Journal Entry (Reflection)

Cooperatives: Principles and practices in the 21st century

A1457

Kimberly A. Zeuli and Robert Cropp

C O O P E R A T I V E S :

ABOUT THE COVER IMAGE: The “twin pines” is a familiar symbol for cooperatives in the United States. The Cooperative League of the USA, which eventually became the National Cooperative Business Association (NCBA), adopted it as their logo in 1922. The pine tree is an ancient symbol of endurance and immor- tality. The two pines represent mutual cooperation—people helping people.

Contents Publication notes ii

Chapter 1 1 An introduction to cooperatives

Chapter 2 5 Historical development of cooperatives

throughout the world

Chapter 3 15 Cooperative history, trends, and laws

in the United States

Chapter 4 27 Cooperative classification

Chapter 5 39 Alternative business models

in the United States

Chapter 6 49 Cooperative roles, responsibilities,

and communication

Chapter 7 59 Cooperative financial management

Chapter 8 69 Procedures for organizing a cooperative

Chapter 9 77 A summary of cooperative benefits

and limitations

Notes 81

Glossary 85

Cooperative resources 89

P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y i



Publication notes This publication is the fourth and most extensive

revision of the Marvin A. Schaars’ text, Cooperatives,

Principles and Practices, University of Wisconsin

Extension—Madison, Publication A1457, July 1980.

What has come to be known simply as “the

Schaars book,” was originally written in 1936 by

Chris L. Christensen, Asher Hobson, Henry Bakken,

R.K. Froker, and Marvin Schaars, all faculty in the

Department of Agricultural Economics, University

of Wisconsin—Madison. Since its first publication,

the Schaars book has served as a basic reference

for cooperative members and leaders, cooperative

instructors and development specialists, and

students of cooperatives throughout the United

States and world. It has been translated into

several languages.

Although the Schaars book has been out of print

for some time, the University of Wisconsin Center

for Cooperatives (UWCC) continues to receive

regular requests for copies. Its straightforward,

basic information on the organization, structure,

financing, and management of cooperatives is as

needed and relevant today as ever. The revisions in

this version, which reflect over two decades of

learning about cooperative development as well

as new cooperative laws and ways of doing

business, will hopefully make it even more useful.

Although we focus on cooperative businesses in

the United States, and draw most of our references

from the agricultural sector, most of the book’s

content is pertinent to cooperatives anywhere, in

any sector. Readers are encouraged to seek out

other publications that deal more extensively with

cooperative laws in their own states and countries,

and provide more detailed information on

consumer, service and worker-owned cooperatives

and credit unions.

Kimberly Zeuli and Robert Cropp, Assistant

Professor and Professor Emeritus in the

Department of Agricultural and Applied

Economics, University of Wisconsin—Madison,

are responsible for all of the editing and most

of the revised text. The following individuals

also contributed to various chapters:

David Erickson, Director of Member Relations,

Wisconsin Federation of Cooperatives

E.G. Nadeau, Director of Research, Planning and

Development, Cooperative Development

Services

David Trechter, Professor, University of Wisconsin—

River Falls

Richard Vilstrup, Professor Emeritus,

Department of Animal Science and

Agricultural and Applied Economics,

University of Wisconsin—Madison

This revision would not have been possible

without generous funding from The Cooperative

Foundation, Inver Grove Heights, Minnesota.

C O O P E R A T I V E S :ii

Groups of individuals around the world andthroughout time have worked together inpursuit of common goals. Examples of coop- eration, or collective action, can be traced back to

our prehistoric predecessors who recognized the

advantages of hunting, gathering, and living in

groups rather than on their own.

Although the word “coopera-

tive” can be applied to many

different types of group

activities, in this publication

the term is used to reference

a formal business model,

which has relatively recent

origins. The earliest coopera-

tive associations were

created in Europe and North

America during the 17th and

18th centuries. These associ-

ations were precursors to

cooperatives. The pioneers

of the Rochdale Society in

19th-century England are

celebrated for launching the

modern cooperative

movement. The unique con-

tribution of early cooperative organizers in

England was codifying a guiding set of principles

and instigating the creation of new laws that

helped foster cooperative business development.

Today, cooperatives are found in nearly all coun-

tries. Chapters 2 and 3 trace the remarkable history

of cooperative development internationally and in

the United States.

What is a cooperative? The cooperative model has been adapted to

numerous and varied businesses. In 1942 Ivan

Emelianoff, a respected cooperative scholar,

remarked that “the diversity of cooperatives is kalei-

doscopic and their variability is literally infinite.”1 As

a consequence of this diversity, no universally

accepted definition of a cooperative exists.Two defi-

nitions, however, are commonly used.

According to the International Co-operative

Alliance (ICA): a cooperative is an autonomous asso-

ciation of persons united voluntarily to meet their

common economic, social, and cultural needs and

aspirations through a jointly owned and democrati-

cally controlled enterprise. Cooperative leaders

around the world recognize the ICA, a non-govern-

mental organization with over 230 member organ-

izations from over 100 countries, as a leading

authority on cooperative definition and values.2

The ICA definition recognizes the essential

element of cooperatives: membership is voluntary.

Coercion is the antithesis of cooperation. Persons

compelled to act contrary to their wishes are not

truly cooperating. True cooperation with others

arises from a belief in mutual help; it can’t be

dictated. In authentic cooperatives, persons join

voluntarily and have the freedom to quit the coop-

erative at any time.3 The forced collectives preva-

lent in the former Soviet Union, for example, were

not true cooperatives.

Another widely accepted cooperative definition is

the one adopted by the United States Department

of Agriculture (USDA) in 1987: A cooperative is a

user-owned, user-controlled business that distributes

benefits on the basis of use. This definition captures

what are generally considered the three primary

cooperative principles: user ownership, user

control, and proportional distribution of benefits.

The “user-owner” principle implies that the people

who use the co-op (members) help finance the co-

op and therefore, own the co-op. Members are

responsible for providing at least some of the

cooperative’s capital. The equity capital contribu-

tion of each member should be in equal propor-

tion to that member’s use (patronage) of the co-

op. This shared financing creates joint ownership

(part of the ICA cooperative definition).

The “user-control” concept means that members of

the co-op govern the business directly by voting

on significant and long-term business decisions

and indirectly through their representatives on the

board of directors. Cooperative statutes and

bylaws usually dictate that only active co-op

members (those who use the co-op) can become

voting directors, although non-members some-

times serve on boards in a non-voting, advisory

P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 1

An introduction to cooperatives 1

C H A P T E R

The first signs of organized hunting activity based around communities are associated with Homo erectus, modern human ancestors who lived between 500,000 and 1.5 million years ago in Africa.

capacity. Advisory directors are becoming more

common in large agricultural cooperatives in the

United States, where complex financial and

business operations require the expertise of finan-

cial and industry experts. Only co-op members can

vote to elect their board of directors and on other

cooperative actions.

Voting rights are generally tied to membership

status—usually one-member, one-vote—and not

to the level of investment in or patronage of the

cooperative. Cooperative law in a number of states

in the United States and in other countries,

however, also permits proportional voting. Instead

of one vote per member, voting rights are based

on the volume of business the member transacted

the previous year with the cooperative. Generally,

however, there is also a maximum number of votes

any member may cast to prevent control by a

minority of members. For example, a grain cooper-

ative might permit one vote to be cast for each

1,000 bushels of grain marketed the year before,

but any single member would be limited to a

maximum of ten votes. Democratic control is main-

tained by tying voting rights to patronage.

