COMMENTARY
Shaping tomorrow’s cooperatives today
In the past few years, some large and
well-known farmer cooperatives and
other smaller ones have been forced
into bankruptcy. Although these business failures do not compare in scope
and impact to other businesses that
have failed in other sectors of the economy, and despite the fact that the great
majority of all cooperatives are healthy
businesses, the failures naturally draw
attention to the role of farmer cooperatives in rural America. These cooperative failures, however, require a new
look at the vitality and flexibility of
cooperative businesses in today's global, dynamic economy.
In response to challenges, we must
try to understand what makes cooperatives particularly strong organizations
and yet susceptible to economic stress.
As in any business, a search for causes
of failure leads in several directions.
We must look at both successes and
failures, and then carefully identify
problems and devise solutions.
Some observers have identified
cooperatives' restricted sources of capital as a subject of concern. Cooperatives
depend on member equity for the capital needed to make the investments
required of successful businesses. The
concern is that farmers and other rural
residents, who benefit from strong
cooperatives, often lack the assets to
make the investments for needed
improvements. And even if they are
able to invest, they are discouraged
from doing so by a capital structure that
often makes it difficult for them to get
their money back and does not provide
the opportunity to realize a capital gain
on their investment. Investments in a
cooperative compete with those needed
for members' own farming operations.
Capital requirements are nearly universal among all businesses and some
would argue that cooperatives for the
most part are in no worse position than
other businesses. They point to the
many successful cooperatives, ranging
in size from national marketing entities
to local farm supply stores, that are
doing just fine. They argue that outside
investors will take over cooperatives
they fund and undermine the cooperative's reason for existing: to benefit
patrons on the basis of use rather than
investors on the basis of investment.
They further respond that farmers and
other member-users have the resources
to fund their cooperatives and will do
so as long as they believe the associations will meet their needs.
In the years ahead, cooperatives, like
much of rural America, will face serious
challenges. The companies they buy
from and sell to are becoming larger,
fewer in number and more sophisticated at passing costs and risks off onto
others in their lines of business. Innovations in areas such as biotechnology,
information services and transportation
are making cooperative facilities and
equipment obsolete. Foreign countries
are using our technology to become
lower cost producers of the same basic
farm products we produce in rural
areas. They are becoming competitors
rather than customers.
As farmers and rural residents
respond to these and other challenges, it
is safe to assume that some of them
would benefit from cooperatives with
additional equity. This applies whether
they are starting a new cooperative or
broadening the services of an existing
one. For example, one strategy for protecting and enhancing rural economies is
for producers to engage in value-added
processing and marketing of the products
they produce (selling pasta rather
than wheat, ethanol rather than corn). In
this way, farmers and rural communities
capture the returns of the entire process
rather than settle for commodity sales.
The facilities to do the manufacturing
and the people needed to operate the
plants and market the products will take
money. The as yet unanswered question
is, "Where will the money come from?"
As in any business, equity capital will
only be made available if an equity holder
realizes returns justifying the capital
investment. Cooperatives, too, must
produce net income and generate benefits
to members as a return for the equity
invested. Member equity in the cooperative
is built from member investments
directly and through retained refunds,
the cooperative version of retained
income that provides most of the equity
for other businesses. This type of equity
has funded most cooperatives, including
many value-added operations with high
capital requirements.
It is time to explore, with objective
thoughtfulness, other possible sources
of equity capital for cooperatives. A few
cooperatives have taken this approach.
Cooperatives can, and do, offer nonvoting
preferred interests. Recently, a
large regional farmer cooperative sold
$90 million in non-voting preferred
stock that pays a dividend of 8 percent
per year. The shares are publically
traded and listed on the NASDAQ
stock exchange. While this means a sizable
portion of the cooperative's future
earnings will go to investors based on
investment, few will challenge the
"cooperative" nature of the association.
Wyoming and Minnesota recently
accepted the "outside equity" argument
and enacted new state laws permitting
entities still called "cooperatives" to
have substantial non-user involvement.
In both states, a "cooperative" can have
up to 85 percent of its earnings allocated
to investors on the basis of investment.
And up to 85 percent of the voting
control can be in the hands of
non-patron members, although patrons
are guaranteed the right to select directors
with at least 50 percent of the voting
power on the board.
Whether entities, which choose to
have this large non-patron presence,
should be truly considered "cooperatives"
is doubtful. This holds true even
if a good portion of the non-patron
interests are held by users. What distinguishes
a cooperative from other
forms of business is not "who" owns
and controls it and is entitled to the
earnings but "how" these attributes are
allocated. In a cooperative, it is based
on use, not investment.
The task of cooperative leaders,
members, directors and advisors as is
our's here at USDA is to take a careful
look at where cooperatives are,
where they are going and what they
need to maintain their critical role for
farmers and rural America. The essential
character and strengths of cooperatives
must be preserved while responding
to new economic and business
forces. The challenge for the cooperative
community will be to make
informed and wise decisions with positive
and lasting impacts on cooperatives,
farmers and rural communities.
James Haskell, Acting Deputy Administrator,
USDA Rural Business-Cooperative Service
