What Cooperatives Are (and Aren’t)
Economist says co-ops represent the aggregates of economic units
By Charles Ling, Ag Economist
Cooperative Programs
USDA Rural Development
any factors are converging to bring new
attention to the cooperative business model.
Discussions about a possible role for co-ops
as part of national health-care reform and an
explosion of interest in local foods, farmers
markets and community-supported agriculture and fisheries
— which often employ co-op business models — have added
to this attention.
During the past 10 or 15 years, we’ve also seen many
experiments with variations on the traditional co-op business
model, as have occurred with some new-generation
processing co-ops and producer-owned limited liability
corporations (LLCs), including those involved in renewable
energy production. As such, it is timely to take a fresh look at
what a cooperative is and how it differs from an investorowned
business.
Emelianoff’s definition
A concise definition of a cooperative by Ivan V. Emelianoff
— in explaining the economic structure of cooperative
associations about 70 years ago — remains refreshingly clear
and applicable today. His work marked the beginning of a
new era in the development and evolution of cooperative
theory. The narrative of ideas presented in this article is
primarily drawn from Emelianoff’s book, and will hopefully
shed light on the nature of cooperatives.
In Economic Theory of Cooperation, Emelianoff carefully
reviewed the worldwide literature on cooperative theory from
the late 19th century until 1939. He came to the conclusion
that for economic analysis of cooperatives, the economic
structure of cooperative organizations should be clearly
defined, and that the definition should be free from the
encumbrance of sociological, legal, technical, socialphilosophical
and ethical considerations.
Against this backdrop, Emelianoff established this
definition: “Cooperative organizations represent the
aggregates of economic units.” While that is more “bare
bones” than many definitions of cooperative, it crystallizes
the essence of what cooperatives should have in common.
“Aggregate” is commonly defined as: “Any total or whole
considered with reference to its constituent parts; an
assemblage or group of distinct particulars massed together.”
Further, as defined by Emelianoff: “An economic unit, or
economic individual, is an economic body admittedly
complete and sufficiently integrated for individual existence
and independent (in conditions of an exchange economy —
interdependent) economic functioning.”
Co-ops as aggregates of farms
In the agricultural context, farms are such economic units.
The nature of cooperative associations as aggregates of
member-farms is clearly discernible in the embryonic forms
of such associations. For example, a buying club of farmers
may want to purchase certain goods together, such as
fertilizer.
The buying club would have someone take orders from
member-farmers and place orders with a vendor, as well as
perform other related chores. If the vendor requires a
deposit, members may advance money to the buying club for
the deposit requirement in proportion to their respective
buying volume.
There may be an elected committee to facilitate decisionmaking
if the number of members is large. Members may
each have one vote if their purchasing volumes are about the
same. Otherwise, some form of proportional voting may be
adopted to conciliate large-volume members."
When the fertilizer (for example) is delivered, members
pay the balance of their obligations. After the transactions
have been completed, payment to the vendor and other
expenses are subtracted from the sum of money paid by
members. Any surplus is returned to members in proportion
to the volume of fertilizer they have purchased.
This buying service is conducted at cost; every aspect of a
member’s transaction through the buying club is in
proportion to their patronage (buying) volume. The buying
club may be disbanded after fulfilling its joint-buying
purpose.
This scenario shows that the buying club represents the
aggregate of its member-farms, through which they purchase
fertilizer. If the buying club metamorphoses into a permanent
purchasing cooperative association, the picture may look
more complicated. However, the underlying nature of the
cooperative as an aggregate of member-farms remains the
same.
Making it permanent
In this new scenario, the person who manages buying
orders and other chores will be the manager of the
cooperative (usually a hired professional). The committee of
members becomes the board of directors. Advanced payments
by members to the cooperative become equity capital for
financing the operation and for carrying inventories and
owning facilities.
Year-end surplus is returned to members as refunds in
proportion to patronage volume, but a portion may be
retained as revolving capital. The principles of
proportionality and service at-cost remain intact, but their
practices may be less evident because the operation has
become more complex.
Although the above example is based on purchasing
cooperatives, the same line of reasoning also applies to
marketing cooperatives. The difference between purchasing
and marketing cooperatives is: instead of procuring goods, a
marketing cooperative markets products produced by
member-farms.
In either case, the member-farms coordinate their
activities through the cooperative, but each fully retains its
economic individuality and independence.
A cooperative may be described as a center of memberpatrons’
coordinated activities, or as an agency owned and
controlled by members through which they conduct their
business. In this respect, it is identical with the special
departments or branches of single member-farms.
For example, a dairy cooperative is the collective
marketing arm of its member dairy farms; a farm supply
cooperative is their supply purchasing department; and a
livestock-genetics cooperative is the breeding service branch
for its members. As some would say: a cooperative is an offfarm
extension of the farming business.