Equitable voting rights, or democratic control (as

written in the ICA definition), are a hallmark of

cooperatives.

“Distribution of benefits on the basis of use,”

describes the principle of proportionality, another

key foundation for cooperatives. Members should

share the benefits, costs, and risks of doing

business in equal proportion to their patronage.

The proportional basis is fair, easily explained

(transparent), and entirely feasible from an opera-

tional standpoint. To do otherwise distorts the

individual contributions of members and dimin-

ishes their incentives to join and patronize the

cooperative.

Co-op benefits may include better prices for goods

and services, improved services, and dependable

sources of inputs and markets for outputs. Most

cooperatives also realize annual net profits, all or

part of which are returned to members in propor-

tion to their patronage (thus, they are aptly called

patronage refunds). Cooperatives can also return a

portion of their profits as dividends on investment.

In the United States, however, federal and most

state statutes set an 8 percent maximum on

annual dividend payments. The purpose of these

limits is to assure that the benefits of a cooperative

accrue to those who use it most rather than to

those who may have the most invested; the impor-

tance of capital is subordinated.

Today, some co-op leaders and scholars consider

this dividend restriction arbitrary and harmful to

cooperatives. From their perspective, the 8 percent

maximum makes investing in cooperatives less

attractive than investing in other forms of

business. It makes cooperatives less competitive as

well, especially in the agricultural processing

sector, which requires a lot of capital for start-up

and growth. An overview of the federal laws that

govern cooperatives in the United States is

included in chapter 3.

Why cooperate? People who organize and belong to cooperatives

do so for a variety of economic, social, and even

political reasons. Cooperating with others has

often proven to be a satisfactory way of achieving

one’s own objectives while at the same time assist-

ing others in achieving theirs.

Farmers create farm supply and marketing cooper-

atives to help them maximize their net profits. This

requires both effective marketing of their products

for better prices as well as keeping input costs as

low as possible. The farmers recognize that they

are usually more efficient and knowledgeable as

producers than as marketers or purchasers. By

selling and buying in larger volumes they can also

usually achieve better prices.

C O O P E R A T I V E S :2

Consumer cooperatives are established to sell the

products a group of consumers want but cannot

find elsewhere at affordable prices. The consumer

members are primarily interested in improving

their purchasing power—the quantity of goods

and services they can buy with their income. They

naturally wish to get as much as possible for their

money in terms of quantity and quality. As owners,

the members have a say in what products their

stores carry.

Employees organize bargaining associations and

labor unions to negotiate collectively with man-

agement and owners. In some cases, employees

form worker-owned cooperatives. As the name

suggests, a worker-owned cooperative is owned

and controlled by its employees.4 Employees

establish bargaining units and cooperatives in the

hopes of increasing their wages and fringe

benefits, improving their general working condi-

tions, and ensuring job security.

Cooperatives do not, as is sometimes assumed,

contradict the goals of capitalism. If that were the

case, cooperatives would not play such an impor-

tant role in the American economy. About 48,000

cooperatives, operating in nearly every business

sector imaginable, serve 120 million members, or

roughly 4 out of 10 Americans.5 The top 100 coop-

eratives in the United States, ranked by revenue,

individually generated at least $346 million in

revenue during 2002 and in the aggregate, $119

billion.6 They represent agriculture, finance,

grocery, hardware, healthcare, recreation, and

energy industries (figure 1.1).

Cooperatives are especially important to agricul-

ture. In 2002, 3,140 agricultural cooperatives

provided roughly 3.1 million farmers (many

farmers are members of more than one coopera-

tive) with agricultural marketing, farm supplies,

and other farm-related services. They captured 28

percent of the market share.7

P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 3

An introduction to cooperatives 1

C H A P T E R

Figure 1.1. Top 100 revenue generating cooperatives in the U.S. by sector, 2002

In terms of non-agricultural cooperatives, 84

million Americans are members of 9,569 credit

unions, 865 electric co-ops serve 37 million people

in 47 states, over 1.5 million families live in housing

cooperatives, and over 3 million people are

members of 5,000 food cooperatives.8

The involvement of so many people in coopera-

tives in such a highly competitive economy reflects

the general satisfaction of members toward their

companies and the apparent efficiency and solid

financial performance of these businesses. Chapter

4 provides a more comprehensive discussion of

the various types of cooperatives and the extent of

their economic success in the United States.

In short, cooperatives are organized to serve

member needs and are focused on generating

member benefits rather than returns to investors.

This member-driven orientation makes them fun-

damentally different from other corporations.

Additional cooperative structural characteristics

and guiding principles further distinguish them

from other business models. In most countries, the

cooperative model represents only one of several

different ways a business can choose to legally

organize. Chapter 5 presents a comparison of the

six major alternative business models in the United

States.

Cooperative management and development To prosper, cooperatives must be well organized,

well financed, well managed, and governed well by

a committed membership. They must be progres-

sive, adapting to changing business climates, and

responsive to their members’ changing needs.

Members, the board of directors, and management

each have responsibilities within the cooperative.

Strong, viable cooperatives require all three groups

to do their share. Chapter 6 describes each group’s

unique and important role.

Although capital, employees,

business volume, and good man-

agement practices are all very

important for successful opera-

tions, a co-op’s members are its

most important asset.

Cooperative success also hinges on effective

member education and communication. Indeed,

providing education, training, and information to

members is one of the seven cooperative princi-

ples adopted by the ICA. The unique education

needs of cooperatives and the essential elements

for a successful education and communication

program are also discussed in chapter 6.

Cooperative financing is also critical and in today’s

complex cooperative organizations it can be quite

complicated. Adequate capital is one of the funda-

mental principles of sound business operation and

at the same time one of the biggest challenges

facing cooperatives today. Financing options must

be consistent with principles of cooperation as

well as with federal and state laws. Chapter 7 lays

out the main concepts behind cooperative financ-

ing, including alternative sources of capital and

equity redemption plans.

As with other business forms, cooperatives should

be established only to meet a well-defined need in

the market. Before cooperatives are created,

advance research should be done by a steering

committee to ensure sufficient support by other

potential members in the community. Chapter 8

discusses in greater detail the procedure for organ-

izing cooperatives. A good feasibility study, strong

membership drives, and a comprehensive business

plan are essential ingredients.

A final analysis of the cooperative model’s benefits

and limitations, to members and the broader com-

munity, is presented in chapter 9.

C O O P E R A T I V E S :4

P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 5

Historical developm ent of cooperatives

throughout the w orld

2 C H A P T E R

The historical development of cooperative busi-nesses cannot be disconnected from thesocial and economic forces that shaped them. Co-ops then, as now, were created in times and

places of economic stress and social upheaval.9

Ancient records and archeological discoveries

point to the existence of cooperative organizations

created by early civilizations in diverse parts of the

world (China, Greece, Egypt, etc.). But it is the

founders of the Rochdale Society in 19th century

England who are celebrated for launching the

modern cooperative movement. The Rochdale

pioneers, and the early European cooperative

thinkers and organizers who laid the foundation

for their success, are responsible for codifying a

guiding set of principles that helped guide the

development of cooperatives across the world.

