The Co-operative Movement of the Russian Far East

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2.2. Fundamental principles - FARMER COOPERATIVES VERSUS COLLECTIVE FARMS American Studies on Ukrainian Problems Vitaly V. Zinovchuk

The main reason for farmers to participate in cooperatives is that they can achieve effects which are impossible or possible in lesser extent when farmer acts alone. This is the primary, personal incentive motivating farmers to initiate group action or to join already existing associations. The effect of farmers' united efforts, of course, could be understood in a very broad scale: from political influence for governmental decision making up to one's enjoying human communications or satisfaction in personal contribution in the social development of rural community. However, the farmer cooperative is a business organization; that's why the expected effect of cooperative activities usually takes a shape of a concrete economic benefit.

From an economic point of view, there are some reasons for farmers to cooperate, or in other words, there are economic justifications for farmer cooperatives. All these reasons are associated with the imperfect marketing system in agriculture. Because of the complexity of agriculture as a production system, it is very difficult for producers to pay enough attention to both production and marketing of their products. Farm supplies also need special business efforts and time. Producers feel that they are being exploited, and someone else excessive profits at farmer's expense. Many producers are frustrated with their inability to promote their products. And finally, supplies and services can be too expensive or even not available for farmers. Farmers can solve these problems by uniting business efforts. The main advantages of farmer cooperation are following:

1. Benefit from economies of size. Large scale of business operations give farmers some obvious advantages. For example, fixed costs of management are spread over greater volume, larger machines use less labor per unit, larger storage structures cost less per unit of capacity, etc. [Schrader, p.125]. Cooperatives help farmers avoid negative influence of competition. This also brings additional economic benefits.

2. Capture profits from another level. In a certain commodity marketing system returns per unit of capital are not equal at the different levels of .this system. For instance, for some products their processing can bring more returns per capital than their production. Without cooperatives farmers are isolated from the benefits of capitalization at further stages of their commodity system. Entry into a cooperative enterprise at this further stage could result in higher returns to the capital for farmers involved in this business. Some investor-oriented firms have closed their processing plants leaving the producers without of market.

3. Access to markets, supplies, and services. Of course, farm producers can get this access through investor-oriented firms. But the cooperative channel is usually more reliable and favorable because it is controlled by farmers themselves. It makes cooperatives especially important in the marketing of perishable products, for example, for dairy, fruit, and vegetables products.

4. Gain from coordination. Cooperatives give an opportunity for farmers to coordinate inputs/ production and marketing. Besides marketing advantages, through cooperatives farmers can harmonize their production with processing. A relatively constant and reliable flow of product (usually based on the contract coordination) allows for cooperative processing facilities to operate at minimum cost.

5. Sharing risk. Reducing individual uncertainty by risk sharing within the group of similar farm producers is a very important motive for farmers to start or enter an already existing cooperative. But risk sharing through cooperatives is not only an insurance program. The extension of farm business into processing can guarantee a certain stabilization of income even when-raw product prices are decreasing.

6. Market power. Participation in cooperative business provides farmers greater power in marketing channel of their commodity. With higher degree of monopoly power cooperatives receive some important advantages for their members. Some special applications of antitrust laws for farmer cooperatives make the participation in cooperative business very attractive for agricultural producers.

What makes farmer cooperatives the unique economic organization ? How are they distinguished from other types of business ventures ? In order to answer these questions, it is necessary to consider specific features of cooperative organizations, which are called fundamental principles of cooperatives. A cooperative principle can be defined as a governing law of conduct, a general or fundamental truth, a comprehensive or fundamental law which reflects the essential objectives and uniqueness of the cooperative form of business [Barton, p.23].

Cooperative principles must be distinguished from cooperative policy and cooperative practice. A policy is a direction which has been chosen by leadershiprof the cooperative to achieve the goal of cooperation most effectively. An example of cooperative policy could be the decision of some cooperatives to limit volume of stock capital or membership. Frequent action or usual business method for the cooperative is called a practice. For example, to pay patronage refunds for patrons who are not members of the cooperative is a practice for some cooperatives. Unlike cooperative principles, policies and practices do not have the universal character. They are a result of decision making process at the level of an individual cooperative or an association of cooperatives. Of course, different cooperatives can independently use the same policy and practice. More importantly the application of the same principle can logically result in different policies and procedures. These differences may follow from different circumstances (e. g. different size farms or perishibility of product, or personalities of members).

Principles on which farmer cooperatives are based, should not be considered as something given once and forever. They are as dynamic as the environment of cooperative business. Changing production and market realities lead to a revaluation for cooperative principles. Some of them became less important for cooperative organization, some have to specify their meaning, some come into a conflict with changed environment and loose their actuality. Thus the evolution and variety of approaches for classification of principles could be explained.

As for earlier period, U.S. farmer cooperatives as all over the World usually based their activities on the Rochdale Society's principles [Vitaliano, рЛ45]. In onodern interpretation they could be reminded as follows:

Open, voluntary membership
Democratic member control, equal voting
Equity is provided by patrons, and is to be limited
Limited interest, if any, on equity capital
Net surplus returns to user-owners as patronage refunds
Honest and moderate risk business practices
Political and religious neutrality
Promotion of members' education
Cash trading
Use of market prices.

Although the Rochdale principles accumulated the best practices of different cooperative organizations which existed in the first half of the last century, they still have their importance for nowadays. These principles, to a more or less extent, could be found in every cooperative venture. Their magnitude is connected with the fact that their founders succeeded in reflecting basic values of cooperation such as equality, freedom, economic justice, openness, democracy, mutual assistance, education which make a cooperative a special forms of business organization.

