Farm Supply and Marketing

Overview

Cooperative firms account for a significant portion of economic activity in U.S. agricultural and food markets, both as providers of key inputs and as marketing and processing agents for farm output. According to USDA statistics [6], marketing and input supply cooperatives account for about a third of both total farm sector revenue and input purchases (USDA, 2006 [7]). Cooperatives play a key role in agricultural markets not only because they account for a significant fraction of economic activity in this sector, but also because they are believed to generate a pro-competitive effect in imperfectly competitive markets. Cooperatives play other socially beneficial roles in the agricultural sector. They provide an opportunity for farmers to share risk and to control managerial decision-making for their direct benefit. Additionally, they offer a credence attribute—farmer ownership—which can be attached to farm commodities, thus providing additional value to some consumers.

Cooperatives perform a wide variety of functions in agricultural and food markets. Often these functions are grouped into the two broad categories, “marketing” and “supply.” Some marketing cooperatives are household names: Sunkist [8], Ocean Spray [9], Sun-maid [10], and Sunsweet [11], for example, have created national recognition with their branded products. These firms provide processing and marketing services to farmers, and also the necessary logistical support to aggregate farm supply. Other marketing cooperatives are much leaner organizations, providing only marketing services to assist farmers, get their product to market, to pool risk, or to negotiate sales as a group to a single buyer or a small number of buyers. Supply cooperatives provide service and inputs to farmers to help them produce their goods. Many farmers purchase basic inputs such as seed, fertilizer, and farm chemicals from a cooperative. In other words, farmers collectively establish a firm to negotiate better terms of purchase for basic agricultural production inputs. Less common, but still widely observed, are cooperatives that provide information services (e.g., record keeping and performance evaluation) to farmers.

History

Formalization of group efforts among farmers into well defined and legally sanctioned cooperative business organizations occurred gradually during the mid- to late nineteenth century, in the U.S. Authors of early cooperative incorporation statutes modified standard stock corporation statutes to reflect Rochdale operating principles. Passage of the Sherman Antitrust Act in 1890 forced cooperative leaders to further formalize and distinguish the cooperative business model. The Sherman Antitrust Act was designed to prevent groups of corporations from combing by granting their stock to a trust. With control of all the corporations vested in teh trust board, the trust would then work to eliminate competition, create a monopoly, and thus raise prices. As independent farm businesses working together to enhance prices, farmer marketing cooperatives were subject to prosecution under the anti-trust laws that were established as a result of the Sherman Antitrust Act. In a quest to establish a unique form of organization that would be exempt from anti-trust regulations, numerous states created new “non stock” cooperative statutes. In addition, the Clayton Act of 1914 exempted from the Sherman Act those organizations (“agricultural or horticultural organizations instituted for the purpose of mutual help and not having capital stock or conducted for profit”). The Clayton Act created some confusion, however, because at the time many farmer cooperatives were still incorporated under older stock-based cooperative statutes. The Capper-Volstead Act was passed in 1922 to resolve this confusion and applied broadly to associations of agricultural producers, both capital stock and non-stock associations. In addition to anti-trust exemptions, farmer cooperatives have benefited from educational and research support from the USDA [12] and from the establishment of the Farm Credit System.

Industry Niche

Cooperatives in the agricultural sector provide basic marketing and supply services, and are more prevalent among farmers who cultivate crops than among those who raise animals (dairy being a notable exception where cooperative firms hold a dominant market share). Marketing and processing services are typically organized around a single commodity. Supply services are restricted to basic variable inputs—agricultural chemicals, fuel and fertilizer, seed, and crop consulting services—and operate much like “buying group,” except in the production of feed for animals. That is, farmers tend not to own the physical assets that are used to produce these inputs, but rather negotiate their purchase collectively. Less common, but still widely observed, are cooperatives that provide services (e.g., information services for record keeping, and processing services such as cotton ginning and walnut shelling). Cooperatives rarely produce farm machinery and generally are not involved in basic research to develop new production technologies.

Organizational Structure

Farmer cooperative are typically organized under state incorporation statutes, but sometimes they also organized as limited liability companies when a need arises for significant investment participation by individuals who do not use the firm’s services. More recently, some states have established “hybrid” LLC/cooperative statutes that sanction cooperative organizations with greater outside participation than permitted in existing cooperative statutes (but that still maintain patron control). The National Conference of Commissioners for Uniform State Law (NCCUSL) [13] recently issued the Limited Cooperative Association Act, which is intended to provide a uniform version of hybrid statutes for potential adoption across states that do not currently have one.