Revolutionary roots in England The first cooperative businesses created in Europe

arose during periods of great social upheaval and

distress caused by dramatic shifts in agricultural

and industrial production practices. Prior to the

Industrial Revolution (about 1750-1850), most

families in England and other parts of Europe were

largely self-sufficient, creating enough food and

goods for their subsistence and small amounts for

trading. The Industrial Revolution introduced the

factory system of production and was marked by a

rapid succession of remarkable inventions that

accelerated the industrialization of business.

Examples of inventions during this period include

smelting iron with coal instead of charcoal, the

cotton gin and power loom, and the steam engine.

The writings of Adam Smith at the time, especially

his advocacy of the laissez faire principle (no gov-

ernment intervention in the economy), further

spurred the revolution.

The industrial system gradually replaced cottage

industries and home-based production. Workers

were required to move into cities to find work.

Away from land, their families were increasingly

integrated into a market economy; instead of pro-

ducing most of their household requirements,

especially food, they had no other choice but to

purchase them. Advances in production were not,

unfortunately, accompanied by fair labor stan-

dards. Workers were typically paid very low wages

and were subjected to harsh working conditions.10

People remaining in rural areas were not much

better off. An agricultural revolution was already

well underway in the 18th century. The introduc-

tion of new cultivation methods and crop varieties

supported a dramatic change in land tenure

patterns. Scattered, small plots of farmland were

aggregated into large, enclosed estates, primarily

for the purpose of grazing sheep and other live-

stock. Between 1760 and 1843, nearly seven

million acres of agricultural land in England were

enclosed in estates. As a result, large numbers of

small farmers were driven from their land into

neighboring towns and villages with few remain-

ing jobs.

A movement towards greater freedom of expres-

sion was another hallmark of this revolutionary

period. The citizens of England began to publicly

dissent with government policies, taking issue with

the status quo and demanding more personal

rights. Therefore, the widespread poverty, unem-

ployment, and general social deterioration that

were left in the wake of the industrial and agricul-

tural revolutions were met with a public outcry to

the government for improved working and living

conditions.

The historical development of

cooperative businesses cannot be

disconnected from the social and

economic forces that shaped

them. Co-ops then, as now, were

created in times and places of

economic stress and social

upheaval.9

Early cooperative societies In the absence of public assistance, the people of

Europe established various types of self-help

organizations. Mutual fire insurance companies

existed in London and Paris as early as 1530,

although the first highly successful and well-

known example was organized in England in 1696,

the Amicable Contributionship.11 The people of

England also created Mutual Aid Societies (they

eventually became known as Friendly Societies)

that offered financial payments and assistance to

members in times of sickness, unemployment, or

death.12 By the mid-18th century many well-estab-

lished societies were already in operation. They

were legalized with the passing of the first Friendly

Society Act (also called the Rose Act) in 1793. A

number of bills were introduced in the 19th

century to encourage Friendly Societies since they

lessened the public burden.13 Workers organized

labor unions to bargain with employers for more

favorable working conditions and to lobby the

government for improved labor legislation.

Cooperative or quasi-cooperative industrial busi-

nesses were in operation in England by 1760. Most

were consumer-controlled organizations focused

on flour milling and baking industries. Cooperative

corn mills for grinding flour appeared in a number

of cities shortly after the turn of the 19th century

to cut the cost of flour and prevent tampering by

greedy millers. Purchasing cooperatives already

existed in most Western European countries by the

18th century. The Weaver’s Society in Fenwick,

Scotland (often referred to as “penny capitalists”)

began to purchase supplies as a group in 1769.14

The precursors to mutuals and unions were guilds,

the associations of merchants, artisans, and crafts-

men that date back to Medieval times. Guilds had

binding rules for production and business prac-

tices. Although guilds were created partially in an

attempt to establish local trade monopolies, they

incorporated socialist practices: member control,

equitable treatment of all members, and financial

support of members who were ill or faced family

crises.

Robert Owen and Charles Fourier— Cooperative visionaries

“Often men wish to escape the

realities of life, and when they do,

they dream of Utopias.” 15

The first cooperative

movement, that is, the estab-

lishment of a coherent

argument for the cooperative

form of organization, gained

momentum in the early 19th

century with the writings and

advocacy efforts of Robert

Owen and William King in

England and Charles Fourier in

France. Robert Owen and

Charles Fourier were both well-known Utopian

Socialists; not only did they envision ideal soci-

eties, they tried to create them in Europe and the

United States.16

Robert Owen (1771-1858) was a prominent indus-

trialist who began to advocate the establishment

of a new type of community to alleviate the

poverty and suffering caused by the Industrial

Revolution. Charles Fourier (1772-1837) was a

bourgeois, famous French social philosopher

whose plans for self-reliant communities were

motivated by the French Revolution and his view

that the working class was being dehumanized

and repressed.

They both envisioned rural villages composed of

farms and small-scale industry, all operated coop-

eratively by the citizens who would also live

together communally. Owen originally conceived

of these communities as a solution for unemploy-

ment, but later believed (like Fourier) that they

were a better alternative to private capitalism and

competition, providing self-employment opportu-

nities and other conditions that would provide

universal happiness. Fourier called his planned

communal cities “phalanxes.”

C O O P E R A T I V E S :6

Robert Owen (1771- 1858):“The Father of Cooperation.”

P R I N C I P L E S & P R A C T I C E S I N T H E 2 1 S T C E N T U R Y 7

Historical developm ent of cooperatives

throughout the w orld

2 C H A P T E R

Owen and Fourier were not abstract thinkers; they

laid out very specific details for their communities.

For instance, they believed that the communities

should contain 1,000-1,800 people living on a rela-

tively small tract of land. Fourier was more explicit:

the area should be three square miles.17 Wealthy

supporters of Owen’s ideas were willing to finance

the creation of such communities. Four were even-

tually created: New Harmony, Indiana (USA);

Orbiston, Scotland; Ralahine, Ireland; and

Queenswood, England. All ultimately failed.

Fourier never found philanthropists willing to fund

the creation of a phalanx. After his death, several

were attempted in France and more than thirty

organized in the United States.18 The most notable

in the United States were Brook Farm, near

Cambridge, Massachusetts (1842-1846), and one in

Fond du Lac County (now the city of Ripon),

Wisconsin (1845-1850). The phalanxes suffered

from a conflict between treating everyone equally

and rewarding those who provided more capital

and labor. The phalanx model, however, influenced

the successful kibbutzim in Israel (discussed later).

Owen was a visionary idealist, not a realistic coop-

erative developer. He was not at all interested,

therefore, in helping the early consumer coopera-

tives in England:“Joint stock retailing is not the

Social System which we contemplate…and will

not form any part of the arrangements in the New

Moral World.”19 In 1839 he did not even bother to

respond to an urgent request by Charles Howarth

to visit Rochdale, England to discuss organizational

plans for a new retail cooperative.

Owen’s attack upon individualism, the family, com-

petition, private property, the market economy, and

organized religion, alienated many people from

cooperation and provoked condemnation of coop-

eratives from various religious groups. Even so,

Owen is often called the “father of cooperation.”

