V. Paper I -- Capital Formation in US Ag Coops

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   This document has been made available in electronic format
            by the Committee for the Promotion and
              Advancement of Cooperatives (COPAC)
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                    REPORT OF THE MEETING
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V.   SPECIAL PAPERS: 

     Paper I:  "A Brief Description of the Dynamics of Capital
               Formation in Agricultural Cooperatives in the
               United States", by Professor Michael Cook 

Professor Cook gave some background information on the
position of agricultural cooperatives in the USA.  In 1987,
the United States Department of Agriculture (USDA) produced a
report on the "Positioning of US Agricultural Cooperatives in
the Market" which stressed the nature of the cooperative as
"having user ownership, control and benefit".  In the USA,
there were 4,000 agricultural cooperatives with a total
turnover of $ 100 billion and, unlike in some countries,
outside directors could sit on their boards.  He also pointed
out that five hundred of these had set up the endowed chair at
Missouri University which the speaker occupied.  He further
added that the "number one" issue in cooperative discussion in
the USA today was capital formation. 
 
Professor Cook reminded participants of the necessity of
understanding cooperatives in terms of their "life-cycles,"
which added a new dimension to the discussion. Various
theories had been advanced by different economists about the
behavior of cooperatives in the market, including the "wave
theory", and the "wind-it-up", "pacemaker" and "mop-up"
theories. 
 
In a market economy, a practical way to assess whether or not
cooperatives were fulfilling their members' needs was to
measure their change in market share for inputs and outputs. 
With some variations, the evidence showed a strong growth of
cooperative market  share in recent years. 
 
He pointed out that agricultural cooperatives in the United
States were formed mainly for defensive reasons: either to
maintain or preserve economic balance within a sector (equity
concerns) or to cope with market failure.  Cooperatives formed
for the first reason tended to be short-lived, whereas
cooperatives formed for the second reason generally had a
better chance of surviving. 
 
Five types of US agricultural cooperative were identified,
starting in the 1930's with the farm credit and rural
utilities cooperatives, and proceeding through Nourse I and
II, and Sapiro I and II (the names were related to economists
who have identified each type).  And since the 1990's, a new
generation of agricultural cooperative had come into existence
- the Sapiro III. 
 
The growth and development of cooperatives over time commonly
led to an increase in heterogeneity amongst the membership,
and to various conflicts, the two major issues being residual
claims and decision control.  Some  common problems were
classified as: the "free rider" problem, the "horizon"
problem, the "portfolio" problem, the "control" problem, and
the "influence costs" problem. 

Professor Cook showed a chart with five recent types of
cooperatives and the residual claimant and decision control
problems inherent in each type.  It was interesting to note
that, while earlier types of cooperatives had been seriously
affected by one or both of these problems, the new generation
"Sapiro III" cooperatives were minimally affected. 

A cooperative might meet a temporary economic need.  In short,
cooperation did not need to be forever.  In those cases, the
possibilities of a "wind it up", conversion to an
investor-owned firm, or transition to a "new generation"
cooperative set-up were open. The speaker looked at the
various options open to a cooperative reaching its point of
strategic choice: Should it exit, continue or transform itself
into some new form of cooperation?  
 
Although there were various options involving conversion to or
relations with an investor-oriented corporation, one route
being taken by some US cooperatives was transition to a "new
generation" cooperative.  The characteristics of these
included: value-added marketing, an appreciable and
transferable "delivery right", defined membership, pooling
plus market agreement, and up-front equity capital.