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Advising people about cooperatives
A cooperative is a user-owned and user-controlled business from which benefits are derived and distributed equitably on the basis of use. Each year, income received from providing goods and services to members, less expenses and reasonable reserve, is returned to members on the basis of the value or quantity of business transacted with the cooperative.
People form cooperatives to obtain services that they cannot get as economically, efficiently, or effectively as individuals. The cooperative provides a structure within which people can voluntarily act or operate by joining resources-physical or mental, man-made or natural, and material, including financial-to achieve an end. This grassroots concept enables people to work together in collective efforts to solve problems or obtain a variety of services; to manufacture and purchase supplies; to produce, process, and market products; and to generate sufficient volumes of business to improve bargaining power and competitive position relative to other businesses.
Cooperatives are business corporations
Three basic types of business organizations comprise our American business system: Individually owned business firms, partnerships, and corporate forms. Corporate forms may be either for profit or nonprofit and investor owned or, like cooperatives, member-user owned. In certain respects, cooperatives resemble other businesses. They have similar physical facilities and must follow sound business practices. They usually incorporate under State laws. They are governed by bylaws and other necessary legal papers. Members elect a board of directors. The board sets policy and hires a manager to run the day-to-day operations. In other ways, cooperatives are distinctively different from other businesses. These differences
Types of cooperatives
Historically, cooperatives perform one or more of three functions: marketing products, purchasing production supplies, and providing services. Brief descriptions of the more common types of cooperatives operating in the United States follow.
The need to meet consumer demands and expand markets for products presents an increasing problem for farmers acting independently. Few farmers produce in quantities needed to deal directly with large wholesalers or retailers. The marketing cooperatives as quantity assemblers provide an increasing variety of off-farm processing and marketing services for about one-fourth of all products that farmers produce.
Marketing cooperatives help farmers produce and process quality products to market specification. Early cooperative marketing included the operation of grain elevators, milk plants, wool pools, cotton gins, livestock markets, vegetable markets, and fruit packing plants. Modern marketing includes the coordination of processing, canning, drying, blending, concentrating, extracting, freezing, or consumer packaging of animal and animal products, such as dairy, fish, meat, and poultry and the same for fruit, nut, and vegetable products, and many other products in integrated organizations. Marketing cooperatives enable farmer members to extend control of their products as long as the cooperative retains physical or legal title to a commodity handled through processing, distribution, and sale.
Bargaining cooperatives are a variation of marketing cooperatives. Producers join to gain strength in negotiating terms for such items as price, quality, quantity, and delivery with processors and other buyers. Producers delegate authority to their bargaining associations to establish common quality, common price, and rules on marketing their product. Bargaining cooperatives do not take possession of products or assemble, process, or distribute them. They also differ from usual marketing cooperatives in that their facilities are limited generally to an office and perhaps a testing laboratory. Some cooperatives perform both bargaining and marketing functions. One example is dairy cooperatives that start as bargaining organizations but subsequently add processing facilities.
Farmers first turned to cooperatives as economic tools to gain advantage of quality and quantity in supply purchases such as feed, fertilizer, and seed. These early efforts often became corporations having full-time managers and warehouses, to handle other production supplies and services such as petroleum products, farm chemicals, animal health products, fencing, building supplies, construction contracting, automotive accessories, etc.
Most cooperatives have affiliated with other cooperatives, often through regional and interregional cooperatives. These efforts reduce farmer costs and strengthen purchasing power through owning large-scale facilities such as petroleum refineries; phosphate, potash, and nitrogen manufacturing plants; feed mills; research farms; and laboratories.
Purchasing cooperatives’ objectives include savings for members through quantity purchasing, manufacturing, and distributing, procuring quality products and providing related services as needed. Distribution to producer members is a major concern at the local level because added services are needed. Many cooperatives now perform both marketing and purchasing functions, although they started as single-function organizations.
Agricultural service cooperatives provide services related to the production and marketing of farm commodities, or they may provide general services. Related service cooperatives offer unlimited possibilities and are used in ever-widening circles to solve mutual problems and provide specialized services that affect the location, form, or quality of farm products or supplies for members.
Services may be part of the operation, or they may be per-formed by separate cooperatives. Examples of services related to handling farm supplies are applying fertilizer, lime, or pesticides; feed grinding or mixing; and harvesting. General Service cooperatives provide a number of specialized services assisting farmers in their business. Other examples of general agricultural service cooperatives include agronomy, artificial breeding, dairy herd improvement, farm machinery, grazing, grove management, irrigation, livestock feeding and production, pest management, and research.