Despite his failures, Owen continued preaching

that cooperative production and living were the

best medicines for the ills of society. His advocacy

stimulated the creation of cooperative societies,

labor exchanges (where handicrafts were traded

based on the amount of labor involved in their

making), and trade unions. Although most of the

organizations he started lasted only a short time,

they provided the groundwork for another genera-

tion of cooperative development in Europe and

North America.

William King— A cooperative developer and pragmatist Dr. William King (1786-1865), another social

reformer in England, was in many respects more

responsible than Robert Owen for spreading the

cooperative idea and for the actual organization of

cooperatives. Although he accepted much of

Owen’s social philosophy, he disagreed on how to

reach those goals. King was more realistic about

cooperatives, advocating and inspiring the devel-

opment of consumer cooperatives across England.

As a physician, King became interested in improv-

ing the welfare of the working people of Brighton,

England. He was involved in organizing numerous

social and educational institutions, including an

infants’ school, a mechanics’ institute, and a library.

Between 1828 and 1830, King published (at his

own expense) a small magazine called “The

Cooperator” that was widely distributed through-

out England. Its 28 issues were a source of inspira-

tion, information, and instruction on cooperation

in theory as well as in practice. The magazine advo-

cated a more realistic type of cooperation within

reach of the working class.

King believed that cooperatives should start small

with the original capital supplied by members, a

significant deviation from Owen and Fourier’s

large-scale operations funded by wealthy

investors. King did not necessarily object to Owen’s

self-sustaining cooperative communities, as long

as they were funded with the members’ own

capital and were restricted to Christians. King was

a religious fundamentalist who believed that

…

An Introduction to Cooperation and Mutualism Michael Boland University of Minnesota

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An Introduction to Cooperation and Mutualism

Copyright © 2017 by Michael Boland

An Introduction to Cooperation and Mutualism Michael Boland University of Minnesota

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Chapter One: Cooperatives and Mutuals are Firms . . . . . . . . . . . . . . . . . . . . 3 The success of a firm lies in its ability to have clear property rights . . . . . . . .3 Who owns a firm? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Exhibit 1.0 What is the make-or-buy decision? 5 Exhibit 1.1 Dimension of job design in organizations with an

application to a convenience store franchise 6 Corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Exhibit 1.2 What are articles of incorporation? 8 Cooperatives are an example of a closely-held firm . . . . . . . . . . . . . . . 9

Exhibit 1.3 What are bylaws? 9 Exhibit 1.4 What are policies? 9 Exhibit 1.5 Types of business forms 10

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Chapter Two: Cooperatives and mutuals are participatory organizations . . . . . . . 13 Exhibit 2.0 The cooperative is a firm 13 Exhibit 2.1 The mutual company 14 Exhibit 2.2 International cooperative alliance values and principles

of cooperation 15 Exhibit 2.3 The special case of fraternal benefit society 16

Cooperative principles and policies . . . . . . . . . . . . . . . . . . . . . . . . 17 Exhibit 2.4 Rochdale Equitable Pioneers Society 17 Exhibit 2.5 The cooperative as the competitive yardstick 18

Participation in benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Exhibit 2.6 What are examples of credit cooperatives? 19 Exhibit 2.7 What is the difference between a stock cooperative and a

nonstock cooperative? 20 Participation in ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Participation in control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Exhibit 2.8 How are directors selected? 21 Exhibit 2.9 Cooperatives and mutuals are not the same as loyalty

programs and buying clubs 22 Principles of cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Formation of cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Chapter Three: Income distribution and equity decisions . . . . . . . . . . . . . . . .29 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Exhibit 3.1 The case of pooling cooperatives 31 Exhibit 3.2 Simplified cooperative income statement 32

Income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Exhibit 3.3 A simplified cooperative balance sheet 33 Choices on distribution of patronage and non-patronage income . . . . . . . 34

exhibit 3.4 Income distribution decision in a cooperative 35 Patronage income distribution choices and cooperative business units . . . . 36

Exhibit 3.5 Sources of equity in a cooperative 37 Choices on tax liability of patronage refunds . . . . . . . . . . . . . . . . . . . 38

Exhibit 3.6 The rationale for why cooperatives have single taxation of income 39

Equity redemption program choice has implications for the balance sheet . . 40 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Exhibit 3.7 Equity redemption by patron birth year in certain farm supply and grain marketing cooperatives in the United States 41

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Chapter Four: Special topics in cooperatives and mutualism . . . . . . . . . . . . . . 43 Limited exemption from antitrust laws . . . . . . . . . . . . . . . . . . . . . . 43 Use in agricultural and community development programs . . . . . . . . . . 43 Pricing strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Why is the number of agricultural cooperatives declining worldwide? . . . . 44 Organizing the governance of cooperatives . . . . . . . . . . . . . . . . . . . . 44 Hybrid cooperative organizational forms . . . . . . . . . . . . . . . . . . . . . 45 The “new generation” cooperative phenomenon in the United States . . . . . 45 Demutualization: a rare but often studied event in cooperatives and mutuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 The current restructuring of ‘mixed’ or multi-purpose farm supply and grain / oilseed marketing cooperatives in the United States . . . . . . . . 47 Collective farming movements . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Economic impact of cooperatives and mutuals . . . . . . . . . . . . . . . . . . 48 The role of faith in cooperative development . . . . . . . . . . . . . . . . . . . 48 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Chapter Five: Summary and conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . 51 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 About the author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

AN INTRODUCTION TO COOPERATION AND MUTUALISM vII

»Preface When I was growing up, as the oldest of 12 children, my parents did a lot of business with the “co-op.” In this case, the co-op was Farmers Union Coop- erative Oil Association of South St. Paul, which later became River Coun- try Cooperative and remains a thriving business in east central Minnesota. It was the only business where my parents had credit. My parents had actu- ally purchased common stock in the co-op in the late 1960s, which, as I discovered later, is unusual since most members are allowed to earn their way into a farm supply cooperative without having to formally purchase common stock. Our family had no credit cards and no home equity line of credit in the 1960s and 1970s. The fact that we lived from one paycheck to another meant that having credit at the co-op was a blessing, provided the account was paid off promptly every month, which it was. The co-op was where we purchased gas and where the car got fixed. Tires, batteries, oil filters, dog food, and other goods were bought at the co-op. And every year my family received a patronage refund. The co-op had operations in three counties and the nearest location was almost 15 miles away.

We banked with a credit union and insurance was done with a mutual insurance company. My cousin, on whose farm we worked, was a member of three farm supply cooperatives and his insurance was in a township mutual insurance company. Childhood photos would invari- ably have someone in my family wearing a red Cenex (now part of CHS, Inc.) or green Land O’Lakes ball cap. Both were cooperatives. I worked at the co-op for four years; my brother later worked there, and ultimately became General Manager at a farm supply cooperative in Washing-

AN INTRODUCTION TO COOPERATION AND MUTUALISMvIII

ton state. My Aunt Maureen (known as Peg) was an executive secretary at what was then the St. Paul Bank for Cooperatives, and would relate her experiences there over a 30-odd year career. As children, we did not understand what a cooperative or mutual was. We knew that gas might be less expensive just down the road and did not require a 15-mile drive to get there! But it was just the way things were done at our house.