The Rochdale principles were very popular among first farmers cooperatives. Some of them in fact were recognized only as important policy. They have provided the basic for modern cooperative principles. The experience of U.S. cooperative movement gave an opportunity to find more clear and laconic forms to express the fundamentals of cooperative organization which could be seen as a further evolution of its principles. After long and comprefensive discussion they were formulated as following:

Operation at cost
Member control
Member ownership
Limited returns on equity capital
Duty to educate [Abrahamsen 1976, p.54].

As the main purpose of any cooperative is to increase incomes or economic well-being of its members by operation or service at cost, it is a key feature of cooperative business enterprise. The goal of any other business organizations is to make profit for their investors. The primary purpose of a cooperative is to make profit for its patrons or users of the cooperative, not for its investors [Roy, p.6]. To operate at cost for cooperative means to distribute their net income to their members proportional to their patronage or, in other words, use of their own cooperative enterprise.

Democratic control is based on the fact that those who use the organization and are to benefit from it, should control it. In the usual investor-oriented corporation control is associated with amount of stock held. But the primary objective of cooperative is not profit for investors but service-at-cost. For this reason, capital cannot be a basis of control in the cooperative. Participation of cooperative members in making principle decisions is usually founded on equitable basis: one-member, one-vote. The reason for that is quite obvious. If money will be the basis of control in the cooperative, the most important decisions would be in favor of investors, not for the benefit of all users.

A fundamental distinction of cooperatives is that these organization are owned by those persons who use their services. Member ownership and member control are interrelated. Due the fact that member-users are at the same time owners of the business, cooperatives provide an effective system of control built "from bottom to above". That is an ideal model for realizing interests of agricultural producers.

Persons who invest in other types of business are interested in making as large a profit on the dollars invested as possible. Capital assumes all of the risk. In cooperatives, members, not capital, assume the major business risk themselves through lower returns on patronage and/or lose of capital. They will take less for their products or their equity will be decreased if the operations of the cooperative have not been successful. And, from another hand, the distribution of cooperative benefits,has the:.same logic: the advantage is primarily given to those who patronize the cooperative, and the returns on investments are limited or nonexistent. That is essential to fulfilling the distributing benefits according to use.

Because the cooperative is a unique form of business organization involving members in the decision making process and depends on their perfomance of certain managarial functions, there is a special need to education members. Member education is important to achieving each cooperative principle. Education creates the understanding required for cooperatives to make intelligent and informed decisions [Knutson, p.40]. However, some scholars argue that duty to educate is a desirable practice that improves operation rather than a fundamental principle of cooperation [Voorhis, p.ll].

The most recent (1987) and vital advancement in the statement of cooperative principles was in a U.S. Department of Agriculture report to U.S. Congress that defined cooperatives as user oriented businesses. These principles represent the most acceptable and efficient fundamental truths or laws leading to the creation and operation of agricultural producer's joint activities in agribusiness. The three principles based on the user oriented firm as applied in the United States are:

1. User-benefit principle. Benefits are returned to users by:
a) patronage refunds or distributions of net income according to member's business volume;
b) favorable prices given by lower prices for supplies and services and higher prices for products marketed and
c) access to market, supplies, and services that would be unlikely without joint action.

2. User-owner principle. Ownership is obtained by:
a) by direct investment;
b) retained patronage refunds;
c) per-unit-capital-retains or reduction of payment to the member for each unit marketed through the cooperative.

3. User-control principle. Control by members can be achieved in three ways:
a) democratic voting or one-member, one-vote;
b) voting proportional to patronage;
c) or even voting proportional to ownership.

Some new contributions can be recognized in the latest interpretation of cooperative principles. These new principles united some cooperative practices which before were promulgated as a cooperative principle. For example, limited returns on capital now is included in the user-benefit principle. Also there is a new understanding of user-control principle. Users can provide the control of their organization also on the basis of proportional voting. Recognition that this is a result of the need to stimulate investments in cooperative interprise by their members. Proportional voting is not associated with reducing member control over cooperative business compared with democratic or equal voting. It only redistributes a voting power with emphasis on use of the organization rather than on membership [vitaliano, p.147].

Cooperatives are corporate organizations but they are principally distinguished from corporations oriented to the investors (Table 11). The main difference is the purpose of

Table 11. The principal differences between investor-oriented
firms and cooperatives

Subject of difference Investor-oriented firms Cooperatives
1. The purpose of the organization Generally to generate profits for investors To serve owner-members
2. Who owns and controls business? Stockholders User-members
3. The right to be an owner of the business Given to any person who is able to buy a share in common stock Given only to qualifying patrons
4. Voting rights in principal decisions Proportionally to ownership of common stock Usually one-member, one-vote
5. Returns on capital No limitations Usually limited
6. Distribution of benefits According to individual share in common stock According to patronage
7. Taxation To the corporation and to individual owners upon distribution Single taxation, either by the patron or by the cooperative.

the organization. While the corporation has a primary objective to provide profits to its stockholders, the cooperative is organized to serve the members who are the user-owners of the business. The investor-oriented corporation derives, its capital by issuing shares of stock that are purchased by investors. Capital of-the cooperative is obtained by direct contributions through membership fees or sale of stock, by agreement with members to withhold a potion of net income based on patronage, or through assesments on some regular basis such as per unit of product sold or purchased, or per acre, per COW, and SO ОП [ingalsbe 1989, p.7].

Cooperative stock is not created for trading on stock exchange. Generally, the prospect of increasing market value of cooperative stock is too insignificant compared with possibilities of other businesses. The reason is that net income is distributed on the basis of patronage rather than on the share of stock owned. The majority of cooperatives still prefer democratic voting system regardless of investment in cooperaive's stock. U.S. farmer cooperatives also enjoy some advantages given to them by federal and state legislation in taxation and antitrust regulation. All these differences identify cooperatives as unigue business organizations.