Trouble ahead?
Low commodity prices, ag economy are major problems facing co-op management
Charles A. Kraenzle, director, statistics
Thomas W. Gray, rural sociologist
USDA Rural Business-Cooperative Service
Editor’s Note: USDA/RBS Research Report 192, “Problems and
Issues Facing Farmer Cooperatives,” examines more fully the various
survey responses discussed in this article. It should be available
by late June on the Internet at www.rurdev.usda.gov, or by calling
(202) 720-8381 for a hard copy ($5 each).
USDA survey of more than 3,000 U.S. farmer cooperatives reveals that low commodity prices,the general agricultural economy, operational
difficulties and increasing costs are the major problems facing cooperative management. Survey results indicate deep-seated concerns about the future viability of both cooperatives and agriculture in general.
Survey respondents were asked two open-ended questions regarding what they saw as the major problems during the past year, and what they foresee as the major problems in the next year or two. The same four major problem areas were identified by both questions, but with shifts in emphasis (see table 1).
Among the four major problem areas identified during the past year, nearly one-fifth of the responses cited low commodity prices making it the most common response. This included low prices for cotton, cottonseed, sweet potatoes, almonds,apples, pears, fresh fruit, milk, sugar, grains and eggs.
The general agricultural economy was the second most cited problem area. A broad range of responses was included in this category, such as concern about: “the depressed farm economy,” “loss of acreage and farmers,” “number of dairy
farmers quitting business and leaving the farm,” and “producer profitability.” Other responses included: “size of farms getting bigger, farmers bypassing local co-op for supplies and sales,” “shrinking ag market,” and “too many big farmers.” As a result of the changing structure of agriculture, many said their cooperative’s sales and profitability were declining.
Cooperative operational problems, cited third most frequently,
included such diverse concerns as: “need for more
working capital,” “financing,” “debt management,” “equity
management,“ “need to increase sales,” “marketing issues” and
“acquisition of another company and adding its operations to
ours.” Examples of other responses in this category included:
“working through merger,” “loss of feed customers,” “reducing our expenses by closing smaller branches to meet larger farmer needs more competitively,” “understanding and responding to our strengths and weaknesses,” and “identifying and persuading directors to pursue non-traditional income opportunities.”
The fourth most often cited problem for the past year was increasing costs. Nearly one-third of the respondents mentioned the rising costs of fuel as a concern. Others mentioned increased cost of doing business because of higher costs for labor,insurance, supplies and other expenses.Examples of responses included: “rising costs,particularly for energy,” “high fuel prices causing cash flow problems,” “rising labor costs,” “rising overhead insurance, health insurance,utilities, etc.,” “increasing costs of operations; labor, repairs, depreciation” and “construction costs.”
Problems in the near future
The same four problem areas were identified for the near future, but with the agricultural economy moving up to the top concern, followed by low commodity prices, operational difficulties, and increasing costs. The character of comments offered for near future problems varied little from those given for the past year. Respondents may have been more hopeful for better prices in the
future, but were aware that structural concerns such as “the continuing trend toward larger farmers,” “lack of production (in local areas),” and the increasing integration of multinational agribusinesses were likely to
continue to be problems in the near future.
There was less frequent concern with prices and the weather, more frequent acknowledgment of major structural difficulties of the agricultural economy, and greater concern about competition. However, problem areas identified as difficult during the past year low commodity prices, agricultural economy, operational difficulties, increasing costs, labor, low margins, competition and weather continued to be cited as future concerns.
Influence of co-op function
Whether a cooperative was primarily involved in marketing,or providing farm supplies or service had an impact on which problems were cited most often. Marketing cooperatives more frequently cited operational difficulties and competition as concerns. In the context of low prices and declining
numbers of farmers and production, marketing cooperatives may plan to expand sales and markets, recruit new and larger members, or at a minimum maintain current market share. Intense competition from larger organizations may make
these plans difficult and raise various other operational issues for future survival.
As did marketing cooperatives, farm supply cooperatives frequently identified “the agricultural economy” as well as “low commodity prices” as major problems. However, farm supply cooperatives more frequently identified “low margins,” rather than “operational and competitive” concerns. With farmers going out of business, low prices, and farmers not being able to pay bills, many farm supply cooperatives may not be able to maintain margins. Responses from supply cooperatives cited: “loss of sales, lack of earnings in the agricultural industry and high cost of products for resale.”
Service cooperatives identified low prices, increasing costs and weather as major problems. These cooperatives are likely more affected by weather concerns than are marketing and farm supply cooperatives. With low prices and a history of declining volume due to poor weather, these respondents most often worry about increasing costs.
With marketing and supply functions, various tensions between the environment of the cooperative and the cooperative organization become evident. With marketing cooperatives,respondents identified operational difficulties within a
larger context of the agricultural economy, competition and low commodity prices. With farm supply cooperatives, respondents identified low margins within a larger context of the agricultural economy and low commodity prices. With service cooperatives, respondents identified low prices and weather as well as increasing costs as problem areas. “Increasing costs” are particularly worrisome. When respondents shifted focus to the near future, larger structural comments became more prevalent.
