University of Wisconsin Center for Cooperatives
Rural Cooperatives, May/June 1999, pp. 4-6.
Published by the Rural Business and Cooperative Development Service 

Improving Their Worth: Farmer co-ops' 1997 value-added activities rise to $10.1 billion

By Charles A. Kraenzle
Director, Statistics
USDA/RBS

and David E. Cummins
Agricultural Economist
USDA/ RBS



Adding value to agricultural commodities by organized cooperatives has been receiving increasing attention from farmers and ranchers. This has been demonstrated by cooperatives increased involvement in processing farm commodities into crop and livestock products, such as beef, pork, sugar and ethanol. The idea is to capture more income for producer-members by integrating further up the marketing channel.

Table 1 - Cooperatives' gross and net value-added, by component, 1994-97
Component 1994 1995 1996 1997

Million dollars
Wages and benefits 6,057 6,542 6,720 6,846
Net income before taxes 1,963 2,358 2,248 2,332
Depreciation 1.355 1,394 1,432 1,594
Interest paid 653 857 1,012 971
Gross value-added 10,028 11,151 11,412 11,743
Net value-added(2) 8,673 9,757 9,980 10,149


Percent of gross value-added
Wages and benefits 60.4 58.7 58.9 58.3
Net income before taxes 19.6 21.1 19.7 19.9
Depreciation 13.5 12.5 12.5 13.6
Interest paid 6.5 7.7 8.9 8.3
Gross value-added 100.0 100.0 100.0 100.0


Percent of net value-added
Wages and benefits 69.8 67.1 67.3 67.5
Net income before taxes 22.6 24.2 22.5 23.0
Interest paid 7.5 8.8 10.1 9.6
Net value-added 100.0 100.0 100.0 100.0
(1) Totals may not add due to rounding. Data for 1994 and 1995 were revised.
(2) Gross value-added less depreciation.
Table 2 - Farmer Cooperatives' net value-added, by type, 1994-97(1)
Type of cooperative 1994 1995 1996 1997

Million dollars
Cotton 173 172 193 198
Dairy 1,377 1,452 1,471 1,565
Fruit & vegetable 1,263 1,453 1,507 1,450
Grain & oilseed (2) 1,284 1,437 1,569 1,475
Livestock 367 464 492 585
Poultry(3) 319 387 451 449
Rice 118 130 130 138
Sugar 174 213 212 344
Other marketing(4) 461 691 531 638
Farm supply 2,714 2,867 2,969 2,872
Cotton gin 197 210 184 238
Other service 227 281 272 197
Net income before taxes 22.6 24.2 22.5 23.0
Total 8,673 9,757 9,980 10,149
(1) Totals may not add due to rounding.
(2) Excludes cottonseed.
(3) Includes eggs, turkeys, ratite, squab, and related products.
(4) Includes nut, tobacco, wool and mohair, dry bean and pea, fishery and miscellaneous marketing cooperatives.
Table 3 - Average of components and average total net value-added, 1994-97(1)
Type of co-op Wages & benefits Net income before taxes Interest paid Total net value-added

Million dollars
Cotton 70 84 30 184
Dairy 1,052 340 74 1,466
Fruit & vegetable 1,115 157 146 1,418
Grain & oilseed (2) 871 376 195 1,441
Livestock 259 151 67 477
Poultry(3) 35 24 451 402
Rice 102 11 16 129
Sugar 196 7 33 236
Other marketing(4) 440 70 71 580
Farm supply 1,796 852 207 2,855
Cotton gin 88 113 6 207
Other service 210 30 4 244
Total 6,541 2,225 875 9,640


Percent
Cotton 37.9 45.9 16.2 100.0
Dairy 71.7 23.2 5.0 100.0
Fruit & vegetable 78.6 11.0 10.3 100.0
Grain & oilseed (2) 60.4 26.1 13.5 100.0
Livestock 54.4 31.6 14.0 100.0
Poultry(3) 85.3 8.7 6.0 100.0
Rice 79.2 8.5 12.3 100.0
Sugar 196 7 33 236
Other marketing(4) 75.7 12.1 12.2 100.0
Farm supply 62.9 29.8 7.2 100.0
Cotton gin 42.6 54.4 3.1 100.0
Other service 86.1 12.1 1.8 100.0
Total 67.9 23.1 9.1 100.0
(1) Totals may not add due to rounding.
(2) Excludes cottonseed.
(3) Includes eggs, turkeys, ratite, squab, and related products.
(4) Includes nut, tobacco, wool and mohair, dry bean and pea, fishery and miscellaneous marketing cooperatives.

