Major changes in agriculture raise big
questions for nation’s cooperatives
By James Baarda, USDA/RBS Economist
James.Baarda@usda.gov
Editor’s Note: The following article is based on a presentation the
author made during the Cooperative Communicators Association
annual institute in Burlington, Vt., this past summer.
embers look to their cooperatives for services
and support in both difficult and good times.
But cooperatives also look to their members
for necessary support, patronage and direction.
This reciprocal relationship between members
and cooperatives means that whatever affects farming also
affects cooperatives. And it means that whatever affects the
business and economic environment in which cooperatives
operate also affects farmer members. Restructuring by large
and small cooperatives, several bankruptcy filings by wellknown
cooperatives, and significant transformation of the
entire agricultural sector can lead to confusion and uncertainty
among producers. This, in turn, may cause cooperative members
and leadership to lose a clear sense of direction and purpose.
But cooperative leadership cannot afford to succumb to
these forces, regardless of the size of the problem.
The first step in facilitating positive, realistic responses
to dramatic changes in agriculture is to identify the forces
causing the changes that affect cooperative members. This
identification process will, at the very least, reduce largescale,
invisible trends and concepts into a workable “short
list” of factors that are hitting home on your co-op and
your members’ farms and ranches. Your task is to establish
reasonable expectations of success, based on these forces.
Then develop short and long-term strategies, depending
on how accurately the “big picture” is perceived. The 12
forces described in the first part of this article offer a basis
for further discussion.
The next step is to assess the implications of these forces
for farmers and their cooperative. The dozen questions in the
second part of this article shift focus from the broad forces to
address cooperative issues directly.
The remaining task for cooperatives, directors, management
and members is to then establish for each cooperative
meaningful connections between the forces and
issues, then devise strategic plans that will lead to the cooperative’s
cooperative’s
successful
response and effective
service to members.
12 forces changing the
face of farming and
farmer cooperatives
The following list
summarizes major forces
affecting U.S. farming
and, consequently, farmer
cooperatives and their
members.
1. Globalization
The impacts of globalization
are felt in three
major ways:
- On markets-World market forces are reflected directly
back to all levels of agribusiness and to U.S. farmers.
Demand, supply, pricing and all other economic forces
that determine farm income and affect farming decisions
are now world issues, not local, regional, national or
hemispheric issues.
- On production-Individual U.S. farmers do not produce
for limited or well-defined markets. Every farmer
is part of a competitive world system in production
choices and costs, governmental support programs,
market delivery systems, sources and pricing of inputs.
Production trends may be inexorable on a world scale,
leaving individual farmers unable to make meaningful
production decisions.
- Non-agricultural environments-Farmers are now
exposed to world financial markets where the economic
systems are far different from the U.S. system. They also
face international and transnational political forces,fluctuating
exchange rates and new communications systems
and technologies, all of which can change rapidly. These
environments are ever-more important to agriculture,
and, at the same time, are less and less sensitive to agriculture.
Almost any production activity in any sector is
expendable if “economics demands it.”
2. New forces drive farming
- Economic forces-Broad micro and macro-economic
forces impinge on every aspect of the farming process.
The forces are not only more pervasive but, in some
regards, they are more volatile that ever before. Stability
and predictability are rare commodities.
- Sources-More and more of the forces driving agriculture
and affecting farming lie outside the control
of farmers or the general agricultural sector even
outside the control or influence of the nation. The
agenda is being set by others, not necessarily by
design, but more by economic forces that are neutral
in some sense, but not at all neutral toward those who
cannot exert power.
- Social forces-Concerns about the environment, food
safety, animal health and treatment, conservation, odor
and pest nuisance, land use, food costs and labor conditions
are among forces finding their way into laws and
regulations that impose general social interests on farmers.
An increasingly constrictive network of prohibitions
and directives are part of every farming plan, decision
and cost calculation.
3. Risk
- Levels of risk-Agriculture has always been a risky business,
but the nature of risk is changing substantially.
Some types of risk seem to be decreasing while others
are increasing, and the impact of these risks is becoming
more severe. Predictability and planning become ever
more important as farming becomes a more sophisticated
science. But risk can undermine the predictability
required for planning, investment and efficiency.
- Sources of risk-As with the market and social forces, an
increasing amount of risk seems to be coming from outside
of agriculture and outside of the national economy.
As a result, farmers and others in the agricultural sector
are less able to take effective action to reduce risk.
- Allocation-The generally declining economic power of
farmers and the increasing power of buyers and suppliers
has led to an increased risk for farmers, while other
agribusinesses strive to reduce or shift risk to others,
including farmers.
