. It is the
patronage income derived from the operation of the cooperative on a cooperative basis.
In a producer cooperative the cooperative markets products supplied by members.
55GLOSSARY
A property right is a legally enforced right to select the uses of an economic good
produced by a firm
Unallocated equity, which can be thought of as unallocated, retained earnings, or
Unallocated Reserves or Surplus, is equity not allocated to the member based on their
patronage. For most cooperatives, this is non-patronage income or any other income on
which the cooperative has paid corporate income tax.
A worker cooperative is a business entity that is owned and controlled by the mem-
bers who are laborers and work in the business.
AN INTRODUCTION TO COOPERATION AND MUTUALISM56
About the author
Michael Boland (boland@umn.edu)
Koller Professor and Director, University of Minnesota
Michael Boland (Mike) holds the Koller-endowed Professorship in Agribusiness Man-
agement and Information Technology at the University of Minnesota. He teaches classes
on agricultural and consumer cooperatives, credit unions, and mutual insurance firms;
an MBA course on agribusiness and food policy issues in the Carson School of Manage-
ment; and a graduate course on food policy for students in public affairs, public health,
law, veterinary medicine, and agricultural sciences. He is an adjunct professor in the
Mondale School of Law and the Carlson School of Management. The Koller Professor-
ship was funded by agricultural cooperatives (CHS, Land O’Lakes, CoBank, and Country
Financial) and Koller friends, family, and colleagues.
Prior to this new position, Mike worked at Kansas State University in the Arthur Capper
Cooperative Center. He serves on the planning committee for the annual Farmer Coop-
eratives program, the National Council on Farmer Cooperatives director education
programs, the Kansas State CEO Roundtable, and the California Center for Cooperative
Development education program. He has worked with more than 45 master’s and doc-
toral students. Mike teaches educational modules on finance, governance, and strate-
gic thinking in boards of director leadership programs for cooperatives, credit unions,
and mutual insurance firms. These programs have been taught in 14 states to more than
4,000 senior employees and directors.
Mike has worked with agribusinesses and cooperatives in Latin America, China, South
Africa, Australia, and Europe. He is a member of Harvard’s Private and Public, Scientific,
Academic, and Consumer Food Policy Group. Mike’s Ph.D. in agricultural economics
is from Purdue University, where he worked on programs in the Center for Food and
Agricultural Business. He is the oldest of 12 children and grew up in Minnesota. His work
experience includes a farm supply cooperative, a regional cooperative, and a cooperative
state council.
Cooperatives and Mutuals are Firms
The success of a firm lies in its ability to have clear property rights
Who owns a firm?
Exhibit 1.0 What is the make-or-buy decision?
Exhibit 1.1 Dimension of job design in organizations with an application to a convenience store franchise
Corporate governance
Exhibit 1.2 What are articles of incorporation?
Cooperatives are an example of a closely-held firm
Exhibit 1.3 What are bylaws?
Exhibit 1.4 What are policies?
Exhibit 1.5 Types of business forms
Summary
References
Cooperatives and mutuals are
participatory organizations
Exhibit 2.0 The cooperative is a firm
Exhibit 2.1 The mutual company
Exhibit 2.2 International cooperative alliance values and principles of cooperation
Exhibit 2.3 The special case of fraternal benefit society
Cooperative principles and policies
Exhibit 2.4 Rochdale Equitable Pioneers Society
Exhibit 2.5 The cooperative as the competitive yardstick
Participation in benefits
Exhibit 2.6 What are examples of credit cooperatives?
Exhibit 2.7 What is the difference between a stock cooperative and a nonstock cooperative?
Participation in ownership
Participation in control
Exhibit 2.8 How are directors selected?
Exhibit 2.9 Cooperatives and mutuals are not the same as loyalty programs and buying clubs
Principles of cooperation
Formation of cooperatives
Summary
References
Income distribution and equity decisions
Introduction
Exhibit 3.1 The case of pooling cooperatives
Exhibit 3.2 Simplified cooperative income statement
Income statement
Balance sheet
Exhibit 3.3 A simplified cooperative balance sheet
Choices on distribution of patronage and non-patronage income
Exhibit 3.4 Income distribution decision in a cooperative
Patronage income distribution choices and cooperative business units
Exhibit 3.5 Sources of equity in a cooperative
Choices on tax liability of patronage refunds
Exhibit 3.6 The rationale for why cooperatives have single taxation of income
Equity redemption program choice has implications for the balance sheet
Summary
Exhibit 3.7 Equity redemption by patron birth year in certain farm supply and grain marketing cooperatives in the United States
References
Special topics in cooperatives and mutualism
Limited exemption from antitrust laws
Use in agricultural and community development programs
Pricing strategies
Why is the number of agricultural cooperatives declining worldwide?
Organizing the governance of cooperatives
Hybrid cooperative organizational forms
The “new generation” cooperative phenomenon in the United States
Demutualization: a rare but often studied event in cooperatives and mutuals
The current restructuring of ‘mixed’ or multi-purpose farm supply and grain / oilseed marketing cooperatives in the United States
Collective farming movements
Economic impact of cooperatives and mutuals
The role of faith in cooperative development
Summary
References
Summary and conclusions
References
Glossary
About the author
Cooperatives:
Principles
and practices
in the 21st c
ent
ury
A1457
Kimberly A. Zeuli and Robert Cropp
C O O P E R A T I V E S :
ABOUT THE COVER IMAGE: The “twin pines” is a familiar symbol for cooperative
s
in the United States. The Cooperative League of the USA, which eventually
became the National Cooperative Business Association (NCBA), adopted it as
their logo in 1922. The pine tree is an ancient symbol of endurance and immor-
tality. The two pines represent mutual cooperation—people helping people.
ii
Chapter 1 1
An introduction to cooperatives
Chapter 2 5
Historical development of cooperatives
throughout the world
Chapter 3 15
Cooperative history, trends, and laws
in the United States
Chapter 4 27
Cooperative classification
Chapter 5 39
Alternative business models
in the United States
Chapter 6 49
Cooperative roles, responsibilities,
and communication
Chapter 7 59
Cooperative financial management
Chapter 8 69
Procedures for organizing a cooperative
Chapter 9 77
A summary of cooperative benefits
and lim
itations
81
85
89
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y i
Publication notes
This publication is the fourth and most extensive
revision of the Marvin A. Schaars’ text, Cooperatives,
Principles and Practices, University of Wisconsin
Extension—Madison, Publication A1457, July 1980.
What has come to be known simply as “the
Schaars book,” was originally written in 1936 by
Chris L. Christensen, Asher Hobson, Henry Bakken,
R.K. Froker, and Marvin Schaars, all faculty in the
Department of Agricultural Economics, University
of Wisconsin—Madison. Since its first publication,
the Schaars book has served as a basic reference
for cooperative members and leaders, cooperative
instructors and development specialists,
and
students of cooperatives throughout the United
States and world. It has been translated into
several languages.
Although the Schaars book has been out of print
for some time, the University of Wisconsin Cent
er
for Cooperatives (UWCC) continues to receive
regular requests for copies. Its straightforward,
basic information on the organization, structure,
financing, and management of cooperatives is as
needed and relevant today as ever. The revisions in
this version, which reflect over two decades of
learning about cooperative development as well
as new cooperative laws and ways of doing
business, will hopefully make it even more useful.
Although we focus on cooperative businesses in
the United States, and draw most of our references
from the agricultural sector, most of the book’s
content is pertinent to cooperatives anywhere, in
any sector. Readers are encouraged to seek out
other publications that deal more extensively with
cooperative laws in their own states and countries,
and provide more detailed information on
consumer, service and worker-owned cooperatives
and credit unions.
Kimberly Zeuli and Robert Cropp, Assistant
Professor and Professor Emeritus in the
Department of Agricultural and Applied
Economics, University of Wisconsin—Madison,
are responsible for all of the editing and most
of the revised text. The following individuals
also contributed to various chapters:
David Erickson, Director of Member Relations,
Wisconsin Federation of Cooperatives
E.G. Nadeau, Director of Research, Planning and
Development, Cooperative Development
Services
David Trechter, Professor, University of Wisconsin—
River Falls
Richard Vilstrup, Professor Emeritus,
Department of Animal Science and
Agricultural and Applied Economics,
University of Wisconsin—Madison
This revision would not have been possible
without generous funding from The
Cooperative
Foundation, Inver Grove Heights, Minnesota.
C O O P E R A T I V E S :ii
Groups of individuals around the world andthroughout time have worked together inpursuit of common goals. Examples of coop-
eration, or collective action, can be traced back to
our prehistoric predecessors who recognized the
advantages of hunting, gathering, and living in
groups rather than on their own.
Although the word “coopera-
tive” can be applied to many
different types of group
activities, in this publication
the term is used to reference
a formal business model,
which has relatively recent
origins. The earliest coopera-
tive associations were
created in Europe and North
America during the 17th and
18th centuries. These associ-
ations were precursors to
cooperatives. The pioneers
of the Rochdale Society in
19th-century England are
celebrated for launching the
modern cooperative
movement. The unique con-
tribution of early cooperative organizers in
England was codifying a guiding set of principles
and instigating the creation of new laws that
helped foster cooperative business
develop
ment.
Today, cooperatives are found in nearly all coun-
tries. Chapters 2 and 3 trace the remarkable history
of cooperative development internationally and in
the United
States.
What is a
cooperative?
The cooperative model has been adapted to
numerous and varied businesses. In 1942 Ivan
Emelianoff, a respected cooperative scholar,
remarked that “the diversity of cooperatives is kalei-
doscopic and their variability is literally infinite.”1 As
a consequence of this diversity, no universally
accepted definition of a cooperative exists.Two defi-
nitions, however, are commonly used.
According to the International Co-operative
Alliance (ICA): a cooperative is an autonomous asso-
ciation of persons united voluntarily to meet their
common economic, social, and cultural needs and
aspirations through a jointly owned and democrati-
cally controlled enterprise. Cooperative leaders
around the world recognize the ICA, a non-govern-
mental organization with over 230 member organ-
izations from over 100 countries, as a leading
authority on cooperative definition and values.2
The ICA definition recognizes the essential
element of cooperatives: membership is voluntary.
Coercion is the antithesis of cooperation. Persons
compelled to act contrary to their wishes are not
truly cooperating. True cooperation with others
arises from a belief in mutual help; it can’t be
dictated. In authentic cooperatives, persons join
voluntarily and have the freedom to quit the coop-
erative at any time.3 The forced collectives preva-
lent in the former Soviet Union, for example, were
not true
coopera
tives.
Another widely accepted cooperative definition is
the one adopted by the United States Department
of Agriculture (USDA) in 1987: A cooperative is a
user-owned, user-controlled business that distributes
benefits on the basis of use. This definition captures
what are generally considered the three primary
cooperative principles: user ownership, user
control, and pro
portional distribution of benefits.
The “user-owner” principle implies that the people
who use the co-op (members) help finance the co-
op and therefore, own the co-op. Members are
responsible for providing at least some of the
cooperative’s capital. The equity capital contribu-
tion of each member should be in equal propor-
tion to that member’s use (patronage) of the co-
op. This shared financing creates joint ownership
(part of the ICA cooperative definition).
The “user-control” concept means that members of
the co-op govern the business directly by voting
on significant and long-term business decisions
and indirectly through their representatives on the
board of directors. Cooperative statutes and
bylaws usually dictate that only active co-op
members (those who use the co-op) can become
voting directors, although non-members some-
times serve on boards in a non-voting, advisory
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 1
An introduction to cooperatives
1
C H A P T E R
The first signs of
organized hunting
activity based around
communities are
associated with
Homo erectus,
modern human
ancestors who lived
between 500,000 and
1.5 million years ago
in Africa.
capacity. Advisory directors are becoming more
common in large agricultural cooperatives in the
United States, where complex financial and
business operations require the expertise of finan-
cial and industry experts. Only co-op members can
vote to elect their board of directors and on other
cooperative ac
tions.
Voting rights are generally tied to membership
status—usually one-member, one-vote—and not
to the level of investment in or patronage of the
cooperative. Cooperative law in a number of states
in the United States and in other countries,
however, also permits proportional voting. Instead
of one vote per member, voting rights are based
on the volume of business the member transacted
the previous year with the cooperative. Generally,
however, there is also a maximum number of votes
any member may cast to prevent control by a
minority of members. For example, a grain cooper-
ative might permit one vote to be cast for each
1,000 bushels of grain marketed the year before,
but any single member would be limited to a
maximum of ten votes. Democratic control is main-
tained by tying voting rights to patronage.
Equitable voting rights, or democratic control (as
written in the ICA definition), are a hallmark of
cooperatives.
“Distribution of benefits on the basis of use,”
describes the principle of proportionality, another
key foundation for cooperatives. Members should
share the benefits, costs, and risks of doing
business in equal proportion to their patronage.
The proportional basis is fair, easily explained
(transparent), and entirely feasible from an opera-
tional standpoint. To do otherwise distorts the
individual contributions of members and dimin-
ishes their incentives to join and patronize the
cooper
ative.
Co-op benefits may include better prices for goods
and services, improved services, and dependable
sources of inputs and markets for outputs. Most
cooperatives also realize annual net profits, all or
part of which are returned to members in propor-
tion to their patronage (thus, they are aptly called
patronage refunds). Cooperatives can also return a
portion of their profits as dividends on investment.
In the United States, however, federal and most
state statutes set an 8 percent maximum on
annual dividend payments. The purpose of these
limits is to assure that the benefits of a cooperative
accrue to those who use it most rather than to
those who may have the most invested; the impor-
tance of capital is subordinated.
Today, some co-op leaders and scholars consider
this dividend restriction arbitrary and harmful to
cooperatives. From their perspective, the 8 percent
maximum makes investing in cooperatives less
attractive than investing in other forms of
business. It makes cooperatives less competitive as
well, especially in the agricultural processing
sector, which requires a lot of capital for start-up
and growth. An overview of the federal laws that
govern cooperative
s in the United States
is
included in chapter 3.
Why cooperate?
People who organize and belong to cooperatives
do so for a variety of economic, social, and even
political reasons. Cooperating with others has
often proven to be a satisfactory way of achieving
one’s own objectives while at the same time assist-
ing others in achieving theirs.
Farmers create farm supply and marketing cooper-
atives to help them maximize their net profits. This
requires both effective marketing of their products
for better prices as well as keeping input costs as
low as possible. The farmers recognize that they
are usually more efficient and knowledgeable as
producers than as marketers or purchasers. By
selling and buying in larger volumes they can also
usually achieve better
prices.
C O O P E R A T I V E S :2
Consumer cooperatives are established to sell the
products a group of consumers want but cannot
find elsewhere at affordable prices. The consumer
members are primarily interested in improving
their purchasing power—the quantity of goods
and services they can buy with their income. They
naturally wish to get as much as possible for their
money in terms of quantity and quality. As owners,
the members have a say in what products their
stores carry.
Employees organize bargaining associations and
labor unions to negotiate collectively with man-
agement and owners. In some cases, employees
form worker-owned cooperatives. As the name
suggests, a worker-owned cooperative is owned
and controlled by its employees.4 Employees
establish bargaining units and cooperatives in the
hopes of increasing their wages and fringe
benefits, improving their general working condi-
tions, and ensuring job security.
Cooperatives do not, as is sometimes assumed,
contradict the goals of capitalism. If that were the
case, cooperatives would not play such an impor-
tant role in the American economy. About 48,00
0
cooperatives, operating in nearly every business
sector imaginable, serve 120 million members, or
roughly 4 out of 10 Americans.5 The top 100 coop-
eratives in the United States, ranked by revenue,
individually generated at least $346 million in
revenue during 2002 and in the aggregate, $119
billion.6 They represent agriculture, finance,
grocery, hardware, healthcare, recreation, and
energy industries (figure 1.1).
Cooperatives are especially important to agricul-
ture. In 2002, 3,140 agricultural cooperatives
provided roughly 3.1 million farmers (many
farmers are members of more than one coopera-
tive) with agricultural marketing, farm supplies,
and other farm-related services. They captured 28
percent of the market share.7
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 3
An introduction to cooperatives
1
C H A P T E R
Figure 1.1. Top 100 revenue generating cooperatives in the U.S. by sector, 2002
In terms of non-agricultural cooperatives, 84
million Americans are members of 9,569 credit
unions, 865 electric co-ops serve 37 million people
in 47 states, over 1.5 million families live in housing
cooperatives, and over 3 million people are
members of 5,000 food cooperatives.8
The involvement of so many people in coopera-
tives in such a highly competitive economy reflects
the general satisfaction of members toward their
companies and the apparent efficiency and solid
financial performance of these businesses. Chapter
4 provides a more comprehensive discussion of
the various types of cooperatives and the extent of
their economic success in
the United States.
In short, cooperatives are organized to serve
member needs and are focused on generating
member benefits rather than returns to investors.
This member-driven orientation makes them fun-
da
mentally different from other corporations.
Additional cooperative structural characteristics
and guiding principles further distinguish them
from other business models. In most countries, the
cooperative model represents only one of several
different ways a business can choose to legally
organize. Chapter 5 presents a comparison of the
six major alternative business models in the United
States.
Cooperative management
and development
To prosper, cooperatives must be well organized,
well financed, well managed, and governed well by
a committed membership. They must be progres-
sive, adapting to changing business climates, and
responsive to their members’ changing needs.
Members, the board of directors, and management
each have responsibilities within the
cooperative.
Strong, viable cooperatives require all three groups
to do their share. Chapter 6 describes each group’s
unique and important role.
Although capital, employees,
business volume, and good man-
agement practices are all very
important for successful opera-
tions, a co-op’s members are its
most important asset.
Cooperative success also hinges on effective
member education and communication. Indeed,
providing education, training, and information to
members is one of the seven cooperative princi-
ples adopted by the ICA. The unique education
needs of cooperatives and the essential elements
for a successful education and communication
program are also discussed in chapter 6.
Cooperative financing is also critical and in today’s
complex cooperative organizations it can be quite
complicated. Adequate capital is one of the funda-
mental principles of sound business operation and
at the same time one of the biggest challenges
facing cooperatives today. Financing options must
be consistent with principles of cooperation as
well as with federal and state laws. Chapter 7 lays
out the main concepts behind cooperative financ-
ing, including alternative sources of capital and
equity redemption plans.
As with other business forms, cooperatives should
be established only to meet a well-defined need in
the market. Before cooperatives are created,
advance research should be done by a steering
committee to ensure sufficient support by other
potential members in the community. Chapter 8
discusses in greater detail the procedure for organ-
izing cooperatives. A good feasibility study, strong
membership drives, and a comprehensive business
plan are essential ingredients.
A final analysis of the cooperative model’s benefits
and limitations, to members and the broader com-
munity, is presented in chapter 9.
C O O P E R A T I V E S :4
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 5
Historical developm
ent of cooperatives
throughout the w
orld
2
C H A P T E R
The historical development of cooperative busi-nesses cannot be disconnected from thesocial and economic forces that shaped them.
Co-ops then, as now, were created in times and
places of economic stress and social
upheaval.9
Ancient records and archeological discoveries
point to the existence of cooperative organizations
created by early civilizations in diverse parts of the
world (China, Greece, Egypt, etc.). But it is the
founders of the Rochdale Society in 19th century
England who are celebrated for launching the
modern cooperative movement. The Rochdale
pioneers, and the early European cooperative
thinkers and organizers who laid the foundation
for their success, are responsible for codifying a
guiding set of principles that helped guide the
development of cooperatives across the world.
Revolutionary roots
in England
The first cooperative businesses created in Europe
arose during periods of great social upheaval and
distress caused by dramatic shifts in agricultural
and industrial production practices. Prior to the
Industrial Revolution (about 1750-1850), most
families in England and other parts of Europe were
largely self-sufficient, creating enough food and
goods for their subsistence and small amounts for
trading. The Industrial Revolution introduced the
factory system of production and was marked by a
rapid succession of remarkable inventions that
accelerated the industrialization of
business.
Examples of inventions during this period include
smelting iron with coal instead of charcoal, the
cotton gin and power loom, and the steam engine.
The writings of Adam Smith at the time, especially
his advocacy of the laissez faire principle (no gov-
ernment intervention in the economy), further
spurred the revolu
tion.
The industrial system gradually replaced cottage
industries and home-based production. Workers
were required to move into cities to find work.
Away from land, their families were increasingly
integrated into a market economy; instead of pro-
ducing most of their household requirements,
especially food, they had no other choice but to
purchase them. Advances in production were not,
unfortunately, accompanied by fair labor stan-
dards. Workers were typically paid very low wages
and were subjected to harsh working conditions.10
People remaining in rural areas were not much
better off. An agricultural revolution was already
well underway in the 18th century. The introduc-
tion of new cultivation methods and crop varieties
supported a dramatic change in land tenure
patterns. Scattered, small plots of farmland were
aggregated into large, enclosed estates, primarily
for the purpose of grazing sheep and other live-
stock. Between 1760 and 1843, nearly seven
million acres of agricultural land in England were
enclosed in estates. As a result, large numbers of
small farmers were driven from their land into
neighboring towns and villages with few remain-
ing jobs.
A movement towards greater freedom of expres-
sion was another hallmark of this revolutionary
period. The citizens of England began to publicly
dissent with government policies, taking issue with
the status quo and demanding more personal
rights. Therefore, the widespread poverty, unem-
ployment, and general social deterioration that
were left in the wake of the industrial and agricul-
tural revolutions were met with a public outcry to
the government for improved working and living
conditions.
The historical development of
cooperative businesses cannot be
disconnected from the social and
economic forces that shaped
them. Co-ops then, as now, were
created in times and places of
economic stress and social
upheaval.9
Early cooperative societies
In the absence of public assistance, the people of
Europe established various types of self-help
organizations. Mutual fire insurance companies
existed in London and Paris as early as 1530,
although the first highly successful and well-
known example was organized in England in 1696,
the Amicable Contributionship.11 The people of
England also created Mutual Aid Societies (they
eventually became known as Friendly Societies)
that offered financial payments and assistance to
members in times of sickness, unemployment, or
death.12 By the mid-18th century many well-estab-
lished societies were already in operation. They
were legalized with the passing of the first Friendly
Society Act (also called the Rose Act) in 1793. A
number of bills were introduced in the 19th
century to encourage Friendly Societies since they
lessened the public burden.13 Workers organized
labor unions to bargain with employers for more
favorable working conditions and to lobby the
government for improved labor legislation.
Cooperative or quasi-cooperative industrial busi-
nesses were in operation in England by 1760. Most
were consumer-controlled organizations focused
on flour milling and baking industries. Cooperative
corn mills for grinding flour appeared in a number
of cities shortly after the turn of the 19th century
to cut the cost of flour and prevent tampering by
greedy millers. Purchasing cooperatives already
existed in most Western European countries by the
18th century. The Weaver’s Society in Fenwick,
Scotland (often referred to as “penny capitalists”)
began to purchase supplies as a group in 1769.14
The precursors to mutuals and unions were guilds,
the associations of merchants, artisans, and crafts-
men that date back to Medieval times. Guilds had
binding rules for production and business prac-
tices. Although guilds were created partially in an
attempt to establish local trade monopolies, they
incorporated socialist practices: member control,
equitable treatment of all members, and financial
support of members who were ill or faced family
crises.
Robert Owen and
Charles Fourier—
Cooperative visionaries
“Often men wish to escape the
realities of life, and when they do,
they dream of Utopias.” 15
The first cooperative
movement, that is, the estab-
lishment of a coherent
argument for the cooperative
form of organization, gained
momentum in the early 19th
century with the writings and
advocacy efforts of Robert
Owen and William King in
England and Charles Fourier in
France. Robert Owen and
Charles Fourier were both well-known Utopian
Socialists; not only did they envision ideal soci-
eties, they tried to create them in Europe and the
United States.16
Robert Owen (1771-1858) was a prominent indus-
trialist who began to advocate the establishment
of a new type of community to alleviate the
poverty and suffering caused by the Industrial
Revolution. Charles Fourier (1772-1837) was a
bourgeois, famous French social philosopher
whose plans for self-reliant communities were
motivated by the French Revolution and his view
that the working class was being dehumanized
and repressed.
They both envisioned rural villages composed of
farms and small-scale industry, all operated coop-
eratively by the citizens who would also live
together communally. Owen originally conceived
of these communities as a solution for unemploy-
ment, but later believed (like Fourier) that they
were a better alternative to private capitalism and
competition, providing self-employment opportu-
nities and other conditions that would provide
universal happiness. Fourier called his planned
communal cities “phalanxes.”
C O O P E R A T I V E S :6
Robert Owen (1771-
1858):“The Father
of Cooperation.”
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 7
Historical developm
ent of cooperatives
throughout the w
orld
2
C H A P T E R
Owen and Fourier were not abstract thinkers; they
laid out very specific details for their communities.
For instance, they believed that the communities
should contain 1,000-1,800 people living on a rela-
tively small tract of land. Fourier was more explicit:
the area should be three square miles.17 Wealthy
supporters of Owen’s ideas were willing to finance
the creation of such communities. Four were even-
tually created: New Harmony, Indiana (USA);
Orbiston, Scotland; Ralahine, Ireland; and
Queenswood, England. All ultimately failed.
Fourier never found philanthropists willing to fund
the creation of a phalanx. After his death, several
were attempted in France and more than thirty
organized in the United States.18 The most notable
in the United States were Brook Farm, near
Cambridge, Massachusetts (1842-1846), and one in
Fond du Lac County (now the city of Ripon),
Wisconsin (1845-1850). The phalanxes suffered
from a conflict between treating everyone equally
and rewarding those who provided more
capital
and labor. The phalanx model, however, influenced
the successful kibbutzim in Israel (discussed later).
Owen was a visionary idealist, not a realistic coop-
erative developer. He was not at all interested,
therefore, in helping the early consumer coopera-
tives in England:“Joint stock retailing is not the
Social System which we contemplate…and will
not form any part of the arrangements in the New
Moral World.”19 In 1839 he did not even bother to
respond to an urgent request by Charles Howarth
to visit Rochdale, England to discuss organizational
plans for a new retail cooperative.
Owen’s attack upon individualism, the family, com-
petition, private property, the market economy, and
organized religion, alienated many people from
cooperation and provoked condemnation of coop-
eratives from various religious groups. Even so,
Owen is often called the “father of cooperation.”
Despite his failures, Owen continued preaching
that cooperative production and living were the
best medicines for the ills of society. His advocacy
stimulated the creation of cooperative societies,
labor exchanges (where handicrafts were traded
based on the amount of labor involved in their
making), and trade unions. Although most of the
organizations he started lasted only a short time,
they provided the groundwork for another genera-
tion of cooperative development in Europe and
North America.
William King—
A cooperative developer
and pragmatist
Dr. William King (1786-1865), another social
reformer in England, was in many respects more
responsible than Robert Owen for spreading the
cooperative idea and for the actual organization of
cooperatives. Although he accepted much of
Owen’s social philosophy, he disagreed on how to
reach those goals. King was more realistic about
cooperatives, advocating and inspiring the devel-
opment of consumer cooperatives across England.
As a physician, King became interested in improv-
ing the welfare of the working people of Brighton,
England. He was involved in organizing numerous
social and educational institutions, including an
infants’ school, a mechanics’ institute, and a library.
Between 1828 and 1830, King published (at his
own expense) a small magazine called “The
Cooperator” that was widely distributed through-
out England. Its 28 issues were a source of inspira-
tion, information, and instruction on cooperation
in theory as well as in practice. The magazine advo-
cated a more realistic type of cooperation within
reach of the working class.
King believed that cooperatives should start small
with the original capital supplied by members, a
significant deviation from Owen and Fourier’s
large-scale operations funded by wealthy
investors. King did not necessarily object to Owen’s
self-sustaining cooperative communities, as long
as they were funded with the members’ own
capital and were restricted to Christians. King was
a religious fundamentalist who believed that
biblical scripture should guide the ethics and oper-
ations of cooperatives. He also taught that cooper-
atives should not pay patronage refunds, but
instead reinvest all net profits to increase the
scope of their activities and to employ as many
members as possible. King also proposed the fol-
lowing guidelines for consumer cooperatives:
(1) members should pay cash for all merchandise
purchased at the cooperative; (2) the co-op should
adopt democratic principles of governance; and
(3) it should publicize the cooperative
movement.
In addition to the advocacy of Owen and King, the
cooperative movement in England was supported
by a number of short-lived cooperative journals,
which were circulated between 1825 and 1830.
Cooperative congresses also advocated and
promoted cooperation; the first took place in 1830
in Manchester, the second in 1831 in Birmingham,
and the third in 1832 in London. Owen’s influence
and rhetoric were exhibited in these and later con-
gresses. For instance, the Third Congress stated
that “the grand ultimate object of all cooperative
societies is community on land.”
What began with a few cooperative societies in
1826 quickly grew to about 300 consumer cooper-
atives by 1830, many patterned after King’s
Brighton Cooperative Trading Association. King’s
ideas may have also influenced early American
cooperatives. A treasurer of a cooperative in
Brighton, England, William Bryan, helped organize
a consumer cooperative in New York City in 1830.
King was compelled to discontinue his active role
in the cooperative movement in the late 1830s for
two reasons: his medical practice was suffering and
poor management and internal discontent
plagued individual co-op stores. By 1840, the
cooperative movement in England was basically at
a standstill and King’s ideas were forgotten,
ignored in the cooperative literature for several
decades.
