Meeting the challenge: co-ops in the 21st century - Industry Overview

Editor's Note: The authors are all staff members of USDA/RBS Cooperative Services. This article is a summary of recently published RBS Cooperative Information Report 60, "Agricultural Cooperatives in the 21st Century. "It is available on-line at the RBS publications Web site: http://www.rurdev.usda.gov/rbs/pub/newpub.htm. To receive a free hard copy of the report, send an e-mail request, including your mailing address, to: [email protected], or fax requests to (202) 690-4083.

The start of the 21st century is a time of change and challenge for agricultural cooperatives. In late 2001, USDA/RBS Cooperative Services (CS) staff conducted six workshops around the country that examined what cooperatives must do to survive and thrive in the years ahead. Each session consisted of a moderator and 10-15 cooperative managers, directors and advisers. They spent a full day discussing external and internal issues and forces confronting cooperatives and priorities for shaping future cooperatives.

After the last workshop, USDA co-op specialists combined the ideas expressed by the participants with independent research findings by its staff and others into a comprehensive report, "Agricultural Cooperatives in the 21st Century." This article summarizes the observations and recommendations in that report.

External issues

The world in which cooperatives operate, both on the farm and in the marketplace, is changing at a rapid pace. To remain viable in the 21st century, cooperatives must recognize and adjust to meet the challenges created by the changing marketplace. These include:

Changing farm demographics. Fifty years ago, America's farms were predominately operated by traditional family farmers who relied on farming for their income and farmed with the assistance of family members, but little or no hired help. Today, large "commercial" farms that comprise only 8 percent of the farm population generate 68 percent of all farm production.

At the other end of the spectrum, part-time farmers account for 62 percent of the farm population, but generate only 8 percent of farm production. Much of the cooperative system was built to support traditional family farmers. Cooperatives must adapt to a diverse membership that requires different services, products and structures.

Technological innovation. Various technology developments are impacting every operation of farmer cooperatives, including:

1. Transportation. Large trucks and wide, smooth roads are making obsolete local grain elevators and farm supply stores built to serve farmers who hauled their production to market and their supplies back home in horse-drawn wagons and early pick-up trucks.

2. Information. Computers make possible ever-faster collection, analysis and dissemination of information among potential buyers and sellers of agricultural production and food products, shortening the time period in which purchase, inventory and pricing decisions are made. Cooperatives must evaluate their role in a marketplace that values nimbleness, flexibility and information over stationary structures and physical inventory.

3. Biotechnology. Biologically based innovations are providing exciting new products, such as ethanol and bio-diesel, bio-polymers and plant-based pharmaceuticals. Historically, improved plant varieties have been developed by land-grant universities and made available to the public at large. Now, investor-owned firms and universities with large research and development budgets form alliances to patent and profit from their discoveries. Producers and cooperatives are struggling to find a role in this growth area.

Consolidation and Industrialization. Consolidation among firms at the processing, wholesale and retail levels of the U.S. food marketing system continues unabated. Dominant retail firms, led by Wal-Mart, are implementing supply-chain management techniques that place increasing burdens on suppliers to provide quality product at the lowest possible price, when and where the buyer wants it. Large food processors, following the lead of poultry marketers, are integrating their operations and dictating how farmers will grow their crops and livestock. As a consequence, even the largest cooperatives are finding it difficult to exert market influence and bargaining strength.

Globalization. Communication and transportation developments are leading toward a truly world market for agricultural supplies and products. Farmers and cooperatives must learn to do business in an environment where they compete and do business with not only the firms down the street, but also the ones on the other side of the globe.

Consumerism. Technological breakthroughs, notably bar coding, are making it easier to identify and track consumer preferences and increasing consumer influence over food marketing. The future of commodity-oriented cooperatives, whose members tend to produce whatever they want and expect their cooperative to sell it for top dollar, may be limited. To be viable in the future, cooperatives must offer products consumers want and that can be sold for more than the cost of producing and marketing them.

Internal Issues

As cooperatives strive to meet the challenges of an evolving business climate, they must also deal with issues within their own organization and operation.

