The Co-operative Movement of the Russian Far East

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2.7. Structural dynamics - FARMER COOPERATIVES VERSUS COLLECTIVE FARMS American Studies on Ukrainian Problems Vitaly V. Zinovchuk

Structural dynamics (changes in number, relative size and competitive relations) of farmers' cooperatives illustrates the necessity of adapting to sometimes radical changes in the economic environment. Such factors as new processing technologies, liberalization of transportation policy, or changing competition mainly cause changes in cooperative structure. Cooperatives have to respond to changing environment to make certain adjustments or to leave business. For example, declining number of grain and oilseed cooperatives during the last 20 years could be explained by difficulty to adjusting to new grain industry practices, unfavorable general macroeconomic changes, and affecting Federal farm programs. But the most significant factor has been unit train rates. New grain industry practices were oriented to grain originating from multiple sources around the world. But at the same time, farmer cooperatives were focused, naturally, only on domestic producer-members. It made them less competitive compared with other grain marketing firms. Rising interest rates made it difficult for cooperatives to get new credits. They had to use working capital to pay term debts. That was not appropriate for every association. And also, some Federal programs led to instability of grain market, forcing competition between cooperatives [Warman, p.4-5].

The general tendency is that U.S. farmer cooperatives become fewer and larger. During the last ten years the general number of cooperatives declined from 5,782 in 1984 to 4,244 in 1993 or 26.6% decline (Figure 25). Marketing cooperatives declined from 3,514 to 2,214 and farm supply cooperatives from 2,136 to 1,547. The increase of service cooperatives can be explained by reclassification of cotton ginning cooperatives, livestock shipping associations, and rice driers from marketing to service [Richardson, et al., p.26].

Membership of cooperatives also decreased from 4.8 million in 1984 to 4.0 million or 16.7% in 1993 (Figure 26). Mainly it was a result of the general decreasing number of farmers. This factor was especially meaningful because many farmers are usually members of more than one cooperative. But not only the decrease of farmers led to the drop in membership of cooperatives. There were also some factors to weaken farmers' positive attitude for cooperatives. They included decreases in instances of exploitation of farmers by unscrupulous agents; increased role of government protection and promotion programs, financial pressure on the farm causing a focus on short run price considerations; standardization of industry wide grading, measuring, and packing; well

Number of U.S. farmer cooperatives, 1984-1993.

Figure 25. Number of U.S. farmer cooperatives, 1984-1993.

Source: Richardson, Ralph M., et al. 1994. Farmer Cooperative Statistics, 1993. CS Service Report 43. Washington, D.C.: Rural Development Administration, Cooperative Service, USDA, p.26.

publicized failures of some large cooperatives; maturation of the cooperative as an institution; and attitudinal changes of farmer and society as a whole [ACS Report to Congress, P.2-3]. Also it should be noted that increasing sizes of farms (it is also a clear tendency) provides the volume to support independent marketing.

In spite of decreasing number and membership of cooperatives, their net business volume is stable and even grew from $73.0 billion in 1984 to $82.9 billion in 1993 or 13.6% (Figure 27). Dairy, livestock, poultry, sugar, fruits and vegetables should be noted as marketed agricultural products with increasing business volume. Cooperative marketing of cotton, grains and oilseeds, rice had a decreasing business volume for the period. The volume of farm supplies, excluding petroleum, was increasing at the same time. For the last ten years average business volume per one member had stable tendency to grow: from $15,086 in 1984 to $20,599 in 1993 or 36.5%. As for net income of farmer cooperatives, its amount also increased from $1.009 billion in 1984 to $1,358 in 1993. There was a considerable variety of the net income in different years. The peak was in 1989 ($1.851 billion), and the lowest level was in 1986 ($0.688 billion). Restructuring resulted in the growth of very large local cooperatives. For instance, three grain marketing cooperatives in Iowa have over 10 millions bushels of

Membership in U.S. farmer cooperatives, 1984-1993

Figure 26. Membership in U.S. farmer cooperatives, 1984-1993

Source: Richardson, Ralph M., et al. 1994. Farmer Cooperative Statistics, 1993. CS Service Report 43. Washington, D.C.: Rural Development Administration, Cooperative Service, USDA, p.27.

U.S. farmer cooperatives' net business volume, 1984-1993.

Figure 27. U.S. farmer cooperatives' net business volume, 1984-1993.

