Joan Fulton
Assistant Professor, Department of Agricultural Economics, Purdue University
The business of
agriculture is changing rapidly in a process many refer to as the industrialization of
agriculture. This environment is creating numerous challenges for locally owned farm
supply and grain marketing cooperatives and, in many cases, is threatening their very
survival.
As local cooperatives
struggle, so do the rural communities they are a part of, since these businesses represent
a significant part of the local economy. This article reports on how local cooperatives in
eastern Colorado are using joint venture and strategic alliance business agreements to
deal with the challenges resulting from the industrialization of agriculture. It also
looks at how these coops are maintaining viable businesses in their rural communities.
Challenges for Locally-Owned Co-ops
The challenges local co-ops face as a result of the industrialization of agriculture can be categorizedinto the following areas:
1) Economies of scale. Scale
economies in virtually all areas of agribusiness are creating a distinct competitive
disadvantage for local cooperatives. The nature of agribusiness is changing so that
efficiency requires a large-sized operation to achieve a low average cost of production.
2) Changing Government Regulation. Many farm supply
firms are having to make substantial capital investments to construct new storage
facilities for fertilizers and pesticides to meet changing Environmental Protection Agency
standards.
3) Inventory Management. As agriculture becomes more industrialized, there is increased pressure to achieve maximum efficiency at all stages in the agribusiness system, including inventory management. The challenge for grain marketing and farm supply cooperatives is how to serve the needs of their membership while controlling the costs associated with maintaining inventory and storage facilities.
4) Investment Portfolio. Many local cooperatives are finding it necessary to follow a portfolio investment approach and expand beyond their traditional business. The advantage of this approach is to provide diversity for the business as well as an income flow from other sources.
5) Technical Expertise. The industrialization of agriculture is creating a much more complex environment for all agribusinesses. Technical expertise is becoming more important for business survival all the time.
6) Mergers. The pressures noted above are leading to consolidation of our cooperative sector. In the decade from 1986 to 1996, the number of marketing and farm supply cooperatives in the U.S. decreased from 4,237 to 3,415 - or about 20 percent. Locally owned cooperatives simply are finding it impossible to maintain a viable business entity, and are being forced to close or to merge with another business. These mergers and consolidations are, in turn, placing pressure on rural communities across the country.
Agland Inc., a farm supply cooperative in Eaton, Colo., has entered into a joint venture with Farmland Industries under which the two will consolidate their feed manufacturing facilities. The new, jointly owned entity will be called Agland-Farmland Feed, LLC. (Photos courtesy of Agland Inc.)
Colorado co-ops find opportunities
As part of a research project
funded by the Rural Business-Cooperative Service of USDA Rural Development, managers of 20
locally owned cooperatives involved in grain marketing and farm supply were interviewed
about their involvement in joint venture and strategic alliance agreements. The
cooperatives were all located in the high plains region of Colorado, east of the Rocky
Mountains. The interviews took place in January 1995.
For purposes of clarification, the distinction
between a joint venture and a strategic alliance is the degree of formality associated
with the agreement. Strategic alliances are more informnal agreements while joint ventures
are more formal and often involve the creation of a new business entity (e.g., a new
cooperative, a partnership, or a limited liability company).
All 20 cooperative managers reported at least
some use of joint venture or strategic alliance business agreements. The extent of usage
varied. Some managers reported one or two informal agreements with neighboring
cooperatives. Others administered several formal business agreements with other
cooperatives.
The types of business agreements the managers
reported are discussed below according to the six challenges identified above.
Economies of Scale
Farm supply businesses can often obtain
volume discounts on input purchases if they are large enough. Many local farm supply
cooperatives, however, are not large enough to take advantage of these volume discounts.
Managers in eastern Colorado reported working together to solve this size problem.
By jointly purchasing inputs, such as
fertilizer, diesel, petroleum and fence posts, with neighboring cooperatives, they were
able to obtain the volume discounts and lower their input costs.
Grain marketing cooperatives often rely on rail
transportation to move grain from the elevator to the next stage in the supply chain.
Given the lack of competition inherent in the rail industry, small cooperatives are at a
disadvantage when it comes to negotiating rail rates.
However, several grain cooperatives in
northeastern Colorado, adjacent to one another along the same rail line, found a way to at
least partially overcome the imbalance of market power the railway held. By forming a
joint venture marketing agreement through which they agreed to ship all of their wheat
(the main commodity shipped by rail), they improved their bargaining position and
negotiated substantially better transportation rates.
Business size also is important in the
efficient processing of grain into feed and the cleaning and bagging of pinto beans.
Cooperatives reported that - through strategic alliances - they were able to obtain the
necessary volume to lower unit production costs. This allowed them to provide the
associated goods and services to their members.