Influence of co-op size
Low margins, increasing costs, low commodity prices and size of cooperative are all closely inter-related. If a cooperative is struggling with low margins, they can sometimes be improved by increasing prices and/or lowering costs. In a market of pervasively low prices and thin margins, a rise in costs can be particularly problematic. Not only can the cooperative not raise prices,but in a climate of “increasing costs,” the cooperative is not likely to be able to reduce its own costs and improve margins.
These difficulties may be particularly ominous with smaller cooperatives, because they also have smaller volumes. In an environment of increasing costs, smaller cooperatives may have more difficulty maintaining margins than larger cooperatives, given that larger cooperatives can spread costs over greater volumes. Smaller cooperatives with smaller volumes have less room to spread costs.
This is particularly difficult in an environment of increasing costs. Smaller cooperatives will likely find it more difficult
to maintain or improve the survivability of the organization.
Competitive problems only deepen these dynamics,
compounding the difficulty of maintaining margins in an
environment of low prices and increasing costs.
These relationships tended to be borne out when considering
problems based on co-op size. Operational difficulties
addressed the internal problems with which cooperatives
struggled to improve margins in an environment of low
prices and increasing costs. For smaller cooperatives that find
it difficult to spread increased costs over larger volumes,
competition emerges as a more frequently cited challenge,
making it more difficult to expand volumes. For larger cooperatives
with much larger volumes, labor issues were identified
as more problematic for the near future, though labor
was cited by some smaller cooperatives as well.
The agricultural economy was among the most often cited
problem areas across all sizes. As with other considerations,
when respondents shifted focus to the future, structural considerations
were cited more often. Regardless of the shifts in
costs, margins, size, growth and/or consolidations, the loss of
the farming base represents fewer farmers and increased
competition for a greater number of larger-volume farms.
Big concern: survivability
The responses showed a deep concern with the survival of
farmer-members and cooperatives. Survival of farmers was seen
as a product of the various influences that went into producer
profitability. Low commodity prices were understood as pervasive,
both in the past and as expected in the future. These low
prices were partly due to excess supply, driven by expansion in
the production of various commodities in some domestic
regions, as well as increased imports of low-cost foreign goods.
Producers had to face these low commodity prices along
with the rising costs of fertilizers, energy and, in some
instances, labor. The problems of low prices and increased
costs were compounded in some regions by weather conditions
that reduced local volumes. Under such conditions low
prices, increasing costs, and declining volumes producer
profitability drops and survivability becomes more difficult.
Some farmers discontinue operations due to inadequate
earnings. Others discontinue operations
due to retirement, urbanization and
health problems. Some farmers develop
strategies to stay in business. They may
seek greater volumes by expanding both
vertically and horizontally. Some
engage in contract production or use
other practices (Internet purchases and
sales) to improve the overall efficiency
of their farm operations.
Many of these dynamics have direct
impact on cooperative survivability. Fewer
farmers can reduce local volume, commodities
sold and supplies and services
purchased. Large farms with greater volumes
may have the option to bypass local
cooperatives and go direct to terminals.
Others that do not bypass the local
may want better deals from their cooperatives.
Those who contract with
investor-owned firms channel volume
away from cooperatives.
Cooperatives must operate in an environment
of increasing costs. Reduced
volumes, low prices and increased costs
have contributed to low margins. Cooperatives
have sought to respond with
various operational adjustments niche
marketing, improving financing, managing
debt, improving efficiency and
expanding growth as well as improving
returns to farmer-members, thereby
helping keep them in business (and preserving
volumes).
Some cooperatives have gone out of
business. Others have sought to make
various organizational changes, including
closing smaller branches, increasing
the number of locations and forming
mergers, joint ventures and strategic
alliances. These organizational changes
have been undertaken in an environment
where other competitive agrifood
organizations are consolidating
and integrating both vertically and
horizontally creating food chains with
multi-regional and global reach.
About the survey...
Information was collected by adding
two open-ended questions to RBS’
annual survey of farmer cooperatives.
1. “In the past year (ending in 2000,)
what did your management consider to
be the major problem or issue facing
your cooperative?” 2. “What does your
management see as the major problem
or issue facing your cooperative in the
next year or two?”
Responses were received from 1,147
of the 3,058 cooperatives surveyed.
Most of the responses were short, such
as “accounts receivable,” “decline in
farmers,” “competition” and “low farm
prices.” Some cooperatives identified
more than one problem or issue, such
as “low farm income and excessive government
regulations” or “imports,
retail consolidation, prices.”
Seventeen problem areas or classifications
were identified. For example,
included under “the agricultural economy”
were such responses as: “changes
in agriculture structure,” “depressed
farm economy,” “declining number of
farmers,” “decrease in production,”
“losing small family farms,” “encroachment
from development” and “declining
net income of farmers.”
Other problem areas cited were
accounts receivable, competition, consolidation,
technology, genetically
modified crops, government regulation,
government programs, increasing
costs, labor, low commodity prices,
operational problems, transportation,
weather, members and low margins.
The classification system was used
for responses received for both the past
year and the near future. A two-tier
methodology was used to report the
findings. In the first tier, those problems
that accounted for at least 50 percent
of the responses were reported. In
the second tier, identified problems
were reported that accounted for at
least an additional 5 percent of the
total responses in a specific category. In
some cases where response numbers
were few, problems were noted if at
least 10 responses were received.
Problems were analyzed by cooperative
function, type, size and region of
the country for both the past year and
the near future. From these analyses,
various relationships among the problem
areas were revealed.