Source: Richardson, Ralph M., et al. 1994. Farmer Cooperative Statistics, 1993. CS Service Report 43. Washington, D.C.: Rural Development Administration, Cooperative Service, USDA, p.26.

storage capacity and facilities that load three unit trains per day. As for supply business, a large local in North Dakota had $21,000,000 in sales and total assets of $10,000,000 in 1993. As a result of locals' growth many of federated cooperatives have merged or even liquidated [Cobia 1994, p.14].

For the cooperatives which decide to stay in business by responding to changing economic environment, there are three main options for further survival - to grow internally by constructing facilities and expanding services, or to grow externally by acquiring an ongoing operation, or to look for favorable alliances with other business organizations keeping their economic independence (Figure 28). The main advantage of growth is associated with economies of size. Larger enterprise gives an opportunity to get higher marketing and political power, to spread certain fixed costs, to attract and use more qualified and motivated management and employees, and to obtain needed financial strength.

However, the growth of cooperatives has certain negative aspects. When a cooperative becomes larger, its members may view this change as weakening their control over the business. Personal relationships can be missed with geographical expansion and serving multiple markets. The system of communications and business operations becomes more difficult for members to understand. This problem is especially painful for small locals with traditionally close relationships. In order to be more effective these organizations need reorganization, such as merging with other cooperatives, but it can destroy members' enjoyment of frequent personal contacts with other farmer members and management. In larger cooperatives, members have to delegate their control power to district representatives and/or directors. The voting structure and management is more complicated. In spite of all these disadvantages cooperatives have to expand their size.

There exist three possible directions for cooperatives to grow internally. First, horizontal growth, is associated with the expansion of an already existing line of business, combining similar functions and services. For example, the development of a large grain elevator cooperative, in which small local elevators are brought under one management, or when the supply cooperative develops a chain of its retail shops. That is the simplest way to achieve economies of sizes.

Second, vertical growth, occurs when cooperatives enter into and harmonize successive vertical stages of production and marketing of the same kind of produce. For example, when the fruit packing cooperative builds a canning facility, or a supply cooperative starts production of any farm input, e.g. fertilizers, chemicals, etc. Vertical integration gives an opportunity to avoid middle men in the marketing channel, but at the same new problems can appear. Vertically growing cooperatives are faced with new functions such as transportation, processing or manufacturing; higher production and market risks; need for new investments; and more qualified management. Many cooperatives prefer to grow both horizontally and vertically.

The third direction of internal growth, conglomeration, occurs when cooperatives begin a principally new line of business which do not have any direct relation to existing, agriculturally-based activities of the cooperatives besides managerial and financial functions. Production of manufacturing goods by agrimarketing cooperatives, or selling of non-farm consumer goods in retail shops of farm supply cooperatives could serve as examples. In spite of certain advantages for cooperatives, conglomeration can lead to the conflict between interests of enterprise and cooperative members. The important point is that growth through conglomeration be recognized as an organizational tool for better serving the needs of farmer members [French, et al., p.140]. In order for restructuring policies to be understood, cooperatives must improve their systems of member education.

In order to survive and develop their business, cooperatives can choose the option of external growth. This means that they will unite or be united with other business organizations. Cooperatives can find several reasons for that. From a marketing point of view, external growth usually brings quick expansion of market areas, and access to monopolized production and marketing facilities and services. External growth is usually not connected with increasing competition, higher construction and operating risks. From a financial point of view, external growth is attractive as a means to obtain relatively easy credits for an established activity, non-cash exchange for stocks, working capital or even losses for tax purposes. Sometimes joining with another company is the most feasible way to rescue a failing operation and the protection loaned funds by a federated cooperative [Vilstrup, et al., p.383]. However, external growth results in a more complicated business structure and system of management. Merging cooperatives may also have different equity profiles and redemption plans. Other disadvantages of cooperatives' external growth are common with any other business firms.

The way of external growth in which two or more cooperatives are united but only one keeps its identity and other loses it, is called a merger. The general procedure of the merging process consists of some typical stages (Figure 29). In all cases, merging cooperatives must be authorized by appropriate.statutes in order to proceed. The main problem of such reorganization is how cooperatives must transfer owner equity. To get a consensus, a merger plan is to be worked out. This plan must be prepared by all boards of cooperatives which are going to be merged, or by a special committee selected by the boards. Each member must be informed about the forthcoming merger, including full text of the plan, and the time and place of meeting where the plan will be considered. The plan must be adopted by the majority (usually two-thirds) of the membership.

