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, marketing and input supply cooperatives account for about a third of both total farm sector revenue and input purchases (USDA, 2006). 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, Ocean Spray, Sun-maid, and Sunsweet, 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 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) 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 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 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 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.

Figure 4-2.2: Revenue and Location by County for Agricultural Cooperatives

Figure 4-2.3: Employment by County for Agricultural Cooperatives

Figure 4-2.4: Membership by County for Agricultural Cooperatives