The Rochdale Pioneers
In the first wave of consumer cooperatives, a short-
lived society was created in Rochdale, England in
1833. James Smithies, one of the original organiz-
ers, was inspired by King’s cooperative magazine
and shared it with his co-founders. Their ultimate
cooperative goals, however, echoed Owen’s teach-
ings. Although their first co-op effort failed after
only two years, a core group of 28 continued to
work actively for social reform and eventually
created the prototype cooperative model for a
modest shop on Toad Lane in 1844.
The so-called Rochdale Pioneers were ambitious
and had lofty goals for their co-op: (1) to sell provi-
sions at the store; (2) to purchase homes for their
members; (3) to manufacture goods their
members needed; and (4) to provide employment
for their members who were either out of work or
poorly paid. In sum, they wanted to “establish a
self-supporting home colony of united interests”
and to “arrange the powers of production, distribu-
tion, education, and government” in the interests
of its members. In addition, they hoped to open a
“temperance hotel” in one of the cooperative
houses to promote sobriety.
The foundation for the Rochdale cooperative was
built upon the intelligent combination of various
ideas that had been tried by previous coopera-
tives. The Pioneers learned from the co-op failures
of the past. For example, the business practices
they adopted for their small store, later called the
Rochdale Principles (sidebar), were novel primarily
in their combination; many had been borrowed
from other cooperatives.
C O O P E R A T I V E S :8
The original Rochdale Cooperative shop on Toad Lane.
It is now preserved as a museum.
Some of the Rochdale Principles, such as demo-
cratic control (one-member, one-vote) and limited
dividends on equity capital, are still followed by
most cooperatives around the world. Other princi-
ples, such as cash trading, are clearly outdated in
most countries where credit cards and (in agricul-
tural co-ops) seasonal loans are the norm. As a set
of guiding principles, they are not necessarily
appropriate for all types of cooperatives in all loca-
tions. They are after all a product of a historical
period and economy and were meant to govern a
small retail store (see chapter 4 for further discus-
sion of cooperative principles).
The phenomenal success of the Rochdale coopera-
tive, which is still in operation today, was just the
boost that the cooperative movement in England
needed. Rochdale became the cooperative beacon
for others to follow. It provided the organizational
pattern that became the prototype for other coop-
eratives and spurred on the cooperative
movement in Europe and North America.
The first cooperative law
The Industrial and Provident Societies Act, author-
ized in England in 1852, was a major development
in the cooperative movement. Prior to the enact-
ment of this law, the Friendly Societies Acts of 1834
and 1846 regulated the registration of coopera-
tives, even though these acts were designed for
mutual-aid groups and not for businesses
engaged in trade. Therefore, the consumer cooper-
atives did not have the proper legal protection
essential for their business operations. The acts
further prevented them from selling to people
other than their
members.
The Industrial and Provident Societies Act
provided both important legal protections for the
cooperatives while also imposing some operating
restrictions. It protected the property of the soci-
eties, gave binding legal authority for their rules,
safeguarded the savings of their investors, allowed
them to sell to non-members, and provided legal
status so that an association could sue fraudulent
officials. It allowed cooperatives to pay patronage
refunds on purchases but limited dividends on
shares of stock to five percent. Although members
still faced unlimited liability for cooperative debts,
share limits of £100 per member were enforced.
The passage of the Industrial and Provident
Societies Act of 1862 loosened some of the restric-
tions and provided limited liability for members,
meaning they would be liable only for co-op debts
less than or equal to the value of their stock. Share
limits were increased to £200 per member and
cooperatives were permitted to invest in other
cooperatives. As a result of these changes, the
organization of the North of England Co-operative
Society became possible. Established in 1863 to
create cost savings for members by purchasing a
variety of goods in bulk, today the Co-operative
Group comprises a family of businesses employed
in a wide range of activities (food, finance, farms,
funerals, etc.). It is a unique consumer-owned
business that is the largest of its kind in the world.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 9
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2
C H A P T E R
Rochdale cooperative principles
1. Voting is by members on a democratic
(one-member, one-vote)
basis.
2. Membership is open.
3. Equity is provided by members.
4. Equity ownership share of individual
members is limited.
5. Net income is distributed to members as
patronage refunds on a cost basis.
6. Dividends on equity capital are limited.
7. Exchange of goods and services at market
prices.
8. Duty to educate.
9. Cash trading only.
10. No unusual risk assumption.
11. Political and religious neutrality.
12. Equality in membership (no discrimination
by gender).
Adapted from David Barton,“Principles,” in David
Cobia (ed.), Cooperatives in Agriculture. Englewood
Cliffs, NJ: Prentice Hall, 1989.
The beginnings of
cooperative credit
During the 1840s, later called “the Hungry Forties,”
famine and extreme hardship spread throughout
Europe. A blight ruined potato crops in many
European countries, although Ireland was the most
severely hit, during 1845-47. The shortage of
potatoes drove up other food prices. Low fishing
yields further exacerbated the food shortage,
which caused millions of deaths and led to severe
economic depression, high unemployment, and
political unrest in the region. The Communist
Manifesto was published in 1848.
During this same year, F.W. Raiffeisen, a mayor of a
group of villages in Northern Germany, created a
cooperative society to alleviate some of the suffer-
ing in his community. The cooperative gave
potatoes and bread to the poor. He soon realized,
however, that charity alone could not solve the
problems of poor farmers; they needed to become
self-sufficient and earn more money. Raiffeisen
then started to organize loan societies, which
embraced various cooperative features. Although
Raiffeisen continued to advocate self-help, his first
societies were mainly efforts to transfer money
from the rich to the poor. In 1862, he helped the
rural farmers of the little town of Anhausen
organize a truly cooperative loan society.
Meanwhile, Herman Schulze had created a
somewhat similar credit institution among artisans
in Eilenburg in 1850. He further refined this model
to fit the credit needs of artisans and other small-
scale industries and developed other credit organi-
zations. Raiffeisen may have been familiar with
these organizations and used them to inform his
own co-op development efforts. Both the
Raiffeisen and Schulze cooperative bank models
rapidly spread across Europe. Features of both
models were used to form credit unions in North
America. Incidentally, the Credit Union National
Association’s headquarters in Madison, Wisconsin
was called “Raiffeisen House” for a number of years.
Early agricultural
marketing and farm
supply cooperatives
in Europe
Denmark is generally regarded as the most out-
standing example of early and successful coopera-
tive farm marketing and farm supply organiza-
tions.20 The first cooperative creamery in Denmark
was established in 1875 at Kaslunde. The early
cooperative creameries incorporated some signifi-
cant improvements in the butter-making process,
including a standardized grading system. The high
quality butter was marketed under a government
brand to reflect their supervision of the grading.
The first cooperative creameries were very success-
ful. News of their success and popularity spread to
other rural areas of Denmark; many others were
soon organized throughout the country. These
developments took place without government
assistance or subsidies.
The early and striking success of cooperatives in
Denmark can be primarily attributed to the role of
the Folk High School. An institution unique to the
country, this school educated young adults in rural
areas. The schools were inspired by the philoso-
pher and clergyman, Bishop Nikolai (N.S.F.)
Grundtvig (1783-1873), and popularized by Kristen
Kold, an educator. Grundtvig established the first
Folk High School in 1844; the one created by Kold
in 1851, however, was more successful and widely
replicated. The mission of the schools was to
enlighten Danish citizens (beyond what they were
learning in primary schools) so they could partici-
pate in the governance of the kingdom. They were
not meant to be vocational or cooperative training
schools but rather designed to expose students to
new ideas and experiences. Today, we would call
them liberal arts schools. Numerous such schools
still thrive in Denmark. Although supported finan-
cially by the state, they are free to set their own
curricula and are required to be nonvocational and
without examinations.
C O O P E R A T I V E S :10
Folk High Schools created trained, rural leadership.
They also established bonds of trust among those
who came to live and study at the schools. The
students developed a willingness to think
together, work together, and play together—in
short, to cooperate. Although not an intended
outcome, the spirit of cooperation produced in
these schools has been, without doubt, an impor-
tant factor in the growth of Denmark’s cooperative
movement.
Cooperatives
around the world
The cooperative movement gradually spread
around the world in the 19th century (table 2.1).
Another notable cooperative advocate is Sir
Horace Plunkett (1854-1932), an Irishman (who
spent 10 years as a cattle rancher in the United
States in the 1800s) famous for advocating the
benefits of agricultural cooperatives in Ireland and
beyond.21 He was instrumental in creating an
international cooperative movement and promot-
ing the cooperative principle of political neutrality.
The Irish Cooperative Organization Society
(formerly the Irish Agricultural Organization
Society), originally founded by Plunkett in 1894, is
located in The Plunkett House in Dublin.
Cooperative businesses are found
in nearly all countries, from the
developing nations of Africa, Asia,
and South America to the indus-
trial countries of Europe and
North America.
Today, cooperative businesses are found in nearly
all countries, from the developing nations of Africa,
Asia, and South America to the industrial countries
of Europe and North America. Northern Europe,
where the cooperative movement took hold very
early, still contains a strong cooperative presence,
especially in agriculture. Many of the cooperatives
in these countries have long histories and are
extremely successful. However, as is the case in the
United States (see chapter 3), economic pressures
have been met with cooperative mergers and con-
solidations. As a result, cooperative numbers in
these countries appear quite low (tables 2.2 and 2.3).
Cooperative numbers in India, even on a per capita
basis, are by comparison astounding. In the case of
India and other countries with relatively high
cooperative numbers, this situation typically
reflects the existence of numerous, local coopera-
tives. More cooperatives do not imply necessarily
that the cooperative sector as a whole is stronger
or more competitive, however.
The spread of the cooperative business model
from 18th century England to such diverse coun-
tries as India, Korea and Uganda, points to the uni-
versal adaptability and diversity of the cooperative
model.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 11
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orld
2
C H A P T E R
C O O P E R A T I V E S :12
Table 2.1. Historical cooperative statistics for selected countries
First Membership
Country First co-op co-op law (% of population)
Albania 1946 NA NA
Austria 1794 1873 47.4
Belgium 1848 1873 35.4
Czech Republic 1852 1873 13.4
Denmark 1851 NA 34.2
Finland 1870 1901 45.8
France 1750 1887 30.1
Germany 1845 1867 27.9
Greece 1780 1914 9.9
Iceland 1844 1937 20.0
Ireland 1859 1893 59.5
Italy 1806 1886 13.3
Lithuania 1869 1917 6.8
Luxembourg 1808 1884 4.8
Netherlands 1860 1855 41.1
Norway 1851 1935 36.4
Poland 1816 1920 NA
Portugal 1871 1867 21.9
Romania 1852 1903 28.5
Russia 1825 1907 9.5
Spain 1838 1885 11.1
Sweden 1850 1895 53.7
Switzerland 1816 1881 50.1
Turkey 1863 1867 12.9
United Kingdom 1750 1852 16.6
United States 1752 1865 56.7
Yugoslavia 1870 1925 6.5
NA = not available
Source: Adapted from Shaffer, J. (1999). Historical dictionary of the cooperative movement.
London: Scarecrow Press, Inc. (pp. 437-39).
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 13
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orld
2
C H A P T E R
Table 2.2. Cooperatives and membership by international region
Number Individual
Region of countries Organizations Societies members
Africa 12 19 27,214 9,561,443
Americas 18 61 43,945 182,486,437
Asia 28 64 480,648 414,383,079
Europe 35 88 197,293 118,473,862
Total 93 232 749,100 724,904,821
Source: International Co-operative Alliance, www.coop.org/statistics.html (July 1,1998).
Table 2.3. Agriculture cooperative statistics
from select countries
Number Membership
Country of co-ops (millions)
Brazil 4,744 3.74
Canada 7,880 14.52
Columbia 1,936 4.82
Denmark 1,446 1.39
Egypt 6,992 4.28
Finland 46 1.07
France 23,573 17.49
Germany 9,112 21.64
India 446,784 182.92
Israel 256 0.03
Japan 3,860 42.84
Mexico NA 0.63
Morocco 9,635 0.68
Norway 4,259 1.59
Repub. Korea 7,669 17.07
Sweden 15,106 4.78
Switzerland 16 1.51
Uganda 3,131 0.64
United Kingdom 42 9.04
United States 27,076 156.19
Zambia 2,174 0.57
Source: International Co-operative Alliance,
www.coop.org/statistics.html (April 26, 2002).
C O O P E R A T I V E S :14
Cooperatives are neither indigenous to theUnited States, nor are they an American inven-tion. As Fairbairn reminds us,“The idea of the
co-op was both imported by the colonists from
Europe and also independently developed and
adapted by settlers of European origin under
North American conditions.”22 Pilgrims coming to
the new world on the Mayflower in 1620 signed
the Mayflower Compact, which described the
operations of an organization, or constitution, with
cooperative characteristics. Once they arrived, the
early settlers worked together collectively to clear
the land, build homes and communities, start
farming, and provide protection for their
families.23 The overview of cooperative develop-
ment in the United States provided here supports
the idea that cooperatives in the United States are
both an artifact of early settlers’ European heritage
and a collective response to harsh living condi-
tions in rural areas.
The driving forces behind cooperative develop-
ment in the United States include the following
five interrelated dynamics:
1. Market failure (monopoly power, excess supply,
missing markets, etc.).
2. Economic crises (depressions and recessions).
3. New technology.
4. Farm organizations and cooperative advocates.
5. Favorable public policy (presidential interest,
legislative initiatives at both state and federal
levels, and judicial interpretation).
The relative importance of these forces at different
periods will become apparent as we trace the path
of cooperative development. Since some of the
most significant contributions Americans have
made to the cooperative model and movement
have been in the agricultural sector, farm coopera-
tives will dominate this discussion.
The first American
cooperatives
The first recognized cooperative business in the
United States (a mutual insurance company) was
founded in 1752, almost a quarter-century before
the birth of the country (America achieved inde-
pendence in 1776). Benjamin Franklin, one of the
signers of the Declaration of Independence,
worked with other members of fire fighting associ-
ations to create the first successful fire insurance
company in the colonies: The Philadelphia
Contributionship for the Insurance of Houses from
Loss by Fire.24 Franklin had already formed the
Union Fire Company in 1736, which became the
model for volunteer fire fighting companies.
Franklin had witnessed the success and impor-
tance of mutual societies when he was living in
England. The Philadelphia Contributionship was
based on a similar London association created in
1696.25
“Although European models and
European immigrant cultures
remained influential, it was in
agriculture that co-ops began to
take root in new and distinctive
North American forms.” 26
American farmers first attempted to organize in
1785 with the establishment of the Philadelphia
Society for Promotion of Agriculture. The first
formal farmer cooperatives were created in 1810:
a dairy cooperative in Goshen, Connecticut, and a
cheese manufacturing cooperative in South
Trenton, New Jersey. On the heels of these organi-
zations, other cooperatives involving different
commodities were formed in many parts of the
country (table 3.1). There was no identified coordi-
nated leadership and most cooperatives restricted
their operations to their local community. Most of
the early agricultural cooperatives were ultimately
unsuccessful.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 15
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and law
s in the United States
3
C H A P T E R
Cooperative history,trends,
and law
s in the United States
C O O P E R A T I V E S :16
Table 3.1. Selected early cooperatives
and mutuals in the United States
Year Cooperative
1752 Philadelphia Contributionship for the
Insurance of Houses from Loss by Fire
(Philadelphia, Pennsylvania)
1810 Dairy cooperative (Goshen, Conneticut)
and cheese cooperative (South Trenton,
New Jersey)
1820 Hog marketing, slaughtering, and packing
cooperative (Granville, Ohio)
1853 Irrigation cooperative (Tulare County,
California)
1857 Grain elevator (Madison, Wisconsin)
1862 Tobacco marketing cooperative
(Connecticut)
1863 Purchasing cooperative (Riverhead, New
York)
1867 Fruit marketing cooperative
(Hammonton, New Jersey)
1874 Poultry marketing cooperative (Illinois)
1877 Cattle rustling protection cooperative
(Texas)
1885 Citrus marketing cooperative (California)
1887 Cotton gin (Wagner, Texas)
The early American
cooperative movement
in agriculture
Politics and cooperative development have been
intertwined in the United States from the very
beginning.27 The first organized cooperative devel-
opment effort was launched by the Order of the
Patrons of Husbandry, commonly known as the
Grange, one of the first farm organizations in the
United States. A U.S. Department of Agriculture
(USDA) employee named Oliver Hudson Kelley
founded the Grange in 1867 as a “fraternal order” to
help restore relationships between farmers in the
north and south after the Civil War. However, the
poor economic conditions most farmers faced at
the time soon compelled the Grange to instead
focus its energies on improving farm conditions. It
believed that cooperatives were part of the solution
and thus helped organize hundreds of agricultural
marketing and purchasing cooperatives between
1870 and 1890. By 1875 the Grange had 858,000
members in thirty-two states.28 At its 1875 annual
convention, the Grange adopted a recommendation
endorsing the Rochdale Principles (it had sent a rep-
resentative overseas to gather information about
European cooperation). As a result, the Rochdale
Principles soon became familiar to farmers in many
parts of the United States.
As the Grange declined in influence, other farm
organizations took more prominent roles in fostering
the development of cooperatives.29 Though short-
lived, the Farmers’ Alliance, formed in 1875 in the
South, and the American Society of Equity, formed in
1902, were both more political than the Grange and
also essential to early cooperative development
efforts.The Farmers’ Alliance was fairly radical; it grew
out of protests against rail and elevator monopolies
and eventually helped affiliated candidates gain
political power.30 The Society of Equity was the
creation of a farm magazine editor, J.A. Everitt, who
advocated the organization of farmers. In Wisconsin,
the Society of Equity supported the progressive
politics of Robert M. La Follette and a broad coopera-
tive movement in the state.31
By virtue of their long existence and organizational
strength, the American Farm Bureau (established
in 1919 and now the largest farm organization in
the United States) and the National Farmers Union
(which grew out of the Farmers Educational and
Cooperative Union of America, established in 1902)
have contributed the most to the development of
farmer cooperatives in the United States. They
have supported cooperative organizations directly
by providing technical assistance, and indirectly by
influencing the enactment of favorable coopera-
tive state and federal legislation. Several of the
largest agricultural cooperatives today can trace
their roots back to these two groups. The National
Farmers Union helped establish CHS, Inc. (today,
the largest farm supply and grain marketing co-op
in the United States) and the Farm Bureau helped
create Growmark (another large farm supply and
grain marketing co-op) and Nationwide Insurance
Companies.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 17
Cooperative history,trends,
and law
s in the United States
3
C H A P T E R
Creating a cooperative
infrastructure: The laws
and government institu-
tions that supported
cooperative development
The first cooperative marketing statute was
enacted in 1865 in Michigan.32 Other states
followed suit: Massachusetts adopted a coopera-
tive law in 1866, New York in 1867, Pennsylvania in
1868, Connecticut and Minnesota in 1870 and so
on. By 1911 twelve states had enacted special
cooperative laws.33 Wisconsin passed its first coop-
erative law in 1887. After 1920, numerous state
laws were passed. The basic provisions of these
laws mirrored the Rochdale Principles. They gener-
ally included the following edicts: (1) cooperatives
could issue shares but the number of shares held
by each member would be limited; (2) voting rights
were to be tied to membership not investment;
(3) each member had one vote; and (4) individual
cooperatives would decide how to distribute their
net profits. Today, all states have cooperative
statutes that are remarkably uniform. Many were
patterned after the state cooperative laws in
Wisconsin, Nebraska, and Kentucky.
At the national level, the government was not as
supportive of agricultural cooperatives. The
Sherman Antitrust Act was passed in 1890 in
reaction to the negative influences of railroad, oil,
and other monopolies at the time. Although the
act contained no explicit reference to coopera-
tives, it made illegal every contract or conspiracy
that restrained trade or commerce. Since agricul-
tural cooperatives allow farmers to set a common
price, several attempts were made to declare them
illegal through court action. From 1890 to 1910,
directors and officers of marketing cooperatives
were indicted under state antitrust laws in six
states under the Sherman Act. Further, in 1897 the
Texas antitrust law was held unconstitutional since
it exempted agriculture. In 1902, the Illinois
antitrust law, similar to that in Texas, was also held
unconstitutional for basically the same reason.
The precarious position of cooperatives was par-
tially corrected at the federal level with the
passage of the Clayton Act in 1914. This act
exempted “agricultural, or horticultural organiza-
tions, instituted for the purposes of mutual help,
and not having capital stock or conducted for a
profit” from the Sherman Act. 34 Although this
helped non-stock, non-profit, cooperative market-
ing associations, it did not clarify the status of
capital stock cooperatives.
The Capper-Volstead Act,
sometimes referred to as the
“Cooperative Bill of Rights,”
authorized the right of farmers
to unite and market or process
their agricultural products
cooperatively without violating
antitrust laws.35
In 1922, U.S. Congress made a bolder gesture in
favor of cooperatives when it passed the Capper-
Volstead Act. The act, sometimes referred to as the
“Cooperative Bill of Rights,” authorized the right of
farmers to unite and market or process their agri-
cultural products cooperatively without violating
antitrust laws.35 It made clear that eliminating
competition between agricultural producers by
their collective action in a marketing or processing
cooperative in and of itself did not constitute a
violation of the Sherman Act and its amendments.
The Capper-Volstead Act recognized both capital
stock and non-stock associations (this distinction
in cooperatives is described in more detail in
chapter 4). In short, it grants limited exemption
from anti-trust laws to agricultural producers who
act together in associations that collectively
process and market their commodities. This
exemption is provided only if the following three
criteria are met:
1. The association operates for the mutual benefit
of producer members (co-op members have to
be agricultural producers);
C O O P E R A T I V E S :18
2. A one-member, one-vote rule is followed, or
dividends on stock or membership capital are
limited to eight percent per annum; and
3. Non-member business must be less than 50
percent of the cooperative’s total business.
Even when these three criteria are met, Capper-
Volstead does not give cooperatives complete
exemption from anti-trust laws. For instance, coop-
eratives cannot force producers to join and they
cannot buy out non-cooperative businesses in
order to create monopolies. There have been
several instances of cooperatives brought to court
for anti-trust allegations even with this law in
place. In addition, farm supply and service cooper-
atives are not given any exemption (see the end of
the chapter for a more detailed description of the
Capper-Volstead Act). Finally, Section 2 of Capper-
Volstead authorizes the Secretary of Agriculture “to
issue a cease and desist order” if he or she has
reason to believe that any such association has
monopolized or restrained trade to the extent that
the price of any agricultural product is “unduly
enhanced.”
The federal government went beyond merely
establishing legal legitimacy for cooperatives; it
helped support organizational efforts by providing
technical assistance, research, information and
credit. The Morrill Land-Grant College Act of 1862
established the land-grant university system and
the Smith-Lever Act of 1914 formalized coopera-
tive agricultural extension programs in the United
States. The research and extension efforts of land-
grant universities were instrumental in creating
many of the farm cooperatives that exist today. The
Cooperative Marketing Act of 1926 broadened and
formalized the USDA’s support and encourage-
ment of farmer cooperatives. It established an
agency (today called the Rural Business—
Cooperative Service) to conduct research and
provide technical assistance and information to
foster increased awareness about cooperatives.
The Agricultural Marketing Act of 1929 established
commodity advisory boards for cooperatives and
the Federal Farm Board, which was charged with
expanding the cooperative movement. Since
access to credit was (and still is) a barrier to coop-
erative development, the government passed the
Farm Loan Act of 1916, which created the Federal
Land Bank for the purpose of providing loans to
purchase land, and the Farm Credit Act in 1933.
The Farm Credit Act helped institute Production
Credit Associations that provided farmers with rea-
sonable operating loans and established thirteen
Banks for Cooperatives (now merged into one
called CoBank) to provide credit to cooperatives
and farmers who were organizing cooperatives.36
These agencies make up the Farm Credit System
(described in more detail in
chapter 4).
Stringing a rural electricity transmission line during the 1930s.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 19
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3
C H A P T E R
The Rural Electrification Act was passed in 1936 as
part of President Franklin D. Roosevelt’s New Deal
programs.37 This act established the USDA Rural
Electrification Administration (REA) as a lending
agency to finance the extension of electric power
to rural areas. Nonprofit organizations were given
first preference for funds, but existing power com-
panies meeting REA loan provisions could also
receive funds. Farmers moved quickly to establish
cooperatives that could take advantage of the new
program. As a result, a formidable argument could
be advanced that rural electric cooperatives are
responsible for bringing about one of the more
profound changes in U.S. agriculture—the
adoption of electricity.
With a strong cooperative infrastructure in place,
cooperatives flourished during the first decades of
the 1900s. Many of today’s cooperatives were
established during this period. The first telephone
cooperative was organized in 1912 and the first
day-care cooperative in 1916. One of the first large
housing cooperatives was established in New York
City in 1927. A group of credit unions created the
CUNA Mutual Insurance Group in 1935.
In this sunny period of growth, agricultural cooper-
atives were prudent enough to form trade organi-
zations to protect their interests if public policy
were ever to shift against them. They established
state- and national-level associations that would
provide commodity information and educational
services to their cooperative members as well as
influence legislation. The Cooperative League of
the USA (now called the National Cooperative
Business Association), the National Milk Producers
Federation, the American Institute of Cooperation
(AIC), and the National Council of Farmer
Cooperatives (the American Institute of
Cooperation is now part of the National Council of
Farmer Cooperatives) were all created between
1916 and 1925.
Early American
cooperators
Early American “cooperative thinkers” were distin-
guished by their commitment to building coopera-
tive business models instead of building utopian
communities or developing co-op philosophy. As
Abrahamsen aptly stated,“Their thinking led to no
fine-spun theories in the realm of social and politi-
cal philosophy. Rather, they were concerned with
cooperative business efficiency and performance
so as to best serve the practical needs of farmers.”38
Aaron Sapiro and Edwin G. Nourse remain the
most recognized examples of early cooperative
leaders and represent two distinct American
schools of cooperative thought that have influ-
enced agricultural cooperative development.
Sapiro (1884-1959) promoted the
organization of large-scale, central-
ized co-ops (legal monopolies) along
commodity lines to help producer
members capture greater market
shares and thereby achieve better
prices. As a lawyer, it is perhaps not
surprising that he also advocated long-term con-
tracts between growers and the co-op (instead of
relying on member loyalty) to ensure timely and
sufficient product delivery. Sapiro’s influence was
greatest in his native state of California and the
Pacific Coast, in part because in the early 1900s his
ideas were better suited to the specialty crops
grown in that region.
Sapiro was a forceful and dynamic speaker who
was able to sway large numbers of farmers
towards his way of thinking. As a result, during the
1920s many cooperatives were formed around the
ideas promoted by Sapiro. Sapiro created a
uniform cooperative marketing law in 1919 that
was adopted in whole or part by 26 states; it also
influenced the wording of the Capper-Volstead
Act.39 Since the ability of cooperatives to capture a
dominant portion of supply seemed highly
unlikely in the early 20th century, Sapiro’s ideas
were only briefly popular. Indeed, most of the early
Sapiro-inspired cooperatives failed. However, his
ideas seem to be more relevant in today’s agricul-
tural environment.
Aaron Sapiro
Edwin G. Nourse (1883-1974), who
grew up on a small farm in Illinois and
eventually earned a Ph.D. in econom-
ics from the University of Chicago,
was staunchly opposed to monopo-
lies of any kind. In stark contrast to
Sapiro’s ideas, Nourse promoted
locally organized and controlled co-
ops that would be large enough to capture only
enough market share to force non-cooperative
firms into behaving more competitively. This idea
is often called the “competitive yardstick hypothe-
sis.”To help the small, local co-ops achieve
economies of scale and compete with larger firms,
Nourse advocated the creation of a federated
system. In a federated system, local co-ops coordi-
nate their purchasing and marketing activities (but
retain their autonomy) through a larger, regional
co-op.
As an academic who held numerous faculty posi-
tions over the course of his career, it is not surpris-
ing that Nourse believed in member education to
ensure member loyalty rather than the “iron-clad”
contracts espoused by Sapiro. Nourse also felt
member education was essential to ensure the
democratic governance of the cooperative would
be sustained. Nourse served
as chairman of the
President’s Council of
Economic Advisors under
President Harry S. Truman
and was an initial founder
of the AIC.
Cooperative restructuring
The growth in new agricultural cooperatives, coop-
erative associations, and cooperative laws slowed
to a crawl after the zenith of the 1920s and 30s.
Cooperatives in the United States, like all other
types of innovations, have followed a typical
expansion and diffusion route:40
n Innovation and experimentation phase
n Take-off phase (a rapid expansion in co-op
numbers)
n Stabilization phase (co-op numbers stay
constant or low growth)
n Consolidation phase
The number of agricultural cooperatives in the
United States peaked in 1930 at about 12,000 but
has been steadily declining since (figure 3.1). By
the 1940s, agricultural cooperatives had started to
enter the consolidation phase and a major reor-
ganization of cooperatives, which continues today,
began. Mergers and consolidations as well as the
expansion of regional cooperatives became
common. The number of agricultural cooperatives
declined from 10,600 to 9,163 during the 1940s
and 50s. Yet, during that same period membership
C O O P E R A T I V E S :20
Edwin G.