Cooperatives add value to the products they market, to the supplies they sell and the services they provide in a number of ways. They gather raw commodities and farm supplies in one place. They change the form and location of such commodities into products available for sale, thus adding value to what they do. The research presented here measures the value-added by these activities during 1994-97.

In 1997, the net "value-added" of farmer cooperatives totaled $10.1 billion, an increase of nearly $1.5 billion, or 17 percent, since 1994. Value-added income represents the earnings from land, labor, capital and management contributed by farmer cooperatives. For this study, value-added was calculated by adding coops' reported (1) wages and benefits, (2) net income before taxes, (3) interest paid on borrowed capital and (4) depreciation. The first three components equal net value-added (NVA). All four components, collectively, represent gross value-added (GVA), which is NVA plus depreciation. In simple terms, this method of measuring GVA is equivalent to subtracting cost of goods sold and total expenses from total net sales and adding service receipts and other income.

Why calculate cooperatives' value-added activities? Cooperatives' value-added:

  • Better represents the contribution made by cooperatives to value-added from agricultural commodities by function and type;
  • Helps cooperative leaders and policy makers improve decision-making by showing where value-added may be enhanced;
  • Yields time-series data that will help track cooperatives' progress and trends; and
  • Provides additional information to further educate producers and others on the cooperative way of doing business.

Co-ops' GVA and NVA increased

In 1994, co-ops' GVA totaled more than $10 billion. GVA grew, and totaled more than $11.7 billion in 1997. NVA (GVA minus depreciation) also grew, from $8.7 billion in 1994 to $10.1 billion in 1997 (figure 1).

Wages and benefits represented the major contribution to co-ops' value-added. From 1994 to 1997, it contributed about 59 percent to GVA and about 68 percent to NVA. Net income before taxes was the second major component. It contributed about 20 percent to GVA and about 23 percent to NVA during the four years. The relative proportions of the components making up both GVA and NVA were fairly stable over the four years (table 1).

Table 4 - Net value-added per dollar of sales by type of co-op 1997(1)
Type of cooperative Co-ops Net value-added Total sales Net value added per $1 sale

No.
Million dollars
Percent
Cotton 16 198 3,004 0.07
Dairy 236 1,565 23,374 0.07
Fruit & vegetable 257 1,450 9,268 0.16
Grain & oilseed (2) 1,014 1,475 24,639 0.06
Livestock 88 585 7,460 0.08
Poultry(3) 20 449 2,118 0.21
Rice 18 138 930 0.15
Sugar 51 344 2,087 0.16
Other marketing(4) 239 638 4,756 0.13
Farm supply 1,386 2,872 25,181 0.11
Service(5) 464 435 3,647 0.12
Total 3,791 10,149 106,474 0.10
(1) Includes marketings, farm supply sales, service receipts and other income. Excludes business done between cooperatives. Totals may not add due to rounding.
(2) Excludes cottonseed.
(3) Includes eggs, turkeys, ratite, squab, and related products.
(4) Includes nut, tobacco, wool and mohair, dry bean and pea, fishery and miscellaneous marketing cooperatives.
(5) Includes trucking, cotton ginning, storage, grinding, etc. related to the marketing of farm products and the sales of farm supplies.

How did changes in co-ops' NVA compare to changes in co-ops' net business volume? Year-to-year changes in NVA were somewhat different from changes in net business volume. Co-ops' NVA increased 12.5 percent from 1994 to 1995, while net business volume was up only 5 percent. However, NVA increased only 2.3 percent from 1995 to 1996, while net business volume increased 13.2 percent, mainly due to increased marketing of grains and oilseeds and higher prices. NVA was up 1.7 percent in 1997 and net business volume was about the same as in 1996.

Gross and net value-added are also used to measure the performance of other sectors of the economy. USDA's Economic Research Service (ERS) uses the value-added format to present the farm income accounts. According to ERS, the value-added format makes it much easier to discern what forces are driving the changes and trends in farm income. In addition, the value-added format is accepted and utilized internationally, thereby facilitating comparisons among countries.

The value-added contribution to the U.S. economy by the agricultural, or farm sector gives some perspective to the value-added contributed by farmer cooperatives. Net value-added for the U.S. agricultural sector totaled $85.3 billion in 1994, nearly 10 times the NVA of farm cooperatives (figure 2). In 1995, NVA contributed by the agricultural sector dropped to $74.8 billion, due to lower output of crop and livestock volume. In 1996, it reached $96.3 billion, before dropping to $92.8 billion in 1997.