As I attended graduate school at the University of Minnesota and then Purdue University, and began a career in academia at Kansas State Uni- versity and now back at the University of Minnesota, I began to work within a network that involved frequent engagement with cooperative directors, managers, employees, and other stakeholders, including aca- demics, accountants, attorneys, lenders, and state cooperative council leaders. I began to better understand the network of agricultural and con- sumer cooperatives and mutual insurance firms in our economy. None of my undergraduate classes in the business school discussed cooperatives. In fact, for one of my classes in which I was required to discuss a compa- ny’s annual report, I chose to discuss a firm that happened to be a coop- erative. My professor intoned in a professorial voice that “Cooperatives were a socialistic idea” and promptly gave me a C. Historically, colleges of agriculture, rather than colleges of business, were home to collegiate courses on cooperatives.

Cooperatives and mutuals are just a different form of business. Once you start looking closely, you begin to appreciate the extent to which they exist throughout the world. Like any business, they exist to make a profit and make their members—who are customers—better off by providing a product or service. The differences lie in how income is distributed, how they are financed, and how they are owned by members. All of these con- cepts are discussed in this book.

For a number of years, I have been asked to write a textbook on coop- eratives and mutuals. I have chosen to write an introductory textbook. Over the past ten years, we have seen many retirements of faculty who taught courses on cooperatives and provided many educational programs to directors and employees. The popularity of such courses has resulted in new faculty being hired who do not have the deep institutional knowl- edge that other instructors had developed over a long career. There are also new courses being taught in colleges and universities where there was no such course taught previously. Thus, I have chosen to write some- thing for students who are taking their first course in cooperatives. An extensive set of teaching materials with detailed lessons plans, case stud- ies, and information, accompanies this textbook; these materials should be useful for instructors and students.

IxPREFACE

I owe a great deal of gratitude to my parents for exposing my siblings and I to the cooperative and mutual form of business. My colleagues in the U.S. Department of Agriculture USDA NCERA 210 Multi-State Coordi- nating Committee of Land Grant University Faculty Focused on Research on Cooperatives have been a valuable sounding board for me. In particu- lar, Phil Kenkel and Greg McKee have been great sounding boards for this textbook. I owe a lot of thanks to my long-time friend and colleague from Kansas State, David Barton, who was involved in the last textbook written on cooperatives in 1989 and kept a set of materials available for others to use over the years. And I owe much to my co-instructors who help teach the law school class on cooperatives and mutuals at the University of Min- nesota. Chris Kopka, Tom Pierson, and Dave Swanson have deepened my knowledge of mutuals and cooperatives.

Most importantly, I am deeply indebted to the thousands of direc- tors, managers, employees, and stakeholders of cooperatives and mutu- als who have educated me about their businesses over the past 25 years. This education has occurred through programs offered by state coopera- tive councils, cooperative annual meetings, regional workshops such as the Farmer Cooperatives conference and California Center for Cooper- ative Development education program, and the activities of the National Council on Farmer Cooperatives. I have had the opportunity to lecture or work in more than 100 countries, with much of this work related to cooperatives or mutuals. The issues are the same no matter where one goes! The relationships among all of these individuals have helped make my career very rewarding. My job involves a great deal of public-private partnerships with these individuals and I am very blessed with this net- work. I also want to thank to Jerry Ryan and the employees and producers of Arrabawn Co-op in Nenagh, Ireland, who provided my students and I an up-close look at Irish cooperatives as part of their study tour. I have led more than a dozen student agricultural study tours in Latin America, Australia and New Zealand, and South Africa, and cooperatives were an important stop for my students.

Cooperative leaders had the foresight to create various endowments at a number of universities to ensure that faculty teach courses in coop- eratives and create new knowledge about cooperatives. In that spirit, the CHS Foundation and CoBank have graciously helped provide funding in the development and editing of this book and its materials. I could not have done this without their help. Finally, I would remiss if I did not thank Kansas State University and University of Minnesota for allowing me to teach, research, and conduct extension and outreach programs on coop- eratives as part of my career. It has been a great career choice for me.

AN INTRODUCTION TO COOPERATION AND MUTUALISMx

AN INTRODUCTION TO COOPERATION AND MUTUALISM 1

»Introduction The purpose of this textbook is to introduce the ideas of cooperation and mutualism. Consequently, it is likely to be used in an introductory course on cooperatives and mutuals as opposed to a graduate seminar course. As an economist, it stands to reason that much of my discussion is written through the eyes of economics. After all, a cooperative or mutual will not survive unless it achieves an economic purpose. Another goal I have with the book is to make it accessible, affordable, and easy to update.

I began with roughly 320 pages of double-spaced text. As I tried to sep- arate what should be in the teaching manual relative to the text, it gradu- ally dawned on me that, with the many kinds of materials publicly avail- able, I was making the book too unwieldy. No class is the same; some are taught once a week, some twice, some three times. The number of stu- dents differs, as does the classroom itself, with some courses taught in traditional lecture halls and others in active student learning classrooms. The real value to the instructor and reader is the teaching materials and how they are used. Virtually all instructors supplement a textbook with their own materials and the same will be true with this book as well.

I thus looked at the materials and decided to make the book much smaller and more focused. Student feedback was overwhelmingly posi- tive! This process resulted in moving much of the original material into the teaching manual and creating a shorter textbook. A number of my colleagues have contributed to the lesson plans in the teaching manual and I want to acknowledge their help and contributions.

The last cooperative textbook, which was edited by David Cobia in 1989 and includes chapters written by various cooperative scholars, made an outstanding contribution by creating a consistent set of cooperative terminology. I have tried to follow their practice, with the exception of one term: investor-oriented firm, or IOF, is a term I understand as an aca- demic, but I believe it is confusing for readers in an introductory class.

AN INTRODUCTION TO COOPERATION AND MUTUALISM2

I have thus chosen to use the terms cooperatives and non-cooperative corporations. Finally, mutuals have never been discussed within previous textbooks on cooperatives and there is no widespread literature on them. Because there is so much overlap, and because many people who belong to a cooperative also belong to a mutual insurance firm and likely do not even realize it, I have chosen to add mutualism as an idea in this textbook.

In keeping with the idea of making the book easily readable, I have chosen not to use explicit citations like those used in an academic journal article. Rather, I have compiled endnotes with information on the sources for particular concepts or ideas. I have tried to acknowledge original sources wherever possible, and to recognize individuals who helped pop- ularize those concepts and ideas.

The first chapter introduces the idea of a firm and how it is defined and organized. I then introduce the idea of property rights and governance. For the vast majority of students, this is the first time they will be exposed to this concept. Because a cooperative is a firm, it is important that students are grounded in these concepts. The formation of cooperatives and mutu- als is introduced within the context of the firm’s Make or Buy decision.

The second chapter defines cooperatives as participatory organizations in which members participate in economic and social benefits, ownership, and control. I introduce the importance of a cooperative using a business strategy to recognize that members are first and foremost customers, and lay out the various types of cooperatives. I also introduce some of the rea- sons why cooperatives have been used so widely in agriculture.

The third chapter lays out cooperative accounting and finance con- cepts. Students taking a course in cooperatives may have little or no back- ground in accounting, but such knowledge is needed to understand the ways in which members participate in their cooperative.

The fourth chapter introduces several topics unique to cooperatives and mutuals, including policies, economic development, pricing strategies, and current issues in cooperatives. Chapter Five ties these concepts together.

