The Co-operative Movement of the Russian Far East

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2.3. Organizational heterogeneity - FARMER COOPERATIVES VERSUS COLLECTIVE FARMS American Studies on Ukrainian Problems Vitaly V. Zinovchuk

Due to the clear certainty of organizational principles, all cooperative ventures carry the same features which define them as a special form of business enterprises. But this does not mean that the cooperatives are driven into the strict organizational framework. They are so different regarding their size, structure, functions, and dynamic that to group,classify and introduce them as an entire system is complex. They can be classified in several ways: organizational structure, geographic scope, function, and line of business. In spite of plenty of literature about cooperatives, the attempts to describe the cooperative system as a whole are not so numerous.

In the U.S.A. there is not a single federated cooperative organization uniting all agricultural cooperatives as, for example, LRF in Sweden, or the Reiffeissen Union in Germany, or ZENCHU in Japan. National associations of American farmer cooperatives such as the National Council of Farmer Cooperatives, the Cooperative League of the U.S.A., or national cooperative branch organizations are mainly trade and political organizations. Of course, their role as coordinators of cooperative movement is significant. But cooperatives themselves as commercial organizations are independent organizations acting according to the business interests of their members, and can be independent or affiliated, centralized or federated. Geographically, cooperatives are classified into four basic groups: a) local (Box 1), b) regional, c) interregional and national, d) international (Table 12).

Box 1

Case of the Farmers Union Oil Company of Edgeley

The Farmers Union Oil Company (Edgeley, North Dakota) is organized and operates as a local supply cooperative with four business locations in Edgeley and a protan plant in Cackle (20. miles). Major commodities handled are petroleum products, fertilizer, chemicals and farm supplies. The sales area covers four counties with approximately radius 25 miles. Number of voting farmer members is 542, and general number of patrons is about 900. The fifteen employees work for the cooperative. Total assets of the cooperative is about $2.44 million. In 1993 the volume of sales reached more than $4 million, and patrons received $100,826 (or 2.47% of sales) as patronage refunds in both cash and noncash forms [Farmers Union Oil Company of Edgeley: Annual Statement 1994].

Agricultural cooperatives are farmers' organizations. That is why the primary organizational initiative takes roots at the local level. After informal discussions and determining the need to start a cooperative, interested local farmers or future cooperative leaders, as a rule, seek assistance from person(s) familiar with the forming process. At this stage cooperative leaders hopefully clearly understand what kind of business the cooperative could fulfil, and who have similar needs to cooperate and also could be able

Table 12. Comparison of different types of cooperatives
according to area served

Type
Area
Founders
Purpose
1. Local Relatively small, usually within a radius 10-30 miles Local farmers Primary purpose of farmer cooperation (marketing, supply, and service). Usually one business location
2. Regional One or several states Farmers and /or local cooperatives To increase volume of business operations, to gain the bargaining power, take advantage of economies of size, etc. Usually several business locations.
3. Interregional and national Part or even all of the United States Two or more regional cooperatives To provide the advantages over what could be achieved by regionals operating independently. As a rule many business locations.
4. International All over the World U.S. and other countries' cooperative organizations To obtain the advantages of international collaboration and access to World markets

to join the cooperative in the future. They also are ready to face opposition to their actions. Competitive environment could affect the appeared idea of cooperation in different ways: to propose more acceptable prices, better contract conditions, favorable services, even publicity, etc.
Next important step for development of a cooperative initiative at the local level is an exploratory producer meeting. If the idea to create a cooperative is generally acceptable at the meeting usually there are three main tasks: to present comprehensively for producers the essence and advantages of cooperative business organizations, to select a steering committee and to make a decision how to fulfil a feasibility study for establishing cooperative. General meetings of future cooperative patrons could be called some times, for example, to discuss results of the production options, market (or supply) and cost analysis, financial analysis, business plan, etc. If the results of a feasibility study are favorable, the steering committee prepares legal papers. Again, general meeting makes a decision about incorporation, adopts bylaws, and elects the boards of directors. Then the new elected body is responsible to implement of business plan, acquire capital, hire the manager, build facilities, and start up operations (Box 2).

