Go on the Offensive or Perish Co-operatives Warned: An Interview with Prof. Cook (1997)

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This document has been made available in electronic format
by the International Co-operative Alliance (ICA)
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Oct, 1997
(Source: Co-op Dialogue, Vol.7, No.2, May-Aug. 1997, pp.34-35)


Go on the Offensive or Perish,  Co-operatives Warned
An Interview  with Professor Michael Cook
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Visiting academic Professor Michael Cook from the Department of
Agricultural Economics at the University of Missouris-Columbia says
supply co-operatives will have to change their focus to survive.

To survive into the future, Professor Michael Cook believes co-operatives
will have to come off the defensive and learn to play an "offensive"
or attacking game.

During a recent visit to Australia, he said co-operatives had been largely
formed for "defensive" reasons, to keep others in the market honest and
to improve the bargaining power of farmers.

"In the 21st Century, if you do not have an offensive-orientated type
of business you are probably going to die," he says.

Property Rights
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Co-operatives' ability to play an offensive or attacking game in the global
market will depend to a large degree on how they deal with what he terms
their, "vaguely defined property rights."

Professor Cook believes many of the fundamental problems of
co-operatives today stem from the fact that, by and large, they have
less clear and definable property (or ownership) rights than
private, investor-owned firms.

"This is the critical difference between the two types of organisations,"
he said.  "Who actually owns and controls co-operatives and how
are decisions made within the organisation?"

These difficulties manifest in five major ways:

-	Free rider problems - where a farmer who does not belong to
	a particular co-operative benefits from the co-operative's presence.
	For example, the co-operative effectively sets the price for raw
	product in the market;  its competition meets that price and so the
	benefit 	flows to all farmers in the industry, not just those supplying
	the co-operative.

-	Horizon problems - where members of differing ages have differing
	needs and expectations of the co-operative.  In the US, nearly 60
	per cent of the equity and risk capital in a co-operative may be in
	the hands of inactive or retired suppliers.  If they all wanted to be
	paid out, the co-operative would go bankrupt.  Similarly, if all the new
	suppliers had to pay for their share of the co-operative's facilities
	in their first few years of operation they would not survive.

-	Portfolio problems - where a co-operative's activities cover a number
	of industries and market sectors.  Supplier resistance makes it difficult
	for co-operative management to rationalise operation in order to
	improve efficiency or concentrate on core strengths.

-	Control problems - where the need for outside investment to fuel
	growth works against the supplier-shareholders' desire to maintain
	control of their business.

-	Influence problems - where there is difficulty developing mechanisms
	to take account of the needs of the various stakeholders in the
	organisation.

These mechanisms need to strike the right balance in the relationships
between:

-	members who supply the product and own the co-operative;

-	board of directors who must set the direction of the group and
	monitor its performance; and

-	co-operative management who must take care of the day-to-day 	running of the operation.

The options
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Faced with these difficulties, US co-operatives are taking one of three
option, Professor Cook said.

Getting out of the co-operative business:  This may take the form of
liquidation, selling out to another company, or converting to a conventional
investor-owned company, though he notes that the conversion option has
been less popular in the US than it has been in Australia.

"From a sociological point of view, US producers are going through a
phase of 'what we own, we want to have control of.'  As a result, the
number of co-operatives converting to investor-owned companies has
actually been quite low," he said.

Redesigning themselves:  A number of co-operatives have had great success in allocating their capital to members in a structured way to
account for the ownership problem, Professor Cook said.

In addition, they have formed strategic alliances with other co-operatives
or companies further down the marketing chain and moved away from a
diverse product range to more specialised production.

New generation co-operatives:  Professor Cook said 'new generation
co-operatives' are the newest and biggest phenomena of the US
co-operative movement in many years.

NGCs are formed under traditional co-operative law, but suppliers provide
the capital up front to process their raw product.

The board does a feasibility study to determine the optimal size plant and
then sells the delivery rights to that plant to suppliers.

"NGCs have defined and finite right of supply (membership)," said
Professor Cook.

"This right is transferable, with board approval, to other suppliers who
wish to buy that right, but the total amount of supply remains finite
unless the plant capacity changes."

When you buy the delivery rights you also sign a five-year marketing
contract.  If you don't deliver the right quality the co-operative reserves
the right to buy the quality it requires and bill you, Professor Cook said.

In some co-operatives, he said, the delivery rights have doubled or tripled
in value.

Suppliers who may have paid $5US a unit for the right to deliver a certain
quantity of product per year when the co-operative started now find their
unit is work $10 or $15.

It becomes a way by which suppliers can see a capital gain from their
involvement in a successful co-operative.

Future options for co-operatives
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Professor Cook says the jury is still out on the best direction for a
co-operative to follow to ensure future survival.

Inevitably, the solution will be different for each country and probably
each co-operative.

A number of noted co-operative theorists are suggesting that unless the
co-operative is solely in the commodity trade, rather than rushing into
acquisitions and growth they may be more successful by remaining smaller
and seeking alliances with other groups.

Although noting that academics do not normally go out on a limb to make
predictions, Professor Cook ended his address with the optimistic
prediction that, if co-operatives could address issues such as their vaguely
defined property rights and come to terms with their capital raising
problems, they could become successful if not dominant players in their
particular industries.

Professor Cook's visit to Australia was sponsored by the Dairy Research
and Development Corporation and the Monash University's Agribusiness
Unit.