Acquiring equity. Cooperative principles limit the opportunity and appeal for non-members to provide equity to cooperatives. Farmers are often either unable or unwilling to adequately capitalize their cooperatives. This saddles cooperatives with weak balance sheets and makes it difficult for them to provide basic services, let alone fund efforts to take advantage of new business opportunities.

Diverging memberships. Cooperative memberships reflect the growing disparity among producers. Commercial farmers frequently want different things from their cooperative than do part-time or retired producers. New business strategies may be necessary to satisfy the desires of a heterogeneous membership.

Board effectiveness. User control is often implemented by a board of directors composed entirely of producer-members. Many of these directors lack the training and experiences to analyze options for dealing with 21st century issues such as supply chains, technological innovations, complex business arrangements and globalization.

Federated model. The federated structure, in which producers form local cooperatives that, in turn, form large regional cooperatives to acquire supplies and market products, is under severe pressure. Many local grain marketing and farm supply cooperatives are not consistently profitable. They expect their regional federated cooperative(s) to be the low-cost source of farm supplies, pay a premium for product delivered for sale and issue a hefty cash patronage refund each year.

Locals are sometimes viewed as unresponsive to the need for change--especially when it comes to closing surplus, unprofitable facilities and to investing in new business opportunities likely to be profitable in the 21st century. Some doubt exists as to whether a system with multiple layers of profit and decision-making centers can take the swift, decisive actions required to succeed in the years ahead.

Recommendations

Two themes permeate strategies for cooperatives to succeed in the 21st century. First, greater investment is needed in the people who make up cooperatives. Members, directors, managers and advisers must have the skills required to deal with 21st century issues. Otherwise, they will neither completely understand the options available nor have the ability to analyze them and make sound business decisions.

Second, an emphasis must be placed on pragmatism and profitability. Cooperatives are businesses. In the years ahead, they should focus on solving business problems and providing value to their members. If they don't, members will stop patronizing them and they will just fade away.

1. Accept and embrace change. Wishing markets had stopped changing at a certain time, or managing a cooperative as if they had, is a sure prescription for disaster. Industrialization, globalization and technological innovation are here to stay. They are continuously evolving and presenting new and different challenges and opportunities. And as cooperatives move through the 21st century, other developments will have an equal or greater impact. Cooperatives must accept and embrace change.

The recommendations that follow will not be implemented if this one is ignored. Cooperative leaders who refuse to accept change can be expected to take the easy way out when confronted by it: do nothing and hope for the best. Directors, managers and advisers must reject this approach and implement strategic planning programs that systematically look at yesterday, today and tomorrow. We should view "where we have been and where we should be" not as ends in themselves, but rather as foundations for building cooperatives that thrive in the years ahead.

2. Strengthen cooperative leadership. Cooperatives need leaders who are prepared to meet the challenges of the 21st century.

Cooperatives must broaden the skills and experiences of their directors. The selection of farmer-directors should be based on ability, not popularity. Directors, once elected, shouldn't automatically serve for life. Longevity can be a criteria for director selection, but it should not be the only criteria. Cooperatives should consider adding outside directors to their boards, especially people with skills in areas where many farmer-directors lack experience, such as food marketing and corporate finance. Grower control is maintained by giving the members the power to remove outside directors who fail to meet their approval.

Managers must be able to work effectively in a cooperative setting. They may not have the impact on director selection they would in an investor-owned firm (IOF). And as the owners are the users, cooperative managers must accept shareholders walking into their office with often critical comments, while in an IOF, the shareholders may not even know where the headquarters is located. When selecting top management, prior cooperative experience should be an important criteria.

3. Maintain a solid equity base. Cooperatives must give producers reasons to invest their scarce financial resources. Providing quality goods and services at reasonable prices is part of the answer.

Some farmers are using new and creative financing strategies compatible with cooperative principles. The new-generation model cooperative gives farmer-owners the option to sell their equity to other producers at a market price. This complies with the user-owner, user-control or user-benefit tenets. In other instances, outsiders may purchase dividend-bearing but non-voting preferred stock. While this is a modest departure from strict user-ownership and user-benefit, it protects the key principle of user-control.

If cooperatives are to be adequately capitalized in the years ahead, either members will need to provide additional funding or cooperatives will have to turn to other sources. The pertinent questions then become, how much capital can farmers provide without jeopardizing their own financial health and how much can cooperatives accept from outsiders without jeopardizing their cooperative character?