Farm Credit System
Agricultural credit is provided through the Farm Credit System at the local level through Production Credit Associations and Federal Land Bank Associations. In some parts of the country, Federal Land Bank Associations and Production Credit Associations have merged their associations into Agricultural Credit Associations. Rural electric and telephone cooperatives provide utility services. The Farm Credit System is a $60-billion nationwide network of borrower-owned banks and associations that provide credit and financially related services to U.S. farmers, ranchers, aquaculturalists, cooperatives, rural utilities, rural home buyers, and other eligible borrowers.
Rural Electric and Telephone Cooperative Associations
Rural Electric and Telephone Cooperative Associations exist for the sole purpose of providing services for their members-owners in their respective operating territories. both electric and telephone cooperatives have the exclusive right to serve specified rural territories in most States. Anyone living in those areas must become a member of the cooperative to obtain electric or telephone service. These cooperatives differ from others in that they use Government financing. Rural Electrification Administration (REA), an agency of USDA, makes loans to electric and telephone systems in rural areas.
The two major business activities are marketing and providing supplies and services. Marketing cooperatives receive and market the catch, or perform some other functions such as locating buyers and negotiating terms of trade. Supply and service cooperatives may provide ice, fuel, and fishing gear, or offer services such as boat repair, insurance, and representational functions. The supply and service cooperatives do not perform a marketing function.
Forestry cooperatives offer certain potential advantages to their membership. Many woodland owners do not have the expertise necessary to select merchantable timber for harvest or to obtain favorable stumpage prices. Often, effective harvesting and marketing of timber require professional guidance and business practices. However, some woodland owners find it difficult, on an individual basis, to regularly utilize the ser-vices of forestry consultants and professional forest managers.
Cooperative organization may allow owners of small tracts easier access to professional management and marketing services. In addition, management of woodlots through cooperatives may prove to be more gainful over the timber-cutting cycle. Implementation of management plans can result in small woodland owners’ assembling a uniform and high-quality volume of lumber, thus attracting more favorable prices. A cooperative structure allows members to pool equipment purchases and such capital requirements as compensation for managers and foresters and expenditures for office needs. Cooperation among woodland owners can also give rise to volume discounts on purchases of forestry supplies.
Cooperatives are particularly suited for certain labor-intensive crops where potential exists for a group effort to be more than the sum of its parts. Several persons or families of limited means unite to individually farm small parcels of larger acreages that are either owned or rented by the group. The human labor each member-family can perform is often the only resource they can pool in forming a cooperative. They expect to be more productive as member-owners than as hired laborers. With the whole family working, there are more direct incentives to produce. They aspire to control the land on which they work.
Increasing numbers of rural and urban consumer cooperatives have developed. They include buying clubs and consumer stores, computer services, day care/nursery, credit, furniture, health maintenance organizations (HMOs), housing, hospitals, legal services, memorial, migrant labor, mutual insurance, optical clinics, pharmacies, preschools, recreation, retirement centers, service stations, sewer, travel agencies, water, and many others. Consumer cooperatives are corporate businesses, generally incorporated under State statutes. Members, often active in consumer groups, are concerned with the quality and quantity of all merchandise, health, child care, and nutrition in food. A host of other cooperatives, many national in scope, are jointly owned and operated by business organizations to provide service at cost. These include the Florist Telegraph Delivery Association; the Associated Press (a news-gathering service); the American Automobile Association; and food, drug, or hardware retailer-owned wholesale cooperatives.
Credit unions are financial corporations chartered and supervised by either State or Federal Government through the National Credit Union Administration. They are formed by people with common bonds through business employment, association, or other organizations within a well-defined neighborhood, community, or rural district. Business organizations whose employees form credit unions often provide office space on the premises. Persons become members by applying and paying small membership fees. Credit unions encourage family money management and wise credit use. Credit unions make loans to members from funds saved by other members. Credit committees are chosen from the membership itself. The committees review loan applications for approval. Repayments are made on mutually agreed schedules and interest is charged on outstanding loan balances. Many credit unions refund part of the interest paid by borrowers each year, thus operating on a cost-of- doing-business basis. Normally, credit unions do not require outside financial support.
The increased cost of living has stimulated interest in a simple form of consumer cooperative called the buying club. Generally, buying clubs order merchandise for members on a preorder and prepaid basis. They are operated by volunteer labor, with members agreeing on basic commodities needed. Sufficient markup is required to justify substantial investment of member time and effort. Often, the club’s existence is limited, either because basic needs cease to exist or because the clubs subsequently develop into consumer co-op stores.