AN INTRODUCTION TO COOPERATION AND MUTUALISM 3

»Chapter One Cooperatives and Mutuals are Firms

The purpose of a firm is to decide what to produce, how to produce it, and how to distribute what is produced. Legal forms of organizations include for-profit corporations, non-profit organizations, partnerships, and sole proprietorships. The majority of business organizations in the U.S. are corporations, and are referred to as C corporations because such organi- zations tax the corporation differently from the owners of the corporation. A number of these corporations are publicly traded, which means they issue stock that can be bought and sold by buyers and sellers in an orga- nized stock exchange. Stock owners include institutional investors such as mutual funds, pension (private and public) funds, and life insurance companies. Cooperatives are a special case of corporations.

This chapter describes how a firm is organized. Market economies such as those found in the U.S. and in many other parts of the world operate efficiently when firms are organized in the ways discussed in this chapter. The next chapter describes the organizational characteristics of a coop- erative, while the third chapter describes the accounting and financial characteristics of a cooperative or mutual, with the economic transaction clearly showing why a cooperative is different from other forms of busi- ness. It is important for the reader to understand what a firm is in order to fully understand the concepts underpinning cooperation and mutualism.

The success of a firm lies in its ability to have clear property rights A property right is a legally enforced right to select the uses of an economic good produced by a firm. Private property rights are those assigned to an individual person, while an alienable property right is one that can be given or transferred to someone else. For example, the government employs a police force and legal system to enforce these rights. Ownership of the property right includes the use of that right and its alienability or ability to

AN INTRODUCTION TO COOPERATION AND MUTUALISM4

give or transfer that right. These rights are separated such that, for example, a person can rent an apartment but cannot sell the apartment.

Market economies have the ability to be highly efficient in organizing economic activity if the property rights are clearly known and assignable to individuals, and if the contracting costs such as search and information costs, bargaining and decision costs, and drafting, policing, and enforce- ment costs are known. Specific knowledge is important in decision-making, and individuals make more productive decisions when property rights are known and assignable. Firms exist because there are contracting costs to using markets, and these costs may be lower when done by firms.

This is easy to understand in a business such as a proprietorship, where one person makes all decisions and signs all contracts. But it is more com- plex in a firm such as a cooperative or mutual. A considerable amount of research suggests that firms are actually a connection of a group of con- tracts. The firm signs contracts with 1) suppliers to purchase inputs to create something, 2) employees to help provide services with their labor, 3) lenders, bondholders, preferred stockholders, or others who provide capital to the firm, 4) buyers who agree to purchase the products or ser- vices made by the firms, or 5) any other entity doing some form of busi- ness with the firm.

In a cooperative, however, some of these contracts exist with owners and employees of the firm. In a consumer cooperative, the goods and ser- vices provided by the cooperative are consumed by the members, while in a producer cooperative the cooperative markets products supplied by the members. Cooperatives are successful if they are able to make some- thing for their members either through purchasing supplies or providing inputs rather than having members do this in the market as individuals with no ownership. This Make or Buy decision has been widely studied within the context of the contractual arrangements that make up a firm. The concepts of ownership, property rights, and purpose of a firm are key to understanding the unique nature of a cooperative.

Who owns a firm? An owner of a firm is someone who has the right to control the firm and the right to any residual earnings after the firm has contracted its expenses with its suppliers, employees, lenders, and others with whom it has a contractual arrangement. These two rights—control and residual claimant on earnings—are linked together or are obtained jointly in a corporation and are the fundamental basis of ownership. There are costs, however, associated with these two rights. For example, one key cost with regard to the right to residual earnings is the issue of risk and the firm’s

CHAPTER ONE: COOPERATIVES AND MUTUALS ARE FIRMS 5

strategy choice. More business units in a firm has may lead to greater diversification, which can reduce risk as long as the correlation between earnings in each of the business units is negative or close to zero.

For the right to control the firm, there are costs of controlling man- agers and costs of collective decision-making. Monitoring the actions of management is difficult when there are many owners, as is often the case with cooperatives and mutuals. Owners can ensure that outside audits are conducted and internal controls are in place. In addition, they attempt to ensure that the board of directors is composed of individuals with the best knowledge possible to monitor management. As seen in the next chapter, cooperatives are limited in this regard because their directors must come from members. The costs of collective decision-making may be high if owners have differing opinions arising from different needs with regard to the cooperative’s products and services. The greater these differences, the greater the costs of collective decision-making.

ExHIBIT 1.0 What is the make-or-buy decision?

Can consumers or producers obtain benefits of volume pre- miums, volume discounts, or missing prod- ucts or services on their own?

If the answer is yes, is vertical coordination of the activities in the supply chain easy? If the answer is no, then buy the product or service.

If the answer is no, would a sup- ply agreement or alliance or similar arrange- ment work?

If the answer is yes, is mutual benefit a solu- tion to coordi- nation rather than detailed production or marketing con- tracts? If the an- swer is no, then buy the product or service via contracting.

If the answer is yes, create a supply agreement or alliance or similar arrangement to contract and buy the product or service. If the answer is no, then vertically integrate as a consumer or producer to make the product or service.

If the answer is yes, then verti- cally integrate as a consumer or producer to make the prod- uct or service.

AN INTRODUCTION TO COOPERATION AND MUTUALISM6

Corporate governance Knowing the governance of a firm is important in understanding how it functions. In an organization such as a C corporation, decision rights are allocated between those internal to the firm such as shareholders, boards of directors, senior managers, and those external to the firm such as out- side auditors, regulatory agencies, analysts, and other stakeholders. Orga- nizations are designed to create jobs that address certain tasks which must be accomplished, and these jobs include varying levels of authority to decide how to best complete those tasks.

Think about this concept in regard to a convenience store that sells refined fuels such as gasoline and diesel fuel, a limited selection of grocery products, convenience foods, and similar products. This store has two cash registers. Consider point A, where there are few tasks to accomplish and limited authority to make decisions. This job might be a clerk who is contracted to run the cash register and has limited authority to make decisions. Point B has more tasks to perform but limited decision-making authority. An example might be a shift leader who runs the cash register, is the supervisor for the other clerk, and may do certain jobs within the store such as stock shelves, but who has limited authority to make other

ExHIBIT 1.1 Dimension of job design in organizations with an application to a convenience store franchise

B: shift leader D: franchise

owner

A: cashier or clerk C: store manager

Ta sk

s to

a cc

om pl

is h

Authority to make decision

CHAPTER ONE: COOPERATIVES AND MUTUALS ARE FIRMS 7

decisions. Point C involves more tasks and more authority. This would be the store manager who has supervisory responsibilities for all employ- ees in the store and is responsible for inventory control. Point D involves many …

ARE 132: COOPERATIVE BUSINESS ENTERPRISES

Prof. Kiesel

Lecture logistics

 Lectures will be recorded and posted

 Lecture slides are posted (including Notetaking handouts)

We will use icklicker/Reef app for active participation during live lectures

Participation

Click on this button (below assignment text) and log in to iclicker App at least once Note: This button is only visible when canvas site is opened in a browser, not in canvas App!

What do you know about Cooperatives?

Why study Cooperatives?

What do you want know about Cooperatives?