Several of the cooperatives reported
involvement in a joint venture agreement that involved joint ownership of petroleum
storage facilities at the pipeline. The managers identified that their business was not
large enough to justify the investment on its own. However, together with the other
cooperatives, they achieved the critical size.
Changing Government Regulations
Some services and supplies traditionally offered by farm supply cooperatives, such as fertilizer sales, customer application and liquid propane, are becoming increasingly expensive for small businesses to offer. This difficulty is, in part, due to changing government regulations aimed at environmental protection. Several of the cooperatives reported that, when they formed a strategic alliance and worked together, they had a large enough customer base to offer the services.
Inventory Management
Effective inventory management is important
in controlling costs for all businesses, including local cooperatives. Cooperative
managers identified they had informal strategic alliances with neighboring cooperatives.
This allows them to exchange products at cost. In addition, it is an effective way of
dealing with the challenge of keeping inventory costs low while also satisfying member
needs.
An example that one manager gave us was finding
a specific size of tire for a farmer so that he/she could get back to field work as
quickly as possible.
Inventory management can also be a challenge
for grain storage, since storage facilities are costly to construct and maintain. Often,
they are used for only a portion of the year. In geographic regions where dryland wheat
and irrigated corn are grown in relatively close proximity to each other, cooperative
managers reported using strategic alliances to store each other's grain on an as-needed
basis. Given the different timing of wheat and corn harvest, sharing of storage facilities
is very effective and eliminates the need to invest in costly additional storage.
Several cooperatives also were involved in a
joint venture ownership of a terminal grain storage facility, something that would not
have been possible for any cooperative individually.
Investment Portfolio
As cooperatives have looked to outside investments to expand their portfolio, they often have found that joint ventures involving ownership of businesses, such as convenience stores, tire centers, and integrated hog operations, were the way to make the project feasible.
Technical Expertise
Technical expertise is vital to the success
of any business and is becoming more important as the business of agriculture increases in
complexity. Several of the local cooperatives in this study found a way to overcome one
problem - not being large enough to afford to hire an individual with expertise on
Occupational Safety and Health Administration (OSHA) and Environmental Protection Agency
(EPA) compliance issues. Their solution has been to share one employee.
Another example of sharing an employee with
specific technical expertise was in grain merchandising education. In addition, several of
the cooperatives reported taking advantage of technical expertise offered by the regional
cooperative, including arranging for transportation of grain with the railway and market
surveys to evaluate the feasibility of new investments.
Mergers
Many of the managers commented on the merger pressures that local cooperatives are facing today. There was universal agreement that mergers of local cooperatives have negative effects, due to direct loss of business to the local community. In addition, mergers often result in members of one community feeling like they "lost" their cooperative to the other community. The managers repeatedly reported that joint ventures and strategic alliances had allowed them to remain independent local cooperatives and to avoid mergers. Some of the managers indicated that a merger with another local cooperative would most likely be inevitable down the road. They were quick to point out, however, that the problems noted above would be greatly reduced because their joint venture and strategic alliance agreements were really a stepping stone to a formal merger down the road.
These
540,000-bushel silos (total capacity) in eastern Colorado were built by a new
member-specific corn storage cooperative formed by Agland and some of its members.
Growers buy into the co-op with a minimum commitment of 5,000 bushels of corn per
year. They can then sell corn through Agland's new joint venture with Farmland, or
add value by feeding it to their cattle.
Keys to successful agreements
Given that joint venture and
strategic alliance business agreements can be beneficial for both the cooperatives
involved and for the rural communities that they belong to, it is important to identify
the factors that make the agreements successful.
The determination of these factors was a major
component of the research project described above. The first component of the research
involved developing hypotheses concerning the success factors from the theory of behavior
and strategy.
Secondly, the hypotheses were tested with the
information obtained from the interviews. The managers were asked to identify the factors
that lead to the success and/or failure of the joint venture and strategic alliance
agreements. The managers' responses corresponded directly with and confirmed all of the
original hypotheses.
From the hypotheses and empirical evidence, it
can be concluded that a joint venture or strategic alliance will be more successful when
the following factors exist:
The managers also identified some factors important to successful agreements that did not directly correspond with the original hypotheses. They noted that joint venture and strategic alliance business agreements will be more successful when they involve:
Conclusions
There is more activity than previously
imagined among locally-owned cooperatives in Colorado with respect to joint venture and
strategic alliance business arrangements. These business arrangements have a number of
positive effects. They allow the business to remain alive, keep the rural community
viable, and provide an effective transition if mergers are the end result.
Since the research was limited to eastern
Colorado, the extent of joint business arrangements in other regions of the country is
unknown and remains a question for future research. However, the Colorado results do
suggest opportunities for local cooperatives to meet the challenges they are facing as a
result of the industrialization of agriculture. 
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