Nourse
Table 3.2. U.S. agricultural cooperative numbers,
membership, and net business volume
Net business
Number of volume
Year cooperatives Membership ($ million)
1915 5,424 651,186 1
1929-30 12,000 3,100,000 2,500
1940-41 10,600 3,400,000 2,280
1950-51 10,064 7,091,120 8,147
1960-61 9,163 7,202,895 12,409
1970-71 7,995 6,157,740 20,556
1980 6,282 5,378,888 66,254
1985 5,625 4,781,216 65,601
1996 3,884 3,642,000 106,069
2000 3,346 3,085,100 99,700
2002 3,140 2,794,000 96,750
Source: USDA-ACS,“Farmer Cooperatives: Cooperative Historical Statistics and
USDA/Rural Development; Rural Cooperatives, July/August 1997, pp 4-5,
Nov/Dec 2001, pp 4-5, and Jan/Feb 2004, pp 28-29.
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Cooperative history,trends,
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C H A P T E R
numbers increased from 3.4 million to over 7.2
million (table 3.2). Cooperatives were also increas-
ing their share of the market. By 1955, cooperatives
marketed more than 19 percent of farm commodi-
ties (as measured by percent of cash receipts) and
supplied more than 13 percent of farm inputs (as
measured by percent of farm expenditures).
Agricultural cooperatives were also becoming
more diversified and vertically integrated. By the
1950s, fertilizer and grain inter-regionals (regionals
serving multiple states) were created with some
grain cooperatives moving into international
markets.
Cooperative consolidations, changes within the
agricultural industry, and declining farm numbers
have all contributed to the decline in cooperative
and cooperative membership numbers. The
number of farms in the United States peaked in
1935 at just over 6.8 million while membership in
agricultural cooperatives peaked in 1955 with
approximately 7.7 million members (table 3.2).
The early 1980s was a difficult period for agricul-
tural cooperatives. Both farmers and cooperatives
had over-extended themselves with debt during the
prosperous agricultural growth period of 1973-79.
0
2000
4000
6000
8000
10000
12000
14000
1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Year
N
u
m
b
er
Total
Marketing
Supply
Service
2000
3000
4000
5000
6000
7000
8000
1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
year
Th
o
u
sa
n
d
s
Sources: 1930–1985 statistics came from USDA ACS, Farmer Cooperatives:
Historical Statistics, Report 37; 1985–2000 statistics came from USDA RBCS,
Farmer Cooperative Statistics, Reports 49 through 61.
Sources: 1930–1985 statistics came from USDA ACS, Farmer Cooperatives:
Historical Statistics, Report 37; 1985–2000 statistics came from USDA RBCS,
Farmer Cooperative Statistics, Reports 49 through 61.
Figure 3.1. U.S. agricultural cooperatives, 1930-2000
Figure 3.2. Membership numbers in U.S. agricultural
cooperatives, 1930-2000
By 1980, U.S. agricultural exports had declined
sharply. As a result, grain and oilseed prices
dropped sharply bringing down land values,
creating an agricultural downturn similar to the
1930s. Double-digit interest rates and falling land
values forced farmers to refinance and downsize,
and some were forced into bankruptcy. Farmers
had difficulty paying their bills and some coopera-
tives were forced to close their doors. While coop-
eratives’ market shares had grown during the
previous 30 years, by 1988 market shares for
almost all commodities and farm inputs had stabi-
lized while some declined. Cooperative shares of
farm marketings and farm inputs both fell to
25 percent by 1988. The number of agricultural
cooperatives declined to fewer than 5,000 and
membership fell to 4.2 million.
Cooperative merger activity increased dramatically
in the 1990s and cooperative numbers and mem-
bership continued to decline. The economy and
farm sector overall gained strength during the
1990s and GATT (General Agreement on Tariffs and
Trade) and NAFTA (North American Free Trade
Agreement) opened more international market
opportunities to agricultural businesses. The larger,
more competitive cooperatives that grew out of
the consolidation trend were able to capture some
new international market opportunities. As a result
of these trends, cooperative net business volume
and market shares once again increased during
the 1990s.
Nevertheless, farmers realized that they still faced
flat or declining farm returns. To generate greater
profits, they began to explore more intensive
value-added activities (processed commodities
capture a greater percentage of consumer expen-
ditures than raw commodities). Younger farmers,
who are likely to invest in the stock market, were
also demanding increased and more immediate
returns on their cooperative investment. This
forced cooperatives to consider alternative financ-
ing arrangements.
This environment helped spur a cooperative
revival in the Midwest. Over 100 new generation
cooperatives (NGCs) were organized in the
Dakotas and Minnesota during 1990-2000. The
NGCs retain many of the characteristics of tradi-
tional cooperatives, but concentrate on value-
added activities and require significant up-front
equity contributions that may result in higher
annual cash patronage refunds (see chapter 4 for a
more complete description of NGCs).
Cooperatives
in the 21st Century
The restructuring of agricultural cooperatives that
began in the 1930s continues today. Traditional
agricultural cooperatives continue to consolidate
and merge as they become more diversified, verti-
cally integrated, and international in focus. The
continued restructuring and reinventing of coop-
eratives appears to be paying off. For some com-
modities and farm inputs, market shares continue
to increase.
The success of the NGCs and continued interest in
value-added agriculture (which is capital intensive)
has spurred further cooperative innovation.
Largely in response to cooperative laws they felt
restricted their ability to attract equity from non-
members, a group of Wyoming lamb producers ini-
tiated a new state cooperative statute passed in
July 1, 2001. This statute allows non-patronage
(investor) members to have unlimited returns on
their equity investment and voting rights (includ-
ing board eligibility). A similar law (308B) was
enacted in Minnesota on August 1, 2003 and intro-
duced in Wisconsin and Iowa for legislative consid-
eration in 2004. (See chapter 4 for a more detailed
description of NGC and Wyoming Cooperatives.)
This “Wyoming Cooperative Model” (WCM) is
clearly a departure from the way cooperatives
have traditionally been defined in the United
States and elsewhere. This model opens the door
to non-user ownership and non-user control, and
to benefits distributed based on equity, not use.
However, many cooperative leaders feel that new
cooperatives have no choice. They need larger
pools of capital.
Another significant development was the conver-
sion of a few large, successful agricultural coopera-
tives (including one NGC) to non-cooperative cor-
porations in 2002. This was part of a larger cooper-
C O O P E R A T I V E S :22
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3
C H A P T E R
ative conversion trend.41 The primary motivation
was to gain access to larger pools of capital. Some
members may support conversions if they receive
substantial cash payments for their cooperative
equity. The new cooperative models might also
initiate dramatic changes in state and federal
cooperative policies and support since the differ-
ences between the new agricultural cooperatives
and investor-owned firms are not very transparent.
Growth in cooperative development during the
21st century is more likely to take place as a result
of rural and urban community economic develop-
ment initiatives. The last two farm bills (1996 and
2002) encouraged and funded the organization of
cooperatives in rural communities as a mechanism
for local economic development. As will be dis-
cussed in the next chapter, the cooperative sector
in the United States is extremely varied and con-
tinues to grow.
Major federal laws that cover
cooperatives in the United States
Federal laws that mention cooperatives cover a
wide range of activities: antitrust action, legal
organization, financing, taxation of net income,
regulatory measures that call for special treatment
of cooperatives, etc. The major laws and a brief
description are presented here.
1890: Sherman Antitrust Act—business acts that
restrained trade and conspiracies were
declared illegal.
1898: War Revenue Act—first tax law to specifi-
cally exclude farmers’ cooperatives.
1909: Corporate Tax Statute, Section 38—
exempted agricultural and horticultural
associations from income tax.
1913: Income Tax Statute—exemption granted to
“labor, agricultural, or horticultural associa-
tions.”
1914: Clayton Act—amended the Sherman
Antitrust Act and legalized non-stock agri-
cultural or horticultural cooperatives.
1916, 1918, 1921, and 1926 Revenue Acts—1916
and 1918 exempted from federal tax mar-
keting cooperatives serving as sales agents;
1921 also exempted farm supply coopera-
tives; 1926 eliminated the requirement that
cooperatives serve only as agents for their
members.
1916: Federal Farm Loan Act—created federal land
banks and federal land bank associations to
make long-term loans to farmers to
purchase land or farms.
1922: Capper-Volstead Act—basic federal
enabling act for farmers’ marketing coopera-
tives, either stock or non-
stock.
1923: Federal Intermediate Credit Act—provided
for 12 Intermediate Credit Banks. These
banks sell debenture bonds to the investing
public to provide funds for the farm credit
cooperatives.
1926: Cooperative Marketing Act—created the
division of cooperative marketing in the
United States Department of Agriculture for
research, education, and service work with
farmer cooperatives. Its name was changed
from time to time and today, this is the
USDA Rural Business-Cooperative Service.
1929: Agricultural Marketing Act—provided for a
Federal Farm Board and a $500 million
revolving fund to make loans to coopera-
tives to purchase surplus commodities for
the purpose of stabilizing farm prices, and to
assist cooperatives generally.
1933: Farm Credit Act—created 12 regional and
one central Bank for Cooperatives to make
loans to agricultural cooperatives; and
established the Production Credit
Associations to make loans to farmers for
production purposes.
1934: Federal Credit Union Act—to charter credit
unions under federal law.
1936: Rural Electrification Act—establish the REA,
a loaning agency to rural electric coopera-
tives, rural telephone companies (Oct. 1949
amendments to REA of 1936), and other util-
ities serving rural areas.
1936: Robinson-Patman Act, Section 4—
cooperatives can make patronage refunds
to members and not non-members and not
be guilty of price discrimination.
1937: Agricultural Marketing Act—has provisions
stating how and when cooperatives can act
for individual farmers in voting, pooling of
returns, and servicing producers under mar-
keting agreements and orders.
1940: District of Columbia Consumers’ Cooperative
Act—allowed consumers’ cooperatives in
the District or elsewhere to incorporate.
1948, 1950, and 1961: Federal Housing Acts—FHA
could insure long-term, high percentage,
mortgage loans to non-profit housing coop-
eratives at modest interest rates.
1962 and 1966: Revenue Acts—established how
cooperatives are currently taxed. The 1962
act established that exempt cooperatives
must pay at least 20 percent of net savings
allocated to members on the basis of
patronage in cash and obtain “consent” from
member-patrons for the remainder, if it
wished to exclude from federal income taxes
retained patronage savings; 1966 added
similar tax treatment for “per unit retain.”
1968: Agricultural Fair Practices Act—prohibits
unfair trade practices affecting producers
and associations of producers.
1978: Act to establish National Cooperative
Bank—Congress provided for the National
Cooperative Bank to provide financing to
cooperatives not eligible to borrow from the
Banks for Cooperatives or the REA. In 1981,
the Bank was privatized and is now totally
owned by its borrowers.
The Capper-Volstead Act of 1922
The Capper-Volstead Act has never been amended
and still provides exemption for certain agricul-
tural and horticultural cooperatives in the United
States today. The following are the principal provi-
sions of the Act:
n It authorizes associations of producers of agri-
cultural products.42
n The members of such associations must be
“engaged in the production of agricultural
products as farmers, planters, ranchmen,
dairymen, nut or fruit growers.”
n The cooperative may collectively process,
prepare for market, handle, and market in inter-
state and foreign commerce.
n Cooperatives must operate for the mutual
benefit of members as producers.
n One cooperative may join with others to have
marketing agencies in common, i.e., federated
associations are permissible.
n The cooperative may be incorporated or unin-
corporated.
n Cooperatives may have marketing contracts
with their members.
n Cooperatives may be organized with or
without capital stock.
n Cooperatives must conform to one or both of
the following requirements:
—No member of the association may have
more than one vote, or
—The association may not pay dividends on
stock or membership capital in excess of eight
percent per annum
n The cooperative must not deal in the products
of nonmembers greater in value than those
handled by it for members.
Since some read more into the act than is actually
there, the following is a list of areas it does not
cover:
n It does not regulate agricultural production nor
establish quotas.
n It does not prevent cooperatives from monop-
olizing the market of an entire commodity
through voluntary internal growth. It may,
however prevent such monopolization if it
occurs through mergers or acquisitions.
n It does not give cooperatives special immunity
from antitrust or other laws, which would not
apply to other businesses firms under similar
situations. Congress did not intend to com-
pletely exempt cooperatives from the antitrust
laws nor to exclusively empower the Secretary
of Agriculture to supervise their conduct. This
was brought out in a number of court cases
decided by the Supreme Court, appeals court,
and the lower courts.
C O O P E R A T I V E S :24
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3
C H A P T E R
n It does not apply to purchasing or service asso-
ciations, but is exclusively restricted to farmers’
marketing and bargain
ing cooperatives.
n It does not prevent price increases, but undue
price enhancement might invite prohibitory
action by the Secretary of Agriculture and/or
the Justice Department. In the history of the
act, such action has never been taken.
n It does not enable cooperatives to incorporate
under it.
n It does not permit members to buy products
and then sell them through the association as
dealers or speculators. It is restricted to
members as producers of the products
marketed.
n It does not automatically grant eligibility to
borrow from Bank for Cooperatives.
n It does not require cooperatives to incorporate
to qualify under the act.
n It does not grant exemption from payment of
federal or state income taxes. Whether a coop-
erative pays federal or state income taxes
depends on whether or not they allocate net
earnings on the basis of patronage.
n It does not prevent pooling of commodities,
expenses, sales receipts, or net earnings.
Chapter 185: The Wisconsin
Cooperative Law
Wisconsin enacted its first cooperative law in 1887.
In 1911 Wisconsin passed a largely revised cooper-
ative law that was copied by 16 states. Wisconsin
revised its cooperative laws in 1921, in 1955 and
most recently, in 1989. This Wisconsin cooperative
law is referred to as Wisconsin Chapter 185. The
principal provisions of that law follow:
n Cooperatives may be organized under this
chapter for any lawful purpose except banking
and insur
ance.
n Five or more adults, one of whom must be a
resident, may form a cooperative by signing,
acknowledging and filing articles.
n Each member who is entitled to vote shall have
one vote, but local associations affiliated with a
central association (a federated structure) may
vote on the basis of number of members the
local has, or on the amount of business trans-
acted with the organization.
n Proxy voting is not allowed, but voting by mail
is permitted
n A quorum must be present to legally transact
business.
n The business and affairs of the cooperative
should be managed by a board of directors of
not less than five persons; in a cooperative with
fewer than 50 members, the number of direc-
tors shall not be less than three.
n The members elect directors. Every director
shall be a member or a representative of a
member, which is a business entity. Unless the
bylaws provide otherwise, a director may be
removed upon a majority vote of all members.
n Directors elect amongst themselves officers of
the board.
n Marketing contracts are permitted but cannot
exceed 5 years. They may be self-renewing for
periods not exceeding 5 years each, subject to
the right of either party to terminate at the end
of each term. Such contracts may require liqui-
dated damages to be paid by the member in
event of a breach of the contract. The associa-
tion may file in the office of the Register of
Deeds of the county in which the member-
maker of the contract resides. This serves as
public notice. Any third party who interferes
with the completion of the contract between
the member and the cooperative may become
liable for damages to the cooperative.
n Once annually the directors shall determine
and distribute the net proceeds after all oper-
ating expenses are met and reasonable and
necessary reserves are set aside. An amount
not to exceed 5 percent may be set aside as an
educational fund to be used in teaching or pro-
moting cooperative organization or principles.
n A share of the net proceeds may be set aside or
paid to officers or employees, or both.
n Dividends may be paid on shares of capital
stock up to 8 percent per annum; the remain-
ing net proceeds, after a reasonable and neces-
sary reserve for depreciation and obsolescence
of physical property, doubtful accounts, and
other valuation reserves, shall be paid as
patronage refunds either to member patrons
only, or to member and non-member patrons
alike, or to non-member patrons at a lower pro-
portion than to member patrons. Net proceeds
from non-member business cannot be paid out
as patronage refunds to members, but may be
used to pay dividends on capital stock.
n The books of a cooperative may be examined
by a member or stockholder at any reasonable
time and for a proper purpose upon written
application.
n Only cooperatives may use the term “coopera-
tive,” or any variation thereof as part of their
corporate or business name.
n At any member meeting a cooperative may
adopt any amendment to its articles, if a state-
ment of the nature of the amendment was
contained in the notice of the meeting. The
amendment is adopted by two-thirds of the
member votes cast thereon. It also requires a
two-thirds approval by votes cast by stockhold-
ers, other than membership stock, if the
amendment has a potential impact on the
value of the stock.
n Mergers of cooperatives must be approved by
two-thirds of all member votes cast thereon
and two-thirds of the votes of all stock
holders
(other than membership stock) cast thereon.
Members of a cooperative may amend their
articles to allow for approval with a majority of
votes cast.
In Wisconsin, Chapter 186 of Wisconsin statutes
relates to the organization and operation of credit
unions. Town mutual insurance companies are
organized under Wisconsin Chapter 612. No
special state laws for consumer cooperatives exist
in Wisconsin (just as in most other states); they can
be incorporated under Chapter 185.
C O O P E R A T I V E S :26
In many ways, the “kaleidoscopic diversity” ofcooperatives defies classification. They exist innearly every sector of the economy and many
serve multiple functions. They range from very
small, locally oriented associations to multinational
business conglomerates. In spite of this diversity,
for ease of explanation and analysis, cooperatives
are often classified in one of three ways:
1. Primary business activity. Cooperatives are
often categorized as production, marketing,
purchasing, consumer, or service. Each of these
broad groups includes more refined categories
that reflect the wide variety of products
handled and functions performed by coopera-
tives.
2. Market area. Cooperatives can be classified by
the size of their market area: local, super-local,
regional, national, or international.
3. Ownership structure. Six distinct co-op owner-
ship models can be identified: (1) centralized;
(2) federated; (3) hybrid—some combination of
centralized and federated; (4) new generation
co-ops (NGCs); (5) the new “Wyoming coopera-
tives”; and (6) worker-owned co-ops.
This chapter provides a more comprehensive dis-
cussion of the various types of cooperatives that
exist and the extent of their economic success in
the United States.
Cooperatives by primary
business activity
Agricultural production
cooperatives
Collectively producing food on community-owned
land is rare in the United States but more preva-
lent in other countries of the world. Collective
farms still exist (and now they are voluntary) in
Russia and other parts of the former Soviet
Union.43 Production cooperatives are also part of
the agrarian land reform movements in many
Central and South American countries.
The kibbutzim and moshavim, established in Israel
in 1948, are unique forms of the village-based
cooperative.44 In a kibbutz, the community owns
all the land and equipment and all production
decisions are made collectively. In a moshav, indi-
vidual households own plots of land and make
their own production decisions. A village-level
cooperative provides inputs, operates a machinery
pool, and helps market member products.
In the United States only a few dairy, hog, fruit and
vegetable production cooperatives exist. In these
cases, farmers have banded together to organize
relatively large operations to achieve greater
profits and to add value to their products (e.g.,
corn farmers raise hogs collectively, using their
corn as feed).
While technically not a cooperative, community
supported agriculture (CSA) represents a relatively
new approach to collective farming in the United
States.45 CSAs are part of a growing movement
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 27
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A kibbutz in Israel
where producers and community members share
responsibility for their food production.
Members
or “shareholders” pay an annual fee to cover the
cost of production for the upcoming season. In
return, members receive a portion of the farm’s
produce each week throughout the growing
season. This system can provide farmers with a
more equitable return for their labor and invest-
ment while relieving some of the burdens and
uncertainties associated with conventional mar-
keting.
Marketing cooperatives
As their name suggests, the primary function of
marketing cooperatives is to market the products
of their members. Beyond that, there is a great
range of additional functions the cooperatives in
this group perform. Bargaining cooperatives (or
associations) are at one end of the spectrum. These
associations negotiate with processors and other
businesses in the supply chain for better terms of
trade for their members. A pure bargaining associ-
ation does not physically handle or take title to the
product involved but merely bargains for price and
other terms of sale. Bargaining associations are
most prevalent in the dairy and fruit and vegetable
sectors.
Two or more cooperatives that are involved in
marketing may create a separate business to
perform this bargaining function. This business,
which is commonly called a marketing agency-in-
common, has a single purpose: to serve as the mar-
keting agent for its co-op members. It does not
physically handle products and it generally does
not take title to them.
At the other end of the spectrum, some marketing
cooperatives also grade, process, package, label,
store, distribute, and merchandise products.
Processing or manufacturing cooperatives focus
on the processing of raw farm products rather
than on the marketing and often leave that
responsibility to brokers or regional cooperatives.
In general, marketing cooperatives in the United
States are becoming larger and more vertically
integrated by increasing their ownership and
control of facilities beyond the first buyer level,
and in some instances, all the way to the retail
level. Some regional marketing cooperatives have
established well-recognized brand names (e.g.,
Land O’Lakes).
The Land O’Lakes “Indian Maiden” logo is one of
the most recognized brands in America. It was
created during the search for a brand name and
trademark in 1928. In 1939 it was simplified and
modernized by Jess Betlach, a nationally recog-
nized illustrator.
In 2002, cooperatives marketed 27 percent of all
farm products in the United States and had a
combined net business volume of $69.6 billion
(table 4.1). Dairy and grain cooperatives accounted
for nearly 60 percent of that figure ($40.5 billion).
Cooperatives are more important to the dairy
industry than to any other major agricultural com-
modity. In 2002, 196 cooperatives marketed 139.2
billion pounds of members’ milk, or 86 percent of
the country’s milk as it left the farm, up from 78
percent in 1985 (table 4.1).46 Cooperatives also
comprise a sizable share of dairy manufacturing.
Cooperatives account for about 85 percent of dry
milk products, 71 percent of butter, 40 percent of
natural cheese marketed, and 7 percent of
packaged fluid milk in the United States.47 Dairy
cooperative product lines also include ice cream,
ice milk, bulk condensed-milk products, condensed
whey, dry whey and whey products, and frozen
product mix. Dairy cooperatives are heavily
involved in brand merchandising, accounting for
more than half of all the cooperatives that market
products under their own brands.
C O O P E R A T I V E S :28
One of the most
recognizable
cooperative brands
in the United
States, then and now.
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Table 4.2. Agricultural cooperative statistics, 2002
Number of U.S. market share2 Net business volume
Type of cooperative cooperatives1 (%) (million dollars)
PRODUCTS MARKETED
Cotton 14 56 2,461
Dairy 196 86 23,038
Fruits and vegetables 212 19 7,338
Grains and oilseeds 768 35 17,474
Livestock and poultry 85 14 12,304
Rice 15 40 748
Sugar 48 55 2,440
Other products 219 8 3,852
Total marketed products 1,557 27 69,655
SUPPLIES PURCHASED
Crop protectants n.a. 32 2,713
Feed n.a. 21 5,573
Fertilizer n.a. 42 4,315
Petroleum n.a. 42 7,157
Seed n.a. 12 1,086
Other supplies n.a. n.a. 3,035
Total farm supplies 1,201 27 23,879
Services and other 380 n.a. 3,416
TOTAL 3,138 n.a. 96,950
1 Many cooperatives are multi-functional; they are classified by USDA according to their predomi-
nant commodity or function as indicated by business volume.
2 Market share estimates are based on data from several sources. Cooperative shares of farm mar-
ketings are estimated by calculating “farmer payments”( = cooperative net business volume-
gross margins) and dividing them by the appropriate total U.S. cash receipts. Cooperative farm
supply shares are estimated by calculating adjusted business volumes (= cooperative net
business volume-export business volume-sales to other firms-supplies sold for non-farm
purposes) and dividing them by the appropriate total U.S. cash expenditures (Kraenzle and
Eversull,“Co-ops increase share of farm marketings,” Rural Cooperatives, May/June 2003).
Sources: USDA, Rural Business-Cooperative Service, Rural Cooperatives, Jan/Feb 2004, pp 28–29. Information
about 2002 market shares from Eldon Eversull at USDA RBCS, unpublished.
In 2002, 768 cooperatives marketed grains and
oilseeds. These cooperatives accounted for 35
percent of the nation’s market share, up slightly
from 33 percent in 1985. In grain and oilseeds, the
marketing cooperative’s role is most extensive in
aggregating, storing, and marketing. Relatively few
co-ops process grain. Those that do operate soy oil
refining plants, rice mills, flaxseed and sunflower
seed crushing plants, durum flour mills, and corn
wetmilling plants that produce syrup and starch.
Cooperatives also market nearly every type of fruit,
vegetable, and nut grown
in the United States.
They play a major role in marketing oranges,
grapes, apples, cranberries, potatoes, and almonds.
In 2002, growers of these commodities owned 212
cooperatives that marketed products valued at
$7.3 billion. These sales accounted for 19 percent
of the market share. Many fruit and vegetable
cooperatives market products under their own
brands; consumers are probably most familiar with
Blue Diamond, Ocean Spray, Sunkist, Sun-Maid,
Sunsweet, Tree Top, and Welch’s.
Marketing cooperatives also play an important role
in the livestock and poultry sector. Marketing activ-
ities include selling and buying on commission
and dealer operations (buying stations with a
central sales desk buying feeder livestock for some
members and buying slaughter and feeder live-
stock from others). Some cooperatives go beyond
marketing and are involved in the production of
feeder animals; contract hog production; and
slaughtering, processing, and meat distribution. In
2002, 85 cooperatives handled livestock and
poultry products with a net business valued at
$12.3 billion. These cooperatives accounted for 14
percent of the total U.S. livestock marketing
volume at the first handler level, up from 8 percent
in 1985.
Purchasing cooperatives
Purchasing cooperatives provide members with
dependable supplies at competitive prices. By pur-
chasing in bulk, the co-op receives volume dis-
counts, which are then passed on to the members.
Most farmers use purchasing (farm supply) cooper-
atives for their farm inputs (feed, seed, fertilizer,
petroleum products, farm equipment, hardware,
and building supplies). Over 1,200 farm supply
cooperatives sold 27 percent of all major supplies
purchased by farmers in 2002 (table 4.1). Today,
many farm supply co-ops also serve non-farmers (a
growing population in many rural communities in
the United States), and handle such items as
heating oil, lawn and garden equipment, and
household appliances. Some also operate gro-
ceries, convenience stores and restaurants, espe-
cially when no other business is willing to support
such operations in small, rural towns. The total net
business volume of farm supply co-ops in 2002
was $23.9
billion.
Cooperatives play a vital role in providing petro-
leum products to rural communities. Their range of
activities includes exploring for crude oil and
natural gas, refining and manufacturing, wholesale
and retail distribution, and related operations such
as research and product testing. By value, petro-
leum products are the largest component of coop-
C O O P E R A T I V E S :30
Blue Diamond, Ocean Spray, and
Sun-Maid are among the more
familiar cooperatives marketing
fruit, nuts, and vegetables.
Cooperatives are involved in
marketing nearly every type of
fruit, vegetable and nut grown in
the United States.
erative farm supply activity: $7.2 billion or 30
percent of supply cooperatives’ net business
volume in 2002. Farm supply cooperatives
accounted for 42 percent of farmers’ fuel pur-
chases in 2002. Feed sold at farm supply coopera-
tives in 2002 had a net business value of $5.6
billion. This volume amounted to 21 percent of
farmers’ total feed purchases.48
Farmers have used cooperatives to secure fertilizer
sources such as potash and phosphate rock. One
of the largest fertilizer manufacturing companies
in the United States is the interregional farmer
cooperative, CF Industries. In 2002, cooperative fer-
tilizer sales in the United States were valued at $4.3
billion. This represented 42 percent of the total fer-
tilizer purchased by farmers.
Supply cooperatives also provide farmers with
crop protection products such as insecticides,
fungicides, herbicides, rodenticides, soil treat-
ments, and wood preservatives. In 2002, farmers
purchased 32 percent of their crop protection
products through a cooperative, up from 29
percent in 1985. The net business value was $2.7
billion.
Non-farm related purchasing cooperatives sell to
independent retailers. For example, the owners of
America’s independent hardware stores organized
purchasing cooperatives to pay less for the
products they eventually sell, which in turn helps
them compete with big warehouse chains like
Home Depot. Over 6,000 True Value dealer-owned
hardware stores are members of the TruServ pur-
chasing cooperative, established in 1948 with 25
members. The ACE Hardware dealer-owned coop-
erative, established in 1924, now serves over 4,800
stores.
Similarly, fast-food restaurants have formed pur-
chasing cooperatives (owned by the franchises)
that supply over 10,000 restaurants with almost
everything they need – food, restaurant supplies,
equipment, advertising, insurance, etc. Restaurants
like Burger King, Dairy Queen, Kentucky Fried
Chicken, and Taco Bell have all organized purchas-
ing cooperatives.
To better serve consumers, many independent
grocers also depend on cooperative wholesalers.
Examples include Certified Grocers, Piggly Wiggly,
and Wakefern Food Corporation (owned by
ShopRite grocery stores). These wholesalers
provide their member-grocers with the identity,
brand names and buying power they need to
compete with the large grocery chains.
Hospitals have also formed purchasing coopera-
tives to buy supplies at lower prices.
Consumer cooperatives
Consumer cooperatives are a specific type of pur-
chasing cooperative. Food cooperatives, especially
natural food stores, are America’s quintessential
consumer cooperative. An English immigrant in
New York City established the first food co-op in
the United States in 1822. Many food co-ops were
organized during the Great Depression, when
people everywhere were trying to save money on
household expenses. Many of these food co-ops
still exist. Today, however, food cooperatives are
more commonly associated with supplying natural
or organic products. There are nine natural food
cooperative wholesalers across the United States.