Surprising Numbers  10 % of world’s total employment happens through

co-ops (International Cooperative Alliance)  The world’s 2.6 million co-ops count over 1 billion

members, and $20 trillion in assets, and revenue up to 4.3% of global GDP (United Nations)

 Country with the largest total number of co-op membership (though many don’t know themselves as such) is the U.S.

 80% of consumers would choose co-ops over other options (2017 survey, Cooperatives for a Better World)

Co-ops are as old as you want them to be

 Cooperation is as old as economic activities  Rochdale Society of Equitable Pioneers (1844) often

cited as the origin of co-ops  Mondragon as largest, most known worker co-op

“It has been said that cooperativism is an economic movement that uses methods of education [...] This definition can also be modified to affirm that cooperativism is an educational movement that uses methods of economics" Arizmendi (ca 1952)

 African Americans have a long, rich history of cooperative ownership, especially in reaction to market failures and economic racial discrimination

 Cooperatives in Socialism and Communism  Education as key principle of co-ops, but co-ops are

also a good educational tool to understand economics and business (management)

Co-ops are as old as you want them to be (cont.)

Co-ops can provide timely solutions

Cooperatives are more than just a business model Address a variety of environmental, economic, and

social justice challenges or our time Co-op movement is a democratic movement Co-operative ideas influence general business

principles

Learning Objectives  By the end of this quarter you will have a basic

understanding of the  fundamentals of cooperative business enterprises.  key economic functions of cooperatives.  conditions amenable to cooperative structures.  experiences shared by professionals working in

cooperative businesses.

We will focus on cooperatives as economic organizations

Required Reading

 No comprehensive textbook available We are using: Cooperatives: Principles and practices in the 21st century. Kimberly A. Zeuli and Robert Cropp, University of Wisconsin Cooperative Extension, A1457. An Introduction to Cooperation and Mutualism. Michael Boland, University of Minnesota (2017). (Additional Articles)

Recommended Reading

 Everything for Everyone: The Radical Tradition that is Shaping the Next Economy, Nathan Schneider. Nation Books (2018)

 Collective Courage: A History of African American Cooperative Economic Thought and Practice, Jessica Gordon Nembhard, The Pennsylvania State University (2014)

 Food Co-ops in America: Communities, Consumption, and Economic Democracy, Anne Mais Knupfer (2013, posted on canvas)

Final (Group) Project

.

 In order to apply the learned material throughout the quarter, you will complete a business case study on a cooperative business of your choice

You will be working on this project in groups of 4-5 students. Groups will be assigned during the second week of instructions. In a first attempt, we will match students according to their interests in certain businesses

15

•

Making mistakes is an important part of learning (Opportunities for low-stakes mistakes; applications, peer-based learning)

• Use Canvas discussion board, student hours, and FAQ module for additional questions (email for confidential concerns)

I am here to help!

Supporting Learning versus Assessment of Skills

Academic Honesty (Peer-learning vs cheating)

Academic Conduct: You are an active member of the UC Davis campus and essential in our efforts to create a fair and honest community. Please review the Code of Academic Conduct. Familiarize yourself with your rights and responsibilities as you are required to acknowledge them for each of your courses. I encourage you to work together as I strongly believe it supports the learning process. However, your submitted quiz and exam answers need to be your own, and any sources used in the preparation of your group project need to be properly cited (Please refer to additional information on proper citation). Any violation will result in you receiving no credit for the assignment or exam in question, and me reporting the incident to the Office of Student Support & Judicial Affairs. Copyright: My lectures and course materials, including PowerPoint presentations, quizzes and exams, assignments, and additional handouts, are protected by U.S. copyright law and by University policy. I am the exclusive owner of the copyright in those materials I create. You may take notes and make copies of course materials for your own use to support your learning. You may also share those materials with other students who are enrolled in or auditing this course except when taking quizzes and exams. You may not reproduce, distribute or display (post/upload) lecture notes, recordings, quizzes and exams, and all other course materials in any other way — whether or not a fee is charged — without my expressed prior written consent. You also may not allow others to do so. Any violation will result in me reporting the incident to the Office of Student Support & Judicial Affairs. (Information included on Syllabus)

Weekly Reflections

 Keep a “Journal”: Opportunity to provide feedback and comments on the assigned readings, lectures and sections, and additional information posted. You can also discus ideas related to each week’s material in preparation for your final project.

Turn in at least six weekly journal entries electronically by midnight each Friday

Quizzes

 One weekly quiz posted on Canvas:  Pre-lecture (available 24 hours prior)

 7 quizzes total (two lowest scores dropped)

First Pre-lecture quiz next week (Lockdown browser required)

Practice quiz posted

Student hours

 M 6:00 –7:00pm: Zoom link (on Canvas)

 F 8:00 – 9:00am: Zoom link (on Canvas)

Please note that the chosen times allow students in different time zones to join as well. You will be able to socialize and work with others in breakout rooms during those times, and/or ask me anything you would like. Please come with questions or identify areas you want to talk about. I am happy to talk and provide feedback, advise you on anything we cover in class, or have a more personal conversation and provide advice as best as I can. I will, however, not prepare and present additional course material during those times.

INTRODUCTION

What is a Cooperative Cooperative principles

Agricultural Marketing Co-ops

 Blue Diamond Growers  Owned by 3,500+ almond growers in

California  Shell, process & market members’ almonds

and almond-based products  Sells packaged and bulk in US and abroad  Sales exceeded $1.5 billion in 2018

Wholesale (Purchasing) Co-ops  Ace Hardware

 Owned by member stores that buy most of their merchandise from the cooperative

 4,476member stores--in all 50 states and 60 countries

 Record fiscal 2018 revenues of $5.7 billion (an increase of 6.1 percent from pervious year

 Paid record patronage dividends of $145.9 million to hardware store members

 Recognized as one of the “2018 Best and Brightest Companies to Work For in the Nation” by the National Association of Business Resources

Consumer Co-ops  REI  Nation’s largest consumer co-op with18 million members  Headquartered in Seattle area, 129 stores  Outdoor sports/recreation equipment & clothing  One-time membership fee ($20)  Record annual revenues of $2.8 billion in 2018, 6 percent

growth  Record $204 million shared with REI members through

annual dividends and credit card rebates  Gave $77 million to employees through

profit sharing and retirement  Invested $8.4 million in 2018 in nonprofits

working on outdoors projects

Worker Co-ops  Cheese Board (Arizmendi)

 Owned by its workers (two owners opened a small cheese store in 1967 and sold their business to their employees)

 Employs about 40 worker/owners with an annual revenue approximately $2 Million

 Sell almost 400 different cheeses and an extensive selection of freshly baked breads and pastries

 Pizzeria sells one type of vegetarian pizza each night, using fresh ingredients, unusual cheeses from the Cheese Board, all on top of a thin, sourdough crust.

Utility Co-ops  Provide:  Electricity  Telephone  Internet service  Satellite television  Wind energy  Leadership in economic development

Cooperative Banks, Housing Co-ops, Artists Co- ops, Social services Co-ops…

Source NCB Co-op 100 Statistics, 2019

Cooperative Principles

What is a Cooperative?

A cooperative is a business owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use.