4. Concentration and industry structure
- Bargaining power-Bargaining power, or lack thereof,
has almost always been of concern to farmers. But it is
an ever-increasing problem because of the increasing
concentration of buyers and suppliers.
- Pricing systems-An increasing number of pricing systems
are “closing” due to the decline in both the number
of participants and a reduction in number of farms.
Reduction in transparency and open price discovery
methods arises from the increase in private agreements
between producer and buyer.
- Retail concentration-Concentration at the retail level
has not only added to problems of bargaining-power balance,
it has also reduced opportunities for farmers to participate
at all. The national scope of retailing concentration
with giant food chains charging for shelf-space and
continued concentration of an already concentrated number
of players in many international markets places U.S.
farmers at a distinct disadvantage.
5. Industrialization of agriculture
- Contracting and integration-Significant increases in
contracting and industry integration have totally changed
some industries. This trend appears to be making its way
into nearly all agricultural sectors. The tradeoffs between
rights and obligations inherent in any contracting system
often leave the real producer at the bottom when it comes
to decision making, influence and profitability.
- Production fragmentation-This process has resulted in
each producer playing a meaningful role in an everdecreasing
part of the production process. Decisions are
removed from the producer to the point that the term
“employee” may best describe many producers.
- The agenda-Perhaps one of the most profound
changes brought about by “industrialization” is that the
agenda for agriculture is being set outside the
farmer/producer system, not by farmers. The driving
forces are profitability, returns on equity, growth, market
dominance, reduction of risk and direct dependence on
financial markets by powerful companies far removed
from the production process.
6. Biotechnology and intellectual property
- New commodities-Biotechnology and production technology
advances are resulting in new genetic commodities
and methods of production. This trend is also
impacting new production and processing technologies.
In many circumstances, farmers cannot afford to be left
behind by not adopting the new technologies. At the
same time, however, they cannot afford to make the
investments to adopt new technology. Farmers bear the
risk of uncertainty about genetically modified organisms
(GMOs) and a possible negative public reaction in case
of a real, or imagined, danger to the food supply.
- Ownership-Production is increasingly dependent on
technology that is owned by proprietary firms. The
agenda for development is set by agribusiness firms
based largely on profitability considerations. Profit is
captured by requiring compensation at some level in the
production system, typically at the producer level. In
many cases, the “producer” either never owns, or has
limited rights in the product itself.
7. Scale of production
- Size-Increased size and scale of operation is not limited
to marketing and processing firms. Farm production
itself is increasing in size, along with requirements for
larger investment, added financing burdens, planning
needs and management skills. Dramatic increases in
farm sizes creates new demands for supplies, financial
services, land and labor.
- Size distribution-Agriculture is facing disparity between
large commercial farmers and smaller operators, ranging
from part-timers to full-time family farms. This disparity
is carried over into farmer needs for supplies and financing,
the choice of commodity produced and their ability
to efficiently produce a quality, uniform product.
8. Sophistication and complexity
- Business methods-All but the simplest of farming operations
must consider the complexities of modern business
and apply sophisticated business practices. This
ranges from the form of business used to financial and
technological computer programs, from expensive and
complex machinery to arcane hedging methods.
- Multiple requirements-Law, accounting, financing and
regulations at the local, state and federal level are an integral
part of every farming operation and are playing an
increasingly intrusive role in the business of farming.
9. Technology
- Information technology-Production and distribution of
agricultural products has been greatly influenced, as have
most other sectors in the developed world, by information
technology. Computing capabilities affect all businesses
of every size to increase record-keeping capacity,
enhance decision-making support and offer data-bases
not previously accessible to producers. Communication
technology has revolutionized the way information is
exchanged and, through the Internet, the amount of
information available on a multitude of subjects.
- Production and distribution technology-Technology
supporting production agriculture has increased in
sophistication and in the capacity to enhance production
efficiency. Co-op members are operating in a dynamic
environment that includes complex, high-performance
machinery, global positioning systems, advances in food
chemistry and technology, processing and packaging
innovations, and distribution system mechanization.
10. Consumers and consumption
- Changing tastes-Consumer tastes for food are changing,
due largely to advertising and marketing. For the
most part, advertising and marketing are designed to
increase product profitability for processors and retailers.
The demand is generated at the retail level and
passed back to producers, who have little or no input to
the process. Farmers are asked to produce what is
demanded when the buyer demands it.