In 1997, marketing cooperatives accounted for nearly 68 percent of co-ops' gross and net

value-added, farm supply, 28 percent and related-service cooperatives, 4 percent. Marketing cooperatives increased their share of both GVA and NVA during 1994-97. In 1994, marketing cooperatives accounted for nearly 64 percent of NVA and farm supply cooperatives, 31 percent.

Wages and benefits accounted for 68 to 73 percent of marketing cooperatives' total NVA during the study period In comparison, wages arid benefits ranged from 61 to 64 percent of total NVA for farm supply cooperatives. Marketing cooperatives, especially those involved in further processing of farm commodities, generally employed more full- and part-time employees than did farm supply cooperatives. Interest paid also contributed a larger proportion to NVA for marketing cooperatives than for farm supply cooperatives. Consequently, net income before taxes contributed a noticeably larger proportion to NVA for farm supply cooperatives than for marketing cooperatives.

NVA by type of cooperative

Dairy, fruit/vegetable and grain/oilseed cooperatives accounted for $3.9 billion, or 45 percent, of co-ops' total NVA in 1994 and $4.5 billion, or 44 percent, in 1997. Each contributed about equally during the period. Although their total contribution to NVA increased during the study period, their proportion decreased due to increased contributions to NVA by livestock, poultry, sugar and "other marketing" cooperatives (table 2).

Wages and benefits major component of NVA

Total co-ops' wages and benefits averaged nearly 68 percent of total NVA during 1994-97. Net income before taxes (NIBT) accounted for 23 percent and interest paid the remaining 9 percent (table 3). Wages and benefits averaged the largest proportion (all above 80 percent) of net value added for "other service," poultry and sugar cooperatives. The proportion was in the 70s for rice, fruit/vegetable, "other marketing" and dairy cooperatives.

Net income before taxes was the major component of NVA for cotton ginning and cotton cooperatives, at 64 percent and 46 percent, respectively. Among the types of cooperatives listed in Table 3, NIBT was the lowest for sugar, rice and poultry cooperatives. What does this mean? It's difficult to say without further study of the industry in which the various types of cooperatives compete. For example, a low contribution of NIBT could be due to cooperative objectives or goals, such as bargaining versus processing, competition with other co-ops or investor-owned firms within the industry, management and/or cooperation with other cooperatives.

The proportion of interest paid to NVA was highest among cotton, sugar, livestock and grain/oilseed cooperatives, all above 13 percent. Interest paid, of course, is a function of debt and would be expected to contribute a larger percentage to NVA among co-ops highly leveraged and/or financing a large inventory.

Where can cooperatives improve value-added?

In recent years, much interest has been generated by farmers in adding value to their raw commodities through greater involvement in marketing and/or further processing. In many cases, this vertical integration further up the marketing chain has been accomplished through the organization of new generation cooperatives, like United Spring Wheat Processors, 21st Century Alliance and U.S. Premium Beef. These co-ops add more value to the raw commodities than do the traditional buy-sell ones. However, there is much more value that farmer cooperatives can add to what they market. A popular vehicle for accomplishing this is the formation of alliances, particularly joint ventures, involving other cooperatives.

Co-ops' Gross and Net-Value Added: 1994-97

To examine how the various types of cooperatives compare in adding value to the products and services they provide, net value-added per dollar of total sales was calculated (table 4). Net value-added per dollar of sales ranged from a low of 6 cents for grain/oilseed cooperatives to a high of 21 cents for poultry cooperatives. Cooperatives with lower ratios tend to be traditional buy-sell. Several of the poultry cooperatives, which includes eggs, turkeys, ratite and other related products, are highly involved in processing and other value-added activities.

What are the implications?

Farmer cooperatives have been increasing the value of traditional raw commodities they market as well as the supplies and services they purchase. However, according to the NVA per dollar of sales, it appears there is considerable potential for adding value, especially in the marketing of grains/oilseeds, milk and cotton. If farmer cooperatives could, on average, add even an additional $.01 of net value-added per dollar of sales through greater involvement in processing and other value-added activities, net value added could be increased by more than $1 billion.

Farmer cooperatives have the opportunity to enhance their members' income through greater involvement in value-added activities, not only by doing more processing and marketing of the volume of commodities moving through their cooperatives, but also by increasing the share of products marketed and supplies purchased through cooperatives. In 1997, farmer cooperatives marketed only 31 percent of the farm products moving off the farm and 30 percent of the major farm supplies—feed, seed, fertilizer, petroleum and crop protectants — purchased by farmers.


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