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
and David E. Cummins
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.
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:
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).
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.
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.