Farmer cooperatives typically require all members to be active farmers. Many cooperatives provide services to non-member farmers, though incorporation statutes typically place restrictions on the amount of non-member business. Some farmer cooperatives are “open” in the sense that anyone who does business with the firm may also choose to become a member. Other farmer cooperatives are “closed” in that membership is rationed according to the availability of processing or marketing capacity. Some farmer cooperatives elect boards of directors and make major decisions such as mergers and acquisitions or dissolution on a one-member/one-vote basis, while others make voting rights proportional to the level of service use for each member. Many farmer cooperatives proportionally “allocate” all or most earnings to patrons, but then retain up to 80% of these allocations for working capital and re-investment. Firms that operate on such a basis pay patrons for the use of their funds in future periods with a formal “equity redemption” program. Most farmer cooperatives claim Subchapter T status for Federal tax purposes, which allows pass-through taxation. Only the patrons pay tax on earnings allocations, even if they are retained for use by the firm.

Population Discovery and Data Sources

TheUSDA's Business and Cooperative Programs Unit [14] within the Bureau of Rural Development conducts a periodic survey of cooperative business in the agricultural sector. Contact information is compiled through a network of industry and government contacts who make note of existing, new, and dissolved cooperatives. The most recent year for which data are available is 2006. We rely entirely on this USDA [12] data to conduct our analysis of economic impact.  All governance data (no random sample) comes from survey work undertaken by the UWCC. The survey response rate for agricultural marketing and supply cooperatives was 35%. The data collection and survey methodology is discussed in detail in the Data Collection [15] section in the Appendix.

Economic Impacts

As Table 4-2 shows, we obtained data from 2,535 farmer cooperatives. Collectively, these firms account for >$40B in assets, nearly $120 B in sales revenue, and pay >$6B in wages. There are approximately 2.5M farmer memberships and 150,000 employees. From Table 4-2.1, by extrapolating to the entire population (2,547 firms) and adding indirect and induced impacts to this activity, agricultural cooperatives account for nearly $130B in revenue, >200,000 jobs, $8.9B in wages paid, and >$10B in valued-added income.

 

Table 4-2.1: Economic Impacts for Agricultural Sales and Marketing Cooperatives

Economic Impact	Multiplier		Unit	Direct	Indirect	Induced	Total
Revenues	1.078		million $	119,039	4,164	5,136	128,340
Income	1.764			6,405	2,091	2,803	11,299
Wages	1.479			6,011	1,297	1,584	8,892
Employment	1.425		jobs	147,708	25,261	37,579	210,548

Biofuels

Biofuels cooperatives are a form of agricultural marketing cooperatives that have recently developed in response to the emerging biofuels sector of the U.S. economy. According to the Renewable Fuels Association [19], farmer-owned cooperatives accounted for about 15% of total production capacity in 2007, down from as much as 70-80% of total capacity in earlier years. During the massive expansion that occurred between 2004 and 2007, much of the investment capital came from private investors, rather than farmers. The data we report below come from 2007, although the entire industry is changing rapidly.

Table 4-2 shows that 39 biofuels cooperatives collectively have close to $3B in assets, >$4B in sales revenue, and pay >$40M in wages. There are 20,000 farmer memberships and close to 2,000 employees. As shown in Table 4-2.2, by adding direct and indirect impacts to this activity, agricultural cooperatives account for >$10B in revenue, close to 8,500 jobs, $472M in wages paid, and >$1B in valued-added income.

Population Discovery and Data Sources

The sources for the business list of the 39 biofuel cooperatives are the Renewable Fuels Association (RFA) [19] and primary research. All governance data was acquired in survey work undertaken by the UWCC. The survey response rate for biofuel cooperatives is 69.5% and all reporting cooperatives provided us with 2007 fiscal year-end data. The data collection and survey methodology is discussed in detail in the Data Collection [15] section in the Appendix.

Economic Impacts

As Table 4-2 shows, we have data on 17 biofuels cooperatives and these firms collectively account for >$2.8B in assets, $4.2B in sales revenue, and pay $6B in wages and benefits. There are approximately 2,000 employees and 20,000 memberships. As Table 4-2.2 shows, by extrapolating to the entire population (39 firms) and adding indirect and induced impacts to this activity, biofuels cooperatives account for close to $10B in sales revenue, >8,000 jobs, $472M in wages paid, and >$1B in valued-added income.