Cooperative Grocer, an industry magazine, esti-
mates that natural food co-ops have 550,000
members while 4,000 food buying clubs boast
another 88,000 members. Altogether, they have a
combined retail volume of $600 million. Most food
cooperatives serve non-member customers,
although they customarily charge them higher
prices. Some cooperatives require members to
work a certain number of hours in addition to or in
lieu of a membership
fee.
Service cooperatives
Farmers, consumers, and businesses use coopera-
tives to obtain a wide variety of specialized
services. In some cases, these services may be
provided as a division or subsidiary of a coopera-
tive whose primary function is either marketing or
purchasing. Agricultural service cooperatives
provide a wide variety of services, including artifi-
cial insemination, milk testing, cotton ginning,
trucking, storage, grinding, crop drying, and live-
stock shipping. Other common types of service
cooperatives include finance, electric, telephone,
housing, and health care.
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Finance. Eighty four million people are members
of 9,569 credit unions in the United States.49 Credit
unions are the fastest growing type of cooperative,
not only in the United States, but worldwide. Credit
unions offer a variety of services, savings and
loans, credit cards, and retirement accounts. Today,
one can find credit unions for schools and universi-
ties, federal employees, communities, companies,
etc. Increasingly, low-income communities have
come to view credit unions as a force for economic
development.
The Farm Credit System, created by Congress in
1916, is the oldest and largest financial cooperative
in the United States. It provides loans, crop insur-
ance, and other financial services to more than a
half million farmers, agribusinesses, agricultural
cooperatives, and rural utility cooperatives. It is a
nationwide network of cooperative financial insti-
tutions and service organizations (six Farm Credit
Banks and one Agricultural Credit Bank, which
serves over 100 local Farm Credit associations).50
It is estimated that today the Farm Credit System
provides more than 25 percent of U.S. agricultural
credit.
CoBank, the national bank charged with providing
credit to cooperatives, is part of the Farm Credit
System. It was created in 1989 as the result of the
consolidation of 11 out of the original 13 Banks for
Cooperatives established by the Farm Credit Act of
1933. In 1999, CoBank merged with the St. Paul
Bank for Cooperatives, making it the national
leader in cooperative lending. CoBank is owned by
approximately 2,500 stockholders (cooperatives,
Farm Credit associations, and other rural businesses).
Other financial institutions that serve cooperatives
include the National Rural Utilities Cooperative
Finance Corporation (CFC), which has loaned funds
to rural electric and telephone cooperatives since
1969, and the National Cooperative Bank (NCB), a
leader in providing loans to housing, consumer,
and other non-agricultural cooperatives in the
United States.51
Insurance. Since the 1920s, cooperative insurance
companies have proven to be among the nation’s
most reliable suppliers of insurance. Mutual
Service Insurance (MSI) was established in the
early 1930s to provide insurance to farm co-ops. In
2004, MSI Insurance Companies merged with
Country Insurance and Financial Services (operat-
ing under the latter name) and provides property
and casualty insurance to agribusinesses and
cooperatives, as well as life and homeowners
policies to individuals. Members of Ohio Farm
Bureau created Nationwide Insurance Enterprise to
sell auto insurance to Ohio farmers in 1926. Today,
Nationwide is one of the largest insurance and
financial services companies in the world, with
more than $148 billion in assets. It offers a full
range of insurance products (auto, fire, life, health,
and commercial) and financial services (adminis-
trative services, annuities, mutual funds, and retire-
ment plans).
Utilities. Rural utility cooperatives are essential to
rural community development in the United
States. They built the infrastructure to provide elec-
tricity and telephone service to rural areas when
no other companies felt they would make enough
return on that type of investment. In 2002, nearly
900 rural electric cooperatives provided electricity
to 37 million people in 47 states. Sixty-five are gen-
eration and transmission cooperatives (G&Ts),
which means they generate and transmit electric-
ity for other distribution cooperatives. Rural
electric and telephone cooperatives also invest in
their local communities, providing distance
learning programs for schools and establishing
industrial parks.
Housing. As housing costs in the United States
continue to climb, housing cooperatives have
become an increasingly attractive housing option.
Housing cooperatives make housing affordable to
millions of Americans from every walk of life and
every income level. Housing cooperatives today
take the form of retirement villages, mobile home
parks, co-housing communities, apartment com-
plexes for low-income residents, and even house-
boats. College students have been living in cooper-
ative housing for decades. One of the largest, the
University Students’ Cooperative Association
(USCA) in Berkeley, California, accommodates close
to 1,300 students (approximately four percent of
the total University enrollment) in 20 buildings.52
C O O P E R A T I V E S :32
Health care. In at least a dozen cities in the United
States, companies have established member-
owned cooperatives to purchase health care for
their workers. Community health care centers,
another form of cooperative health care, can be
found in many rural areas and inner city neighbor-
hoods. Health maintenance organizations (HMOs),
many of which are organized as cooperatives,
provide health care to more than 1 million
Americans. HMOs have built their reputation by
concentrating on primary care, or preventive
medicine. Among the biggest HMOs in the nation
is Group Health Cooperative of Puget Sound,
Washington, which provides medical services to
477,800 people, one of every 11 residents in the
state of Washington.
Others. Examples of other consumer and service
cooperatives include cooperative memorial soci-
eties (approximately 140 exist in the United States
with 500,000 members), outdoor recreation retail-
ers (Recreation Equipment Inc., or REI, is the largest
consumer-owned co-op in the United States),
hotels (created as a cooperative in 1946, Best
Western is the world’s largest lodging chain),
florists (Florists Telegraph Delivery Service—FTD),
and a cooperatively owned cable TV channel (C-
Span, founded by owners and operators of the
nation’s cable television channels).
Cooperatives by
market area
Local cooperatives
Local cooperatives have typically operated in rela-
tively small geographic areas (serving members
who live within a radius of 10 to 30 miles or within
a single county). Usually they have only one facility
(e.g., a single store or plant). Mergers and acquisi-
tions, however, have enlarged the operating size of
many locals in the United States. Some farm supply
and grain locals are now as big as regionals were
in the 1950s. Super locals cover a multi-county
area, often with several locations.
Interregional and national
cooperatives
Large cooperatives serving one or more states in
an area are called regional cooperatives.
Interregional and national cooperatives serve a
major portion of the United States. Although
regional cooperatives are sometimes in competi-
tion with one another, they cooperate through
these national associations to better serve their
members.
Major interregional and national cooperatives
include CF Industries and Universal Cooperatives.
CF Industries is owned by eight regional farm
supply cooperatives; it serves over one million
farmers in 48 states and Canada. Universal
Cooperatives is owned by 17 regional agricultural
cooperatives; it provides manufacturing, distribu-
tion and purchasing services to over 8,000 retail
outlets and over two million co-op customers
worldwide. Products supplied range from tires to
detergents to food products. Universal owns the
CO-OP brand name, one of the oldest trademarks
in the United States.
International cooperatives
International cooperatives serve members and
operate in more than one country. Today, several
agricultural cooperatives that began in the United
States operate in several countries. For example,
Growmark has operations in the United States and
Canada; Land O’Lakes has investments in farm
supply and dairy processing operations in Eastern
Europe; and the International Cooperative
Petroleum Association, headquartered in the
United States, has member cooperatives in Belgium,
Denmark, Egypt, France, and other countries.
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Legend:
C O O P E R A T I V E S :34
Regional cooperative
Local cooperative
Member Member
Local cooperative
Member Member
Local cooperative
Member Member
Figure 4.3. The federated cooperative structure
Centralized regional cooperative
Local branch
Member Member Member
Local branch
Member Member Member
= flow of goods and services
= ownership and control
Figure 4.2. The centralized cooperative structure
with more than one business location
Local cooperative
Member Member Member
Figure 4.1. The centralized cooperative
structure with one business location
Cooperatives by
ownership structure
Centralized cooperatives
Centralized cooperatives are owned directly by
their members (figure 4.1) and are typically local
with a single branch. Most cooperatives in the
United States are centralized cooperatives.
Regional, national, and international cooperatives
may also be centralized, although it is not as
common. Larger centralized cooperatives may
have several branches or retail outlets but opera-
tional control and authority are centralized at the
headquarters of the cooperative (figure 4.2).
Centralized cooperatives have one main office, one
board of directors, and one CEO or general
manager.
The service area of a centralized regional coopera-
tive is often divided into districts. Each district
usually has a given number of delegates depend-
ing on the size of the cooperative membership.
Members within each district elect the delegates,
who in turn elect the board of directors. The board
hires the CEO or general manager. The CEO hires
managers to oversee the daily operations of each
branch.
Ocean Spray, the cranberry juice company, is a
well-known centralized regional cooperative. It is
owned by more than 800 cranberry growers and
126 grapefruit growers located throughout the
United States and Canada. The headquarters are
located in Massachusetts, but fruit receiving
stations and processing and bottling plants are
located throughout the United States and Canada.
Federated cooperatives
A federated cooperative is a cooperative owned
and controlled by other cooperatives (figure 4.3).
Local cooperatives elect, through their board or
elected delegates, the board of the federated
regional cooperative. Board directors at the
regional level typically represent geographic dis-
tricts weighted by the number of local coopera-
tives in a given area. For example, CHS has eight
regions and 17 directors; the number of directors
per region varies from 1 (regions 2, 7, and 8) to 5
(region 1, which has the most members) (see
figure 4.4).
Federated regional board members may all be
members from the locals, or they may represent a
combination of members and managers of local
cooperatives. The number of voting delegates may
be one per cooperative or it may be based on
membership size, business volume with the feder-
ation, equity investment with the federation or a
combination of these factors.
Local cooperatives receive benefits (patronage
refunds) in proportion to their patronage with the
federated cooperative. They also invest equity in
the federated co-op, which can be lost should the
co-op go bankrupt. This happened when Farmland,
one of the largest federated farm supply coopera-
tives in the United States at the time, went
bankrupt in 2003.
Hybrid cooperatives
Some large cooperatives have both centralized
and federated features. In these cooperatives,
called combination or mixed, both individuals and
autonomous cooperatives are direct members. For
example, Land O’Lakes is owned by more than
7,000 producer-members and approximately 1,300
local cooperatives.
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Figure 4.4. The regional map for CHS (2004). As with
other federated cooperatives, board representation is
weighted based on the number of cooperatives in each region.
Other business structures
Cooperatives can use several other types of struc-
tural arrangements to take advantage of economic
opportunities. A subsidiary is a corporation organ-
ized, owned, and controlled either directly or
through trustees by a parent cooperative. To
legally isolate the parent cooperative from the
subsidiary, there needs to be clear separation of
management and profits between the two organi-
zations. The purpose of the subsidiary is to assume
certain duties and functions of the parent cooper-
ative.
A joint venture is an association of two or more
participants, persons, partnerships, corporations, or
cooperatives that carry on a specific economic
operation, enterprise, or venture. The identities of
these participants, however, remain separate from
their ownership or participation in the venture. Use
of joint ventures among cooperatives involves a
partnership arrangement between two or more
cooperatives. This type of activity has become
commonplace among both local and regional
cooperatives. Regional supply cooperatives have
formed joint ventures to manufacture feed and fer-
tilizer or to refine petroleum products. More
recently, cooperatives have become involved in
joint ventures with investor-owned firms (IOFs).
A holding company is a corporate entity with
controlling ownership in one or more operating
companies. This degree of ownership can vary
widely, as long as the holding company can
exercise control through the operating company’s
board of directors. Normally, the holding company
generates no revenues from operations. Income is
limited to returns from investments in the operat-
ing companies. Cooperative Resources
International (located in Wisconsin) for example, is
a holding company for three cooperative sub-
sidiaries: Genex, an artificial insemination (AI)
cooperative; AgSource, a milk testing and related
service cooperative; and Central Livestock, a live-
stock marketing cooperative.
An information sharing organization comprises
two or more cooperatives that market and price
independently, but exchange production and
market information. Improved information allows
participating cooperatives to improve their mar-
keting and pricing efforts. For example, one group
of dairy cooperatives in the United States
exchanges their production, inventory, and market
information for dry whey weekly; another group
does the same for non-fat dry milk.53
New generation cooperatives (NGC)
New generation cooperatives (NGCs), also referred
to as new wave or value-added cooperatives, have
two structural characteristics that distinguish them
from other types of centralized agricultural coop-
eratives.54 First, NGCs tie membership shares to
“delivery rights.” Members purchase shares that
give them the right and obligation to sell a certain
quantity of product to the cooperative. For
example, one share may mean the member will be
required to deliver 1,000 bushels of wheat to the
cooperative each year. If the member fails to
deliver, the cooperative has the right to assess the
member some fee to cover the cost incurred from
the co-op purchasing the shortfall elsewhere.
Second, NGCs have limited or closed membership.
Through the sale of delivery rights, the cooperative
limits the number of members and the quantity of
product it receives from members.
The initial membership share price is determined
by dividing the total amount of equity capital
needed from members by the number of units of
product that will be processed by the cooperative
plant. When they want to leave the cooperative, or
reduce the amount they sell to the co-op,
members can sell their shares to other producers.
This marketability means membership shares can
also change in value, either increasing or decreas-
ing. Share value depends on cooperative perform-
ance.
Since members typically provide significant equity,
they receive a relatively high portion of the co-op’s
annual profits as cash patronage refunds. If the
cooperative needs additional capital for growth, it
may issue additional shares of delivery rights.
C O O P E R A T I V E S :36
The Wyoming cooperative model
As noted in the previous chapter, a new Wyoming
cooperative statute was enacted July 1, 2001. It
legalized the creation of a limited liability
company (LLC)–cooperative hybrid, which will be
referred to here as the Wyoming Cooperative
Model (WCM) although other states (such as
Minnesota) have passed or are considering similar
cooperative statutes. The WCM allows two classes
of members: patron members, those who use the
cooperative, and investment members, those who
do not use the cooperative but invest equity
capital. All members can have the same voting
rights, although bylaws can be written to subscribe
more complex voting rights. The law does not
require investment members to be afforded the
right to vote, therefore, bylaws can be written that
do not give them voting rights.
Patron member votes are counted collectively. For
example, assume patron members possess 60 of
the total 100 voting rights in a cooperative. If a
majority of the patron member votes, say 40, are
cast in favor of a proposal, 60 votes are actually
counted as favoring the proposal. Any member can
be elected to the board of directors, although the
board must include at least one patron member,
and patron members must represent at least half
of the voting power of the board. Thus, the cooper-
ative statutes provide some protection of patron
member control.
Annual net profits are divided between two pools:
a patronage and an investment pool. Net profits
are distributed to patron members on the basis of
use and to investment members on the basis of
investment. For instance, assume the cooperative
chooses to allocate $100,000 of its annual net
profits to its members. Patron member A, whose
patronage of the cooperative represents 5 percent
of the cooperative’s total profits, would receive
$5,000. Investment member B, whose investment
represents 10 percent of the cooperative’s equity,
would receive $10,000. However, patron members
as a group must receive at least 15 percent of the
profit allocations.
The WCM is eligible for partnership (Subchapter K),
limited liability, or cooperative tax status. This
decision is up to the board of directors.
Clearly, the primary advantage of the WCM is its
ability to attract “outside” investors such as venture
capital companies. Since many financial institu-
tions require at least a 50-50 debt-to-equity ratio,
this additional influx of capital means many new
ventures become feasible. The WCM advantages
are balanced by some fairly substantial drawbacks.
Perhaps most significantly, it is not protected by
the Capper-Volstead Act. Further, it is not eligible
to receive loans from CoBank (although CoBank is
pursuing a change in its cooperative definition
that would allow it to make loans to WCMs).
Worker-owned cooperatives
As the name implies, employees own worker-
owned cooperatives. Most worker-owned coopera-
tives operate in the processing or service sectors.
With this type of arrangement, usually (but not
always) profits and losses from the business are
allocated to the members based on their individ-
ual labor contributions rather than their patron-
age. Worker-owned cooperatives have existed in
the United States since colonial times. They are
created to preserve jobs, improve working condi-
tions, wages, and productivity, spread ownership of
capital resources more broadly, and establish more
democratic work environments. The economic
downturn and high unemployment rates of the
1980s generated a surge of interest in worker
cooperatives in the United States. Today, there are
an estimated 300 worker-owned cooperatives in
the United States.55
Two structures related to worker-owned coopera-
tives are worker collectives and Employee Stock
Ownership Plans (ESOPs). The term “collective” in
this context refers to a management style rather
than an ownership model. Thus, a worker-owned
cooperative can also be a collective. Collectives are
managed by the entire membership instead of a
select management team; they have a flat man-
agement structure rather than a hierarchical one.
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C H A P T E R
ESOPs developed out of the U.S. Employee
Retirement Income Securities Act of 1974. This act
changed the federal tax code to allow special
employee ownership through the employee’s
pension plans. The purpose of an ESOP is to enable
employees to acquire beneficial ownership within
their company without having to invest their own
money. Many businesses with ESOPs are not com-
pletely employee owned; it is often a
corporation/employee mix. Also, there is no
requirement for democratic control, unlike the
structure of cooperatives. An estimated 10,000
firms in the United States are ESOPs, employing 10
million people.
Conclusion
In the United States, as in other countries, coopera-
tives play a prominent role in national and local
economies. They exist in nearly every sector, serve
multiple functions, and range in size from very
small, local cooperatives to international busi-
nesses. They also vary in terms of ownership—
most cooperatives are owned directly by their
members, but others are owned by other coopera-
tives. Some cooperatives limit their membership to
a certain number, others to their workers. Today, in
some states, cooperatives are opening their mem-
berships to include an investor class. All legally rec-
ognized cooperatives in the United States,
however, comprise a single business class:
Subchapter T corporations. The relative merits of
the cooperative structure, as compared to other
forms of business are the subject of the next
chapter.
C O O P E R A T I V E S :38
Cooperatives have a remarkable history andmany positive attributes. However, the coop-erative model is not the best structure for all
business ventures. Choosing the most appropriate
business structure is an important strategic
decision for business owners. In the United States
(and in Canada, Europe, and other countries) there
are essentially five primary business structures
from which to choose:56
1. individual (sole) proprietorship,
2. partnership,
3. limited liability company (LLC),
4. corporation (Subchapter C and S), and
5. cooperative corporation (Subchapter T).
The business structure should be chosen based on
the following general criteria:
n What makes the best business sense in the
short-run?
—How easy is it to get the business started?
—How easy will it be to raise start-up capital?
n What makes the best business sense long
term?
—Is the structure flexible enough for growth?
—Where will future capital for growth come
from?
—Does it offer the possibility for easy conver-
sion to another structure down the road?
n What level of control is required and desired?
—Can management be delegated?
—Will ownership be time consuming?
—Who will share in decision-making?
n What type of legal liability are owners subject
to?
n What are the tax implications of the various
structures?
This chapter briefly describes each business struc-
ture within the context of the decision criteria
outlined above. Table 5.1 provides a summary of
the comparison. Cooperatives, for obvious reasons,
are dealt with more extensively.
Individual (sole)
proprietorships
In a proprietorship, one person owns and controls
the business. This person assumes the risk of own-
ership, keeps all profits, and bears any losses. They
are personally responsible for the investment in
the business, the actions of the firm, and for any
growth or expansion of the business. Unless other-
wise provided for, the business ceases to exist after
the death of the owner. If the business is sold, the
owner receives the appreciated or depreciated
value from the equity invested. Individual propri-
etorships have what is called pass-through
taxation. All business income is reported on the
owner’s personal tax return and taxed at the
owner’s individual income rate. The Internal
Revenue Service (IRS) does not consider a separa-
tion of employers from owners in this business
arrangement, so the business cannot deduct fringe
benefits paid to employee-owners.
There are advantages to this method of doing
business. The owner is his or her own boss. Any net
profits belong to the owner and need not be
shared with anyone. This does not preclude,
however, a profit-sharing plan with employees.
Individually owned businesses are easy to set up.
No incorporation papers need to be prepared, no
incorporation fee needs to be paid, and no bylaws
need to be adopted.57 Personal talents and initia-
tive are fully rewarded; financial compensation (all
of the business profits) provides the incentive for
the owner to see that the business succeeds.
There are also disadvantages to individually
owned businesses. The available capital is limited
to what the owner has or can borrow. As a result,
many proprietary firms are small. The owner faces
significant financial risk since business losses are
borne by the owner alone. The owner has unlim-
ited liability, which means he or she faces not only
the loss of whatever equity is invested in the
business but also other personal assets (e.g., their
car or house) to cover business debts. Decision-
making rests with one individual, so success is
limited to the business ability of the owner.
Notwithstanding these potential drawbacks, indi-
vidual proprietorships remain the most prevalent
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form of business in the United States (figure 5.1). It
is the most common form of business for small
companies since it is the simplest form of business.
Therefore, individual proprietorships account for a
relatively small share of all business income in the
United States (figure 5.2).
Individual proprietorship
+ Easy and inexpensive to organize
+ Owner has complete control
+ Owner receives all income
– Owner has unlimited liability
– Owner is taxed on all business profits
– Not suitable for large or complex businesses
Partnerships
Partnerships are formed when two or more
persons own and operate a business jointly. Each
person in the business is a partner but not neces-
sarily on an equal basis. Together they pool their
resources, borrow on their shared credit strength,
share in the decision-making process, and collec-
tively bear the debts. Votes on management deci-
sions may be in proportion to their individual
investment or management agreement. There are
two types of partnerships: general and limited. A
limited partnership may have one or more
partners who are restricted from participating in
management and whose business liability is
limited to their investment in the business. General
partners face unlimited liability. In either case,
partners divide the net earnings of the business as
well as its losses according to a contractual agree-
ment. The contractual agreement for the division
of net earnings or losses may be in proportion to
investment, contribution of labor, a combination of
the two, or by some other means.
Partners realize the benefits from equity apprecia-
tion (depreciation) upon the sale of the partner-
ship. Partnerships also have pass-through taxation.
The partnership does not pay income taxes; rather,
net taxable income is divided among the
partners
and they pay individual income taxes on their
share. As with proprietorships, the business cannot
deduct fringe benefits paid to employee-owners.
The partnership ends with the death or withdrawal
of any partner.
The combination of capital, skills, and experience
that the partners can jointly provide is a major
advantage of partnerships. Flexibility in defining
other aspects of the business (for instance, how
profits are divided) is another advantage.
There are some disadvantages with partnerships.
Limited partners are personally liable for any debts
of the business and commitments made by any
partner. Partnerships can be uniquely challenging
because they may involve many different personal-
ities. Partners need a high degree of mutual trust
and respect to make the arrangement last.
C O O P E R A T I V E S :40
Figure 5.1. Percent distribution of all
U.S. firms by legal form of organization,
1997
Source: 1997 Economic Census, U.S. Census Bureau
Figure 5.2. Percent distribution of all
U.S. firms’ receipts by legal form of
organization, 1997
Source: 1997 Economic Census, U.S. Census Bureau.
Partnerships
6%
Partnerships
3%
Individual
proprietorships
73%
Individual
proprietorships
5%
Other, <1%
Other, 1%
C corporations
11%
C corporations
75%
Subchapter S
corporations
10%
Subchapter S
corporations
16%
Partnerships
+ Easy to organize
+ Partners share control
+ Partners receive all income
– Some partners have unlimited liability
– Partners are taxed on all business profits
– Personality differences may cause problems
Limited liability company
Limited liability companies (LLCs) are a relatively
new business trend in the United States and share
many of the characteristics of a partnership.58 In
this arrangement, all owners enjoy limited liability.
In decision-making, the owners have voting rights
proportionate to their investment or by some
other mutual agreement. Most LLCs require the
unanimous consent of owners on many important
issues. Profits are divided in proportion to each
owner’s level of investment or by some other
mutual agreement. Owners may withdraw their
assets at will, but transfer of ownership interest
may require unanimous approval of the remaining
owners. LLCs also generally require unanimous
approval by the remaining owners to continue the
joint venture after the withdrawal of any one
owner. However, unlike partnerships, an LLC may
institute a “continuity of life” clause if the owners
agree in advance to give the consent necessary to
avoid dissolution upon the disassociation of a
member.
LLC owners pay individual income taxes on their
share of the firm’s profits. There is no separation of
employers from owners and therefore, the
business cannot deduct fringe benefits paid to
employee-owners. However, an LLC has the option
to elect to be taxed as a general business corpora-
tion.
The LLC model is gaining in popularity in the
United States because it combines the flexibility
and advantageous tax treatment of a partnership
(pass-through tax treatment) with the limited lia-
bility of a corporation. It is less complex and there-
fore less costly to set up and manage than a cor-
poration. By the 1990s, farmers were choosing LLCs
over cooperatives for many new businesses. The
LLC has also been used as a vehicle for organizing
joint ventures among established corporations,
including those involving cooperative and
investor-owned firms. The disadvantages of an LLC
center around the consensus required among
members for certain key business decisions.
Consensus is difficult to consistently achieve over
time. The relative ease of exit, which can threaten
long-term stability, is another significant disadvan-
tage of the LLC.
Limited liability companies (LLCs)
+ Easier to organize than a corporation
+ Democratic control
+
Limited liability
– Owners are taxed on all business profits
– Too easy for owners to exit
– May be cumbersome with a large number of
partners
Corporations
A corporation is a legally chartered institution
formed by a group of people or other businesses
who are granted, as a body of one, certain legal
powers, rights, and privileges distinct from those of
the individuals making up the group. The corpora-
tion is generally chartered under the laws of the
state where the principal or home office of the
company is located and operates under those
laws. The corporation can be thought of as an indi-
vidual. It owns assets, has the right to the
company’s net income, and is liable for debts,
losses, and other claims. It may also vote in certain
instances, for example, if it owns stock in another
corporation. The corporation can maintain perpet-
ual existence. If an owner dies or sells equity to
another owner or back to the corporation itself, the
owner’s disassociation does not cause the dissolu-
tion of the corporation as it would in a proprietor-
ship or often in a partnership. There are three
primary types of corporations in the United States:
Subchapter C, Subchapter S, and Subchapter T. The
subchapter status reflects different state and
federal tax policies.59
Subchapter C-corporations are often referred to as
“for-profit” corporations, which is misleading. Most
businesses, unless organized as non-profits, need
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to generate profits in order to stay in business.
Ownership shares (stock) in C-corporations are
generally offered on public stock market
exchanges (such as the New York Stock Exchange).
The purpose of the C-corporation, to generate
returns for its investors (stockholders), distin-
guishes it from cooperatives. Profits, after corpo-
rate taxes, are distributed to stockholders in pro-
portion to their investment (number of shares of
stock) in the corporation. Hence,
C-corporations
are also commonly referred to as investor-owned
or investor-oriented firms (IOFs). There are no limits
on the returns to individual stockholders. They
gain or lose any appreciation or depreciation in
the value of their stock.
A board of directors, which is elected by the stock-
holders, and the corporate officers make the main
business decisions in a C-corporation. Each stock-
holder usually has as many votes as the number of
shares of voting stock he or she owns. A general
manager or chief executive officer (CEO) is hired by
the board to provide overall management of the
business. Neither the directors nor investors have
any obligation to use the firm’s products or
services.
A C-corporation is subject to double taxation: the
firm’s net profits are taxed at the corporate rate
before being distributed to stockholders. Once
they are distributed, the stockholders also pay
income tax on these funds. Despite this unfavor-
able tax treatment, there are several advantages
with the C-corporation model. Stockholders enjoy
limited liability. In the event of company losses or
bankruptcy, each stockholder will at a maximum
lose the amount represented by the stocks he or
she owns. The corporation can exist indefinitely
unless it is purposely dissolved or is only incorpo-
rated for a specific number of years. Investment in
the corporation through the purchase of shares of
stock is fairly straightforward and easily accommo-
dates both large and small investors, since share
values can be kept low enough to attract many
investors. Transfer of ownership is also accom-
plished rather easily. Finally, since the corporation
is a separate and distinct entity from any of its
stockholders, its ability to borrow money and
attract capital is greater than that of any of its indi-
vidual owners.
The cost and difficulties associated with creating
C-corporations are its major disadvantages.
Keeping stockholders informed, distributing divi-
dends, and paying corporate taxes, generate
business expenses greater than those associated
with other business models. Further, each stock-
holder has limited and usually very little, if any,
control over the business. Proxy voting and cumu-
lative voting may give more control to some stock-
holders than others.
C-corporations
+ Owners have limited liability
+ Larger pool of investors and easier to raise
capital
+ Business life is perpetual
– Complex and costly to organize
– Double taxation to corporatiion and to stock-
holders
– Owners have little control
S-corporations
+ Owners have limited liability
+ Business life is perpetual
+ Taxed as a partnership
– Limit of 75 stockholders
A Subchapter S-corporation shares most of the
characteristics of a C-corporation. It has perpetual
life, limited liability of investors, and is controlled
by a board of directors elected by stockholders
and a general manager hired by the board. The
major difference from a C-corporation (and the S-
corporation’s major advantage) is that it is taxed as
a partnership (pass-through taxation). Net profits
are distributed to the stockholders in proportion
to their investment; only stockholders pay tax on
the net profits. S-corporations are limited to 75
stockholders and no other corporations or non-
resident aliens may purchase its stock; this limita-
tion is the great disadvantage of the S-corporation.