Characteristics of co-ops
Being aggregates of member-farms, cooperative
associations have these characteristics in common:
a) The equity capital of a cooperative is the sum of
advances needed for financing anticipated
transactions of individual members of the
cooperative; it is not the same as the entrepreneurial
capital of an investor-owned corporation.
b) The member-owners of a cooperative are
independent farmers who have chosen to coordinate
certain activities via a cooperative. They are not the
same as the stockholders of an investor-owned
corporation, who are a diverse set of shareholders
joined solely by common investment.
c) The surplus or deficit of a cooperative is the account
payable to, or receivable from, the member-patrons
of the cooperative on their current transactions; this
is not the same as the profit or loss of an investorowned
corporation.
d) The sum for patronage refunds to members is the
sum either underpaid (overcharged) to the members,
or — in case of a deficit — overpaid (undercharged)
to members on their transactions through the
marketing (or purchasing) cooperative; the sum for
patronage refunds is not the profit of the cooperative
or its income.
e) The dividend on capital, if any, does not represent a
profit or any income of the cooperative; it is the
interest payment for using capital advanced by
members. By contrast, investor-owned corporations
pay dividends to shareholders out of earnings.
f) All the economic functions of a cooperative are
ultimately the economic functions of the memberfarms
performed through the cooperative as their
collective branch or collective department.
Therefore, all economic services of cooperative
associations are performed at cost.
Emelianoff emphasizes: “None of such traits can be
unreservedly used as an unerring test of a truly cooperative
organization, since these traits only indirectly disclose the
economic character of the cooperative aggregate….The only
comprehensive and indisputable test of the cooperative
character of organizations is their aggregate structure.”
Unique aspects of co-ops
The unique aspects of cooperative character, however, are
often not readily apparent. There are many reasons for this,
some examples being:
- Cooperatives only reflect the characters and aspirations of
their membership, which are diverse and manifest the
diversity of the population, the geographical regions and
the commodities involved. Such differences directly, or
indirectly, have a certain bearing on the character of an
association and its cooperative ideals. The variability of the
external characteristics of cooperatives is kaleidoscopic and
infinite. Differences in their external and superficial
features obscure cooperatives’ ultimate economic character
of being aggregates of their member-farms.
- Most cooperatives are incorporated. The legal vestments of
incorporated cooperative associations also cloak their
economic structure as aggregates of member-farms to such
a degree that they are often mistaken to be the same as
investor-owned corporations. This is one of the principal
sources of confusion in understanding cooperative
organizations.
- A lack of distinction between the concept of an investorowned
corporation as a profit-seeking economic unit and
the concept of a cooperative as an agency of its member
farms is another factor that confuses many. Use of common
accounting terminology for both business models adds to
this confusion. As the above list of co-op characteristics
shows, such conventional terms as “profit,” “capital,”
“shareholders,” “dividends,” etc., should be used with
reservations when describing cooperatives.
- In governance, a cooperative board of directors —
including its board election rules, composition, function,
responsibilities and interaction with management — is not
the same as the board of an investor-owned corporation
(especially the publicly traded ones). Consequently, the role
of the top manager of a cooperative is also somewhat
different from that of an investor-owned corporation (even
if they have the same title).
Emelianoff’s conclusion that cooperative organizations
represent the aggregates of associated economic units
provides a clear insight into how cooperatives organize and
function. This insight is not limited to agricultural
cooperatives.
A unique mode of organizing coordination
In a paper dealing with the issue of economic coordination
some 45 years later, James Shaffer echoed (though without
citing) Emelianoff’s definition of cooperatives as aggregates
of member-farms. Because member-farms are independent
entities, represent independent profit centers and act
independently, except that they jointly own the cooperative,
the cooperative association is neither a horizontal integration
of its member-farms nor a vertical integration between
member-farms and the cooperative. He asserted that “the
cooperative is a third mode of organizing coordination.”
References:
Emelianoff, Ivan V. Economic Theory of Cooperation:
Economic Structure of Cooperative Organizations, Washington,
D.C. 1942 (litho-printed by Edwards Brothers, Inc., Ann
Arbor, Michigan), 269 pages. (A reprint by the Center for
Cooperatives, University of California, 1995, may be accessed
at: http://cooperatives.ucdavis.edu/reports/index.htm.)
Shaffer, James D. “Thinking About Farmers’
Cooperatives, Contracts, and Economic Coordination,”
Cooperative Theory: New Approaches, ACS Service Report
Number 18, U.S. Department of Agriculture, Agricultural
Cooperative Service. July 1987, pp. 61-86.
American Heritage Dictionary of the English Language,
New College Edition, Houghton Mifflin Company, Boston,
1976.