Craft producers have found cooperatives to be advantageous in such areas as marketing, production assistance, and obtaining technical assistance. Marketing activities might include: identifying potential customers and target markets; evaluating customers’ needs; giving craftsmen feedback on the latest trends in color, design, and competition; setting uniform quality standards, develop-ing coordinated lines, and guaranteeing delivery to attract wholesale buyers; providing retail and wholesale services such as operating craft shops, selling at wholesale or gift craft shows, sponsoring craft shows, publishing catalogs, providing sales representatives, or acting as a wholesale merchant.
Production assistance can be obtained in the areas of bulk purchase of materials at a reasonable cost and with uniform quality; joint purchase and use of machinery or equipment; continuous review of equipment, supplies, and technology; training; and help in product design and color selection. Technical assistance can be provided in the areas of design; production and business skills; government regulations; assistance in securing loans or needed services for members; and information about new books, seminars, periodicals, and exhibitions that contribute to members’ professional growth.
Members of health co-ops prepay medical costs through monthly premiums to consumer-sponsored health plans. This spreads costs and helps members prepare for the possibility of serious illness. Physicians practicing in multi-specialty groups emphasize keeping patient members well through preventive medicine and outpatient care. Some health plans employ doctors or establish clinics or hospitals.
“Cooperative” applied to housing means joint operation of a housing development by those who live in it. Members own membership certificates or stock in the corporation, carrying exclusive right to occupy a dwelling unit and participate in corporation operations. Cooperative housing corporations own the total property. Cooperative ownership permits individual dwelling unit ownership within a total property estate, with undivided interest in the common estate.
A common purpose of cooperative housing projects is to obtain adequate housing at savings on mortgage rates. Members may reduce building costs through self-help approaches to home ownership.
Migrant workers form labor cooperatives to sell their services to agricultural producers. Their manager contracts with farmers for services, and provides them transportation and super-vision. Indications are that these workers work more days than agricultural workers who are not organized.
Concerns about drawing wills, settling estates, and other nor-mal legal needs stimulate development of legal services cooperatives. They are organized like health service cooperatives and help spread costs over many members.
There are three types of memorial associations: those that only recommend mortuaries to members, those that contract with mortuaries for member services, and cooperative-operated mortuaries supported by prepaid burial costs.
Public demand for outdoor recreation increases annually as more leisure time becomes available. Forming recreation cooperatives on private rural land shows potential for meeting future needs and increasing landowner use. Recreation cooperatives are classified as user controlled and resource controlled.
User-controlled cooperatives are those where resources, suchas land or facilities, are controlled by users through lease or purchase to provide co-op members and their families with services or facilities for outdoor recreation. Examples include camps, golf, flying, playgrounds, skiing, swimming, tennis, trap shooting, or other facilities operated on a nonprofit basis. In resource-controlled cooperatives, owners organize the cooperative to develop and market recreational facilities and services, or jointly purchase services and supplies used to pro-duce recreation income. Resource-controlled cooperatives pro-vide opportunity for adjacent landowners on a lake or stream to develop a single unit for boating, swimming, fishing, camping, or hunting under one management. Economies of scale are attained in capital investment, promotion, and advertisement.
Housing, meal concerns, book needs, and other problems bring students together in cooperatives. They pool funds and labor and agree on methods of operation to fulfill their needs as they study.
Professional workers' approach to organizating cooperatives
It takes only a few people wanting to solve mutual problems to generate interest in forming a cooperative business. These people are usually leaders in specified areas working to get others with similar interests involved in business solutions. They call on professional workers, in whom they place confidence, for help in the cooperative-forming process, i.e., planning, organizing, financing, and managing.
Reacting to requests
Cooperatives won’t solve all the problems that their members face; nor will they correct specific problems in all situations. The cooperative approach should be used only when it can be demonstrated that a cooperative can provide a needed economic service not presently available, or that, by providing a service, it can increase net returns to prospective members. A cooperative should not be suggested if the service is readily available from existing firms, at a reasonable cost, and particularly if one of those firms is a cooperative.
Here are some other prerequisites to consider before suggesting development of a new cooperative:
- Producers in the area must feel an economic need for the proposed cooperative’s services and be able to identify a mutual objective. It is not enough for a third party to identify an economic need.
- A core of local producer leadership must carry on the development effort.
- Producers must be willing to work together and follow the basic principles of cooperation.
- Producers must be willing and able to support a cooperative by making the required capital investment, and then patronize and participate in its affairs.
Examples of questions to ask when groups request assistance to determine prerequisites are:
- Why is a cooperative needed?
- What type of cooperative is needed?
