Unit 1.

The Cooperative Form of Business

What is a Cooperative?

A special type of business (usually corporate) owned and controlled by its member patrons. This is in contrast to ordinary corporations that are investor-owned firms (IOFs).

Basic PhilosophyPhilosophy of Cooperatives

Through joint effort and collective action (cooperation) on the part of individuals with mutual interests, these individuals will be better off.

Requirements for Being a Member Owner of an Ag Co-op

1. Be an agricultural producer or other co-op

2. Provide equity capital (equity => from owners)

3. Be a customer (active)

Member Responsibilities/Obligations

1. Patronize Co-op2. Provide Equity Capital3. Keep Informed4. Accept Risks of Being a

Member

PATRON =CUSTOMER =User of the business

(buyer of inputs or seller of products)

NOTE: Co-op patrons not always ‘members’.

PATRONAGE

$ amount or

$ volume of business done with a cooperative

Co-op Versus Coop

Co-op = abbreviation for cooperative

Coop = place for chickens

Business Firm Interest Groups

1. Users (customers)

2. Owners (investors)

3. Controllers (decision makers)

4. Employees

Concerns and/or Characteristics of Corporations

Survival/Perpetual LifeCustomer Needs (purpose)EfficiencyProfitabilityLimited LiabilityInterest Groups/Stakeholders

Dual Objectives of Co-ops

= Serving Dual Interests of Owners as:

1. Investors (return on investment)

2. Patrons (services and return on use)

Types of Co-ops

Based on Function Performed

1. Marketing2. Supply3. Service

Types of Co-ops

Based on Area Served1. Local – local community to

multiple counties2. Regional – multiple states3. National4. International

Types of Co-opsBased on Organizational Features

1. Interregional- mbrs = other regionals

2. FederatedFarmers = mbrs of localsLocals = mbrs of regionals

3. CentralizedFarmers = mbrs of regionalLocal businesses run by regional

Steps in Starting a Co-op

Deter. Preliminary Mbr. InterestFurther Research/Analysis

Producer surveyFeasibility study (mkt, cost, …)

OrganizationReconfirm mbr interestGet mbrs to commit/agreeLegal documentsStaffing (directors, mgmt)Acquire facilities and financing

Recommendations in Starting a Co-op1. Use Specialists

AttorneysUniversity staffUSDA staffFinancial Experts

2. Consider Alternatives to Starting a Co-op3. Easier to Later Expand than Contract4. Be Conservative in Projections5. Require Producer Commitment6. Make sure good management is available

and that members are willing to pay for it.

Co-op Justification?

1. Economic NEED2. Economic NEED3. Economic NEED

Economic NEED?

1. Better Price (level or risk) by –A. Increasing competition (or offsetting

mkt power)B. Developing own product (or capturing

other-level profits)C. Taking advantage of economies of size

2. More Dependable Market (for outputs or inputs)

3. Better Services

The ROCHDALE Society

A co-op retail store (i.e. consumer co-op) that sold food, clothing, and other household items to its patrons. The co-op was founded in 1844 in Rochdale, Lancaster, England by 28 craftsmen known as the Rochdale pioneers. This co-op has been recognized as the first such business organization which has served as a prototype for other co-ops.

Why Study Co-op Principles?

1. To understand unique or fundamental aspects of co-ops.

2. To guide the operation of a co-op.

3. To understand the basis for many co-op laws.

Cooperative Principles

1. User Ownership

2. User Control

3. User Benefits

User Ownership =

Users own (at least partially) the co-op

Users provide equity capital (invest $)

(Creditors provide debt capital)

User Control =

The ability to influence co-op decisionsMay or may not mean active involvement in the decision making process; instead, it implies the opportunity to do so if desiredUsers normally exert their influence thru an elected group of representatives known as the board of directors

Forms of USER Control

1. One Member, One Vote

2. Voting in Proportion to Patronage

Other Observations on ‘Control’

1. User Control ≠ investor control although both are ‘democratic’ forms of control

2. Form of investor control is one share of stock, one vote

3. Co-op member voting in proportion to patronage is:

a. Illegal for co-ops with headquarters in Iowab. Used more often by regional co-ops than by

local co-ops

The user benefit principle is related to the operation at cost practice.

Operation at Cost =>

Cooperative earnings (savings, surplus, profits) are to be returned to the memberPATRONS.

Operation at cost≠

Nonprofit

The Return or Distribution of Earnings to:

1. Customers in proportion to the amount of patronage done with the business (i.e. return on USE)= PATRONAGE REFUNDS

2. Investors in proportion to the amount of money invested in stock in the business (i.e. return on INVESTMENT) = DIVIDENDS

Limits on Co-op Earnings Distribution

Patronage refundsNo limitUsually ≥ 20% cash (for tax reasons)

Dividends- ≤ 8%

Patronage Refund Example

CO-OPSales: $200,000Expenses: $180,000Earnings: $ 20,000MEMBER APurchases: $ 8,000% of total for co-op 4%(8,000/200,000 = 4%)

Patronage Refund: $ 800(4% x 20,000 = 800)

Patronage Refund

Total: $800Cash (> or = 20%) $160Noncash $640

The noncash patronage refund is also called a retained or deferred patronage refund.

Why Co-ops May Have Earnings

1. Overcharges or underpayments because costs are unknown initially.

2. Co-ops charge going market prices which are above costs:

a. To avoid price warsb. To avoid passing savings on to

nonmembers

Evaluation of Co-ops as a Marketing Alternative:1. Level of prices initially paid (or charged)2. Patronage refund

a. Level b. % cashc. When noncash will be paid

3. Price and quality of services4. Dependability as a market outlet (or input

supplier)5. Economic effects without the co-op

(competitive yardstick)6. Value of owning your own business