Table 4-2.2: Economic Impacts for Biofuels

Economic Impact	Multiplier		Unit	Direct	Indirect	Induced	Total
Revenues	1.095		million $	9,405	395	502	10,302
Income	1.756			627	200	274	1,101
Wages	2.445			193	124	155	472
Employment	3.538		jobs	2,398	2,415	3,670	8,483

Grocery Cooperatives

Overview

Over the past decade, estimates of retail consumer cooperatives have averaged between 300 and 350 stores. During those years, no one has attempted to identify the number of cooperative buying clubs in the country, although a major natural foods wholesaler reports that they serve these less formal organizations in 32 states. A loosely connected group of large buying club networks is estimated to serve nearly 150,000 households throughout the U.S.

History

Consumer-owned food stores have emerged, grown, and declined in waves since the 1850s. The most recent growth period occurred during the mid-l960 and early 1970 when there was a nationwide resurgence of cooperative food stores. By 1979, an estimated 3,000 food stores and buying clubs operated in the United States and Canada (Food Co-op Project, 1979 [21]). By the 1990s, however, the changing social and political climate resulted in a substantial decline in the number of cooperatives, accompanied by a period of consolidation and growth for the strong cooperatives. By the mid-2000s, food cooperatives once again experienced growth-driven, intense consumer interest in alternatives to a market system that might not serve their needs.

Consumers’ interest and participation in retail food cooperatives tends to increase in periods of social, political, and economic turmoil. Although their secondary needs may vary considerably, cooperative members consistently want their cooperatives to provide price, quality, and selection advantages. Growth periods also occur when large numbers of consumers experience economic difficulties and develop an interest in ownership and control of their retail food sources when they become concerned for food safety and when they experience a strong desire for an ethical society (Hoyt, 1982 [22]). Failure of cooperatives is consistently traced to decline in member participation, lack of management skills, inadequate capitalization, strong competition, increasing concentration in food retailing, and "loss of the cooperative spirit" (The Co-op Handbook Collective, 1975 [23]).

Industry Niche

The retail grocery industry is highly competitive. Recently, the large market share gained by non-traditional outlets, which includes warehouse clubs and super centers, has increased competitive pressure on the traditional grocery retailer, already squeezed by the loss of the food consumers’ dollar to the food-away-from-home-market, which captured 48.5% of total food expenditures in 2005. The industry has also seen a high level of merger and consolidation, both horizontal and vertical, with large wholesalers acquiring retail outlets (Plunkett Research, 2008 [24]).

Retail food cooperatives have introduced numerous consumer-oriented innovations, and have fought to retain retailing practices that provide the consumer competitive value and service. Since the 1930's, cooperatives have pioneered nutritional labeling, open dating, unit pricing, bulk sales, informative advertising, consumer education, and innovative institutional structures. They have also consistently been in the forefront of consumer protection through selective merchandising and boycotts, political lobbying, and ongoing consumer education.

The most extensive impact food cooperatives have recently had on the grocery industry has been their pioneering introduction of natural and organic foods, which began with the “new wave” of food cooperatives in the early 1970s. Cooperatives dominated this market until the 1990s, when several independently owned natural foods markets began large-scale expansion. In 1990, the total organic food and beverage market amounted to $1B in sales, served primarily through cooperatives and other independent retailers. In 2008, that market was expected to reach $23B, with the traditional mass market grocery stores and non-traditional food stores having gained projected shares of 38% and 16%, respectively (Organic Trade Association, 2008 [25]).

Organizational Structure

Retail food cooperatives either operate retail stores or pre-order buying clubs. Cooperatives that operate retail stores are predominantly single-store operations, but some successful stores have expanded to operate two or more stores. The largest of these is the Puget Natural Markets [26] which operates out of nine locations. Several retail food cooperatives have expanded into non-grocery businesses. Most are restaurants and delis, but a few others include natural home products and vertical integration into ownership of farms and orchards. The store-based food cooperatives are characterized by their strong support for natural and organic foods, community activities, local food systems and environmental sustainability. Although many current store-based food cooperatives originally encouraged members to work voluntarily in the store in return for a “member discount,” most stores now hire professional management and operate the store with paid staff.

