June 16, 2020

Agricultural cooperatives: types, principles, pros and cons

A co-operative is an independent private business association of individuals who are at once the members and the consumers of the goods they produce and/or the services they provide. Small businesses can achieve economies of scale this way, competing with large corporations in the market. Farmers in agricultural coops can get access to supply and markets that are otherwise beyond their reach. Profit is not the primary goal but can still be allocated to the members proportionate to their use of or contribution to a cooperative. Thanks to the “one member, one vote” principle, members can, on a regular basis, democratically elect representatives among themselves as a board of directors.

Types of cooperative organizations

There are many different types of cooperatives based on the needs of their members. All of them, however, share the same idea, providing and procuring goods and services. Profit is never a top priority, although patronage (a share proportionate to use) is often paid from the available budget. Usually, profit accumulates over a specific period of time and then is allocated among the members according to their participation. The range of industries covered by co-ops is vast: from providing utilities, groceries, labor services, housing, to credit unions and agricultural cooperatives.

Let’s take a closer look.

Agricultural cooperatives

Agricultural producers, suppliers, traders form cooperatives to get access to more supplies and markets at a reasonable cost. Their goal is to reduce cost by increasing the scale of their economies. In other words, the more agro-producers combine their efforts in a co-op, the cheaper the total cost of production becomes. Similarly, the traders united under a cooperative can compete in an open market with large industrial corporations in a fair way.

Arts and Crafts cooperative organization

As in most other cooperatives, members (artisans and performers) combine their financial and artistic effort to obtain needed but otherwise unattainable services and supplies, as well as moral support. Such coops provide their members with studio spaces and various specific tools at a reduced cost. On top of that, the democratic principle guarantees artistic freedom and independence.

Business cooperatives

Small businesses of all types can join their efforts to lower overall production and distribution costs, and form cooperative businesses. These can be retail stores, taxi cab owners cooperatives, and other types.

Childcare and Preschool cooperatives

This cooperative association is usually formed by students, to provide affordable child care to the community. What makes them so attractive is that parents can be members as well, and, consequently, have a say in many decisions. The childcare cooperatives often provide high quality preschool programmes and services.

Credit Unions

Сredit union is a nonprofit type of cooperatives that specializes in providing financial services (savings, loans) at the lowest possible cost. Members are employees, pensioners, and even family members over the age of 16.

Food coops and buying clubs

Higher product quality, greater control over production, and lower prices are the main main reasons for such coops to form.

Insurance cooperatives

All members of such a coop are policyholders, and their primary goal is to provide insurance services. Their secondary goal is to generate revenues that will reduce cost of providing the services. As usual, members receive the patronage dividends from the available profit and have an owner-control over the coop.

Retail coops

Benefits for members include discounts and more control over sale policies. Interestingly, retail cops sell consumer goods to the non-members as well. The accumulated earnings can turn into patronage refunds for a specific period of time paid back to the members.

Student cooperatives

Students form cooperatives to reduce the cost for basic needs such as food and housing. In fact there are many types of student coops, ranging from housing to childcare, and even bookstores. The additional benefit is experience that the students gain from cooperation.

Utility services cooperatives

Members of these co-ops share the capitalization costs and receive utilities (communication, electricity, water), usually at lower rates, especially if the users are the owners themselves. There are many types of utility cooperatives: cable television coops, telephone coops, and so on.

Worker coops

Members are the workers of their own business. They take part in management, allocate income and net losses, spread risks among each other, and share profit according to their contributions. All around the world, workers form cooperatives to ensure steady income and employment for themselves.

Agricultural cooperatives up close

A single modest agricultural producer may struggle with access to supplies and to the competitive markets, especially where major food production corporations are already involved. Meanwhile, the risks connected with growing crops or dealing with those big corporations can be too unbearable, while the loss of profit can put an end to the business altogether.

In other words, there are plenty of reasons why farmers join cooperatives.

  • Better access to markets and supplies;
  • Lower overall production cost;
  • Risk mitigation;
  • Democratic management system.

These are among the key benefits members of agricultural coops are looking for. The only potentially off-putting thing about cooperative ownership is the shared economic responsibility. It is required that each member actively participates in a farming co-op. Profit is paid on the basis of participation, as a share proportional to use. Furthermore, profit may fluctuate from year to year depending on how well the cooperative is doing on the whole.