The S-corporation was designed for small busi-
nesses (e.g., family farms) that wanted the limited
liability of a corporation, but the tax treatment and
control of a partnership.
C O O P E R A T I V E S :42
Non-profits
Any corporation (including cooperatives) may be
incorporated as a non-profit business (501c) as
long as it meets state statutes. Non-profit firms try
to operate at cost and generate very limited
profits; any profits earned are retained within the
business. Exceeding state-dictated profit limits
could mean loss of the corporation’s non-profit
status. In this event, it would then be treated as a
C-corporation. The purpose of most non-profit
firms is to provide some type of essential service
(e.g., day care and affordable housing). The corpo-
rate status gives the providers of the service some
legal protection in terms of limited liability.
Although some refer to cooperatives as “non-profit
corporations,” this is erroneous; most cooperatives
are profit seeking.
Cooperatives
A cooperative is also a corporation
(Subchapter T)
and therefore has perpetual life, limited liability of
investors, and is controlled by a board of directors
elected by members. However, it has certain struc-
tural characteristics and a guiding body of princi-
ples that set it apart from other corporations. Like
all corporations, cooperatives need to generate
profits in order to survive and grow.60 However, in
cooperatives, all or most of the profits are distrib-
uted back to the member-users on the basis of use
(patronage refunds), not on level of investment.
This creates a different set of objectives for the
cooperative corporation—the cooperative must be
member-oriented rather than investor-oriented;
this difference in orientation and objectives
creates the biggest distinction between coopera-
tives and other corporations. Cooperative
members may or may not believe that profit maxi-
mization is the best goal for their cooperative. A
cooperative will provide goods and services
demanded by its members that a C-corporation
might not because of profitability concerns.
Cooperatives are not operated to create profits at
the expense of members. A substantial portion of
profits should be distributed back to members as
patronage refunds. Cooperatives may also elect to
return profits as equity dividends. However, under
the Capper-Volstead Act, marketing cooperatives
must either limit dividends to eight percent
annually or restrict voting rights to one-member,
one-vote. In Wisconsin, all cooperatives are
required to limit dividends to eight percent
annually and to restrict voting rights to one-
member, one-vote (see chapter 1 for additional
information on cooperative voting rights and
chapter 4 for more details on Capper-Volstead).
Cooperatives are at a disadvantage in terms of
their ability to raise capital. Not only are they
legally required to cap investment (equity) returns,
they are also not allowed to give investors any
voting rights within the organization nor any rep-
resentation on the board of directors. Cooperatives
can sell preferred (non-voting) stock on a public
stock market, and some (e.g., CHS) have been rea-
sonably successful at doing this.61 However, when
average market returns exceed eight percent,
cooperative stock is less attractive than other
options.
Taxation of cooperatives
Generally speaking, cooperatives are subject to the
same taxes at the same rate as regular corpora-
tions: they pay social security taxes, real estate
taxes, sales, personal property, excise, franchise,
and any other taxes corporations pay. However,
both state and federal laws make some special
provisions for the income tax treatment of cooper-
atives. 62
Under the Federal Internal Revenue Code all
profits of a cooperative are taxed at either the co-
op or member level in the year earned. If the co-op
allocates the profits earned from member business
on the basis of patronage, and there is member
consent (qualified allocation), it does not pay cor-
porate income taxes on those funds (they are
deducted from corporate taxable income). This is
often referred to as single (or pass-through)
taxation. A 1962 Internal Revenue tax law dictates
that qualified allocations require (a) member
consent, and (b) at least 20 percent of patronage
refunds must be paid in cash, with no more than
80 percent retained as allocated equity to be
redeemed later. Since members are required to pay
individual income tax on 100 percent of the
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patronage refund in the year earned (and not just
the cash portion), it makes sense that they would
need at least 20 percent in cash to pay the taxes.
Obtaining member consent to accept this patron-
age refund as taxable income in the year earned is
crucial. The IRS recognizes member consent given
in one of three ways: (1) Members agree in writing;
(2) joining or continuing as a member of a cooper-
ative that has in its bylaws that membership con-
stitutes consent and members have received a
copy of this bylaw; or (3) the member endorses
and cashes a patronage refund check with a
printed statement that endorsing and cashing the
check constitutes patron consent to include it as
taxable income. Later, when the cooperative
redeems this allocated retained patronage refund,
the member has no tax obligation.
If member consent is not received, or 20 percent in
cash is not paid, the allocated patronage refund is
considered an unqualified allocation. In this case,
the cooperative pays corporate income taxes on
the allocated income in the year earned. If later the
cooperative redeems the allocated retained
patronage in cash, it receives a tax credit and the
member pays individual income tax in the year
received.
Whether or not a member is obligated to pay indi-
vidual income taxes on patronage refunds
depends upon whether the patronage was related
to business activity or personal consumption. For
example, a farmer-member may purchase fertilizer,
feed or other inputs from a farm supply coopera-
tive. These are tax-deductible farm business
expenses. The patronage refund is viewed by the
IRS as a savings in these expenses and, therefore,
must be included as taxable income. However, if
home heating oil was purchased, the patronage
refund would not be considered taxable income. In
the case of marketing cooperatives, such as a dairy
or grain co-op, a member would include the milk
or grain check as taxable income. If the coopera-
tive pays a patronage refund on profits generated
from marketing the milk or grain, the member has
received additional income that must be included
as taxable income. Since household expenditures
are not tax deductible, any patronage refunds from
consumer cooperatives (e.g., food cooperatives)
are not considered taxable income for members.
Co-op profits that are unallocated are taxed at the
cooperative level in the year earned at the corpo-
rate tax rate. Further, any profits paid as dividends
on equity are double taxed; the cooperative pays
corporate income tax before any dividends are
paid and the member (regardless of whether they
are a consumer or farmer) pays individual income
tax when they are received.
Under the Federal Internal Revenue Code, agricul-
tural marketing and farm supply cooperatives can
qualify as either exempt (Section 521) or non-
exempt cooperatives. Section 521 cooperatives are
allowed certain additional deductions from their
corporate taxable income. The two major deduc-
tions are (1) non-patronage income (for example,
rent and interest earned on bank deposits) and
income from non-member business distributed to
members on a patronage basis; and (2) dividends
paid on capital stock. However, since 521 require-
ments are quite strict, most marketing and supply
cooperatives are non-exempt. For instance, the co-
op must treat members and non-members alike in
regards to pricing and patronage refunds. If a mar-
keting cooperative, they must do no more than
50 percent of business with non-members. If a
farm supply cooperative, no more than 15 percent
of the business may be with non-producers.
Per unit capital retains (for example, 5 cents per
bushel of corn marketed) can also be allocated or
unallocated. If allocated and there is member
consent, the member pays individual income tax
on the retained allocation in the year earned.
However, unlike patronage refunds, the IRS does
not require 20 percent of the per unit capital retain
to be paid in cash in the year earned. If the per unit
capital retain is unallocated, the cooperative pays
corporate income tax in the year earned.
C O O P E R A T I V E S :44
Cooperative principles
Cooperative principles have evolved over time. The
Rochdale principles (described in chapter 2) were
the first established set of cooperative principles
and included organizational points that mani-
fested social and political as well as business
concerns. The most widely recognized contempo-
rary set of cooperative principles is that sanctioned
by the International Cooperative Alliance (ICA). The
ICA has adopted three formal statements of coop-
erative principles, in 1937, 1966, and 1995. The
seven principles adopted in 1995 are
1. Voluntary and open membership.
Cooperatives are voluntary organizations, open
to all persons able to use their services and
willing to accept the responsibilities of mem-
bership, without gender, social, racial, political,
or religious discrimination.
2. Democratic member control. Cooperatives
are democratic organizations controlled by
their members, who actively participate in
setting their policies and making decisions.
Men and women serving as elected represen-
tatives are accountable to the membership. In
primary cooperatives members have equal
voting rights (one member, one vote).
Cooperatives at other levels are also organized
in a democratic manner.
3. Member economic participation. Members
contribute equitably to, and democratically
control, the capital of their cooperative. At least
part of that capital is usually the common
property of the cooperative. Members usually
receive limited compensation, if any, on capital
subscribed as a condition of membership.
Members allocate surpluses for the following
purposes: developing their cooperative,
possibly by setting up reserves, part of which
at least would be indivisible; benefiting
members in proportion to their transactions
with the cooperative; and supporting other
activities approved by
the membership.
4. Autonomy and independence. Cooperatives
are autonomous, self-help organizations con-
trolled by their members. If they enter into
agreements with other organizations, including
governments, or raise capital from external
sources, they do so on terms that ensure dem-
ocratic control by their members and maintain
their cooperative autonomy.
5. Education, training and information.
Cooperatives provide education and training
for their members, elected representatives,
manager, and employees so they can con-
tribute effectively to the development of their
cooperatives. They inform the general public—
particularly young people and opinion
leaders—about the nature and benefits of
cooperation.
6. Cooperation among cooperatives.
Cooperatives serve their members most effec-
tively and strengthen the cooperative
movement by working together through local,
national, regional, and international structures.
7. Concern for community. Cooperatives work
for the sustainable development of their com-
munities, through policies approved by their
members.
Of course, not all cooperatives adopt all of the ICA
principles. The basic three “defining” principles
(user-ownership, user-control, and proportional
distribution of benefits) are more commonly
accepted as the only principles necessary to guide
cooperatives. Many cooperative leaders and
scholars believe that the additional principles
should serve only as recommendations. They may
not be appropriate (or make the best business
sense) for all co-ops in all environments. For
example, housing cooperatives do not have open
membership policies; they are physically limited to
the number of members they can admit. Credit
unions restrict membership based on financial
criteria; otherwise, they could face significant
financial risk.
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Conclusion
In many respects, cooperatives are quite similar to
other types of corporations. They all participate in
the same labor and capital markets and must pay
similar wages, management compensation, and
interest rates. Many operational practices, such as
packaging, storing, transporting, processing, and
advertising, would also be the same across all
business models. Research studies have shown
that cooperatives and other corporations are
equally efficient. And certainly, general economic
conditions—unemployment, interest rates, infla-
tion, etc.—affect all corporations the same. The
casual consumer usually cannot tell whether they
are doing business with a cooperative or a non-
cooperative (unless of course “cooperative” is part
of the company name).
The fundamental difference between cooperatives
and other corporations is member- versus
investor-orientation. Cooperatives focus on gener-
ating benefits (which may or may not be profits) to
members, while other corporations focus on
creating returns for their investors. Because of this
difference, the operating philosophies between
the two can differ greatly. Cooperatives are often
created to correct market failures (e.g., provide an
important local service) and not to simply make
corporate profits.
C O O P E R A T I V E S :46
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 47
5
C H A P T E R
Topic
Individual
(sole)
proprietorship Partnership
Limited liability
company Subchapter S Subchapter C
Cooperative
(Subchapter T)
Who are the
owners?
Individual
proprietor
General and
limited partners2
Usually two or
more individuals,
but can have one
Minimum of
two individuals;
maximum of 75
Stockholders
(general public
and other busi-
nesses)
User-members
(can be other
businesses);
minimum of five
members in
Wisconsin
How is the
business
financed?
Owner
investment and
retained profit
from operations
Partners’
investment and
retained profit
from operations
Same as
partnership
Sale of stock and
retained profits
Sale of stock and
retained profits
Sale of
stock/shares to
members and
retained profits
How is
ownership
transferred?
Privately
negotiated
Privately
negotiated;
current voting
partners usually
approve new
partners
Privately
negotiated;
current voting
partners usually
approve new
partners
Privately
negotiated; may
require corpo-
rate approval
Privately
negotiated or
publicly traded;
if public, anyone
with enough
money can
purchase stock
Usually highly
restricted;
transfers to
other members
not typical; new
members subject
to board
approval
What is an indi-
vidual owner’s
legal liability?
Unlimited General
= unlimited
Limited
partnerships
= limited
Limited Limited Limited Limited
Table 5.1 Comparison of business models in the United States
———————Corporations———————
OWNERSHIP
BENEFITS
Who receives
profits?
Owner Partners in pro-
portion to
investment or by
agreement
Same as partner-
ship
Stockholders in
proportion to
investment
(stock)
Stockholders in
proportion to
investment
(stock)
Members in pro-
portion to their
purchases or use
of services
(patronage)
What earnings
are possible on
invested
capital?
Unlimited Unlimited Unlimited Unlimited Unlimited Limited by law in
most states;
usually at 8%.
Who benefits
from equity
appreciation?
Proprietor,
realized upon
sale of business
Partner, realized
on sale of
business
Partners, upon
dissolution of
LLC or sale of
LLC interest
Investors, upon
sale of stock
Investors, upon
sale of stock
Equity does not
appreciate
(except with
NGCs and then
members
benefit)
(continued)
C O O P E R A T I V E S :48
Topic
Individual
(sole)
proprietorship Partnership
Limited liability
company Subchapter S Subchapter C
Cooperative
(Subchapter T)
Table 5.1 Comparison of business models in the United States, continued
———————Corporations———————
BENEFITS, continued
CONTROL
Who pays
income taxes?
Owner at indi-
vidual rates
(pass-through
taxation)3
Partners at indi-
vidual rates
(pass-through
taxation)
Partners at indi-
vidual rates
(pass-through
taxation), unless
investor is a cor-
poration, in
which case cor-
porate taxation
applies
Individuals at
individual rates
(pass through
taxation)
Corporation
pays at corpo-
rate rate; stock-
holders pay at
individual rates
on dividends
and capital gains
(double
taxation)
Co-op pays no
corporate taxes
on qualified
patronage
refund allocations
to members
(pass-through
taxation), but
does pay corpo-
rate taxes on
unallocated net
profits, net profits
from nonmember
business, and
equity dividends;
members pay
individual
income tax on
cash and
deferred patron-
age refunds and
dividends
Who votes? Not applicable Partners Partners Stockholders Stockholders Members
How are votes
distributed?
Not applicable Among partners
in proportion to
investment or by
agreement
Same as partner-
ship
Only one class of
stock (common).
One vote per
share
One vote per
share of common
stock owned.
May also issue
preferred stock
One vote per
member in most
cases
Who establishes
policy?
Owner Partners Partners
Board of direc-
tors elected by a
majority vote of
the owners
Board of direc-
tors elected by a
majority vote of
the owners
Board of direc-
tors elected by a
majority vote of
the owners
Who manages
the business?
Owner or hired
management
All partners or a
general partner
in the case of a
limited partner-
ship
All partners may
participate in
management or
hired manage-
ment
Board of direc-
tors or hired
management
Hired
management
Hired
management
1Subchapter status reflects distinctions in the federal tax code.
2A limited partnership may have one or more general partners and one or more limited partners; limited partners are generally
restricted from participating in management decisions.
3Pass-through taxation is also referred to as single taxation.
Cooperative are owned and controlled by theirmembers. The members elect a board ofdirectors, who in turn hire a general manager
or CEO. Although the board is legally responsible
for the cooperative, each of these agents—the
members, the board, and the CEO—has a unique
set of roles and responsibilities, which will be
covered in turn in this chapter. It is essential that all
cooperative agents understand and are held
accountable for their responsibilities. Chaotic
organizational structures and weak leadership
creates inefficient businesses, regardless of the
firm
structure.
Cooperative governance
and control
Membership responsibilities
It is not unusual for members to believe that they
have very little role to play in their cooperative
(beyond patronage), especially if it is large. Yet, the
role of members is essential—it is placed at the
top of the “control” diagram below. Their money
helps finance the cooperative and they alone reap
the benefits and suffer the losses associated with
the cooperative’s performance.63 Since members
share in both ownership and control, they have
important duties to perform to ensure their coop-
erative remains viable.
Cooperatives are democracies and as such depend
on the active participation of all constituents.
Therefore, the most important obligation of coop-
erative members is participation in the governance
of the cooperative. In practice, this means they
need to: keep informed about the cooperative
from reliable sources (not neighbor gossip), attend
cooperative meetings, and take their turn at com-
mittee and board service. It is important to remind
members that probably everyone could claim they
are “too busy” and if no one is willing to give some
time, the cooperative will fail. As a board member
they will gain valuable exposure to ideas and tech-
niques that can be used to improve the perform-
ance of their own business and that of other
organizations in which they may be involved.
Members are responsible for establishing the
purpose of the cooperative and defining how
those goals should be achieved. Members approve
the articles of incorporation (and any amend-
ments), which establish the cooperative as a
business. They also approve the bylaws, which
establish the broad rules for operating the cooper-
ative. In addition, membership approval is required
for major changes in the cooperative (for example,
a merger or dissolution). The following list provides
more specific details of membership responsibilities.
Membership responsibilities
n Attend and actively participate in all coopera-
tive annual meetings.
n Serve on cooperative committees and be
willing to run for a board seat.
n Only criticize the cooperative in a constructive
manner and do not expect special treatment.
n Keep informed about the cooperative by
reading newsletters, news articles, and annual
reports.
n Adopt and amend articles of incorporation,
bylaws, and any resolutions or motions pre-
sented at cooperative annual meetings.
n Elect and remove directors.
n Help ensure that directors, management, and
employees abide by the cooperative’s bylaws
and policies.
n Require an annual review of the co-op’s finan-
cial standing and the CEO’s performance.
n Contribute equity to the cooperative.
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Cooperative roles,responsibilities,
and com
m
unication
Members
Board of directors
CEO
Figure 6.1. Cooperative governance
and control
C O O P E R A T I V E S :50
n Patronize the cooperative to the fullest extent
possible and pay accounts promptly.
n Abide by the decisions of the cooperative
board and management.
n Choose to leave the cooperative if unhappy,
rather than ruining it for other members.
Perhaps members’ most critical task is the election
of a good board of directors. It is generally not
possible for members to know all the operating
details of the cooperative so they delegate power
to the board of directors to act on their behalf.
Therefore, it is very important that members elect
capable people for the board.
It needs to be stressed that members can only
exercise their governance authority in legally sanc-
tioned meetings. In most states, cooperative
statutes do not permit voting by proxy and voting
by mail is limited to specific conditions. Election of
directors and major cooperative decisions are
made on the basis of those members who exercise
their voting privilege, for example by two-thirds or
the majority of those voting.
Board of director responsibilities
The primary duties of the board of directors are to
safeguard the assets of the members and to repre-
sent their interests. The board of directors is legally
responsible for the cooperative’s continued viabil-
ity. They are also charged with establishing policies
to implement the cooperative’s mission.
Cooperatives can be thought of as a large ship
heading towards a destination: The members
establish the destination; the board of directors set
the course and make sure it is being followed. In
practice, this involves setting performance stan-
dards for the business, measuring performance,
comparing actual performance to the standards,
and determining corrective action if the standards
are not being met. The board of directors is
responsible for setting the overall performance
goals for the cooperative (e.g., annual net profit
levels).
The directors hire and supervise a CEO or manager
to steer and run the daily operations. Therefore, the
hiring and supervision of a CEO is one of the most
significant roles the board plays. They need to
select a competent person and be willing to pay a
salary high enough to attract and retain a well-
qualified individual. Compensation packages vary,
but generally cooperatives pay the same base
salary as their non-cooperative competition and
some offer bonuses tied to performance standards.
Hiring a CEO or general manager may be challeng-
ing for a board since most directors typically have
limited experience in hiring decisions. The search is
made easier if the board has an up-to-date job
description that clearly describes the duties and
expectations attached to the job. A list of required
and desired skills will also make the hiring process
smoother.
The following list includes a detailed list of addi-
tional board responsibilities.
Board of director responsibilities
n Attend every board meeting, actively partici-
pate, and be willing to ask questions.
n Be prepared for every board meeting (read the
packet of information sent by management;
keep informed by reading newsletters, news
articles, and past annual reports).
n Seek additional information or training when
needed to make the right decisions (e.g., finan-
cial training).
n Elect board officers (chair, vice-chair, etc.).
n Hire and supervise the CEO or general
manager. Ensure that management abides by
the cooperative’s bylaws and policies.
n Do not micromanage the CEO; let him or her
do the job you specify.
n Do not expect special treatment by the coop-
erative and do not vote on issues where there
is a conflict of interest.
n Bring appropriate decisions to the broader
membership for approval and make sure the
decisions are implemented.
n Raise capital, supervise loan repayments,
manage member equity, and determine and
distribute annual patronage refunds and divi-
dends.
n Select financial institutions (banks) and
auditors.
n Remove board members who are not doing
their job and help fill any board vacancies.
n Keep written records of all board meetings.
n Establish long-term plans and objectives for
the co-op.
n Patronize the cooperative to the fullest extent
possible and pay accounts promptly.
Strong and effective boards make
strong and effective cooperatives.
Clearly, the board of directors has weighty respon-
sibilities and selection of an active, well-qualified
board is critical to the success of a cooperative (see
election procedures in sidebar on next page).
Strong and effective boards make strong and
effective cooperatives. Most state cooperative
statutes require that board members be active
members of the cooperative. Usually outside (non-
member) directors may serve only in an advisory,
non-voting c apacity.64 Co-op members with the
following traits should be encouraged to run for
board seats:
n Good business judgment;
n Independent thinking and a willingness to ask
critical questions;
n Respect for other members;
n Integrity;
n A strong work ethic (works well with others,
makes and keeps commitments, manages time
effectively); and
n A comprehensive understanding of
cooperatives.
Seven to nine board members are common for
local cooperatives. Wisconsin statutes, for example,
require a minimum of five board members, unless
the cooperative has fewer than 50 members, and
in that case a minimum of three board members.
The board elects officers, usually a president
(chair), vice-president (vice-chair), secretary and
treasurer. In some cooperatives, the bylaws allow
employees and members who are not on the
board to serve in secretary and treasurer positions,
otherwise board members serve in those posi-
tions. Many boards divide their work among per-
manent and ad-hoc committees. For example, they
may have audit, building and equipment, and
membership committees. The committees make
recommendations to the board for action.
Board decisions may only be made in an official
board meeting. Individual board members have no
authority to take action on their own and are
expected to uphold board decisions. Boards
should only speak as one voice; this means that
individual directors who disagree with a board
decision should not express their opinion publicly.
Doing so could undermine the cooperative.
Board members, unlike general members in a
cooperative, face unlimited liability. Failure to make
a good faith effort to fulfill their duties (due dili-
gence) may subject board members to legal
action. Board members can be held personally
liable for any losses experienced by the coopera-
tive if they are absent from a meeting without
cause, if they fail to disclose a conflict of interest, if
they knowingly participate in or perpetuate a
fraudulent or illegal act, or if they act imprudently.
Many cooperatives carry insurance that covers
board members in the case of lawsuits by
members. However, the insurance is only valid if
the director carries out his or her duties responsi-
bly (with due diligence).
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Evaluating CEOs
The CEO should be evaluated on a regular
basis, at a minimum annually. An evaluation
begins with the job description, which details
the areas and tasks for which the employee can
be held responsible. Generally, the evaluation
compares actual performance to a pre-deter-
mined standard. The evaluation should point
out the following:
n What the employee has done well;
n Areas of work that need improvement;
n Recommended resources (training, equip-
ment, etc.) to help the employee succeed;
n Reasons work performance was sub-
standard (within employee control or not);
and
n Corrective actions.
C O O P E R A T I V E S :52
Manager responsibilities
The CEO or general manager is the sole employee
of the board of directors and is ultimately respon-
sible for the day-to-day operations of the coopera-
tive. The CEO is responsible for ensuring that the
cooperative’s daily activities are leading towards
the realization of the cooperative’s objectives and
mission. He or she sets more specific performance
objectives (e.g., target sale volumes for different
departments) that ultimately lead to the larger
performance goals set by the board.
The most important function the CEO plays is
hiring and supervising all other co-op employees.
Employees need to understand the cooperative’s
mission, they need to be motivated, and trained
well. Making certain that employees see how their
efforts fit into the overall goals of the cooperative
is a key component of a manager’s job. This can be
a difficult and time-consuming process.
Coordination of human and physical resources
becomes more challenging when the cooperative
operates in seasonal markets. For example, agricul-
tural input cooperatives usually experience a peak
demand for their products each spring, marketing
cooperatives experience a peak in the fall, and
electric cooperatives face seasonal and daily peaks
in demand for energy. Seasonality increases the
importance and difficulty of coordination because
the cooperative needs sufficient resources, includ-
ing people, to handle demand during a peak
period, but doesn’t want those resources underuti-
lized during slack times.
Managing a cooperative is, in many ways, more
challenging than managing a comparable
investor-owned business. One feature that makes
managing a cooperative more difficult is that
cooperative objectives may not be as clear-cut as
those in other forms of business. In investor-owned
firms (IOFs), for example, the goal is to maximize
investor returns—the bigger the corporate profits
are, the better. For cooperatives, profit maximiza-
tion is rarely, if ever, the only objective. The mem-
bership wants to see their cooperative survive and
continue to serve their needs but they would
rather see net profits increase on their own farms
rather than at the corporate level. Thus, members
Board of director election
procedures
The most common and the most traditional
way—particularly for new and small coopera-
tives—to find board candidates is to ask for
nominations from the floor during the co-op’s
annual meeting. Although this is the least-
complicated method, and some may view it as
the most democratic, it has some serious
drawbacks. The pool is limited to those who
attend the meeting, who may be neither the
most qualified nor the most representative of
members.
A better approach, and one used by most
established cooperatives, is to appoint a nom-
inating committee to find well-qualified
board candidates. The nominating committee
(generally three to five people) is selected by
the board and may comprise board members,
the manager, and members. The committee
should represent (or be familiar with) the dif-
ferent geographic areas of the co-op’s mem-
bership, should understand the duties of the
position, be objective, and bring different per-
spectives to the process. As a group, they
prepare a slate of candidates, with at least two
nominees for each open position.
Once nominated, the cooperative should
publish the candidates’ credentials (experi-
ence, education, etc.) and other pertinent
information in a newsletter or website several
weeks prior to the voting. The board should
still accept nominations from the floor before
voting proceeds.
Voting by secret, anonymous, written ballots is
the most common and preferred method.
Voting by proxy is typically not allowed in
most states (including Wisconsin), but
delegate systems, where a delegate votes for
a certain portion of the membership, are
accepted.
may view profit maximization by the cooperative
as being in direct conflict with their goals. Given
this, it is more difficult to define success for the
cooperative and many managers and boards of
directors struggle with establishing long-term
goals for their cooperative.
The manager’s interpersonal skills are critical as vir-
tually every transaction in most cooperatives is
between the firm and one of its owners. Unlike the
manager of an IOF, the cooperative manager is
indirectly the employee of every member and
each member feels entitled to voice his or her
opinion about the cooperative’s products, prices,
services and general practices. This feedback
provides valuable information that an astute
manager can use to position the cooperative for
future success. There are, however, two less benefi-
cial aspects of this constant scrutiny. First, the
manager has to be judicious at filtering
truly valuable constructive criticism
from baseless complaints. Second, the
managers of many cooperatives, partic-
ularly smaller locals, live in a fish bowl.
Some members are resentful of the
salary a general manager receives, par-
ticularly when they themselves have
had a poor year. This resentment com-
plicates member relations and may
restrict the manager’s ability to perform
his or her various functions.
In general, the skills needed by cooperative
managers are the same as those needed by
mangers of other firms, though perhaps in differ-
ent proportions:
n Decision-making skills
n Interpersonal skills
n Goal setting skills
It is worthwhile to note that members should not
be employed in managerial positions. When a co-
op member is manager, it may become more
dificult for the board to exercise authority over the
manager.
The board and manager
relationship
The ability a cooperative board and CEO to form a
seamless relationship is generally a strong indica-
tion of an efficient, well-managed cooperative. This
relationship requires each party to understand the
boundaries of their responsibilities. Board
members should not micro-manage and the CEO
should not try to usurp the policy-making and
oversight functions reserved for the board. Table
6.1 outlines some general rules for separating the
responsibilities of the board and manager.
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“The conventional definition of
management is getting work
done through people, but real
management is developing
people through work.”65
Table 6.1. Division of responsibilities between
board and management
Board responsibility vs. Management responsibility
Ideas Actions
Decisions about what the Decisions about how the
cooperative should be doing cooperative does something
Long-term and substantial Short-term and moderate
commitments of resources commitments of resources
Personnel development to Job-related training for
ensure executive depth and people other than the
capable succession management team
Monitoring board and Evaluating employee
managerial performance performance
The board of directors is responsible for defining
the main elements of the strategic plan: namely,
the fundamental reason for the cooperative’s exis-
tence, the general means by which the cooperative
will achieve its goals, and the underlying values
that will guide the cooperative’s actions. The oper-
ational plan, which is a blueprint for implementing
the strategic plan, is the responsibility of manage-
ment.
Once the strategic and operational plans have
been developed, the board must monitor the
cooperative’s progress. If there are significant devi-
ations from the plan, the board should attempt to
determine the cause of the deviation and take
appropriate action. That may mean revising the
plans or requesting the manager to modify the
business strategies.
Cooperative
communication and
education
Leadership, control, and financial ownership of a
successful cooperative require informed and
educated members. This is recognized by the inclu-
sion of member education, training, and informa-
tion as one of the seven cooperative principles
endorsed by the International Cooperative
Alliance. Cooperatives generally support this prin-
ciple, but the level of implementation and financial
support for education and information programs
vary widely. Communication and educational
efforts range from informal and ad-hoc efforts
(e.g., sending board members to training work-
shops) to creating a well-funded education and
communication department. All cooperatives have
either a stipulation in their bylaws or follow state
cooperative laws that mandate communication
with members. These requirements often include
holding annual meetings, notifying members of
special meetings, and informing members about
significant changes in financial operation or
structure.