Box 2


Case of Dakota Growers Pasta Co.

In 1992-1993 North Dakota durum wheat growers formed a local cooperative to organize their own flour mill and pasta manufacturing operation in Northern Plains. The first organizational action was conducted under the leadership of the president of U.S. Durum Growers organization and a steering committee. Farmers have each invested an average of $14,000 in risk capital, demonstrating their commitments to the cooperative. At the preoperational stage a $55,000 feasibility study was conducted thanks to contributions from such or organizations as the N.D. Agricultural Products Utilization Commission, the N.D. Wheat Commission, and N.D. Farmers Union as well as a contribution from potential growers. The study showed that the project had a high provisions for success. Then, after successful equity drive and a loan secured from the St. Paul Bank for Cooperatives cooperative leaders hired top management before operations began, secured a loan from the St. Paul Bank for Cooperatives, made a site selection and constructed a $40 million pasta plant to produce up to 50 million pounds annually of specialty pasta. The cooperative began operating in 1994. The cooperative united more than 1,100 farmers (Torgerson 1994, p.12].

If patrons can control their cooperative and receive from it their benefits directly, such type of cooperatives are called centralized (Figure 18). Local cooperatives are centralized. Some centralized cooperatives served rather big geographic area and are also called regional ones. Members have direct membership in the large regional cooperatives but they have direct business connections with local business outlets. Most dairy and many single crop cooperatives are regional. A typical centralized regional cooperative is described in Box 3.

Box 3

Case of Cass-Clay Creamery, Inc.

Founded in the depth of the Great Depression, Cass-Clay is now a cooperative association of 800 dairy farmers from Minnesota, North and South Dakota with milk supply area approximately 400x500 miles. The cooperative employs 361 people and has a total milk producers' annual payroll of $56 million. The cooperative members are united in ten districts. Each district is represented by its director at the cooperative's Board of Directors. The director must be an active farmer, a member of association, and be elected by members in his district. Taking into consideration the particularities dairy business, Cass-Clay organized convenient locations of collecting, distributing and processing facilities for local farmers. At present the cooperative owns six milk processing plants located in milk supply area.

Regional cooperatives also can be of federated type. In that case they are created by local cooperatives as local cooperatives in their turn are created by farmers. This type of cooperative also is fully controlled by farmers because it was created with the same organizational idea: from the bottom to above. But members control of regional cooperatives, receive the benefits, and fulfil business operations through their local organizations. The relationship between the member and local centralized cooperative is identical to the relationship between the local and its federated cooperative. Many farm supply, grain and other field crop cooperatives are organized as federated cooperatives (Box 4).

Box 4

The case of CENEX<

Farmers Union Central Exchange or CENEX (St. Paul, Minnesota) is one of the largest U.S. regional federated cooperative. Existing for more than sixty years, it is a leading supplier of refined fuels, lubricants, propane, tires and vehicle accessories, plant food, crop protection product, information and technology service for farmers from Great Lakes to the Pacific Northwest. CENEX was formed in 1931 by 31 locals from four states. There are 1,800 local cooperative members that in turn have a total of 320,000 members in 15 states. From 1931 to 1994 net sales raised from $61,000 to $1.8 billion, and net income soared from $18,000 to $63.9 million. Petroleum products is a cornerstone of CENEX business. Through CENEX, cooperative members are owners of a 42,500 barrel-per-day refinery at Laurel (Montana) and nearly 75% of the national Cooperative Refinery Association with its 75,000-barrel-per-day refinery at McPherson (Kansas). CENEX also has a network of 918 miles of crude and product pipelines and eight petroleum terminals. While serving agricultural members remains the heart of CENEX business, its locals significantly contribute in the development of business community in many rural towns. CENEX members have consistently enjoyed a financial return on their investment. To date, $404 million in cash has been returned to member cooperatives, representing 45% of CENEX's cumulative net earnings since 1931 [CENEX: Annual Report 1992].