Proportional distribution of profit may not seem like a very reliable way of making money to some. However, agricultural cooperatives do not aim at profit maximization in the first place. Instead, their primary goal is to provide services to the members, ensuring their business and economic needs are met. Every registered co-op member is eligible to vote and elect representatives among the co-members as the board of directors. The important difference between a cooperative and any other type of business is that non-members cannot vote or be elected. There is no outside party that can impose its policy on the cooperative’s economic activities. Thanks to the official exemption to the antitrust laws in the United States, a co-op is economically and politically independent from the government, as well as from any private corporations.

Agricultural Cooperatives in the United States

According to the University of California there are over 3000 agricultural co-ops in the United States today, with 2.8 million members. They operate according to the principles based on the modified traditional Rochdale Society concepts of 1844, such as “one member, one vote,” and “service at cost”. Out of these principles come all the benefits associated with being a member of a farming co-op. The main motivation for small agro-businesses to form or join cooperatives is to combine their efforts and resources, while reducing the costs.

In the United States, agricultural cooperatives specialize in marketing, supply, and providing services.

Marketing coops

These farming coops are out in the front line, assembling, packing, processing, and selling the produce. They aim at both domestic and foreign markets, capable of competing worldwide thanks to their cooperative structure.

Supply cooperatives

As the name suggests, these agricultural co-ops are concerned with purchasing supplies rather than selling them. Their primary focus is to reduce costs and generate savings which can then be allocated to co-op members.

Service coops

There are many agricultural services needed by the individual farmers: hulling, ginning, you name it. In service cooperatives, members support each other by providing services at a lower cost as opposed to expensive and unreliable outsourcing.

Bargaining cooperatives

Last but not least, there is one more type of agricultural co-ops in the US. Bargaining co-ops specialize in negotiating affordable prices for the members in the market, always making sure the deal is fair for the co-op farmers.

How do co-ops work? Principles of cooperatives

Traditionally, what makes cooperatives so different from any other business enterprise is the principles they are founded on. These principles define and guide the co-ops, ensuring, among other things, democratic self-ownership, tolerance (lack of discrimination), open membership, independence from the government, and equal economic responsibilities distributed among the members.

According to the US Department of Agriculture, four general traditional principles distinguish cooperatives from any other type of business:

  • Service at cost;
  • Financial obligation and benefits proportional to use;
  • Limited return on equity capital;
  • Democratic control

They emerged from the so-called Rochdale principles, which, despite being a little outdated today, ensured the economic sustainability and the appeal of the first cooperative businesses in the past. They were:

  • Open membership
  • One man, one vote
  • Cash trading
  • Membership education
  • Political and religious neutrality
  • No unusual risk assumption
  • Limited interest on stock
  • Goods sold at regular retail prices
  • Limitation on the number of shares owned
  • Net margins distributed according to patronage

These slightly outdated principles still form the foundation for the sustainability of cooperatives around the world. Let’s, however, get a closer look on the four principles recognized by the Agriculture Department of the United States today.

Service at Cost

The ultimate goal of any cooperative is to unite individual small businesses into an economy of size and, thus, provide access to otherwise unavailable services, products, materials, and markets. The lower cost of services, products, and materials is another major consideration when forming a co-op.

Financial Obligations and Benefits Proportional to Use

Members of co-ops benefit directly and indirectly from the availability of supplies and markets for their products and services, and from acquiring knowledge about business practices. However, the amount of direct benefits an individual receives depends on his or her level of participation. In other words, benefits for the co-op members are proportional to their input.

Similarly, all the economic responsibilities, risks, and losses are shared equally and proportionally among the members.

Limited Return on Equity Capital

Although most cooperatives are not non-profit (except credit unions), their primary focus is always on obtaining and/or providing products and services rather than achieving profit maximization. Higher quality of the products and services at a lower cost is what attracts people to co-ops. Therefore, the return on investment is limited, paid as a patronage over a specific period of time, given there is enough profit available. Often, profit can be further re-invested in the cooperative, to take care of its future needs.

Democratic Control: Cooperative Structure

The basic idea behind the membership in a cooperative is the good old Rochdale principle of “one member, one vote.” Like other businesses, co-ops have boards of directors, except the directors are annually elected representatives of the membership itself. Only a member of a cooperative can be on the board, but every member is eligible to vote and to serve.