The importance of
communication and education
Cooperatives have special communication and
education needs because of their unique owner-
ship and governance structures. Cooperatives
involve a wide range of people in the decision-
making and management process. Consequently,
communication within cooperatives must be con-
tinuous and effective and involve all agents
(members, board, management, and employees).
Cooperatives in northern Europe have a common
saying that “a cooperative without an education
program will last for a generation and a half.”The
task of educating new and younger members and
developing new leadership is a continual and
growing challenge for most American coopera-
tives. New members need to know the value of the
cooperative, why it was formed, what it has accom-
plished, and its future goals.
Effective communication and education becomes
particularly critical as cooperatives grow and
become more complex, making them increasingly
difficult for members to comprehend. Further,
many members feel removed from the cooperative
since their voice seems lost in large member-
ships—it may be difficult to see how the coopera-
tive contributes to their own bottom-line. Most
cooperatives were relatively small and single-
product organizations when they were estab-
lished. It was simple for the members to visualize
the impact of their decisions on the cooperative
and how it contributed to their well-being. Finally,
the heterogeneous needs and characteristics of
members in a large cooperative often require a
variety of different services. As a result, concerns
over pricing policies and fairness often arise.
Money spent on quality member communication
programs is a sound cooperative investment.
Member support and loyalty is a type of capital
that can be drawn on in times of crisis. Members
who understand the cooperatives’ objective,
policies, and actions, are more likely to patronize
the cooperative, stay with the cooperative through
difficult times, have fewer complaints, offer more
constructive criticism and suggestions, and take a
greater interest in the co-op. Informed members
serve as effective salespeople for the cooperative,
C O O P E R A T I V E S :54
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helping promote new products and services. They
will also be able to help inform the community
regarding the cooperative’s contributions to com-
munity development.
Cooperatives must also provide training for man-
agement and directors. Many new and inexperi-
enced directors must be informed and educated
about the cooperative business model. Cooperative
managers, if they are new to cooperatives, will also
need to be educated about some of the unique
facets of cooperatives (e.g., the division of
board/manager responsibilities and patronage
refunds).
Since cooperatives frequently consider and decide
major policy actions in a semi-public environment
(with all cooperative members) rather than behind
closed doors, cooperatives should educate the
public to avoid opposition that results from misun-
derstandings about cooperative objectives. For
example, during the past few years many coopera-
tives have been forced to close local plants, eleva-
tors, and stores. When this occurs, cooperative
members and employees as well as community
leaders and the public need to understand the
reasons behind the closures and how they will be
carried out. Public education is also essential to
maintain the favorable public policy cooperatives
now enjoy.
To be truly beneficial to the cooperative, informa-
tion must flow from the board and management
to members and the public, and from members
and the public to the board and management.
Establishing a
communication strategy
To create a successful communications program,
cooperatives need a board and management team
committed to the idea. The program must be well
planned and should include continuous evaluation
and feedback from members, employees, public
citizens, government and education agencies, and
other cooperatives. An adequate budget is needed
to support a well-trained staff that will conduct the
planning, implementation, control and evaluation.
Successful programs are operated continuously
and not just when the cooperative has a problem
or crisis.
The first step in planning is to gather information
about the cooperative’s members, the market,
competition, and current economic conditions.
Careful internal analysis based on systematic
research provides the foundation for successful
public relations and education programs. Member
and employee profiles are especially important.
Their profiles should include demographic data,
including age, income, education and geographic
location. The level of cooperative knowledge
members possess also needs to be determined in
order to establish what needs to be communi-
cated. The following questions can be used to elicit
this information:
1. Do members know and understand the distin-
guishing features, objectives, goals, policies,
and philosophies of their cooperative? Do they
know the potential benefits and limits of the
cooperative?
2. Are members familiar with the organizational
structure and operation of their cooperative?
Management team and
board of directors
Information flow
in cooperatives
Employees,
members,
and public
C O O P E R A T I V E S :56
Do they know where to get information and
where to take their problem? Do they under-
stand how they are represented on the board
of directors?
3. Do members understand their cooperative’s
financial statement, their policy on equity for-
mation and redemption, and member and
cooperative tax obligations?
4. Are members familiar with the background
and history of the cooperative?
5. Do the members understand the different
member programs offered by the cooperative?
Are they getting correct and adequate infor-
mation on the services offered? To what extent
do members use the cooperative as a source of
technical information?
6. Do members realize the business climate in
which the cooperative operates? Do members
understand the effects of business trends on
the cooperative? Are they aware of govern-
ment policies and regulations that affect their
business? Is this information readily available
elsewhere, or should the cooperative provide it?
How to communicate
There are many ways to communicate with people
(table 6.2). The most effective form of communica-
tion is still probably personal contact. Small group
discussions are also effective. In both cases there is
an opportunity for instant feedback and reaction.
Even in moderate-sized meetings, there is some
opportunity for feedback. Unfortunately, in most
cooperatives, personal contact is limited to that
between employees and members because the
Table 6.2. Communication options for cooperatives
Communication
channel Media type Method
Personal contact Individualized Management, directors, employees,
members
Member committees
Mass media Field days, open house, tours
Annual meeting, district meeting
Community meeting
Trade shows, fairs
Print Individualized Personal letters
Newsletters, member magazines
Mass media Direct mail
Annual report
Trade journals
Newspapers
Audio/Audio-visual Individualized Telephone
Conference calls
Mass media Websites
Video, CD-ROM
Radio, television
general manager and his or her staff may be
located at distant headquarters.
One of the best opportunities for the cooperative
to communicate with the membership is the
annual meeting. A well-planned annual meeting
can be used to showcase the year’s activities.
Conducting a successful annual meeting requires
planning, advertising, contacting members and
public citizens, developing an effective agenda,
organizing an interesting meeting, selecting a sat-
isfactory location and facility, and providing neces-
sary services.
An integral part of every annual meeting includes
the preparation and presentation of the annual
report of the cooperative. Annual reports can
range from simple financial statements listing the
current balance sheet and statement of opera-
tions, to elaborate accounting reports prepared by
the board chairman and management. These
might include pictures of new facilities, equip-
ment, employees and directors, and graphic pre-
sentations of the past year’s business activities. An
adequately designed annual report can also
provide an effective tool for informing the
members and the public about the cooperative
throughout
the year.
Meetings directed toward local audiences are
often more effective than large annual meetings.
Consequently, most cooperatives that cover a fairly
large area divide their territory geographically, and
each division usually has its own annual district
meeting. These meetings present a good opportu-
nity for members to meet management, to get
feedback directly to management, and to become
better informed about their organization.
One of the most effective forms of written commu-
nication is the newsletter, which may be a single
sheet or a magazine of several pages. Whatever the
form, all information should be clearly and con-
cisely presented, should be of interest to the
members, and should be sent out regularly. New
information and a novel approach to writing the
newsletter help engage the reader. In a number of
research studies, members have listed the newslet-
ter as their most important source of information
from the cooperative.
Cooperatives have also expanded their use of
technology for member communications. Young
cooperative leaders like the convenience of com-
municating with their cooperative through e-mail
or the Internet. Many cooperatives now have
websites and use television and video in their
communications programs. Speed and relatively
low cost are prime advantages of mass media.
Good media coverage can keep members
informed about the cooperative’s activities and
also can build interest in the cooperative by the
general public. Several large regional organizations
use closed-circuit television to transmit parts of
their annual meeting by satellite to different geo-
graphic areas and involve members directly
through interactive conference broadcasts.
Employees may be one of the most important
elements in any communication program. In most
cooperatives, employees often make the greatest
impression on members and have the most
frequent contact. In fact, it might be the check-out
person, the person who delivers the fuel, the clerk
in the credit union, the milk hauler, the field repre-
sentative, the technician, or the general manager,
who “is the cooperative” in the eyes of the individ-
ual member. Therefore, it is important to educate
all employees about the cooperative’s history,
programs, and policies. Every organization needs
skilled employees, but cooperatives need employ-
ees that are specially trained and understand
cooperative principles and practices, possess
adequate knowledge about products and services,
and have the ability to transmit that information to
the membership.
When to communicate
The board and management are frequently caught
between two opposite positions on when to dis-
seminate information to the membership. Too
much information, too soon may help the compe-
tition discover the cooperative’s plans and prevent
the cooperative from seizing business opportuni-
ties. Supplying too little information too late may
generate false rumors and an angry membership,
thereby leading to the same conclusion—missed
business opportunities.
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Although each cooperative has to decide when to
release information, two guidelines might be
useful:
1. If the information could help competitors, relay
it only to the board and key management
(unless critically needed for member decision
making).
2. The more controversial the issue, the greater
need for the cooperative to provide timely,
factual, and reliable information to members.
Otherwise, the cooperative can develop a
negative image with the members and public
due to misunderstandings about the coopera-
tive’s objectives.
Adding a new product or changing store hours
may require only a routine announcement in the
cooperative’s newsletter. However, a proposed
merger, closing an existing facility, or a change in
the way members are represented may require the
cooperative to communicate a large amount of
additional information before the issue is resolved.
To minimize controversy and ensure a smooth
transition, those members affected by the change
need facts to dispel rumors and fears. Cooperative
leadership must provide enough timely information
for their members to make intelligent decisions.
Conclusion
Creating a strong and competitive cooperative is
the shared responsibility of members, the board of
directors, management, and employees. Multiple
firm objectives and democratic governance make
cooperatives uniquely challenging businesses. A
skilled CEO or general manager is critical to the
success of the cooperative, as is a quality commu-
nication and education program. The changing
business environment and growth of cooperatives
has accelerated the need for member information.
Communicating with new members, potential
members, government agencies and the public will
continue to be a major challenge for cooperatives.
A list of general communication and education
resources is provided in the appendix. While the
primary mission of most cooperative councils is to
represent their members before legislative and
rule-making bodies, many have very active educa-
tion programs. Often these programs are carried
out in cooperation with state extension services,
university centers, and industry trade associations.
Several universities have active cooperative
centers that teach cooperative courses as part of
degree-granting programs, conduct research
related to cooperative businesses, and provide
outreach education, usually through the
Cooperative Extension Service.
C O O P E R A T I V E S :58
As suggested in the preceding chapter, themost important responsibility of cooperativeboards and CEOs is financial management
and decision-making. The board of directors and
management need to have a good understanding
of their cooperative’s financial situation to make
the best short-term business decisions as well as
to guide long-term strategic planning. Two essen-
tial financial statements need to be reviewed on a
regular basis (at least annually): the balance sheet
and statement of operations. Both will be dis-
cussed later in the chapter.
One of the most important tasks of cooperative
leadership is to estimate the co-op’s current and
future capital requirements. Adequate capital is a
fundamental principle of sound business opera-
tion. In cooperatives, a significant portion of capital
must come from the membership. If a cooperative
is to provide services at reasonable cost and if
members expect to benefit from its operations,
then members must also assume the responsibility
of financing the cooperative. Plans for financing
must be consistent with the principles of coopera-
tion as well as with state and federal legislation.
This chapter outlines two different equity redemp-
tion plans that help cooperatives meet these
requirements.
The importance of capital
Cooperatives need adequate capital to function
efficiently and to grow. They need reserves for
depreciation and unpredictable contingencies. Not
only is it important to have sufficient capital ini-
tially, including during organization, but it is also
vital for daily operations and growth. Increasing
the cooperative’s business volume and services
requires additional capital.
Costs of organizing the cooperative include such
items as legal and incorporation fees. Before a
cooperative actually starts business operations,
money may also be needed to cover the cost of
membership drive meetings and feasibility studies.
Capital is also clearly needed to purchase the nec-
essary physical facilities such as land, buildings,
and machinery (fixed assets). This is particularly
true with manufacturing or processing co-ops. The
members should provide most of the money for
the fixed assets to give the cooperative a strong
financial beginning and a good credit base. It is
seldom desirable to borrow more than 50 or 60
percent of the market value of the fixed assets.
It may be better to lease physical facilities when
they can be leased at favorable rates. To own such
facilities ties up large amounts of capital that
might be more productively used as working
capital in day-to-day operations. It is good
business to inquire what savings—service and
financial—can be made from leasing facilities
instead of owning them.
Cooperatives, like any other corporation, have to
cover working capital requirements: payroll, main-
tenance, utilities, taxes, insurance, repairs, raw
materials, fringe benefits, etc. Working capital is
also used for advances or partial payments to
members for commodities delivered to marketing
cooperatives. It is not only desirable, but also nec-
essary, to pay members something at the time, or
shortly after, the product is delivered. Moreover,
the cooperative can generally borrow for this
purpose more easily and at lower rates of interest
than can individual members.
When products are paid for in full within a few
days, or even a few weeks after delivery, advances
or partial payments usually are not made.
However, in some cooperatives, final payments are
delayed several weeks or even months due to an
extended storage or marketing period. Such coop-
eratives may handle goods harvested seasonally
but marketed over a much longer period (e.g., corn
or wheat). In these cases, advance payments of 50,
75 or even 90 percent of the expected price and
value are frequently made so the producer can pay
his/her bills incurred while producing the raw
product. In farm supply co-ops, the co-op may
offer a seasonal operating loan to farmer members
who need to offset the costs of feed, fertilizer, seed,
chemicals, equipment, and other inputs until after
their farm products are harvested and sold. More
commonly, farmers borrow operating capital from
a financial institution and pay the cooperative
when the inputs are purchased.
Of course capital needs vary greatly depending on
the size of the business; whether the physical facili-
ties are leased or owned; whether large or small
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inventory stocks are carried; and future plans for
growth. Often, cooperatives have enough money
for fixed assets, but have too little operating
capital. If the members have furnished the money
for fixed assets, then these fixed assets can be used
as security for borrowing money for operating
purposes. However, the co-op needs to be fairly
certain that its annual profits will be sufficient to
service the operating loans. If fixed assets are also
underfinanced, then leasing the facilities and using
member investments for working capital might
solve the shortage of capital.
Adequate working capital allows management to
take advantage of cash discounts when purchas-
ing supplies. It also permits buying in large
volume, making substantial savings possible.
Prompt payment of bills adds to the business rep-
utation of a cooperative. In addition, the plant and
equipment are likely to be kept in better repair,
and thus operate more efficiently, when adequate
working capital is available.
Sources of capital
There are two types of capital: debt capital and
equity capital. Debt capital includes loans (short
and long term), bonds, and any other type of credit
obtained from commercial banks, cooperative
banks, and other financial institutions. Equity
capital is provided by co-op members, nonmem-
ber investors, and from successful business opera-
tions. It is the equity that the owners have in the
business. Equity capital may or may not be
returned to members and may or may not bear
dividends. These considerations are left largely to
the discretion of the board of directors. Equity
capital is obtained in four ways:
1. Selling common stock or membership certifi-
cates to members.
2. Selling preferred (non-voting) stock to
members and non-members.
3. Deferred patronage refunds and per unit
retains from member business (allocated
equity).
4. Retained profits from member and non-
member business (unallocated equity).
As owners, cooperative members are responsible
for providing the cooperative with adequate
capital. Since cooperative profits are distributed on
a proportional basis, and this is accepted as an
equitable practice, it seems logical to require
members to contribute capital in proportion to
their patronage as well. Both ownership and
control should be vested in active patrons to
maintain the cooperative character of the associa-
tion.
Common stock and
membership certificates
Cooperatives can be organized as either stock or
non-stock cooperatives, although in practice the
difference is fairly trivial. Almost all agricultural
cooperatives, for example, are organized as stock
cooperatives. However, typically only one share of
common stock (generally priced at $100 or less) is
required for membership.66 Non-stock coopera-
tives offer membership certificates, which
members receive when they pay a nominal mem-
bership fee. In either case, initial membership
payments are not a large source of equity capital
for most cooperatives (NGCs are the exception, see
chapter 4).
Common stock shares cannot be traded; if a
member chooses to leave the cooperative he or
she must sell the shares back to the cooperative at
their par value (original purchase price). For
example, if a member purchased a share of
common stock for $25 in 1970, he or she will only
be paid $25 for it when it is redeemed to the coop-
erative in 2004, even though the book value (the
appraised value of all assets divided by the total
number of shares outstanding) might be $200.
Only at dissolution, merger, or bankruptcy is the
book value of the common stock shares signifi-
cant. Again, NGCs are an exception. In NGCs, mem-
bership shares can be traded and can increase (or
decrease) in value.
Low-priced shares and certificates make it possible
to diffuse and extend membership to more people
(since more can afford membership). However,
higher membership fees create both membership
commitment as well as a strong financial position
for the co-op. Further, with more initial equity, a
C O O P E R A T I V E S :60
greater portion of patronage refunds can be dis-
tributed as cash. This is the logic behind the high
up-front equity investments required by NGCs; the
average cost of membership in NGCs in the United
States during the 1990s was about $30,000.
Preferred stock
Stock cooperatives may also sell preferred, or non-
voting shares of stock, although doing so is still rel-
atively uncommon. They can sell this type of stock
to both members and non-members (see the CHS
example in chapter 4). As with common stock, the
board of directors determines annually what
dividend rate, if any, is to be paid on preferred
stock (although most states limit the dividend to 8
percent per annum). Such dividends may be
allowed to accumulate. The holders of preferred
stock have a prior claim over common stockhold-
ers when dividends are issued and in the case of
dissolution. If a cooperative files bankruptcy, it is
required to pay bank loans first, preferred stock
second, and common stock third.
Allocated and unallocated equity
Established cooperatives generate new capital
from business profits as well as additional earnings
from other co-op investments. To generate net
profits (also called net earnings or savings), co-op
revenues must exceed all operating expenses. At
the end of each business year, the cooperative
board calculates net profits and chooses a portion
to retain as unallocated equity and a portion to
allocate to members (figure 7.1). Since the cooper-
ative needs to retain capital for regular operating
costs, unexpected capital requirements, and future
growth, only part of the annual net profits should
be redeemed as cash patronage refunds. In most
agricultural cooperatives in the United States, only
about 30 to 40 percent of net profits are paid out
as cash refunds to members.
The unallocated reserves are permanent capital
and considered the shock absorbers
for a business.
Sudden losses, shifting consumer demand, and
many other market changes create financial uncer-
tainty; reserves help alleviate this uncertainty. The
portion of retained earnings that are deemed unal-
located equity represents general cooperative
funds; the co-op is under no obligation to return
this capital to its members. Profits from non-
member business are generally placed in unallo-
cated equity accounts.
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Figure 7.1. Example of allocation choice
for annual co-op profits
Total annual net profits: $1,000,000
($200,000 from nonmember business, the
remainder from member patronage)
Unallocated equity:
$200,000
Patronage refunds:
$800,000
Deferred patronage
refunds (allocated
equity): $560,000
Cash patronage
refunds: $240,000
Unallocated reserves are
permanent capital and are
considered the shock absorbers
for a business.
Net profits are allocated to members according to
the amount of business (patronage) they con-
ducted with the cooperative during that year. This
amount can either be paid out to members in cash
(cash patronage refunds) or deferred (deferred
patronage refunds form the basis of the members’
allocated equity accounts). For example, assume
that member A marketed $1,000 worth of grain
through the co-op in 2003. The grain marketed by
all of the co-op’s members in 2003 had a total
value worth $100,000. Therefore, member A would
receive 1 percent (1,000/100,000) of the co-op’s
allocated profits in 2003. If allocated profits for all
members were $800,000, member A would receive
$8,000 in patronage refunds. As discussed in
chapter 3, federal laws in the United States require
that at least 20 percent of the allocated profits be
paid as cash, so member A would receive at least
$1,600 (0.20 x 8,000) in cash and the remainder
would be deposited in that member’s allocated
equity account.67
Per unit retains are capital contributions withheld
from patron payments for products received or
products purchased. For example, a dairy coopera-
tive might withhold 5 cents per hundredweight of
milk from a farmer’s monthly milk check. Thus, over
the course of the year, a dairy farmer selling
500,000 pounds of milk would contribute $250 to
his allocated equity account.68 Although per unit
retains could theoretically be withheld in purchas-
ing associations (for example, 2 percent of pur-
chases) it is seldom done.
Allocated equity, as the term suggests, is techni-
cally owned by individual cooperative members
and the cooperative is legally obligated to redeem
it at some future point in time. Allocated equity
accounts seldom earn interest, but if they do, they
are quite comparable in many respects to invest-
ments in cooperative preferred stock (some coop-
eratives report allocated equity as preferred stock).
The board of directors generally decides what rate
of interest, if any, shall be paid on allocated equity.
The directors also decide when to redeem equity.
Many cooperatives issue certificates of equity to
members. The certificates state the amount of
equity allocated to the member. Others simply
send notices to members stating the amount of
capital credited to them during the year in the
cooperative’s books. When this is done, no formal
certificates of equity are issued. These notices have
considerable merit over formal certificates of
equity since the certificates are sometimes lost or
destroyed. Such notices need to be given so
patrons will know the amount of their investment
and will have the information to report on their
personal income taxes (for a more detailed discus-
sion of the tax implications, see chapter 5).
Equity redemption plans
Today, at least in agriculture, cooperatives require
members to make significant equity invest-
ments.69 To obtain capital from members, coopera-
tives need to show that (1) the expected returns
will exceed the opportunity cost and (2) the capital
will eventually be returned.
Equity redemption means the cooperative returns
its retained allocated equity in cash to the
members who helped generate it. Many coopera-
tives still practice unsystematic or ad-hoc equity
redemption, for example, returning allocated
equity to members only when the member
reaches a certain age, moves out of the co-op’s
trade area, or retires; or financial hardships. Some
co-ops only retire equity upon death of the
member (settling with the member’s estate).70
Under equity redemption plans, capital is provided
by members, used for a time by the cooperative,
and then redeemed or repaid to the members on a
systematic basis. Once equity redemption has
begun, additional equity will still be withheld from
active members. Revolving equity requires contin-
uous withholding of funds each year (new money
replacing old money). An equity redemption plan
ensures that the burden of co-op financing is
transferred from those who started the organiza-
tion, many of whom may have become inactive
members, to those who use the cooperative.
Compared to returning equity on an ad-hoc basis,
C O O P E R A T I V E S :62
a plan helps the cooperative meet long-term
equity goals and helps raise new equity.
A good equity redemption plan treats members
fairly and leads to investment in proportion to use.
Cooperatives should have fair equity redemption
plans described in either their by-laws or operating
policies. This section discusses three such plans
that have been adopted by cooperatives in the
United States and other countries: the revolving
fund plan, the base capital plan, and the percent-
age of all equities
plan.
The revolving fund plan redeems allocated equity
based on the age of the equity (the year the equity
was retained), using a first-in, first-out order. The
most common method redeems only one year of
retained equity each year. Thus, members’ money
withheld in 1995 might be repaid in 2000, that of
1996 redeemed in 2001, and so on.
This plan is one of the most effective ways to accu-
mulate capital and is a lot easier than selling new
shares of stock. It helps ensure that current
members furnish funds in proportion to their use
and provides a systematic way of returning invest-
ments to members. New organizations may begin
with this plan at the very start and older organiza-
tions may also adopt the plan. A disadvantage to
the revolving plan is that it is difficult to maintain
an established and fixed revolving plan with a fluc-
tuating or declining volume of business.
The base capital plan is simple in principle but
complex in practice. The board can establish an
equity capital “base” target for the cooperative as a
whole, or for individual members. In either case, it
redeems all cooperative equity that exceeds this
“base” equity capital target. For instance, if a co-op
has $10 million in assets and the board decides
that it wants 60 percent of the cooperative
financed with equity capital, then its base equity
capital target is $6 million. If at year’s end the
cooperative has retained $6.25 million in equity, it
redeems the $250,000.
Alternatively, the co-op could also establish that
the allocated equity accounts for each member be
kept in proportion to their use. For example,
member A mentioned earlier would be required to
contribute 1 percent of the co-op’s allocated
equity accounts or the equity capital target.71 If
the account exceeds this amount, the excess is
redeemed. If the account is short, no equity is
redeemed and only 20 percent of the patronage
refunds are redeemed in cash.72 Once a member’s
patronage and equity are in equal portions, 100
percent of their patronage refunds are paid in cash
(thus keeping the ratio stable).
The advantage of the base capital plan is that each
member’s investment is proportional to his or her
use. The disadvantage is that it places a heavier
burden on younger farmers who may need cash
refunds for their farm more than established
farmers. Base capital plans are not easily approved
by members since many would have to forgo
some of their cash patronage refunds. Recognizing
that this may unduly burden some members, espe-
cially young farmers just starting out, some coop-
eratives have adopted a targeted base capital plan,
meaning members can slowly build up their equity
contribution over time, if desired.
The percentage of all equities redemption plan
involves repaying a certain percentage of the des-
ignated equity pool each year, regardless of the
equity’s age. An illustration of this plan is shown in
table 7.1. During the first five years the coopera-
tive’s capital was built up to a desirable level and
no equity was revolved. During this time the
member contributed varying amounts based on
his or her volume of business. In the sixth year the
cooperative retired 20 percent of its capital contri-
butions under the plan and thus retired $500 of
this member’s investment. Since this member only
contributed $400 to the capital fund that year;
thus, the total investment was reduced to $2,400.
In subsequent years, the amount retired also
varied according to the decision of the board of
directors. It is apparent from table 7.1 that the
amount refunded during a year has no relation to
the specific amounts withheld in previous years,
making this seem somewhat arbitrary for
members. Also, it does not ensure that an individ-
ual’s investment is proportional to their use; the
same percentage is redeemed for all members.
However, it is more flexible than the base capital
plan.
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Regardless of the plan, boards need to remember
that if revolving equity is delayed a long time, say
10 to 15 years (the average revolving period for
farming cooperatives in the United States was still
about 19 years during the 1990s), then patrons can
suffer from the depreciated value of their invest-
ments as a result of inflation. Further, it will some-
times be necessary to deviate from an established
redemption plan if major capital needs arise or if
business fails to turn a profit for a long period of
time. This can be challenging and may require a lot
of communication with members to make sure
they understand the reasons behind such changes
in plans.
An equity redemption plan can only be sustained
with proper financial planning. Equity decisions
must allow sufficient flexibility to protect business
performance. Any redemption plan should be tied
to business objectives.
Financial statements
In today’s complex and global marketplace, it is
crucial that directors and management understand
the financial situation of their cooperative. Regular
review of financial statements is necessary to make
prudent business decisions, to protect the equity
invested by members, and to make sound long-
term strategic plans. Reviews should be conducted
at least once annually. The fact that directors may
not have formal training in accounting and finan-
cial analysis does not decrease their financial
responsibilities. Competent accountants and other
financial analysts should be hired to help directors
evaluate and interpret cooperative finances. The
balance sheet and operating statement (also called
profit and loss statement, income statement, or
earnings report) are the most essential financial
statements and should be provided to the board
and management monthly. Together they provide
a picture of the cooperative’s financial position, its
performance, and its ability to meet its financial
obligations.
The balance sheet
The balance sheet presents a financial snapshot of
a cooperative at a specific point in time (generally
the last day of the business year). It also typically
includes the balance sheet for the prior year to
allow for comparisons. A sample balance sheet is
shown in table 7.2. Key financial terms are defined
in table 7.3. The balance sheet is broken into three
parts: assets, liabilities, and equity. The parts must
always balance because the total resources or
assets of a business equal the amount owed to
others. In other words,
Assets = Liabilities + Members’ Equity
Assets are normally divided into three categories
(current, fixed, and other) according to the time it
takes to convert the asset into cash. Current assets
are expected to be converted within the year. They
include cash, accounts receivable, and inventories.
The reported value for inventories is equal to the
lesser of their cost or market value. Fixed assets are
not expected to be sold (hence the name fixed).
They include the “bricks and mortar” of the cooper-
ative, the buildings, equipment, and land. Their net
C O O P E R A T I V E S :64
Table 7.1. An illustration of the percent-
age of all equities redemption plan
Capital Capital Net capital
Year contributed redeemed investment
1 200 0 200
2 300 0 500
3 500 0 1,000
4 750 0 1,750
5 750 0 2,500
6 400 500 (20% of 2,500) 2,400
7 1,000 480 (20% of 2,400) 2,920
8 800 292 (10% of 2,920) 3,428
9 750 857 (25% of 3,428) 3,321
10 600 830 (25% of 3,321) 3,091
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Table 7.2. Balance sheet for two years
YEAR 1 YEAR 2
ASSETS
Current assets
Cash $ 154,263 $ 497,156
Accounts receivable 579,215 417,853
Inventories 609,041 469,782
Other 236,250 77,756
Total current assets 1,578,769 1,462,547
Fixed assets
Land 175,111 175,111
Buildings & equipment 3,524,572 3,560,822
Less: Accumulated depreciation (1,393,027) (1,560,589)
Total fixed assets 2,306,656 2,175,344
Other assets
Investments in regional co-ops 877,416 907,839
Total other assets 877,416 907,839
TOTAL ASSETS 4,762,841 4,545,730
LIABILITIES & MEMBER EQUITY
Current liabilities
Accounts payable 188,701 8,253
Seasonal operating loan 0 0
Current: Long-term debt 142,000 142,000
Accrued expenses / other 211,893 294,568
Total current liabilities 542,594 444,821
Long-term liabilities
Notes payable: bank 921,980 779,980
Notes payable: members 0 0
Total long-term liabilities 921,980 779,980
Members’ equity
Common stock 15,650 15,650
Deferred patronage refunds 2,404,601 2,398,027
Unallocated equity 878,016 907,252
Total members’ equity 3,298,267 3,320,929
TOTAL LIABILITIES & MEMBER EQUITY 4,762,841 4,545,730
book value, not their market value, is reported. The
net book value equals the original cost minus
depreciation. All fixed assets, except land, are
subject to depreciation. Depreciation accounts for
an asset’s loss of value due to normal wear and
tear over time. A new car is worth more than a 5-
year old car, for example. Other assets include
investment in regional cooperatives and other
investments.