4. Emphasize education. Cooperative education is an investment and should be viewed as such by both cooperative and public decision makers. While the importance of cooperative education has not diminished over the past few decades, the resources devoted to it have been severely curtailed.

Director training is the No. 1 priority. Without the proper training, the pressure will mount on farmer-directors to abdicate their role as stewards of their members' assets to outsiders with the expertise to run the business but not the appreciation for the importance of the member-user that makes a cooperative special.

Cooperative education is urgently needed for other audiences as well: employees, members, youth, young farmers and the general public. Cooperative leaders have allowed, even facilitated, an across-the-board erosion in cooperative education. In the long run, this can be as damaging as any failure in financial oversight.

5. Seek efficient structures. As farmers and cooperatives enter the 21st century, traditional structure is under severe pressure. When profit margins are thin, internal conflicts among the layers of decision makers in a federated system--as each strives to capture what margins there are--can become debilitating. Also, assets are tied up in farm supply manufacturing facilities and grain elevators that might be better deployed in information technology and value-added food processing.

Large, federated cooperatives are facing intense competitive pressure. In some cases, smaller, centralized associations will be able to function with less capital and to make management decisions relatively quickly. When these associations see an opportunity that is beyond their reach, they may be better off forming a joint venture with other cooperative and non-cooperative firms than forming a federated cooperative. This provides access to people, funding and markets not otherwise available, while they continue to function as an independent cooperative organization.

Farmer-members must ask themselves some fundamental questions: Do they have to own physical assets they can see and touch? Can they operate in an environment of shared control and benefits? Can they allow their cooperative businesses to evolve and change?

6. Forge a strong public policy presence. Government decisions will play an important part in the future of cooperatives. Farmers and cooperatives will receive few favorable laws or administrative decisions just because they think they deserve them. Good policy outcomes, like good business outcomes, are usually the result of careful planning and hard work.

In the 21st century, cooperatives must enhance their role in protecting and advancing the political interests of farmers. This includes educating legislators regarding how cooperatives might receive stronger support in terms of access to and assistance from federal and state programs. It also means collaborating with program administrators to make sure producer-members receive the maximum benefit, or suffer the least possible harm, from public sector initiatives.

7. Make decisions based on cooperative principles. The core cooperative principles (user-ownership, user-control and user-benefit) make the cooperative a unique form of organization with distinct characteristics, strengths and difficulties. While all three principles are important, the concept of user-control seems most critical to operating on a cooperative basis. As cooperative members struggle to adjust to the demands of the 21st century, they may find that flexibility is necessary to protect the continued availability of a cooperative presence in the industries where they do business. But only through continued user control can the members ensure that these deviations from the norm don't transform their "cooperative" into just another investor-owned firm. It is through control that members ensure business outcomes consistent with their goals for their cooperatives.

Control is the ability to make the decisions that determine how the entity conducts itself. Member-users can have 100 percent of the voting rights and still give away control to management, lenders, outside equity holders or advisors. To increase the likelihood of success for the greatest number of cooperatives in the 21st century, the single most critical recommendation of those who participated in USDA's focus group meetings is this: cooperatives must have highly competent directors who understand how to exercise effective control over their cooperatives and do so in a manner that promotes the best interests of the member-users.

Role of cooperative principles

No definition of a "cooperative" is universally accepted to the exclusion of others. But three basic principles capture the essence of a cooperative enterprise. They are:

* User-ownership. Users provide the equity investment in a cooperative and have an ownership claim on its assets.

* User-control. Users elect directors and democratically decide other key issues for their cooperative.

* User-benefits. Users receive both the services provided and a share of the earnings on the basis of how much business they conduct with the cooperative.

Other businesses are owned and controlled by investors who focus on maximizing profits. Cooperatives aim to provide quality goods and services to their members at the lowest possible cost, consistent with generating sufficient earnings to keep the business viable. These principles provide some business advantages and justify favorable public policy initiatives. But they also make it difficult for cooperatives to meet certain business challenges, and this is leading some persons to advocate placing less emphasis on them.

COPYRIGHT 2003 U.S. Department of Agriculture, Rural Business - Cooperative Service
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