Cooperative Advantages and Disadvantages

All of the pros and cons of agricultural cooperatives stem directly from these four principles. No benefit or risk should come as a surprise to the co-op members: what you see is what you get.

Advantages of Cooperatives

Thanks to the principles of democratic control and proportional use, members of a farming cooperative get access to services, products, materials, and markets otherwise unavailable to them. Each member gets not an equal share but is rewarded according to their participation, that is, their input share. In other words, one-for-all-and-all-for-one principle is at the core of every agricultural cooperative. It is the reason why farmers are so eager to form one in the first place. Besides, co-ops enjoy freedom from any outside economic influence, either from the government, or from any major private corporations.

Co-ops are member-oriented

Cooperatives are not aimed at profit maximization like corporations, instead they focus on the members’ needs. The members of a farming cooperative work for benefits rather than profit. Namely, they want to benefit from services provided by other members of the same cooperative or a neighboring co-op. Among other benefits are availability of products and materials at a reasonably low cost, as well as access to the larger markets where the members-producers can sell their products or services.

Coops are democratic

As we have already seen, every member of an agricultural cooperative is eligible to elect and to be elected as one of the board directors. The latter are representatives of the membership and have a responsibility to oversee the business. As a rule, the election is held annually, to uphold the democratic system of self-government, as well as to ensure the co-op members’ rotation. In addition, a CEO can be appointed by the board for a more effective management. All of the financial and legal issues related to the functioning of the cooperative are the responsibility of the board and the CEO. Whatever they decide on these issues, however, should be and usually is in the interests of members rather than aimed at profit maximization. Farming cooperatives are user-controlled and user-owned which guarantees transparency, full accountability, and benefits proportional to the members’ inputs.

Co-ops are Independent

Agricultural cooperatives are guaranteed independence from both public and private sectors by law. In the United States, they are, in fact, exempt from antitrust laws. Within the legal scope of economic and administrative activities, the government has no say about what farming co-ops should or shouldn’t do. This is allowed because of the nature of cooperatives as organizations formed by the people for the people, with an open but limited membership. In other words, each co-op decides on who can or cannot become its member, never letting the outside influence, be it the government or a major corporation, to impact any decisions or goals.

Patronage Proportional to Use

A patronage is the share of the overall co-op profit paid to a member based on his or her activity and input for that year (or any other specific period of time agreed upon by the members). In other words, if all farmers participate equally, they will get an equal share of profit. However, if some have contributed more than others this year, they will get a larger patronage from the profit respectively. This is equal profit distribution based on a fair assessment of members’ contributions to the cooperative. To put it more simply, every member receives what he or she justly deserves. Patronage can also be retained for a specific number of years and paid out as equity much later, with the member’s permission.

Cooperative Equity

Patronage can accumulate in the form of a retained profit and be paid out in full to a member of a farming cooperative as equity. In other words, an individual can be an active member for a certain period of time (for example, 10 years), and, at the end of the period, get paid all the patronages accumulated in those 10 years.

Risk mitigation

Cost of business transactions can be enormous for one small business, and, without cooperation and proper investment, very little is possible to achieve. Moreover, it can be intimidating to face major business organizations and compete with them in the big market on your own. That’s why farmers form cooperatives, so that by joint effort and investment, they could create a formidable economic power to access competitive markets and secure fairness of transactions. Big corporations might not be interested in individual small businesses, but large agricultural co-ops will definitely attract their attention. Since in a co-op, members support each other, they can spread or “pool” the risk connected to a single transaction evenly among themselves. One for all and all for one.

Disadvantages of Cooperatives

The flip side of the independence and democratic control is the equally distributed economic responsibilities of the co-op members. Since no investment can enter the cooperative by outsourcing, loss of profit impacts every member. Every individual patronage has to be reduced to compensate for the loss. Still, members’ support for each other is always a consolation. No one is left to deal with the loss of profit on their own.

Perhaps for someone the idea of sharing economic responsibilities may seem as a daunting prospect, but it is a kind of risk that is worth taking, considering the benefits of cooperation. Your profit and well-being depend on how well the co-op is doing financially, which, in turn, depends on the level of your participation. It is a fair and transparent deal with predictable risks and countless benefits as a counterweight.