- Uniformity-The enormous size of the fast food industry
and grocery retailers is in many ways reducing the variety
of foods demanded and offered. In other ways, however, it
is increasing variety. More products are becoming homogeneous
commodities for which uniformity of size, quality
and taste is absolutely essential. This, in turn, often eliminates
the smaller producer from meaningful participation
in the supply chain.
- Service demands-As consumers move further away
from a realistic understanding of the farming process,
they become more demanding and less forgiving of variety
in quality, taste or appearance.
11. Lifestyles and attitudes
- Farmer expectations-Perhaps the most important
forces to consider are those that come from farmers
themselves. Farm families have expectations about a
desired lifestyle and standard of living, income level and
stability, and a decent working environment. Among
many other things, this may well influence what farmers
want from their cooperative, the kind of operations the
farmer endeavors to establish, and their willingness to
remain in agriculture.
- Rural residents-Farmers and other rural residents have
observed substantial changes in rural communities, many of
which are based on declining income and population. Institutions
and amenities are nevertheless required for those
remaining, and rural residents have reason to expect that
their community will be stable and a rewarding place to live.
This, in turn, influences attitudes toward business, the
importance of local firms and the impacts of local cooperative
facilities on employment and community income.
12. General economic pressures
- Profitability-Prices, costs, risks, variability and other
problems inherent in agriculture combine with similar
pressures from other parts of the economy to place
severe pressure on farm profitability and stability. Many
of the factors just discussed contribute to the problem.
There is every reason to believe that such pressures will
continue long into the future.
- Value of agriculture-A problem broader than farm
profitability and stability is that of the value of agriculture
and agricultural production. Unacceptable returns
and stability undermine the sense of value in producing
agricultural products, as does the decline of farmers’
overall position in the industry. The public, including
policymakers, may also place less value on agricultural
production and the traditions of independent farming.
- Financial markets and performance-Cooperatives and
farmers have vested interests in financial and equity markets.
As those markets change, so too, do the fortunes of
cooperatives and members. For the most part, performance
of the markets is entirely beyond the control of cooperatives
or farmers. Yet, market behavior dictates financial
resources available for cooperatives and members, levels of
investment in cooperatives, savings and spending patterns,
and financial flows into and out of the agricultural sector.
A dozen issues for co-ops
The 12 forces discussed above suggest numerous questions
that can be asked about cooperatives and their future
in American agribusiness. Some affect cooperatives directly
as businesses, other issues impinge on cooperatives because
of the impact on farmer-members.
The following list of 12 issues summarizes challenges
faced by cooperatives in the changing economy and agriculture
sector. They are presented in the form of questions
to emphasize that specific answers are needed. The
response to such questions can be positive; the questions
do not suggest in any way that cooperatives cannot respond
effectively to the changing forces faced by members.
- Do the forces mentioned and the resulting changes in
the industry affect cooperatives in a particular way?
Is there something about cooperatives that makes them
susceptible to the forces mentioned above that differs, either
qualitatively or quantitatively, from other kinds of businesses?
Do the impacts on farmers extend to the cooperative in a significantly
different way than for other types of agribusiness?
These questions can be addressed for each of the forces
because some will most certainly have different impacts on
cooperatives than others.
How do cooperatives respond? On the one hand, the
cooperative may have a response comparable to that of noncooperatives.
In addition, each force and the response by
farmers may be reflected back to cooperatives differently
than from non-cooperatives. The latter possibility leads to a
general inquiry about cooperatives: of the forces acting on
farmers, are some more amenable to solution by cooperatives
than any other form of business? Can cooperatives solve
farmers’ problems as no other form of business can?
- Do agriculture cooperatives exist in a dying sector?
As economies globalize, does U.S. agriculture face per-manent disadvantages because of high costs, regulations,
etc.? To what extent, if any, is agriculture facing contraction,
major modification, or extinction? If U.S. agriculture’s
existence is challenged, are the cooperatives that serve agriculture
also doomed? The issues raised in a recent book
that questions the long-term future of U.S. agriculture are
timely and are being considered by a surprisingly wide
range of individuals.
One question for cooperatives is their role in these large
trends, if such trends do indeed even exist. Do cooperatives
have a special role to play in helping farmers and the U.S.
economy avoid the “death” of agriculture as we now know it?
Do cooperatives demonstrate weaknesses, as well as strengths,
in response to sector declines and possible replacement with
other commodities or types of economic activities?
A profound question is what role cooperatives will play in
the future of agriculture. Can cooperatives play a unique role,
either individually or collectively, in maintaining the strength
of the agricultural industry by effectively supporting farmers?
- Are cooperative decision-making processes adequate?
