University of Wisconsin–Madison

Agriculture and Farm Supply Cooperatives

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.

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, Organic Valley, 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, fuel, and agronomy services 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.

USDA gathers statistics on agricultural cooperatives, and reports on marketing activity in 15 different commodity categories, as well as farm supply and services. The statistics reflect the broad size range among agricultural cooperatives: 1.3% of the cooperatives have over $1 billion in sales and generated 52% of all cooperative business volume. The number of agricultural cooperatives continuesd to decline in 2015, largely due to mergers and acquisitions. (USDA, 2015).

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. Westward expansion in the first half of the 19th century created an agricultural surplus and the need to access to broader markets. Marketing cooperatives were one tool that farmers could use to contend with low prices, wide marketing margins, and discriminatory freight rates and practices by the railroads.

The Order of the Patrons of Husbandry, known as the Grange, was formed after the Civil War. It supported local cooperative development to meet the demand for agricultural marketing and farm supply services, and in 1875 endorsed the Rochdale Principles. While many of these cooperatives later declined, collective action in the political realm and in cooperative development continued to address unfavorable market conditions for the farmer.

Other organizations emerged, including the Farmers’ Alliance, which was active in the southern states. The use of crop liens in the south created chronic debt for many small tenant farmers and sharecroppers. Racial discrimination practices made it difficult for black farmers to participate in the Alliance, and a segregated branch of the movement, the Colored Farmers’ National Alliance and Cooperative Union, was established in 1886. The Alliance introduced cooperative practices to some Southern black farmers, but discrimination and the passage of Jim Crow laws in the 1890s significantly affected cooperative development.

Emerging in the early 1900s, the American Farm Bureau and the National Farmers Union became significant forces in farmer cooperative development by providing technical assistance to new cooperatives, and by lobbying for the enactment of state and federal legislation favorable to cooperatives. Several of the largest modern agricultural cooperatives grew out of the development efforts of these organizations.

The Sherman Antitrust Act, which made the constraint of trade through contract or conspiracy illegal, had been passed in 1890 to counter the negative effects of monopolies on the economy. However, since agricultural cooperatives were used by farmers to set a common price for their products, there were subsequent attempts to declare agricultural cooperatives in violation of the antitrust law.

These difficulties eventually led to the 1922 passage of the Capper-Volstead Act, which authorized the right of farmers to market or process their agricultural products cooperatively if certain criteria were met.

In the years following World War II, the increased use of cooperatives in the agricultural sector was accompanied by cooperative consolidation that led to a smaller number of larger cooperatives. As the scale of operations increased, agricultural cooperatives entered into a wider variety of value-added processing ventures.

The civil rights movement embraced cooperatives as a way to support independent black farmers in the south. Organizations such the Federation of Southern Cooperatives provided a wide range of services to counter the legacy of segregation and discrimination and promote operating independence and land retention among black farmers .

The federal government has supported cooperative development in the agricultural sector in a variety of ways. The Smith-Lever Act of 1914 created the Cooperative Extension System, a partnership funded by the U.S. Department of Agriculture (USDA) and land-grant universities. The Cooperative Marketing Act of 1926 broadened the USDA’s support of farmer cooperatives, which continues.

Organizational Structure


Farmer cooperatives are incorporated under state statute. All states have laws enabling agricultural cooperative formation, but the laws may lack or have different statutory requirements for cooperative organization and governance aspects such as member voting rights, member and patron distributions, and capital stock.

Farmer cooperatives typically require all members to be active farmers, but may also provide services to non-member farmers. Incorporation statutes typically limit the amount of non-member business a cooperative can conduct. This reflects of the of the requirements of the Capper-Volstead antitrust exemption, which requires farmer cooperatives to conduct at least 51% of its business with its farmer members.

Some farmer cooperatives are “open”, and allow anyone who does business with the firm to choose to become a member after meeting membership requirements. Other farmer cooperatives are “closed”, and membership is rationed according to the availability of processing or marketing capacity.

Many farmer cooperatives elect boards of directors and make major decisions such as mergers and acquisitions or dissolution on a one-member/one-vote basis. Others may also make member voting rights proportional to the level of patronage.

Most farmer cooperatives claim Subchapter T status for Federal tax purposes, which allows pass through taxation. Members and/or patrons pay taxes on the cooperative’s earnings that are proportionally “allocated” to them based on their use of the cooperative.

A portion of cooperative earnings may be retained as unallocated reserves to provide working and reinvestment capital. The tax liability for unallocated earnings is assumed by the cooperative. Cooperatives may also retain up to 80% of patron allocations to meet future capital needs. There is an typically expectation that these retained allocations will eventually be returned. The strategic oversight of these equity redemption programs is a major responsibility of a farmer cooperative’s member-elected board of directors.

More recently, farmer cooperatives, their subsidiaries, or joint ventures may sometimes organize as a limited liability company (LLC). This structure allows significant investment participation by non-patron individuals or businesses that do not use the firm’s services, and distributions based based on investment instead of patronage. Some states have established “hybrid” LLC/cooperative statutes that sanction cooperative organizations with greater investor participation than permitted in existing cooperative statutes, but that still maintain patron control. A uniform Limited Cooperative Association Act was developed to provide a uniform version of this type of hybrid statutes for potential adoption across states that do not currently have one.