Buying clubs operate on a pre-order basis in which members either order a standard “market basket” of foods at a pre-determined price or combine individual family orders into full case lots. The second option is commonly facilitated through a computerized ordering system. In both methods, case lots of food are delivered to a central distribution point where the larger, single order is re-sorted into individual orders. Members pick up their orders at the distribution point. Food is ordered and delivered periodically, most often monthly or bi-weekly. Large buying clubs may hire an outside manager/coordinator, but most of the labor is provided by member volunteers. Savings in buying clubs can be significant, because most of the cost of retail distribution is eliminated by the labor contribution of cooperative members.

All food cooperatives that operate stores are incorporated under state statutes. Over the last decade, some food cooperatives that were originally incorporated as nonprofits have re-incorporated in those states that have cooperative statutes that accommodate the needs of consumer cooperatives. Few buying clubs are incorporated.

Most cooperatives require a relatively small investment in an initial membership share, and an additional financial contribution, which may be in the form of additional membership shares or in an annual membership fee. Investment in membership shares is considered a contribution to equity, while membership fees, if not refundable, are treated as income. Consumer cooperatives are not required to pay income taxes on member-based income if they return that income to members either as cash or as allocated patronage. However, they are required to pay income taxes on non-member income and unallocated member income.

Food cooperative members vote on a one-member/one-vote basis and elect a board of directors from among the membership.

Population Discovery and Data Sources

We obtained the list for consumer goods cooperatives from the Consumer Cooperative Management Association (CCMA) [27] grocery cooperatives lists maintained by Ann Hoyt [28]. All economic data was obtained from survey work undertaken by the UWCC. The survey response rate for grocery cooperatives was 41% and all reporting cooperatives provided us with 2007 fiscal year-end data. We supplemented revenue and employment data for purchasing cooperatives from Onesource [29]. The data collection and survey methodology is discussed in detail in the Data Collection [15] section in the Appendix.

Economic Impacts

Table 4-2 shows that we obtained data from 101 consumer grocery cooperatives, and these firms collectively account for >$323M in assets, $865M in sales revenue, and pay $171M in wages and benefits. There are approximately 14,000 employees and 487,000 memberships. From Table 4-2.3, by extrapolating to the entire population (290 firms) and adding indirect and induced impacts to this activity, consumer grocery cooperatives account for close to $2.1B in sales revenue, >15,000 jobs, $252M in wages and benefits paid, and $316M in valued-added income.

Table 4-2.3: Economic Impacts for Groceries Cooperatives

Economic Impact	Multiplier		Unit	Direct	Indirect	Induced	Total
Revenues	1.013		million $	2,098	12	14	2,124
Income	1.781			178	59	80	316
Wages	1.474			171	36	45	252
Employment	1.130		jobs	13,640	711	1,066	15,417

Arts and Crafts

Overview

Arts and crafts cooperatives are used by artists and craftspeople to market their product to maximize sales income. Cooperatives also can be a cost-effective means to obtain studio space, gallery space, or other specialized supplies or services needed by artists and craftspeople to carry out their work. These cooperatives account for a very small portion of the economic activity generated by the arts and culture sector.

Industry Niche

Typically, visual artists and craftspeople use gallery owners, dealers, wholesalers or other retailers to market, authenticate, and show their work on a commission basis. They may also direct market their work through such vehicles as their own studio, the internet, or art fairs.

Arts or crafts cooperatives provide artists with an alternative access to marketing their work, and provide them with greater control over how their work is presented. Cooperatives can also present a solution for inventory management, insurance, shipping logistics, and other risk management issues, ultimately returning a larger share of gross revenues to the artist.

Few markets can sustain arts and cultural activities on a for-profit basis alone, and nonprofit arts and cultural organizations play a large role in this sector. In recognition of the benefits, both social and economic, that arts and cultural activities bring to a community, public and private grants fund these organizations, and subsidize arts activities in various ways. Arts and crafts initiatives also have been developed to address rural economic development issues, and include use of the cooperative model. Nonprofit arts and culture organizations spend >$63.1B annually, (Americans for the Arts, National Report [31]), and direct expenditures accounted for 1.3M jobs in 2005 (Americans for the Arts, Summary [32]).