Like assets, liabilities are also segmented according
to time (current, long-term, and other). Current lia-
bilities are debts due within one year. They include
trade accounts, seasonal operating loans, cash
patronage refunds due members, and taxes and
insurance. Long-term liabilities are debts or
portions of debt with more than a one-year due
date. They include long-term loans from banks
(e.g., mortgages) and long-term contracts.
Deferred or other liabilities are obligations without
specific payment terms. They include deferred
income tax liabilities and deferred compensation
to employees.
Members’ equity (also called net worth or owners’
equity) represents the capital members have
invested in the cooperative, or the portion of coop-
erative assets they own. Equity is often called risk
capital because it is the last to be paid (or the first
loss) in bankruptcy and it alone bears the risk of
asset value fluctuations (since liabilities will stay
fixed). Members’ equity is typically divided into
three categories on the balance sheet: common
stock, deferred patronage refunds (or allocated
equity), and unallocated equity.
The statement of
operations
The operating statement records the cooperative’s
operations for a given period, usually for one
business year. Like a student’s report card, it shows
the progress the cooperative has made. It also typi-
cally includes the operating statement for the prior
year to allow for comparisons. The operating state-
ment has three sections: income, expenses, and
savings. A sample statement of operations is pre-
sented in table 7.4.
C O O P E R A T I V E S :66
Table 7.3. Key financial definitions
Gross margins = income – cost of goods sold
Income = The dollar value of products and
services sold by the cooperative, also called
gross sales.
Cost of goods sold = Beginning inventory at
cost + purchases of goods to be sold – cost of
inventory at the end of the period.
Gross income = gross returns + other income
The revenue (after purchasing and service
expenses) the co-op realizes from selling its
products and services.
Gross returns = gross margins + service
income
Other income = incidental revenue – inciden-
tal expenses + patronage refunds + dividends
+ interest on investments. It is also called non-
operating income.
Savings = gross income – total expenses
Residual funds after expenses and income taxes
are deducted from income, also called net
earnings or net profits.
Local net margins = total net margins – patron-
age refunds received from regional co-op
Local net worth = net worth – investments in
other co-ops
Net assets = total assets – current liabilities
Net funds available = (net margins + depreciation)
– (increases in investments in other co-ops + cash
patronage refunds paid + dividends paid on stock
+ income tax)
Net local assets = total assets – current liabilities –
investments in regional co-ops
Working capital = current assets – current liabilities
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 67
Cooperative financial m
anagem
ent
7
C H A P T E R
Table 7.4. Statement of operations covering two years
YEAR 1 YEAR 2
INCOME
Grain Sales $ 2,089,852 $ 1,972,194
Farm Supply Sales + 12,699,517 + 12,007,710
Total Sales 14,789,369 13,979,904
Cost of Goods Sold 12,127,283 11,874,601
GROSS MARGINS 2,662,086 2,105,303
OTHER INCOME
Service Income 252,781 225,275
Finance Charges + 70,204 + 66,622
Total Other Income 322,985 291,897
GROSS INCOME 2,985,071 2,397,200
EXPENSES
Personnel Expense 1,357,663 1,143,445
Fixed Expenses
Interest 162,821 165,874
Depreciation 181,324 174,087
Insurance 26,113 25,140
Property Taxes 50,410 48,975
Variable Expenses 902,816 825,476
TOTAL EXPENSES 2,681,147 2,382,997
SAVINGS
Local Savings (Loss) 303,924 14,203
Patronage Refunds Rec’d. 23,990 47,770
NET SAVINGS (LOSS) 327,914 61,973
Income includes all revenues received by the
cooperative during the period being reported. The
total or gross income accounts for all cooperative
sales, what the cooperative pays for its raw materi-
als or product (cost of goods sold), and any other
income received. Other income includes finance
charges, rent, and investment income.
Expenses reflect what the cooperative pays to do
business. They are generally divided into three cat-
egories: personnel, fixed, and variable. Personnel
expenses include employee salaries and benefits
(insurance, retirement, and social security). Fixed
expenses are incurred regardless of the coopera-
tive’s volume of business. They consist of interest
payments on loans, depreciation, property taxes,
and insurance premiums. Variable expenses are
directly related to the cooperative’s daily opera-
tions and comprise equipment and vehicle main-
tenance, utilities, advertising, and other expenses
related to production and management.
Savings is simply income minus expenses and rep-
resents the net profits of the cooperative for the
year being analyzed. Local savings is the figure that
cooperatives want to pay attention to since this is
actually what they control. Patronage refunds
received from regional cooperatives may be
important, but do not actually reflect the viability
of their co-op’s business.
Financial ratios
To make informed business decisions, the financial
statements have to be interpreted and analyzed.
Comparisons across time and with industry stan-
dards are an important piece of the analysis.
However, care needs to be taken when making
comparisons. Since size and volume make compar-
ing different cooperative businesses difficult, finan-
cial ratios are often used. Ratios are also helpful
when comparing a single business’ results across
time. Financial statements are usually analyzed
using four categories of ratios: profitability, liquid-
ity, efficiency, and solvency.
n Profitability reflects the cooperative’s ability
to generate savings and includes ratios for
returns on sales and returns on assets.
n Liquidity measures the ability of the coopera-
tive to meet current financial obligations on
time and can be gauged using short-term cash
flow, the interest coverage ratio, working
capital-to-sales ratio, the current ratio, and
other ratios.
n Efficiency evaluates the productivity of the
firm with ratios, such as expenses-to-sales and
labor-to-income.
n Solvency reveals the long-term financial
health and stability of the cooperative (the
ability to stay in business over the long run). It
includes debt-to-fixed assets and equity-to-
assets ratios.
To gauge the financial performance of the cooper-
ative, the board of directors and management
need to establish financial standards (a target
value or range) for various performance indicators
(choosing only a few to track over time). Next, they
should compare their cooperative’s measures with
the established standards. Benchmarking raises
red flags and helps in financial planning. However,
it should be remembered that each cooperative is
unique and therefore may have reasons for not
achieving industry standards. Finally, all financial
measures are historical and are not perfect predic-
tors of the future.
Conclusion
Adequate financial skills and sufficient data will
help ensure that the cooperative board and CEO
make sound financial and business decisions. This
chapter provides a very brief introduction into
some financial basics; board members and
managers are encouraged to attend training
sessions for more in-depth information. Equity
redemption is another key decision board
members and managers face. It is important for
cooperatives to establish redemption programs for
two reasons: it keeps investment in proportion to
use (i.e., equity is provided by the active members)
and helps attract future capital.
C O O P E R A T I V E S :68
Cooperatives need to be well designed and, asyou have read in the previous chapters, mustbe soundly financed and skillfully managed.
But success also depends on the foundation built
during organization. Successful businesses are not
started overnight. Careful and deliberate planning
must be started long before the co-op opens its
doors. The following section outlines nine steps
that should be taken when organizing any cooper-
ative. From initial concept to the start of opera-
tions, this process typically takes from six months
to two years. Some co-ops may take even longer to
be established. At every step, the organizing group
must decide whether or not to move ahead to the
next step. While completion of this process does
not guarantee success, lack of planning and com-
mitment guarantees, if not failure, at the least a dif-
ficult start-up phase.
Step 1: Preliminary
exploration
GOAL: Find out as much as possible about the
needs and expectations of potential members,
about cooperatives in general and about the
relevant industry. Is there a need for the proposed
cooperative?
Step 2: Gauging
broader interest
GOAL: Provide adequate information to potential
members to allow them to make an informal
decision about whether or not to pursue starting
the proposed cooperative.
The idea of starting a cooperative usually comes
from a few people or perhaps only one individual.
They discuss the plan with friends and associates.
To proceed further, one or more meetings should
be called to put the idea before others in the area.
These preliminary discussions are very important.
They provide an opportunity, before formal organi-
zation is undertaken, for prospective members to
weigh the probable advantages of starting the co-
op against roughly estimated costs. It gives those
interested a chance to bring up possible problems
and make suggestions to guide the organizational
process. These initial discussions will often lead to
modifications of the original idea.
If, as a result of these open discussions, there
seems to be general support and approval of the
proposed cooperative, the next step is to form a
steering committee, which will do a careful study
of the conditions under which the cooperative is
to operate.
Step 3: Form a
steering committee
GOAL: Select a steering committee to direct and
carry out the cooperative’s development process.
Steering committees usually consist of about 5-9
volunteer members. This group either assumes the
remaining development tasks themselves or coor-
dinates and guides other members or outside con-
sultants. Regardless of who performs each task, the
steering committee is responsible for making sure
the tasks are accomplished. One of their main roles
is keeping potential members informed of their
progress; without regular updates, potential
members may lose interest. They also coordinate
future organizational meetings. Steering commit-
tee members should be prepared to spend a sub-
stantial amount of time with this effort.
Steering committee members can be elected from
a group of potential members or organized by the
core leadership who initiated the co-op develop-
ment process. The steering committee as a whole
should exhibit the following characteristics:
n Enthusiasm and the willingness to work hard
n Determination to succeed
n Good communication skills
n Flexibility and resiliency
n Strong decision-making skills
n The ability to mobilize and organize resources
n Previous business and leadership experience
n Financial management skills and experience
n Knowledge of the industry
n The ability to work as a team!
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 69
Procedures for organizing a cooperative
8
C H A P T E R
Procedures for organizing a cooperative
The steering committee should meet on a regular
basis to complete the following tasks:
n Develop a mission statement for the coopera-
tive;
n Explore the general interest level of potential
members in the proposed cooperative;
n Identify any potential obstacles to the early
stage development of the cooperative;
n Initiate (and fund if necessary) a feasibility
study.
Step 4: Clarifying the
purpose of the business
GOAL: Clarify the purpose of the cooperative and
establish potential member interest and resources.
The first and most basic project the steering com-
mittee will undertake is to determine the funda-
mental purpose of the proposed cooperative
business. What will the cooperative do? What
specific products or services will be provided? Will
these products or services fill a previously unmet
demand or somehow improve upon what cur-
rently exists (e.g., in a more convenient location or
at better prices)? Or, will a new market (demand)
need to be created? A mission statement is a
succinct and formalized statement of the coopera-
tive’s purpose. The mission statement will serve as
a compass for cooperative organization and opera-
tion.
Once the steering committee has established a
mission statement for the cooperative, they can
survey potential membership to gauge interest
levels and further refine their business idea. What
experiences have potential members had with the
cooperative model? A community in which people
have had positive experiences owning and patron-
izing cooperatives is more likely to organize new
cooperatives than a community with either few or
negative experiences. The reception of a new idea
depends upon general attitudes, which are affected
in turn by economic considerations, cultural biases,
education, etc. All of these factors determine the
amount of effort and time it will take to make the
cooperative a reality. The steering committee
needs to honestly evaluate how favorable the
general environment is to their cooperative idea.
The steering committee must also estimate the
potential number of members and the volume of
business they will do with the cooperative. Will the
members do enough business to meet operating
expenses with a small margin for savings and
growth? To obtain this information, the survey
should include questions such as: would you be
interested in receiving this service from a coopera-
tive? If so, how often, or in what quantity, and at
what price? What product or service need do you
currently have that might be filled by the coopera-
tive? What are you currently paying for those
products or services and what would you be willing
to pay? The survey results form the base for the
next steering committee task, the feasibility study.
Step 5: Conduct a
feasibility study
GOAL: Is the cooperative based on a sound, viable
business idea? A feasibility study should provide
the steering committee with enough information
to answer this question.
A feasibility study will provide an estimate of the
cooperative’s viability and probability of success. It
may take the form of a formal, contracted study or
a more informal assessment by members of the
steering committee. Feasibility studies should be
prepared by a person or team who is objective,
reliable, and has the right expertise. They should
have knowledge of the industry and the ability to
forecast market trends. Often, co-ops will have to
pay for a good feasibility study. To find references,
contact other cooperatives, cooperative develop-
ment specialists, or university small business or
cooperative centers.
The feasibility study provides essential information
for the business plan. Perhaps more importantly, it
also identifies any obstacles to the business before
more time and money are invested in organization
efforts. The study should include three major com-
ponents: a market analysis, an organization and
technical analysis, and a financial analysis. Contents
from a typical feasibility study are shown in the
C O O P E R A T I V E S :70
sidebar. A feasibility study should provide enough
information to allow the steering committee (and
others) to answer at a minimum the following
questions:
Who will be served by the cooperative? How
many potential members are there, where are
they located geographically, and what is their
level of interest in the cooperative? Will these
members be able to financially support the
development of the cooperative? What kind of
return do the members want or need to make
their cooperative investment worthwhile?
What does the market look like? Is there a
market for what the cooperative plans to
provide? How big is that market, where is it
located, and who is serving it now? How much
will it cost to produce the product or service
and is that competitive with other comparable
companies? How much revenue is required to
meet operating expenses? What is the proba-
bility that revenue level will be achieved? A
comprehensive analysis that looks at worst-
and best-case scenarios for each market indica-
tor is key.
How will the cooperative operate? What kinds of
operations will the cooperative need to set up?
Will the cooperative own or rent buildings or
trucks? Is complex processing equipment
needed? It is often a good idea to rent real
estate or equipment until operational strategies
are settled into a final form. At what point will
the cooperative purchase land and equipment?
What kind of money will be needed and where
will it come from? What will it cost to operate
the cooperative? What kinds of funds will be
needed for start up, what will be needed until
the cooperative breaks even, and when will
that be? Does the cooperative have access to
sufficient capital? The study should indicate the
expected portion of the funding that will come
from the membership and how much must be
borrowed.
Who will run the cooperative? Within the
steering committee, are there leaders compe-
tent and willing to undertake the development
and operation of the cooperative? The steering
committee, and later the elected board of
directors, will probably have to work hard for
two or three years to get the cooperative from
the idea stage into operation. Are they up to
the task? Once the cooperative is up and
running, how much will qualified management
cost (and how much can the cooperative afford
to spend)? How many employees will be
needed and what is the salary rate for compa-
rable jobs in the area?
The feasibility study should provide the steering
committee with a comprehensive understanding
of the industry and where the proposed co-op will
fit within that industry. It should also highlight the
key factors that will allow the co-op to succeed. It
is important to remember that all feasibility
studies are predictions. They cannot guarantee
that the predictions will be realized. Therefore, it is
important to ask for at least three scenarios: the
best possible conditions, the most likely outcome,
and the worst-case scenario.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 71
Procedures for organizing a cooperative
8
C H A P T E R
Sample contents of a
feasibility study
I. Introduction and scope of study
II. Market analysis
A. Domestic market profile
B. International market profile
C. Target market
D. Overall market feasibility
III. Producer survey and supply analysis
A. Review and analysis of survey results
B. Supply outlook
IV. Organization and technology analysis
A. Organizational capacity analysis
B. Technology and equipment needs
C. Operational scenarios
V. Transportation and processing analysis
A. Map of producer locations
B. Supply outlook
VI. Financial analysis
A. Financial analysis and feasibility summary
B. Assumptions and methods
VII. Overall feasibility evaluation
A. Summary and conclusions
B. Recommendations
It is also important to critically review the feasibil-
ity study. How valid is the data? For instance, were
potential customers surveyed regarding their pref-
erences? Also, what assumptions were used in the
predictions?
Step 6: The
membership drive
GOAL: Sign a sufficient number of prospective
members to membership agreements and gather
additional seed funds.
The steering committee should review the feasibil-
ity analysis results and decide if it makes sense to
proceed with the organization of the cooperative.
If the answer is yes, the next step is to undertake a
membership drive. It is not uncommon, however,
for a membership drive to be started before a full
feasibility study is completed, to draw in financial
support and volunteers to support the feasibility
study.
In a membership drive, steering committee
members and other volunteers go out into the
community to explain the proposed cooperative
and to garner support. To generate initial member-
ship interest, the committee can set up informa-
tion tables at fairs or other events or arrange
meetings that are open to the public and publicize
them in the media. To create greater understand-
ing and a more committed membership, smaller,
invite-only meetings might also be necessary.
A set of quality written materials that clearly
explain the co-op’s mission and financial expecta-
tions are key to a successful membership
campaign. Prospective members should be asked
to sign a membership agreement that will become
legally binding once the cooperative is incorpo-
rated. Prior to that, it simply clarifies for both the
cooperative and the member what is expected
from each. It should clearly state cooperative
objectives and financial commitments expected
from membership (the price and minimum
number of shares required for membership).
If the number of members who sign agreements
with the co-op falls short of a pre-determined goal,
a special meeting may be called to decide if the
project should be folded or revised. If the project
ends, the fees collected from prospective members
should be returned unless a portion is needed to
cover the organizational expenses.
Step 7: Develop a
business plan
GOAL: Establish in detail the business structure of
the cooperative and get a group of potential
members to approve and commit to the plan.
The business plan is important because it is the
blueprint of business operation for the coopera-
tive, and because it is the foundation of any
funding application package. The purpose of the
business plan is to increase the co-op’s chances of
success by conducting extensive research and
planning. It builds on the feasibility study but
provides more complex and comprehensive
analysis. It should include an objective assessment
of how well the business will work, the risks
entailed, and a detailed plan of action. A business
plan is necessary to secure funding from financial
institutions and investors. It also helps establish a
shared vision for the future of the cooperative that
should help members avoid planning conflicts. It
becomes a working document that should be con-
tinually referenced and, if necessary, updated.
External, skilled individuals should write the
business plan under the guidance of the board. It
should contain many of the same topics as a feasi-
bility study (see table 8.1) although the content
will be more detailed and comprehensive. An exec-
utive summary should give a brief synopsis of the
plan. The market analysis should describe the
cooperative’s target market, projected market
share, and competitive advantage both in the
short and long run. A marketing plan should
include a description of marketing and sales activi-
ties and a general sales strategy. The business plan
should also include details regarding production,
research and development, and delivery methods.
Personnel issues (employee requirements, hiring
plans, and compensation expectations) and
member responsibilities should be presented in
the management and ownership section.
C O O P E R A T I V E S :72
All aspects of the financial picture, including
sources of capital, should be laid out in the finan-
cial section, which should also include budgets
and several years of cash flow projections. The
capital structure of the cooperative is a key
decision the steering committee and potential
members must make as part of the business plan
development. The following steps should be
helpful in the process:
1. Estimate the amount of capital required to
start the co-op and fund operations through
the first business year. This figure should be
based on the projected business costs and
cash flow requirements calculated in the feasi-
bility study and the desired level of accumu-
lated reserves (unallocated and allocated
equity).
2. In general, most lending agencies require that
members (plus grants) provide at least half of
the equity. For instance, if you decide the co-op
will require $50,000 in capital to get started, a
maximum of $25,000 can be borrowed from a
bank (debt capital). The remainder would have
to be financed by member equity and/or
grants. Lenders evaluate their willingness to
loan money to businesses based on this initial
equity and on other characteristics detailed in
the business plan, such as projected cash flow,
degree of risk, and quality of management.
3. It is not always easy obtaining capital from
members. They may be unwilling or unable to
provide funding. It will be important to remind
members that their initial investment repre-
sents their ownership stake in the cooperative.
Getting members to provide equity also
reflects their level of commitment to the
success of the business. It should be high
enough that failure of the business would have
a negative consequence and yet not so high as
to preclude new members. At this point, the
co-op also needs to establish its equity
redemption program. Clearly spell out how
members’ equity will be revolved.
4. Estimate the loan amount and sources of
funding. Determine the best lending sources
and prepare loan application packages.
Step 8: Prepare
legal documents
and incorporate
GOAL: Incorporate the cooperative as a legal
entity and specify business-operating rules.
Incorporation
Incorporation as a cooperative can happen at
several points along the organizational timeline.
Some groups choose to incorporate early, as it
helps with name recognition in the community
and can help in recruiting members and obtaining
funding. Others choose to wait until they know
that the project is truly feasible. Regardless of
when it happens, the procedure is the same.
All cooperatives, no matter how small, should
incorporate to limit the liability of individual
members for the debts and obligations of the
association. Legal advice is recommended in
drawing up or reviewing the incorporation papers.
The articles of incorporation are, in effect, a charter
from the state or federal government that author-
izes the entity to do business. Most cooperatives
incorporate under state laws, though credit unions
often incorporate using federal laws.
Almost all states have laws specifically written for
cooperatives. In Wisconsin, for example, coopera-
tives register their articles of incorporation with
the Department of Financial Institutions. They
must be signed by at least five people, with at least
one person residing in the state. The articles
include the name of the cooperative, its purpose
and location, and the number of directors (in
Wisconsin at least five unless the co-op has fewer
than 50 members, then it is three). Membership
classes and the type, amount and value of capital
stock (if a stock cooperative) are also described.
The original and notarized copies plus the filing
fee are sent to the Department of Financial
Institutions. Upon receiving a certificate from the
register of deeds that the duplicate articles of
incorporation have been recorded in the county of
the cooperative’s location, the secretary of state
issues a certificate of incorporation.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 73
Procedures for organizing a cooperative
8
C H A P T E R
Bylaws
The articles of incorporation and the bylaws con-
stitute the two primary sets of rules that dictate
cooperative procedure. After the cooperative has
been incorporated, a temporary board should be
formed that will adopt bylaws and elect officers.
The bylaws are an internal document that includes,
among other issues, membership restrictions, how
the board of directors and officers are nominated
and elected, how decisions are made by the board
and members, stock requirements, patronage allo-
cations and distribution, details on how to change
the bylaws and a dissolution plan for the coopera-
tive. In addition to the bylaws, the cooperative will
eventually also establish policies that deal with
board-management relations and governance
responsibilities. Sample bylaws and articles of
incorporation can be obtained from the University
of Wisconsin Center for Cooperatives. Bylaws are
generally not filed with the state, but they are
legally binding documents and should be well
understood by the presiding board officers.
Step 9: Early start-up
phase
GOAL: Elect the first board of directors, acquire
capital, and hire a manager. Get the co-op off to as
strong a start as possible.
First membership meeting
At the first official meeting of the cooperative the
draft bylaws are presented, discussed and
approved, and the first official board of directors is
elected. Often state incorporation statutes will
dictate how much advance notice must be given
to members before this meeting can be held. In
Wisconsin, for example, the notice must be given
at least 7 but no more than 30 days before the
meeting. Recruitment of members to run for the
initial board of directors is an important task since
this group will take the cooperative from the idea
stage into operation. Board candidates should be
experienced in business and have an understand-
ing of the sector in which the cooperative will
operate. Members should receive advance infor-
mation about board candidates so they can
choose effective leaders. Once elected, the board
will meet and select officers. One of the first things
that the new board should do is coordinate the
business plan, which will provide a blueprint for
the operation of the cooperative.
Setting up the business
Once the board is comfortable with the business
plan, they need to set up the business. This will
include approaching members and other investors
to accumulate the necessary capital, hiring man-
agement, and making decisions on building and
equipment purchases or leasing.
Once the cooperative is up and running, the board
should redefine their role. They should no longer
be involved in the daily operations of the coopera-
tive—that becomes the responsibility of the man-
agement team. The board needs to focus instead
on planning, establishing cooperative goals and
making sure the management decisions are
leading to those goals, and monitoring the cooper-
ative’s finances.
The purpose of planning is to identify the coopera-
tive’s mission, vision, and guiding principles. The
process should, ideally, involve multiple layers of
the firm (the board of directors, management, and
employees). Planning helps the cooperative avoid
“institutional drift,” a condition where a business
has failed to identify clear goals or a plan for
achieving them. Successful planning focuses on
what the cooperative wants to achieve; how it
proposes to achieve its goals; and why it wants to
pursue these goals. Planning forces the coopera-
tive, and in particular the board of directors, to
define explicit goals for the cooperative and to
examine its competitive environment. Planning
may also help the cooperative avoid crises and
emergencies by requiring the planners to think
through the implications of various ideas. Planning
is often divided into strategic planning, which
focuses on the long run (typically a three to five
year time horizon), and operational planning,
which deals with the short term (generally the
next business year).
C O O P E R A T I V E S :74
Conclusion
Creating a new cooperative is a time-consuming
and often frustrating process. It requires a great
deal of commitment from the steering committee.
All businesses are prone to failure and coopera-
tives are no exception. The good news is that once
they are established, cooperatives tend to have a
lower failure rate than other types of businesses.
Success depends on a few key factors. Establishing
a core group of committed members and broad-
based community support is essential since
members will need to contribute start-up capital. A
comprehensive feasibility study, involving objec-
tive financial and market analysis, is another
important ingredient. This will determine demand
for the cooperative’s products and services and its
potential for success.
The cooperative should have a clearly defined
purpose (mission) and vision to which all members
and management strive to achieve. Clearly defined
business goals and targets help management and
members see where they are and what they need
to do to fulfill further goals. This keeps everyone
on the same page and prevents the organization
from getting sidetracked, allowing it to remain
focused on achieving its mission.
The co-op needs to follow sound business prac-
tices. It needs to know its market and how to serve
that market well and profitably. The board and
management need to maintain accurate records of
financial activities. It is advisable to use an inde-
pendent accounting firm for assistance, especially
before any sale of stock or a large collection of
money, and for annual financial audits. The
manager and board must know exactly where the
business stands financially to make sound
business decisions. In addition, the cooperative
should have an annual audit by an outside
accounting firm. The cooperative needs to have
adequate start-up and growth capital, including at
least 50 percent held by members as equity invest-
ments. The cooperative should also schedule
annual education and training for directors, man-
agement, and members to improve their business,
communication, and cooperative skills.
Cooperative development specialists are readily
available at little or no cost (see the appendix for a
reference list) in most areas to help guide the
steering committee through the development
steps and offer useful tips learned from other orga-
nizational efforts. Lawyers and accountants should
also be hired to ensure that the appropriate laws
are being followed and that finances are in order.
However, the ultimate decisions regarding how the
cooperative should be structured and run, and
most importantly whether it is viable, will be up to
the co-op’s future members.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 75
Procedures for organizing a cooperative
8
C H A P T E R
C O O P E R A T I V E S :76
The preceding chapters have hopefully giventhe reader an introduction to cooperativeprinciples and practices and an appreciation
of the cooperative movement. Springing from
modest beginnings in England at the end of the
18th century, the cooperative model has evolved to
successfully accommodate a myriad of different
businesses in virtually every country. The coopera-
tive model will continue to change, reflecting fluc-
tuations in social and business environments.
There remain, however, three defining cooperative
principles: user-ownership, user-control, and pro-
portional distribution of benefits.
To continually provide benefits to members year
after year, cooperatives must be well organized,
well financed, well managed, well governed, and
supported by a committed membership. They
must be progressive, anticipating business
changes, and flexible, responding to changing
member needs. Some will need to be innovators in
their business sector. Others will need to supply
products and services to their members that are
simply more convenient or at better prices. As with
any other business, there must be demand for a
cooperative’s goods and services for it to survive.
The unique aspect about cooperatives is that most
of the demand comes from its members. This
member-driven orientation makes co-ops funda-
mentally different from other corporations.
Ultimately, cooperation is voluntary; members
must realize enough benefits from their coopera-
tive to make their financial and time commitment
worthwhile.
General benefits
Cooperatives allow people to pool their human
and financial resources and raise more capital.
Individuals who may have been unable to start a
business on their own can do so through coopera-
tive action. Benefits to members and to the com-
munity are both tangible and intangible. Tangible
benefits may be seen immediately in improved
services, more product availability, and better
prices, whereas it may be some time before the
intangible value from organizing cooperatives
becomes apparent. Through organizing and gov-
erning their cooperative (through committees and
the board of directors), members develop leader-
ship and problem-solving skills and confidence in
their ability to help themselves. Cooperatives
encourage members to rely on themselves to solve
economic and social problems instead of on the
government.
Cooperatives in the United States receive some
protection from anti-trust laws. This gives
members the opportunity and incentive to share
valuable production, marketing, and consumer
information with each other since they can work
together rather than act as competitors.
Cooperatives should also provide access to addi-
tional information and training by organizing
member education events. Through ongoing edu-
cation, cooperatives can help members improve
product quality, adopt new technology, and gain a
better understanding of modern business
methods and economic issues.
Cooperatives can have a significant and positive
impact on the communities in which they are
located. They create and retain local jobs, have a
more long-term commitment to remaining in the
community and provide local leadership and
development. Since cooperative profits are
returned to local owners (and not to investors who
may live outside the community), more money is
spent in the community, strengthening the local
economy. In many cases, marketing, supply, and
service cooperatives also benefit non-members by
increasing the competition (the competitive yard-
stick theory). Monopolies (as well as monopsonies)
have the power to charge outrageous prices and
deliver only the most profitable services. For
instance, in many rural areas in the United States,
internet companies would not install the necessary
technology because of low population (and thus,
demand). In some cases, rural residents have
banded together to form cooperatives to provide
such technology, which is then available to the
whole community.