Farming Co-ops and Crop Monitoring

There are many ways how producer cooperatives can benefit from using Crop Monitoring. Our digital agro-platform integrates satellite imagery, vegetation indices, and weather data, to provide precision-driven agricultural solutions to farmers, traders, insurers, and advisors. Precision allows for a more rational use of resources, time, and budget, leading to both higher crop productivity and increased profitability.

Agricultural producers have to manage their fields on a regular basis, relying on traditional scouting, conventional weather forecasts, and historical harvest data records. The reliability of these traditional methods has always been somewhat questionable. Therefore, Crop Monitoring offers farming coops updated ways of managing fields.

Enhanced Scouting for Agricultural Cooperatives

Our scouting feature is based on satellite data and vegetation indices, allowing for an automated detection of problem areas, and minimizing the reaction time. Thanks to a team account feature, field owners and assigned scouts stay connected while performing tasks. Besides, all members of the same cooperative can monitor each other’s fields in the shared account. There is no need for using heavy equipment in the fields and plenty of time is saved in the process.

Higher Productivity at a Lower Cost

Similarly, satellite imagery and vegetation indices make it possible to identify zones with higher and lower productivity within every field owned by a producer cooperative. This gives farmers an opportunity to precisely determine the amount of seeds and fertilizers required for each zone based on its productivity. As a result, there is a considerable reduction in waste of the supplies (and budget) along with an increase in the total crop yield.

Crop Rotation

One more way a farming coop can be sure to increase productivity of their fields, is to know the history of crop rotation for every field. Fumbling through the records is an unrewarding as well as time-consuming task, and sometimes records get lost. Historical crop rotation feature of our agricultural platform lets you see all the “records” on one screen any time anywhere.

Weather Management

On top of that, weather risks can be significantly mitigated by agricultural coops using Crop Monitoring’s multi-layered weather analytics feature. Instead of wasting time on fumbling through the historical weather records, you can look at the charts and see the weather data as curves and bars for a particular field for the past 5 years. Data relevant to farming, such as

  • Air temperatures
  • Cold/heat stress events
  • Accumulated precipitation

to name a few.

Additionally, on the same chart you will see the history of vegetation development for the field, and growth stages (for particular crop types). This will also allow members of coops to make reliable predictions as to the future yields of their fields.

What is more, EOS has partnered up with aWhere to deliver farmers a reliable 14-day weather forecast specifically related to particular fields covering the area of 9 by 9 km.

At the same time, current weather conditions for every individual field, such as air temperature, humidity, and cloudiness (to name a few), are always conveniently on display.

With this feature, agricultural coops will be able to create a fuller picture of the climate influence on the development of crops, take appropriate measures, and thus ensure better yields.

Software v. Mobile App

We offer cooperatives not one but two versions of Crop Monitoring, one for PC, and one for a mobile device. Actually, there is no contest going on between the two; they are complementary with each other. While the classic software version is perfect for a desk at an office or home, the mobile app is ideal for the scouts in the fields. The team account feature will make sure that agricultural coops can keep track of the assigned scouts performing all of the tasks. For example, when a scout spots a clearly visible problem in the plant, he or she can snap a photo of it and upload it into the task menu. The customer will then see that photo in their shared account. A team account also makes it possible for scouts to instantly share task reports created right in the app.

Notification Manager

Even if you forget to log into your account to check the latest data on your fields, we’ve got you covered. Notifications about the most relevant updates (new satellite images of your fields, vegetation index value change, among others) will be sent to your e-mail.

User-friendly

Perhaps the key benefit that farming cooperatives can get out of using EOS Crop Monitoring is the ease with which our platform is operated. All the crucial data is gathered in one screen to save you time on collecting it manually from different sources. Everything you need to know about your fields and the state of their crops is already here, in your account. Relevant data is constantly updated, making sure you never lose touch with your fields, wherever you are: at home or in the office, as long as there is an internet connection.

To sum up, with Crop Monitoring, farming coops can significantly reduce the cost of essential agricultural field management activities, such as sowing, fertilizing, and scouting, also helping to reduce waste of resources and time. Team accounts will suit any cooperative, while the notifications will make sure users stay constantly in touch with the state of their crops, listening to the pulse of the fields.

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