 The user-owners are called members (USDA)

Cooperative principles distinguish cooperatives from other forms of business

Contemporary or Co-op Principles (USDA)

 User-benefit Sole purpose is to provide & distribute

benefits to its users on basis of their use  User-owned

People who own & finance the cooperative are those who use the cooperative

 User-control People who control the cooperative are

those who use it

Seven Cooperative Principles (ICA)

Voluntary & Open Membership Democratic Member Control Members’ Economic Participation Autonomy & Independence Education, Training & Information Cooperation among Cooperatives Concern for Community

What is a Cooperative?

A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. (International Coop Alliance)

Political Economy and Common-pool Resources

 Olstrom (Nobel-laureate) seven design principles for common pool resources:  Clearly defined boundaries  Local rules adapted to local conditions and needs  Mechanisms for those affected by the rules to change then  Monitoring of participant behavior  Appropriate consequences for rule violations  Processes for conflict resolution  Free and flexible self-organization,

and additional principle for large systems: Principle of federation: A pattern of nesting, so that smaller decisions happen in smaller groupings, which in turn defer to larger institutions for larger challenges

INTRODUCTION (cont.)

 What is a cooperative?  How is it different from other businesses?

 Are there commonly agreed upon cooperative principles?  How were they determined?  How have they involved over time?  How valid are they today?  What cooperative principles if followed, will optimally position

cooperatives in the future?

 Cooperatives are a unique form of businesses or organization

What is a Cooperative? (Review) A cooperative is a business owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use. (USDA)

 User-owned  People who own & finance the cooperative are those who

use the cooperative

 User-control  People who control the cooperative are those who use it

 User-benefit  Sole purpose is to provide & distribute benefits to its users on

basis of their use

(Narrower USDA definition)

What is a Cooperative?

A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. (International Coop Alliance)

 Seven Principles

(Broader ICA definition)

Three (Four) classes of principles of cooperatives (Cobia)

Seven Cooperative Principles (ICA)

Voluntary & Open Membership Democratic Member Control Members’ Economic Participation Autonomy & Independence Education, Training & Information Cooperation among Cooperatives Concern for Community

Why Cooperate?

 Producers (Farmers) create supply or marketing cooperatives to help maximize net profits Market products at better prices Keep input costs low

Consumers can buy products or use services they want but cannot find elsewhere at affordable prices

 Employees organize bargaining associations and labor unions to negotiate collectively for increased wages and benefits, general working conditions and job security

Example: Reason for Co-ops among Farmers

1. Pool their (financial) resources 2. Carry out business activities they could not perform

independently as efficiently

 Existing businesses/structures have not provided them with goods and services, they desired

 Existing businesses have followed monopolistic practices

 Create economies of scope and scale

Application: Local food systems (food hubs and food incubators) CSA’s

Example: Reason for Co-ops among Agricultural Producers (cont.)

 Benefits include favorable prices, services that would otherwise not be available, access to markets and assured supply, as well as patronage refunds  Cooperative with $200,000 in revenue and 180,000 in

expenses, has $20,000 left as net income to return to patrons:

 A patron that does $4000 worth in business with the cooperative receives a refund of proportional share (4,000/200,000=400 or 3=2%)

 Cooperatives provide access to markets and market or bargaining power to its users*

*Users are patrons; patrons eligible to vote are members

Why do Farmers Join Together?

 Reasons farmers joined together include: 1. To obtain a fair or efficient price (correct market failure) 2. Reduce costs through economies of scope and scale 3. To provide supplies, and services that are missing or in

danger of being lost, access to markets 4. To pool risks 5. To capture profits from another level (vertical integration) 6. To benefit from increased market power

markets

Classification Cooperatives by primary business activity:

Agricultural Production Cooperatives Purchasing Cooperatives Consumer Cooperatives Service Cooperatives

Finance Insurance Electricity Housing Healthcare

Classification of Co-ops(cont.) Cooperatives by market area:

Local Cooperatives Interregional and national

Cooperatives International Cooperatives

Classification of Co-ops(cont.)  Cooperatives by ownership structure:

Centralized Cooperatives Federated Cooperatives Hybrid Cooperatives

Other business structures New Generation Cooperatives (NGCs) Wyoming Cooperative model Worker-owned Cooperative

Terminology  Cooperatives are also sometimes called nonprofit

corporations or patron-owned corporations  Firm other than co-ops are often called: noncooperatives,

investor owned, proprietary or profit, private, ordinary, standard, other corporations or just corporations.

 Can get confusing and be misleading

 Key difference: Co-ops return net income to users or patrons, while other firms return net income to investors

 We will try to use Co-ops* versus Investor oriented firms (IOF)

* Owned by customers or patrons (few by employees)

Matrix of Cooperative member and patron classification (Cobia)

Stakeholders  Each business has a set of key stakeholders: 1. Owners or investors (controlling or noncontrolling owners) 2. Employees, who work for the business in some capacity (labor

or management) 3. Patrons or customers, who patronize business by using it as

source of supply or service or as an outlet for services they produce

4. Other stakeholders (e.g. creditors and suppliers)

 Any person can be all four types  In Co-ops, roles are closely connected

Stakeholders

Legal Forms of Businesses Proprietorship is a business owned and controlled by one entrepreneur who provides the equity capital, makes key management decisions, and bears unlimited liability for debts and losses in exchange for the opportunity to receive profits.

Partnership is similar to a proprietorship, except that it is owned and controlled by two or more people.

Corporation is a legally chartered institution formed by a group of people or businesses who are granted a s body of one.

 Cooperative corporation

Limited Liability Company(LLC) is similar to a partnership but all partner have limited liability

Legal Forms of Businesses Basic Legal Business Forms

Proprietorship Corporation Partnership

IOF Corporation Cooperative Nonprofit

BusinessConsumer Employee Nonprofit and government

Goods Services AgriculturalNon-Agricultural

Marketing Supply Service Marketing Supply Service

Comparison of legal forms of doing business (Cobia)

Comparison of legal forms of doing business (cont. )

Comparison of legal forms of doing business (cont. )

Individual Proprietorship

+ Easy and inexpensive to organize + Owner has complete control + Owner receives all income - Owner has unlimited liability - Owner is taxed on all business profits - Not suitable for large or complex businesses

Partnerships

+ Easy to organize + Partners share control + Partners receive all income - Some partners have unlimited liability - Partners are taxed on all business profits - Personality differences may cause problems

Limited Liability Company (LLC)

+ Easier to organize + Democratic control + Limited Liability - Owners are taxed on all business profits - Too easy for owners to exit - May be cumbersome with large number of

partners

C-Corporations

+ Larger pool of investors and easier to raise capital + Business life is perpetual + Owners have limited liability - Double taxation to corporation and stockholders - Owners have little control - Complex and costly to organize

S-Corporations

+ Business life is perpetual + Owners have limited liability + Taxed as partnership - Limit of 75 stockholders

Key Concepts

 The following concept to enhance understanding of Co-ops:

1. The primary purpose is economic benefits for members 2. Members are usually patrons 3. Members own and control the Co-op 4. Qualifying patrons receive distribution of benefits 5. Co-ops are private organizations 6. Public policy establishes the institutional framework

Issues and Discussion

 Much of controversy stems from whether guidelines are considered mandatory principles, strongly recommended policies, or common practices

Discussion questions: Do economists behave differently? (Frank et al, 1993) Why are cooperative principles important? What is the difference between principles, policies, and practices? (Give an example of each). What are the advantages and disadvantages of strictly following a commonly accepted set of principles?