More specific benefits
Marketing cooperatives help their members
increase their sales volume by reaching new and
bigger markets with greater bargaining power.
Cooperatives often help farmers improve their
product quality through careful grading, branding,
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 77
Sum
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and lim
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9
C H A P T E R
Sum
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and lim
itations
and packaging. As a result, members receive better
prices for their goods, which in turn leads to more
personal profits. Some cooperatives also provide
business assistance services, which can also lead to
more effective marketing and better prices.
Processing cooperatives add value and profits to
their members’ raw products. For instance, durum
wheat is transformed into pasta, milk into butter,
etc. The portion of profits that usually go to non-
cooperative “middlemen” processors are instead
diverted to cooperative members. In addition to
more revenue, marketing and processing coopera-
tives also give farmers a sense of security;
members know that the cooperative provides a
secure market for their products, which is espe-
cially important with perishable products such as
milk.
Supply cooperatives help their members buy in
larger volume and therefore, at lower cost.
Collectively co-op members have a bargaining
power that no individual could exert alone in the
marketplace. The cooperative also negotiates with
vendors, which means more quality control over
the goods it purchases for members. Because this
type of cooperative may also fill a gap in the mar-
ketplace, members may have increased access to
goods and services not previously available to
them (e.g., affordable housing or organic food).
Consumer cooperatives, in comparison to other
non-cooperative retail stores, may be more respon-
sive to member preferences and needs, especially
as they change over time.
Service cooperatives also help members save
money and meet unmet demand. Mutual insur-
ance companies save members tens of millions of
dollars annually on premiums. Credit unions have
taught millions of families thrift and financial man-
agement and have loaned them money for useful
purposes that could not have been borrowed as
easily elsewhere. The comfort and satisfaction that
comes from rural electric service and from modern
telephone service are not measurable in dollars,
yet the great majority of farmers and other rural
residents in the United States did not experience
these until cooperatives provided them.
Worker-owned cooperatives can create improved
working conditions for employees, including job
security. Since the employees share company
profits and losses, they have the incentive to work
harder. These factors can lead to low employee
turnover, high productivity, and strong profits.
Cooperative limitations
Cooperatives are clearly not a panacea for every
economic problem and they may not be the best
choice for every business opportunity. Farm supply
cooperatives, for instance, have difficulty compet-
ing with large corporations such as Cargill; most
simply can’t move that type of volume. Marketing
cooperatives also face a major challenge compet-
ing with large (often multinational) food corpora-
tions and serving large retailers. However, the fed-
erated structure and larger inter-regional coopera-
tives help smaller local cooperatives overcome this
challenge.
Non-agricultural purchasing cooperatives have dif-
ficulty competing with large discount stores like
Wal-Mart. They are also inappropriate when
members only require goods and services on an
infrequent basis (e.g., purchasing a car or real
estate). Employees who want to turn their business
into a worker-owned cooperative face the chal-
lenge of having few models and support services
to help them with the process.
Regardless of the business, the cooperative model
poses unique challenges and sometimes limita-
tions. As discussed in chapter 8, organizing a coop-
erative requires a great deal of time, effort, and
leadership. It also requires members to invest
capital. In some cases, such as new generation pro-
cessing cooperatives, the capital contributions can
be significant. Further, in some countries, although
not usually in the United States, cooperatives may
have more difficulty securing funding from banks
since they may not be as well understood as other
types of firms.
Finding developers, attorneys, and financial
analysts who are familiar with the cooperative
model, may also be challenging. A failure to under-
stand cooperative complexities can lead to inap-
propriate assistance and advice. Cooperative gov-
C O O P E R A T I V E S :78
ernment agencies and trade associations, as well
as university-based cooperative centers, can help
cooperatives find the right technical assistance.
Once the cooperative is in operation, continuous
member education is critical. An on-going commu-
nication and education program is critical to
keeping members involved and committed to the
cooperative. Cooperatives in their second or third
generation may cease to operate cooperatively;
that is, members no longer play an active role in
the organization. A strong communication and
education program can help prevent this from
happening.
Educating board members is particularly essential,
especially in large, complex cooperative busi-
nesses. New directors may have little prior experi-
ence or training for their position. However, even
with well educated and well-informed members
and directors, decision-making in cooperatives (as
with any democracy) can be slow and inefficient. In
some business sectors, this inefficiency can hinder
a cooperative’s competitive performance. The need
to inform members of cooperative business can
also be at odds with a cooperative’s business
strategy. If leaked to the competition, key financial
information or news of a merger may lead to lost
business opportunities for the cooperative.
Maintaining adequate capital reserves and finding
new capital for growth are perennial problems for
cooperatives. A lack of capital is bad for any
business. Perhaps the greatest limitation of the
cooperative model is the restriction that members
must provide the majority of the capital. This is a
challenge for members who have limited capital or
are heavily in debt. Further, a basic cooperative
standard is that equity financing should be pro-
portional to patronage. This means that not only
do cooperatives need to find adequate operating
capital, but they must also redeem old equity
capital and replace it with new capital from
current members.
That fact that cooperative benefits spill over to
non-members is certainly good for the community.
However, it can reduce membership and patron-
age. Why invest in the cooperative when you can
receive many of the benefits anyway? This “free-
rider” problem also occurs amongst members.
Without binding patronage contracts, members
are free to take their business elsewhere to find
the most attractive price. Uncertain patronage
(supply and demand) makes optimal performance
and strategic planning challenging.
Public support
In many countries, including the United States,
cooperatives today are generally granted favorable
public policy treatment. For instance, federal laws
and policies protect cooperatives from anti-trust
and other regulations and federal and state
agencies issue grants to support their develop-
ment as well as offer free technical assistance. In
return, cooperatives may also lessen the govern-
ment’s burden (especially in rural areas) by provid-
ing essential goods and services other firms would
not and playing the competitive yardstick role by
keeping prices down through competition.
In the United States relatively little industry is run
by local, state or federal governments. However,
the government can do a number of things more
effectively than private industry. This is especially
true with projects characterized by significant
financial risk. In these cases few private groups
would invest capital and bankers would be
unlikely to loan money. Or, the project may require
so much capital (as in the building of a huge dam)
that only the government could arrange for its
construction. Finally, some services and products
may not be profitable enough for private business,
or they may not be able to recoup any profits
(military protection and highway construction, for
example). Thus, if it were not for government, these
public goods and services would go unmet.
In some instances, we are now seeing cooperatives
being formed that are more successful in provid-
ing these same services. For example, there are
excellent cooperative models in the areas of health
care and housing that have been more successful
than federal housing and health care projects. The
sense of ownership and control by the member-
users makes the difference. Therefore, cooperatives
can help replace some government business,
allowing the government to focus on other initia-
tives. This role for cooperatives is extremely impor-
tant in developing countries.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 79
Sum
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and lim
itations
9
C H A P T E R
C O O P E R A T I V E S :80
1 Ivan Emelianoff. Economic Theory of Cooperation:
Economic Structure of Cooperative Organizations.
Ph.D. dissertation, Columbia University, 1942. p. 13.
2 The ICA was founded in London in 1895. Its
members are cooperative organizations in all
sectors: agriculture, banking, consumer, energy,
fisheries, housing, industry, insurance, and
tourism.
3 Some cooperatives have membership agree-
ments that restrict when members can quit.
Marketing cooperatives, for example, may
require members to continue marketing their
commodities through the cooperative for a
given period of time (e.g., the remainder of the
year) or face financial penalties.
4 This type of cooperative should not be confused
with factories owned by cooperatives where
people work on a strictly employer-employee
basis.
5 National Cooperative Business Association
(NCBA) October 2003 statistics.
6 NCBA Co-op 100 Statistics, 2003.
7 USDA, Rural Business-Cooperative Service,
Farmer Cooperative Statistics (2002 co-op
numbers and 2001 market share information).
8 2003 United States Credit Union Statistics
(www.cuna.org), National Rural Electric
Cooperative Association (2004 estimates),
National Association of Housing Cooperatives
(2004, www.coophousing.org/about_nahc.
shtml), and Consumer Federation of America
2004 Statistics.
9 This point is made by both Henry H. Bakken and
Marvin A. Schaars, in The Economics of
Cooperative Marketing (New York: McGraw-Hill
Book Company, 1937), and Brett Fairbairn,
“History of Cooperatives,” in Cooperatives and
Local Development, Christopher Merrett and
Norman Walzer, eds. (London: M.E. Sharpe, 2004).
10 For a review of the living and working condi-
tions in England during this period, see Johnston
Birchall, Co-op: The People’s Business (Manchester:
Manchester University Press, 1994).
11 John Bainbridge. Biography of an Idea—The Story
of Mutual Fire and Casualty Insurance (Garden
City, NY: Doubleday and Company, 1952).
12 Friendly Societies are still prevalent in the
United Kingdom today. For more information,
visit the Association of Friendly Societies site:
www.afs.org.uk.
13 By defining legal societies as Mutual Aid
Societies, the government also hoped to prevent
the formation of labor and political unions.
William Henry Beveridge, Voluntary Action (New
York: Macmillan and Co., 1948) and Peter Gray,“A
Brief History of Friendly Societies,”The
Association of Friendly Societies (2004).
14 Henry H. Bakken and Marvin A. Schaars. The
Economics of Cooperative Marketing (New York:
McGraw-Hill Book Company, 1937. p. 24).
15 Bakken and Schaars.
16 In their time, they were known as socialists. They
were labeled “utopian” later by Karl Marx.
17 Charles Fourier. Theory of Social Organization
(New York: C.P. Somerby, 1876).
18 Bakken and Schaars.
19 Birchall, p. 22.
20 Bakken and Schaars.
21 J. Shaffer. Historical Dictionary of the Cooperative
Movement (London: Scarecrow Press, Inc, 1999.
pp. 437–39).
22 Fairbairn, p. 27.
23 Gene Ingalsbe and Frank Groves.“Historical
Development” in Cooperatives in Agriculture,
David Cobia, ed. (Edgewood Cliffs, NJ: Prentice-
Hall, 1989. pp. 106–120).
24 “Citizen Ben.” www.pbs.org/benfranklin. March
26, 2004.
25 Joseph Knapp. The Rise of American Cooperative
Enterprise, 1620–1920 (Danville, IL: Interstate, 1969).
26 Fairbairn, p. 29.
27 Fairbairn and Bakken and Schaars make this
point.
28 Fairbairn.
29 The Grange still exists today, although it is
largely a social organization.
30 Fairbairn.
31 Fairbairn.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 81
Notes
32 While the 1865 Michigan law is generally consid-
ered the first cooperative marketing law, in 1857
New York and Ohio passed laws that legalized
mutual town cooperative fire insurance compa-
nies. The 1865 Michigan statute originally only
authorized mechanic and other labor associa-
tions; it was amended in 1875 to include agricul-
tural and horticultural associations (Bakken and
Schaars).
33 Bakken and Schaars.
34 From Section 6 of the Clayton Act.
35 The Capper-Volstead Act has never been
amended. Proposals for additions and changes
have been suggested, but no congressional
action has been taken.
36 It wasn’t until 1978 that Congress chartered The
the National Cooperative Bank (NCB) to provide
financing to cooperatives not eligible to borrow
from Banks for Cooperatives.
37 The New Deal (1933-1938) was a government
initiative to help end the Great Depression
(1892-1933).
38 Abrahamsen, 1976. p. 76.
39 Bakken and Schaars.
40 See Fairbairn and others for a more detailed
description of this process.
41 A study conducted in 2003 found that conver-
sions of cooperatives to investor-owned struc-
tures were rare, but the economic pressure to do
so was growing (E.G. Nadeau and Rod
Nilsestuen, Strengthening Cooperative Business
Structures: Lessons Learned from Demutualization
and Cooperative Conversions, 2004).
42 The Capper-Volstead Act does not mention
“cooperatives,” but rather associations of pro-
ducers. For example, the National Farmers
Organization, which is not a cooperative but
rather a producer bargaining agency and a
major farm organization lobbying group but
gets its authority under the act.
43 Z. Lerman, K. Brooks, and C. Csaki (1994). Land
Reform and Farm Restructuring in Ukraine. World
Bank Discussion Paper 270.
44 M.E. Fulton, et al. (May 1997).“International
Agricultural Cooperatives.”Working paper.
45 CSAs were originally created in Japan in 1965 by
a group of women who wanted to purchase
locally produced food (John Hendrickson, 1996
MS thesis, University of Wisconsin–Madison).
46 Dairy co-op’s market share in 2002 was 86
percent if non-members’ milk is included in the
calculation. USDA, RB-CS,“Marketing Operations
of Dairy Cooperatives,” RBS Research Report 201,
February 2004.
47 Ibid.
48 In 2003, Land O’Lakes, Inc. purchased Purina
Mills and is now the largest feed company in
North America.
49 2003 United States Credit Union Statistics.
50 www.farmcredit.com
51 The NCB was chartered by Congress in 1978, but
became private in 1982.
52 www.usca.org.
53 Since these are informal organizations they are
not incorporated and have no business name.
54 NGCs also incorporate traditional cooperative
practices such as democratic control, with a
board of directors elected by the membership,
and patronage refunds based on usage.
55 NCBA statistics, 2003.
www.ncba.coop/abcoop_work.cfm
56 In reality, a business can combine elements of
various types of businesses, although the funda-
mental differences in structures would still allow
them to be categorized as one of the five
described business types.
57 In the United States, as in most other countries,
all businesses need to file registration papers
with the appropriate state and federal agencies.
58 Wyoming enacted the first LLC law, in 1977, to
allow for all of the properties discussed in this
section (the most common characteristics of
LLCs today); other states quickly followed suit.
C O O P E R A T I V E S :82
59 The Internal Revenue Code categorizes corpora-
tions in numerous subchapters according to
their special tax circumstances.
60 Some service and purchasing cooperatives
operate at near break-even levels and do not
generate many profits at the firm level.
61 CHS began selling preferred stock on the
NASDAQ Preferred Listing under the symbol
CHSCP in 2003. The stock has a par value of $25.
The shares entitle their owners to receive an
annual cash dividend equal to eight percent of
the original issue price ($25 per share) as
declared by the company’s board of directors.
Dividends are paid on a quarterly basis.
62 In Wisconsin, any cooperative incorporated
under Chapter 185 is exempt from filing
Wisconsin business income tax.
63 Some managers may receive compensation
packages tied to cooperative performance, but
the primary claimants to any benefits (or losses)
are still the members.
64 Some states do allow outside directors with
voting power.
65 Agha Hasan Abedi, President, Bank of Credit and
Commerce International, Luxembourg, Leaders
July 1984.
66 There are two primary types of stock sold by
cooperatives: common stock (often called “A”
stock) has voting rights while preferred stock
(“B” stock) carries no voting rights. Membership
usually only requires the purchase of common
stock.
67 As explained in chapter 5, the member would be
required to pay tax on the entire $8,000.
68 Deferred patronage refunds usually make up
the largest portion of a member’s allocated
equity account since they accumulate over
several years.
69 In 1998, the average total equity per member in
all agricultural co-ops was $5,952, up from
$3,217 in 1989. USDA.
70 A 1991 USDA study found that most agricultural
cooperatives use a combination of systematic
and unsystematic equity redemption practices.
More than half (53 percent) use a systematic
program (the revolving fund method being the
most widely used), over 75 percent also redeem
equity upon a member’s death.
71 Typically, cooperatives use a 3-year patronage
average.
72 In a pure base capital plan the member would
be required to pay the cooperative the differ-
ence up-front.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 83
Notes
C O O P E R A T I V E S :84
acquisition – one firm purchasing another; a type
of merger.
antitrust laws – laws declaring illegal any trusts or
combinations that restrain trade (both state
and federal laws).
articles of incorporation – a legal document filed
with the appropriate state agency (for
example, in Wisconsin, articles are filed with the
Department of Financial Institutions) showing
the purpose, capitalization, address, and names
of the incorporators of a company.
asset – that which is owned, such as property,
money, goodwill.
association – an organization of people with a
common purpose united in a formal structure.
audit – an examination and verification of the
records and financial accounts. An unqualified
audit is an audit using generally acceptable
accounting procedures and prepared by a
qualified accountant or auditor, who reports
the audit to be accurate without reservation as
to the balance sheet and operating statement.
balance sheet – a statement showing the assets,
liabilities, and net worth (or owner equity) of a
business on a specified date, usually the end of
the year.
bargaining cooperative – a cooperative whose
sole or principal function is to bargain for
terms of sale. It does not handle the actual
products as an operating cooperative does.
book value of stock – refers to the dollar value of
common stock certificates. It equals the
appraised value of all assets of a business less
liabilities and value of preferred stock divided
by the number of shares of stock outstanding.
broker – an agent who receives a fee (brokerage)
for his/her selling or purchasing service. He/she
does not physically handle the product.
bylaw – a standing rule, not included in the consti-
tution or articles of incorporation, which speci-
fies operational practice and policy.
capital – money, or dollar value of property, used
in a business whether supplied by owners
and/or borrowed.
capital stock – book value of the invested money
in a company represented by the total shares
of stock in a corporation including those fully
or partially paid for as well as for those as yet
unissued.
certificate – a paper which certifies the condition,
status, obligation, rights, etc. of the holder of
the paper.
certificate of equity, of investment, revolving
fund certificate – usually a certificate without
a maturity date issued as evidence of retained
patronage refunds or per unit retains. These
retained funds legally constitute an investment
in the capital of the cooperative and, therefore,
are part of the association’s net worth.
certificate of membership – sets forth the rights,
privileges, and conditions of membership in a
nonstock cooperative. It is given to the
member upon payment of the membership
fee.
charter – the articles of incorporation under which
a corporation is legally organized. It consists of
the powers, rights, and liabilities of a corpora-
tion granted to the incorporators. It is the
authority to proceed as a corporation subject
to the constitution and laws of the state where
the incorporation took place.
common stock – ownership capital in a corpora-
tion divided into shares or stock certificates
which carry voting rights, unless otherwise
indicated, and which are eligible to receive div-
idends. There is no due date on such stock and
it carries all the risks associated with the invest-
ment. Sometimes common stock is split into
Class A common stock which has voting rights
and Class B common stock which does not.
consolidation – a merger of two or more compa-
nies in which a new company is organized to
replace the original companies.
consumer cooperative – a purchasing association
which sells primarily consumption goods –
food, clothing, fuel, household goods, furniture,
etc. It may also provide services for consumers,
such as health care and housing.
contract, marketing – a legal agreement between
a cooperative and its members under which
the member agrees to market salable products
mentioned in the contract through the associa-
tion, and the association agrees to market the
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 85
Glossary
products for the member. A local association
may also contract to market its products
through a central marketing cooperative.
cooperative – a user-owned and user-controlled
business that distributes benefits on the basis
of use.
corporation – a legal entity created under the cor-
poration laws of a state (or sometimes under
federal law) whose powers, liabilities, and rights
are separate and distinct from those of the
individuals constituting the corporate body.
credit union – a cooperative organized to create a
source of loanable funds for useful purposes
and to educate its members in financial
matters.
director – one of several persons elected by the
members to govern or control the affairs of the
cooperative.
dividend – a sum of money taken out of a corpo-
ration’s net profits and paid to shareholders
based on their equity investment.
equity – the ownership interest of a company’s
members or stockholders as distinguished
from that of bond holders or lenders; invest-
ment rights in a company; the total assets less
the total liabilities.
farm supply cooperative – a purchasing coopera-
tive through which its patrons obtain farm
supplies such as feed, seed, fertilizer, gasoline,
chemicals, appliances, and other production
goods.
federation – an association of local cooperatives
in which the local associations elect a board of
directors to govern the central association, with
the locals retaining their autonomous character.
Farmers are members of locals and locals (or
regionals) are members of the central associa-
tion.
gross margin – the difference between the selling
price and buying price, generally indicated as a
percentage of the selling price.
incorporating – the act of setting up a corpora-
tion by filing incorporation papers with the
appropriate state agency.
integration, horizontal – the act of combining
two or more like production units or marketing
agencies under central control and manage-
ment, as for example, two or more retail stores.
integration, vertical – successive bargaining units
in the marketing channel brought under
central control and management. Example,
wholesale and retail units owned and operated
by one firm.
interest – payment for the use of borrowed
money.
liabilities – amounts owed by a business to its
creditors, either short-or long-term; also desig-
nated as current liabilities (payable within a
year) and fixed liabilities (payable after a year).
limited liability – in a corporation, the stock-
holder as an investor is liable for the debts of
the corporation only to the extent of the value
of the shares owned.
member – each of the persons composing an
association. In a capital stock association a
person must have purchased at least one share
of common voting stock to fully qualify as a
member. In a nonstock or membership associa-
tion, he or she typically pays a membership fee.
In some cooperatives (e.g., Alto and Foremost),
neither a membership fee nor purchase of
stock is required for membership.
membership agreement – an agreement
between a person and a cooperative under
which the person agrees to become a member
of a cooperative (sometimes confused with a
marketing contract).
membership fee or membership capital – the
amount or fee paid by a member for member-
ship in a nonstock association or in an unincor-
porated cooperative.
merger – two or more companies brought
together as one in which the acquiring
company continues but the acquired one is liq-
uidated. (See acquisition, consolidation.)
middleman – a business firm which physically
transfers and exchanges title to products in
their passage through the marketing channel
from producer to ultimate consumer.
C O O P E R A T I V E S :86
mutuals – similar to cooperatives, an association
of members.
net margin – gross margin minus the operating
expenses; same as net earnings, profit, net
revenue, or net savings from business opera-
tions.
net worth – owners’ equity in a business firm. It is
the excess of the value of assets over liabilities.
nonstock cooperative – a membership organiza-
tion formed without capital stock.
open membership – an unrestricted membership
policy of a cooperative; a very liberal policy
with few restrictions as to admission of
members.
operating statement – an itemization of business
income and expenses for a given period,
usually a year.
par value (of stock) – the dollar value of a share of
common or preferred stock which is stated on
the stock certificate. This value may be equal to,
greater, or less than its market value which rep-
resents the amount for which the stock can
actually be sold.
retain (per unit) – funds withheld from patrons to
build up capital under a revolving capital plan
of financing (also called capital retains).
revolving capital plan of financing – a financing
plan in which capital funds are obtained from
member patrons through capital retains or
retention of patronage refunds, are used for a
time by the cooperative and later repaid to the
member patrons; a plan for rotating all or part
of the capital funds of an association.
revolving fund certificate – see certificate of
equity.
service cooperative – a cooperative that deals
solely or primarily in the rendering of services
(such as housing, financing, insurance, artificial
breeding, electricity, and telephone service) as
distinguished from handling commodities.
sole proprietorship – a business or firm owned by
one individual.
stock or share – a certificate showing investment
in the cooperative as well as ownership rights.
value-added – in strictly economic terms, the dif-
ference in prices received for raw products and
the retail value of the transformed products.
wholesaler – a merchant middleman operating
between the processor (or manufacturer) from
whom he/she buys and retailers to whom
he/she sells; usually does not sell directly to the
end user.
working capital – total current assets minus total
current liabilities.
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 87
Glossary
About UWCC
Since its inception in 1962, the University of
Wisconsin Center for Cooperatives (UWCC) has
strived to study and promote cooperative action
as a means for meeting the economic and social
needs of people. The Center organizes various
extension and outreach programs directed at all
aspects of the cooperative business: organizing
cooperatives, cooperative financing, cooperative
structure, and cooperative management, leader-
ship and governance. The Center is part of the
Cooperative Education Alliance, a partnership
between the Wisconsin Federation of
Cooperatives, Minnesota Association of
Cooperatives and UW Extension.
UWCC outreach efforts are supported by one of
the largest collections of cooperative materials in
the United States held at the Truman Torgerson
Library (madcat.library.wisc.edu) as well as by a
popular and comprehensive website that receives
an average of more than 120,000 hits a year
(www.wisc.edu/uwcc).
C O O P E R A T I V E S :88
Cooperative
university centers
United States
Arthur Capper Cooperative Center
Dept. of Agricultural Economics
305 Waters Hall
Kansas State University
Manhattan, KS 66506
Phone: (785) 532-1508
Fax: (785) 532-6925
Website: www.agecon.ksu.edu/accc/
Cooperative Enterprise Program
Cornell University
Ithaca, NY 14853-7801
Phone: (607) 255-8800
Fax: (607) 255-9984
Website: cooperatives.aem.cornell.edu/
Quentin Burdick Center for Cooperatives
North Dakota State University
P.O. Box 5636
Fargo, ND 58105
Phone: (701) 231-1016
Fax: (701) 231-1059
Website: www.ag.ndsu.nodak.edu/qbcc/
University of Wisconsin Center for Cooperatives
230 Taylor Hall
427 Lorch Street
Madison, WI 53706-1503
Phone: (608) 262-3981
Fax: (608) 262-3251
Website: www.wisc.edu/uwcc
Canada
British Columbia Institute for Cooperative
Studies
University of Victoria
University House 2 – Room 109
PO Box 3060 STN CSC
Victoria BC V8W 2Y2
Canada
Phone: (250) 472-4539
Fax: (250) 472-4541
Website: web.uvic.ca/bcics/
Centre for the Study of Cooperatives
101 Diefenbaker Place
University of Saskatchewan
Saskatoon, Saskatchewan S7N 5B8
Canada
Phone: (306) 966-8509
Fax: (306) 966-8517
Website: coop-studies.usask.ca
Coady International Institute
Cooperative Development Programs
St. Francis Xavier University
P.O. Box 5000
Antigonish, Nova Scotia B2G 2W5
Canada
Phone: (902) 867-3960
Fax: (902) 867-3907
Website: www.stfx.ca/institutes/coady
Cooperative
development resources
Cooperative Development Services
131 West Wilson Street, Suite 400
Madison, WI 53703
Phone: (608) 258-4396
FAX: (608) 258-4394
Website: www.cdsus.com
Credit Union National Association
P.O. Box 431
Madison, WI 53701-0431
Phone: (800) 356-9655
Fax: (608) 231-4263
Website: www.cuna.org
National Association of Housing Cooperatives
1707 H Street, NW, Suite 201
Washington, DC 20006
Tel: (202) 737-0797
Fax: (202) 783-7869
Website: www.coophousing.org
National Cooperative Bank/NCB Development
Corporation
1725 Eye Street, NW Suite 600
Washington, DC 20006
Phone: (800) 955-9622
Fax: (202) 336-7800
Website: www.ncb.coop
P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 89
Cooperative resources
National Cooperative Business Association
1401 New York Avenue. NW, Suite 1100
Washington DC 20005
Phone: (202) 638-6222
Fax: (202) 638-1374
Website: www.ncba.coop
National Cooperative Grocers Association
19 Main Street SE
Suite 500
Minneapolis, MN 55414
Phone: (612) 331-9103
Fax: (612) 331-9145
Website: www.ncga.coop
Northcountry Cooperative Development Fund
19 Main Street SE
Suite 500
Minneapolis, MN 55414
Phone: (612) 331-9103
Fax: (612) 331-9145
Website: www.ncdf.coop
National Rural Electric Cooperative Association
4301 Wilson Boulevard
Arlington, VA 22203
Phone: (703) 907-5500
Website: www.nreca.org
World Council of Credit Unions
5710 Mineral Point Rd.
P.O. Box 2982
Madison, WI 53705-4493
Phone: (608) 231-7130
Fax: (608) 238-8020
Website: www.woccu.org
USDA-Rural Business Cooperative Services
1400 Independence Avenue
Stop 3250
Washington DC 20250-3250
Phone: (202) 720-7558
Fax: (202) 720-4641
Website: www.rurdev.usda.gov/rbs/
For a complete list of cooperative specialists by
state, visit the USDA-Rural Business Cooperative
Services site at
www.rurdev.usda.gov/rbs/coops/cscontac.htm.
C O O P E R A T I V E S90
Copyright © 2004 by the Board of Regents of the University of Wisconsin System doing business as the
division of Cooperative Extension of the University of Wisconsin-Extension. All rights reserved.
Send copyright inquiries to: Manager, Cooperative Extension Publishing, 432 N. Lake St., Rm. 103,
Madison, WI 53706.
Authors: Kimberly A. Zeuli is assistant professor and Robert Cropp is professor emeritus of agricultural
and applied economics, College of Agricultural and Life Sciences, University of Wisconsin-Madison and
University of Wisconsin-Extension, Cooperative Extension. Special acknowledgments to Marvin A.
Schaars who last revised this publication. Produced by Cooperative Extension Publications, University of
Wisconsin-Extension. Editing and layout by Linda Deith.
University of Wisconsin-Extension, Cooperative Extension, an EEO/AA employer, provides equal oppor-
tunities in employment and programming, including Title IX and American with Disabilities (ADA)
requirements.
This publication is available from your Wisconsin county Extension office or from Cooperative Extension
Publishing. To order, call toll-free: 1-877-947-7827 (WIS-PUBS ) or visit our website: cecommerce.uwex.edu.
A1457 Cooperatives: Principles and Practices in the 21st Century R-08-2004
Contents
Publication notes
Notes
Glossary
Cooperative resources
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