Often large regional cooperatives unite features of both centralized and federated cooperatives. This means individual farmers as well as local cooperatives can be their direct members. For instance, Southern States Cooperative, Inc. (Richmond, Virginia) provides fertilizer, petroleum, seed, feed, and other farmer supplies for any members, individuals or associations, who become patrons through the purchase of a share of common stock [Abrahamsen, p.39]. Sometimes mixed cooperatives are faced with the problem of determining voting rights for their heterogeneous members. Besides the general cooperative practice of "one-member, one-vote", it is also possible to vote proportionally to member patronage or member investment. For example, Land O' Lakes calculates its voting rights by 70% on number of members, 20% on patronage and 10% on investment. Differences in business volume of locals could also be taken into consideration for formation of the regional cooperative's board of directors (Box 5).

Box 5


The case of Sunkist Growers, Inc.

Sunkist Growers is mixed regional marketing cooperative with more than one hundred years successfully serving both individual citrus producers and local cooperative associations. This cooperative organization united 6,500 members in California and Arizona. Annual turnover of the cooperative is $1 billion. The Sunkist organizational "pyramid" includes district exchanges and local packinghouses. District exchanges are organized as nonprofit cooperative associations with the main task of collecting and disseminating information between Sunkist management and local packinghouses, and to coordinate sale orders and shipments. As for packinghouses, half of them are established as local cooperatives and another half as licensed (commercial) agencies. All packinghouses are required to market their products through a district exchange. Gitrus growers саn bесоmе members of a district exchange either through their local cooperative associations or directly if they use licensed packinghouses. Local associations and direct grower-members select director(s) of each district. exchange. District exchanges elect members to the the Sunkist board of directors. Each director represents a specific district exchange. Additional directors are elected for specified percentage increases in their share of Sunkist's volume Jacods, p.19].

Of the 4,244 farmer cooperatives in 1993, 4,125 were centralized organizations, mostly locals. The 76 associations identified as federated often operate at points quite distant from their headquarters. And finally, 43 cooperatives had mixed membership structure [Richardson, et. al, p.2]. Each type of cooperative has certain advantages and disadvantages (Table 13).
With the purpose of reaching higher efficiency of production and business operations, to expand the spectrum of activities, increase market power, etc. farmer cooperatives are also free to participate in other cooperative or non-cooperative organizations, and even establish them. As a rule, large regional cooperatives have subsidiaries, i.e. corporations which are organized, owned, and entity controlled by cooperative, organization. If cooperative obtains the control through ownership 100% of voting stock, the subsidiary is called wholly owned, but if the share less but still greater.:than 50% the subsidiary is called a majority owned subsidiary [Kraenzle, p.4]. Cooperatives, in relation to their subsidiaries, can play the role of holding companies with operational control through the subsidiaries' board of directors. Usually the main benefit for holding companies from their subsidiaries is to get return on investments rather than consolidation of revenue from subsidiaries' operations (Box 6).
Of course, a wholly owned subsidiary can be more easily controlled by its parent cooperative but majority-owned subsidiary gives more opportunities for developing business relationships with other cooperatives or even with business organizations of other types. Collaboration between cooperatives often leads to creation of joint ventures. Usually a joint venture is understood as an association of two or more participants (persons, partnerships, corporation, or cooperatives) to carry on a specific, limited

Box 6


Case of GTA Feeds

GTA Feeds (Sioux Falls, South Dakota) is a wholly owned subsidiary of Harvest States Cooperatives, one of the largest cooperatives in the United States. The corporation produces about 300 registered feed products at 9 grain processing plants in Minnesota, Montana, South and North Dakota, providing farmer members with high quality feeds and services including laboratory analysis of farm-grown feed stuff, engineering assistance, farm management services, management consulting, and computerized ration formulation. Through an expanding network of more than 600 dealers, GTA Feeds markets products in 18 states from California and Oregon to Michigan and Illinois [Harvest States Cooperatives: Annual Report 1993].