Organizational Structure

Arts and crafts cooperatives are typically organized under the business statutes in the state where the cooperative is located. In many states, cooperative statutes are designed for agricultural purposes only, and many cooperatives use the LLC statutes which provide organizational flexibility.

A significant segment of arts and crafts cooperatives are in some way affiliated with a nonprofit arts and cultural organization, or receive funding from a grant-making organization. In these cases, cooperatives may choose to incorporate as a nonprofit and apply for nonprofit tax status.

Typical arts and crafts cooperatives are small, with 25-30 members. While some are managed collectively, often at least one staff person is hired to manage a gallery space, and to bring a sales orientation to the organization. Most cooperatives work on a consignment basis; a typical arrangement would be for 70-80% of the selling price to be returned to the individual producer member and 20-30% retained by the cooperative organization. Often a jury system is used to evaluate new work before membership is offered to a new artist. Membership criteria may also include specialty product requirements, or be location-based.

Population Discovery and Data Collection

The business list of 284 Arts and Crafts cooperatives comes from the Cooperative Development Foundation (CDF) [33], Ann Hoyt [28]and primary research. All economic data comes from survey work undertaken by the UWCC. The survey response rate for the Arts and Craft cooperatives was 36% and all reporting cooperatives provided us with 2007 fiscal year-end data. The data collection and survey methodology is discussed in detail in the Data Collection [15] section in the Appendix.

Economic Impacts

Table 4-2 shows that we obtained data from 80 arts and crafts cooperatives for which we have data, and these firms collectively account for >$34M in assets, $32M in sales revenue, and pay $5M in wages and benefits. There are approximately 830 employees and 16,000 memberships. From Table 4-2.4, by extrapolating to the entire population (305 firms) and adding indirect and induced impacts to this activity, arts and crafts cooperatives account for $237M in sales revenue, close to 4,000 jobs, $53M in wages paid, and $148M in valued-added income.

Table 4-2.4: Economic Impacts for Arts and Crafts Cooperatives

Economic Impact	Multiplier		Unit	Direct	Indirect	Induced	Total
Revenues	2.521		million $	94	63	80	237
Income	1.761			84	27	37	148
Wages	3.312			16	16	21	53
Employment	1.261		jobs	3,012	312	474	3,798

Other

This section covers impacts of the "other" sector, which includes a mix of worker and purchasing cooperatives from multiple economic subsectors. Purchasing cooperatives covered in this sector include, among others, True Value [35], Ace Hardware [36], The Bike Cooperative [37], Carpet One [38], and Unified Grocers [39]. Worker cooperatives in this section include, in addition to many small bicycle and book stores, coffee shops, bakeries, and other small retail businesses, a fair-trade coffee roaster [40], a taxi company [41], an industrial engineering firm [42], and an adult theatre [43].

Population Discovery and Data Sources

The list for "other" cooperatives comes from two sources: purchasing cooperatives from National Cooperative Business AssociationNCBA [44], worker cooperative lists from Melissa Hoover,  U.S. Federation of Worker Cooperatives (USFWC) [45], and Prof. Christina Clamp [46]. All economic data was acquired from survey work undertaken by the UWCC. The survey response rate was 48% for purchasing cooperatives and 32% for worker cooperatives, and all reporting cooperatives provided us with 2007 fiscal year-end data. Revenue and employment data for purchasing cooperatives was supplemented from Onesource [29]. The data collection and survey methodology is discussed in detail in the Data Collection [15] section in the Appendix.

Economic Impacts

Table 4-2 shows that we have data for 125 cooperatives, and theses firms collectively account for $13.3B in assets, nearly $52B in sales revenue, and pay >$1.2B in wages and benefits. There are approximately 3M memberships and over 100,000 employees. Adding direct and indirect impacts to this activity, cooperative firms in the "other" category account for nearly $60B in revenue, >185,000 jobs, $4B in wages and benefits paid, and nearly $25B in valued-added income. Note that we do not extrapolate to the total population of 282 firms in this category because each firm is very different and applying an average value to all firms results in too much prediction error.

Table 4-2.5: Economic Impacts for Other Commercial Sales and Marketing Goods Cooperatives.

Economic Impact	Units	Direct	Indirect	Induced	Total
Revenues	million $	59,981	100	124	60,206
Income		13,719	4,517	6,636	24,871
Wages		2,292	832	1,017	4,140
Employment	jobs	98,237	34,601	51,421	184,259