Timing and deliberation-Are cooperatives inherently
slow in making decisions in a rapidly-changing environment
because of their reliance on member approval? Are decisions
made in the right place in the cooperative by the right people?
Are these questions, stated as fact by some, real issues, or
only unsupported observations?
Directors-Are boards of directors capable of making
timely, correct and forceful decisions? Have co-op boards
gathered the expertise needed for modern agriculture, and
are boards capable of using this expertise?
- Are cooperatives and their leaders capable of playing inthe world arena?
Sophistication-Are cooperative members and their leaders
not sophisticated enough to participate in the dynamic,
worldwide agricultural and agribusiness arenas? While we
know this is not the case, others do not. As a consequence,
the fundamental member-control issue can be undermined
and potential cooperative participation in the world markets
dismissed as inherently impossible.
Complexity-Is the business so complex and large that
success can only be expected from professional management
and planners, regardless of how good at farming members
and directors are? Should the field be left to the professionals,
or should a new balance of power be explored?
Both of these queries come to the fore frequently when
farmers form new-generation cooperatives that have both a
highly complex processing system beyond the board’s technical
expertise and a marketing system they are not familiar
with. One consequence is that the board of directors, and
therefore the members, may rely too heavily on management,
may not provide the necessary oversight of management and
cooperative performance and may not participate effectively
in strategic planning and major cooperative decisions.
- Is cooperative business too limited to be successful?
Sophistication-Are cooperative members and their leaders
not sophisticated enough to participate in the dynamic,
worldwide agricultural and agribusiness arenas? While we
know this is not the case, others do not. As a consequence,
the fundamental member-control issue can be undermined
and potential cooperative participation in the world markets
dismissed as inherently impossible.
Complexity-Is the business so complex and large that
success can only be expected from professional management
and planners, regardless of how good at farming members
and directors are? Should the field be left to the professionals,
or should a new balance of power be explored?
Both of these queries come to the fore frequently when
farmers form new-generation cooperatives that have both a
highly complex processing system beyond the board’s technical
expertise and a marketing system they are not familiar
with. One consequence is that the board of directors, and
therefore the members, may rely too heavily on management,
may not provide the necessary oversight of management and
cooperative performance and may not participate effectively
in strategic planning and major cooperative decisions.
- Is cooperative business too limited to be successful?
Diversity-Cooperatives serve farmer-members. This statement
defines the breadth of their activities. Many other businesses
are successful because they can diversify to reduce risks
and take advantage of synergies, something cooperatives cannot
do effectively, if at all. How detrimental are the diversification
limitations to the long-term survivability and flexibility of cooperatives?
Exactly how do these limitations inhibit the cooperative?
For example, does limitation on type of product marketed
or supplied place the cooperative at a disadvantage with respect
to a competitor who can engage in product lines required for
the market? An important question to be answered is how
cooperatives can respond without losing their character and
their close association with farmers’ production processes.
Service mandate-If prices and costs do not generate
profits for a period, cooperatives may not be able to temporarily
abandon a line of business, as can other business.
Does this place them at a disadvantage? This also raises the
question of profitability requirements for co-ops. Given the
purpose of cooperatives and the complexity of accurately
determining benefits to members, are there situations where
a cooperative can operate without “profits” and still be considered
a successful business organization? Have cooperatives
established suitable alternatives to pure “profit” motive?
- Similarly, does service devoted only to members doom cooperatives in times of change?
In business limited to service to members, and with limited
flexibility to expand business, what is the cost to cooperatives of
serving only members? How is this cost balanced against the
benefits of such service? Who ultimately bears the burdens of
the cooperative?
- Do member demands and behavior weaken cooperatives?
Economic demands-Farmer-members bear the burden
financing the cooperative. When farmers demand not only
good prices, but high returns and a quick equity revolvement,
do they set the stage for cooperative failure? This differs
from the relationship between a non-cooperative business
and its customers. But is it a weakness?
Loyalty-Are cooperatives placed at a disadvantage with
respect to non-cooperative businesses when members shop
for prices rather than maintaining a long-term relationship
with their cooperatives? Is there any way to tie a cooperative’s
loyalty to its members on one hand, and loyalty to the
cooperative on the other? These are perennial issues faced by
federated and direct-membership cooperatives. Some
observers attribute the failure of both centralized and federated
cooperatives to member behavior-individual farmers in
the case of centralized cooperatives and the local members of
a federated cooperative.
- Is there a fatal size limit on “true” cooperatives?