 

economic operation, enterprise, or venture, but with the identities of participants remaining apart from their co-ownership or co-participation in the venture [Hulse, p.2]. Participants share on an agreed basis including expenses, margins, losses, risk, and some measure of control over the conduct of the agreement. The advantages of participation in joint ventures for cooperatives can include: sharing fixed costs, eliminating duplicate services, new enterprise opportunity, sources of product and sales opportunities. An example of these advantages is presented in Box 7.

Box 7

The case of SunMark Ltd.

Two local grain marketing cooperatives in Ohio, Sunrise Cooperative Inc. and Agri Mark Farmers Coop Inc., started to lease and operate the 1.1-million bushel elevator in Mansfield. The new joint venture was called as SunMark Ltd. The rail terminal is a property of regional cooperative Countrymark Inc. (Indianapolis, IN) which is owned by local cooperatives around Indiana, Ohio, and Michigan. The reason for the this joint venture is to avoid competition between regional and local co-ops in grain marketing. The Countrymark has preferred to solve the problem correspondently to the spirit of farmer cooperation: to strength rather its locals what is to strength itself finally. The advantages for locals in this joint venture are connected with convenient geographical location of the terminal for farmer members, possibility to share the risk on 50-50% basis in using so big facility, hiring highly professional personnel, limited liabilities company organization [Zdrojewski, p.18].

Sometimes cooperatives unite their efforts in order to improve selling of their members products by forming of special marketing organizations called as agencies-in-common. Historically, the term "agency-in-common" was introduced by already the mentioned Capper-Volstread Act in 1922 for marking a way for cooperative to coordinate their marketing activities without violating U.S. antitrust laws. Though these organizations are federated cooperatives, there is justification for special classification. First of ail, agencies-in-common are organized by groups of cooperatives to coordinate marketing, with each member retaining exclusive ownership over a unique set of physical and human capital [Reynolds, p.s]. They do not physically handle products, and they generally do not take a title in marketing transactions [Cropp, p.49], although there are some exceptions to that rule. For example, one reason for dairy cooperatives forming marketing agreements with Land O'Lakes, Inc. (Minneapolis, Minnesota) as their agency-in-common, was to take advantage of its nationally recognized brand of butter. Their sole function is limited only by arrangement of the sale but not broad participation in processing and other production involvement or any other services for members. Usually their asset requirements are limited. Agencies-in-common have fewer members than other federated cooperatives. An example of successful participation in agency-in-common is proposed in Box 8.

Box 8

Case of American Crystal Sugar Company

American Crystal has a one-third ownership interest in Midwest Agri-Commodities which was organized as a marketing agency-in-common for a homogenous product. Midwest merchandises beet pulp and molasses as an agent of three sugar beet processing cooperatives. The amount of sales and related costs to be recognized by each owner is allocated based on their pro rata share of production of the year. The owners provide Midwest with cash advances on an ongoing basis for operating and marketing expenses incurred by Midwest. American Crystal advanced Midwest $30.4 million during the year ended August 31, 1994. The owners are guarantors of the short-term line of credit Midwest has with the St.Paul Bank for Cooperatives. In January 1994, American Crystal also entered into a marketing agreement with United Sugars Corporation, whereby United Sugars will market the cooperative's production of sugar. As of August 31, 1994, American Crystal has a 69% ownership interest in United Sugars [American Crystal Sugar Company: Annual Report 1994, pp.30,31].

A distinguishing feature of modern U.S. agribusiness is the dominance of large-scale and tremendously complicated business structures. Cooperatives must also find a new design for their organizations in order to operate effectively in competitive environment of concentrated market power. Different new organizational arrangements help farmers to overcome weaknesses of their traditional associations. Often, cooperative organizations must become larger and more complex. But to save the orientation to the user-owners is an important consideration of each step to a new organization.