- Who is urging the development of a cooperative and why?
- How many people are interested in this proposal
- How has this interest been determined?
- How many have visited existing cooperatives?
- What educational or discussion group meetings have been held? Who conducted the meetings? Did the same people attend each time?
- Has outside help or advice been requested? If so, from whom?
- Where do people now get the products or services that the proposed cooperative would supply?
- What competition would the proposed cooperative have?
- What is the capital requirement? How much capital are organizing members able and willing to invest?
- Where will cooperators obtain credit?
- How much business volume is expected the first year? Second year? Third year? Is this seasonal volume?
- If the cooperative were organized and started in business, what are the prospects of getting a qualified manager?
- What existing cooperatives are interested in opening a branch or taking in members as an alternative to forming a new cooperative?
- What are the greatest problems in organizing this cooperative?
- What are the greatest assets in getting a cooperative started?
- What long-range factors or trends should be considered to ensure the cooperative’s success?
Obviously, all these questions and others will not be answered when first raised. But what is important is to deter-mine the presence or absence of these prerequisites. If they are present, it must still be determined if a cooperative would be economically feasible before pursuing development.
Steps to organize
The following sequence of events for organizing a new cooperative should be suggested by the professional to the interested groups:
- Hold a meeting of leading participants to discuss the economic need that formation of a cooperative might fulfill.
- Hold an exploratory meeting. Vote whether to continue. If affirmative, select a steering committee.
- Conduct a survey as a basis for determining cooperative feasibility.
- Hold a second general meeting to discuss results of the survey. Vote on whether to proceed.
- Conduct a market or supply-and-cost analysis.
- Hold a third general meeting to discuss the results of the market or supply-and-cost analysis. Vote whether to proceed this time by secret ballot.
- Conduct a financial analysis and develop a business plan.
- Hold a fourth general meeting to hear results of the financial analysis. Vote again on whether to proceed. If affirmative, vote a second time on whether the steering committee should remain intact or changes should be made.
- Draw up necessary legal papers and incorporate.
- Call a meeting of charter members to adopt the bylaws. (It’s a good idea to invite all potential membership to ratify the bylaws.) Elect a board of directors.
- Call the first meeting of the board of directors and elect officers. Assign responsibilities to implement the business plan.
- Conduct a membership drive.
- Acquire capital, and include the development of a loan application package.
- Hire the manager.
- Acquire facilities.
- Start up operations.
Leadership and advisers
The types of specialized help needed and their functions are:
Organization and legal counsel
Each State has one or more statutes under which corporations are incorporated. Agricultural and nonagricultural cooperative corporation statutes may be specified. In some States, only agricultural cooperatives may organize. In some cases, incorporation may be more feasible under nonprofit or general business incorporation laws of the State, and the cooperative then establishes bylaws for operation. An attorney familiar with State cooperative statutes is needed to draw up the articles of incorporation, bylaws, and membership agreements, to draw up or review contracts for purchase of property or construction, loan agreements, capitalization plans, or any other legal instrument needed to start the cooperative.
Not all attorneys are familiar with cooperative law. References for finding qualified individuals may be obtained from the district Bank for Cooperatives, State cooperative council, existing local or regional cooperatives, and State extension specialists who work with cooperatives. A continuous qualified legal counsel is important to ensure compliance with laws applying to cooperative business.
Financial planning and counsel
Feasibility studies, membership capitalization, methods for establishing and repaying long-term and operating capital are important planning steps. The design and installation of an accurate bookkeeping system, tax records, and support accounts are necessary for the cooperative’s success. Resource people for these areas included an accountant or auditing firm familiar with cooperative accounting, the district Bank for Cooperatives, agents of the lending institution, State extension specialists who work with cooperatives, the State cooperative council, and local and regional cooperatives. Accurate records and an ongoing program of financial planning help ensure the success of the business for the benefit of its member owners.
Specialists in the area of operations and marketing must be involved in the early stages of the cooperative’s planning and formation. Resource persons from equipment and machinery suppliers, commodity handlers, State Extension specialists in marketing, as well as those listed as resource persons in legal and financial areas, could supply information and ideas for the cooperative’s success.
Capital needs depend on the type and size of operations. All standard methods, and some designed for cooperatives, are used by members in financing. Sufficient member investment is needed to demonstrate a commitment to provide capital to operate the business and to persuade credit sources to lend additional funds to the cooperative. Member investment is attained through fees, dues, or assessments, or by issuing stock at the outset and using revolving funds after operation starts. Stock is usually not sold outside the membership because cooperative investment does not offer growth possibilities or returns like other investments.