Size concerns-Is there a maximum size to which a cooperative
can grow and still maintain its true cooperative relationship
with members? Member control, member relations,
and response to individual member needs may diminish with
increasing size. What roles can cooperative education and
good member relations play in this evolving process?
capital contributed by members. Limits on capital sources are
frequently mentioned by co-op leaders and those who work with
them as a major restriction on the cooperative form of business.
Capital needs-Cooperatives may need to participate in
capital-intensive, value-added activities. Are cooperatives so
limited in their sources of capital that they may be precluded,
by upstream or downstream business, from serving members?
Are farmer members able and willing to contribute the capital
needed for projects that offer significant returns? What
must cooperatives return to members in exchange for higher
levels of equity investment?
User-financing, and, more importantly, non-user or outside
financing is a major issue in cooperatives and deserves
careful attention. The issues must be addressed from the perspective
of both the cooperative and the individual members.
- Do cooperatives have structural defects?
This issues shows two sides of the same coin.
Too Complicated?-Cooperatives have developed federated
systems, centralized systems with complex voting methods,
numerous financing techniques (based on the patronage relationship)
and complex systems of returning benefits to
patrons. Are these complications necessary? Do they serve a
needed purpose and have they undermined the cooperative’s
relationship with members?
Too Simple?-Have cooperatives attempted to remain
uncomplicated and dependent on member financing,
patronage and loyalty to the extent that they cannot respond
effectively to changes in the agricultural sector and the
economy generally? Have they placed their financial health
in the hands of members who may damage the cooperative
by self-serving behavior?
- Are cooperative benefits identified and recognized?
Questions about cooperatives and their performance cannot
be analyzed or answered without fully understanding the
benefits cooperatives offer. When benefits are not identified
and explained, cooperatives are at a disadvantage because their
benefits are more subtle and more difficult to explain than the
benefits derived from other forms of business. Yet these benefits
are the foundation for loyalty, continued use and survival.
Are cooperatives positioned to alleviate pressures on
farms, particularly family farms? Are they more capable
than other agribusinesses of increasing returns to farmer
members, of establishing better prices and pricing systems,
of representing farmers’ interests in the market
place and of capturing benefits of the marketing and supply
chain for farmers themselves?
Does the cooperative make its benefits clear to members?
Are all benefits presented in a form recognized by members
as benefits? Are members uncertain why they belong to the
cooperative? Does the cooperative have a system in place
communicate its benefits to members?
- Have cooperatives lost sight of cooperative
fundamentals?
Response to challenges-In responding to the massive
changes in agriculture, have cooperatives given up fundamentals
to become more like non-cooperative businesses in size,
type of business, financing, control or in other ways? What
kinds of balances are needed to respond effectively and preserve
the cooperative? What are the fundamentals worth keeping?
Strengths-While couched in terms of questions challenging
cooperatives, the list of 12 is also an affirmation of the
many strengths of cooperatives. When cooperatives attempt to
make fundamental changes to meet challenges, they may
weaken themselves by giving up their strengths. How can
cooperatives make wise decisions in the face of immediate life-or-
death conditions?
Responsibilities-Who in the cooperative is responsible
for keeping co-op fundamentals alive? What kind of management
training, board training and member relations are
needed to instill solid, yet dynamic, adherence to cooperative
principles?
Searching for answers
Members, boards of directors, management, lenders and
advisors would like to understand the implications of the
forces discussed and would like answers to the questions
raised. How can cooperatives address the 12 forces and 12
questions outlined?
First, consider the validity and relevance of each of the
big picture forces relative to your cooperative. Then rank
the forces according to immediate or long-term impact,
whether primarily affecting farmers or the cooperative. Also
consider the influence, if any, that the cooperative can exert
to modify the problems or divert detrimental consequences.
Consider whether the changes are good, bad or neutral for
the cooperative.
Similarly for questions about cooperatives-assess each
one with your cooperative and its members in mind. How
applicable is the question for the cooperative? Has the cooperative
(its board of directors, management, members or others)
recognized the question as a problem? Should they have?
If questions exist, has the cooperative responded effectively?
If not, what steps can be taken to correct problems? What
questions might be the most likely to face the cooperative in
the future? What is the best mechanism to begin to address
problems before they become critical?
It is important to re-emphasize that the 12 questions in no
way represent a broad criticism of contemporary cooperatives.
They are designed to focus attention on specific problems so
that they can be recognized and dealt with in a timely fashion.
In fact, each of the questions can be seen in one way or another
to be a uniquely cooperative strength or opportunity.
The cooperative’s final task is to understand the multiple
environments in which the cooperative and its members
operate, consider challenges and opportunities all participants
face, and use the unique structure and problem-solving
methods of cooperatives to turn challenges into successful
responses.