The procedure for unification of cooperatives which prefer consolidation is quite similar. The distinguishing feature of such of external growth is the fact that all cooperatives are losing their identity, and a new organization is to be formed instead. Cooperatives usually consolidate when they have approximately equal size and market influence, and participants do not want to be a part of another organization. The main reason for consolidation is to get a new start — to eliminate weaknesses which existed before the consolidation. But consolidation is generally a more expensive reorganization than a merger or acquisition.

The purchase of another business, or acquisition, has become popular among the cooperatives. Some of the considerations of this kind of expansion are the same as for merger or consolidation. But acquisition presents more opportunities for the surviving cooperative in formation of organizational structure, changing management and employees, and eliminating duplicate services. Purchased business gives cooperative members access to new services, certain marketing advantages (Box 15), and sometimes qualified management and trained personnel. Usually acquisition is a relatively simple action decided by directors of acquiring and acquired firm. In some cases, they may wish to give members the final word in approving this action.

Box 15

Case of Wisconsin Dairies Cooperative (Baraboo, Wisconsin)

A classic example of external growth philosophy can be found in Wisconsin Dairies' decision to acquire the assets of Foremost whey processing from McKesson Corp. These processing plants were attractive to the cooperative, which produced large volumes of whey and whey protein as by products from its cheese plants. Cheese production accounts for nearly 72% of the cooperative's $548-million annual sales. The Foremost purchase proved to be an even better acquisition than had been hoped for at the time, due in part to the cooperatives' continued growth in cheese production. Considerable benefit of the Foremost acquisition was also that it gave the cooperative control of a once nationally known consumer brand name. Before that, the cooperative only used that brand name on whey products. It has licensed the "Foremost" name to other companies in the Western United States, Hawaii and Mexico for use on consumer dairy products. At the end of 1994, members of Wisconsin Dairies and Golden Guernsey Dairy Cooperative (Milwaukee, Wisconsin) voted to consolidate and create a new cooperative, Foremost Farms USA, with $778 million in annual sales and 5,500 members. Consolidation will improve milk assembly, processing and marketing-activities for member-owners. For example, the consolidation with Golden Guernsey gives for members of Wisconsin Dairies a well-known, regional brand name for fluid milk and soft dairy products [Campbell, p. 13].

Cooperatives can develop surviving strategy without merging, consolidation or acquisition. Unions, or alliances, with other cooperative or non-cooperative business organizations while preserving full identity of all engaged participants, can be considered an acceptable alternative. In this report, some principal forms of alliances for cooperatives have already been mentioned (federation of cooperatives or federated cooperatives, marketing agencies-in-common, and joint ventures). The main objectives for cooperative entering into an alliance is to achieve higher efficiency in operation, mutually beneficial vertical coordination, new activities, access to new market, increasing market power, reducing competition, elimination of duplicate services and overlapping market areas. The case of overlapping sales areas by local CENEX cooperatives in North Dakota illustrates these potential savings (Figure 30). One of the successful strategic alliances for cooperatives, which presented an opportunity to save million of dollars per year from elimination of duplicate services, was found in the joint venture of two large cooperatives headquartered in St. Paul, Minnesota (Box 16).

Box 16

The case of CENEX/Land O'Lakes

Two of the biggest supply cooperatives in the Northern States, headquartered just 25 miles from one other, were fierce competitors, duplicating services in six of the fifteen states they served. There was a good deal of overlap in both the trade area and in the cooperatives served by the two organizations. Both organizations were financially healthy and could bring specific market and financial strength to a new operational agreement. The farm supply businesses of the two cooperatives were similar in size; the annual sales of each were about $1 billion. Leaders of CENEX and Land O'Lakes recognized that a joint venture might be the best solution for both cooperatives. A joint venture would allow them to share major benefits in the areas of economic and operational savings. According to the agreement, CENEX was to manage petroleum, and Land O'Lakes had dominance in feed and seed, with a shared operation of the agronomy business. The main advantages of the joint venture came from elimination of duplicate facilities and efforts which in turn led to improved production, manufacturing, and distribution efficiency; increased ability to compete with larger, noncooperative agribusinesses; the ability to remain competitive in a difficult economic environment; and additional flexibility in dealing with future developments [Hofstad, pp.126-128].

However, not all cooperatives are able to survive in changing economic environments. Some of them have to cease business, liquidate property, and distribute equity, if any. The main contributing factors for liquidation of cooperatives can be recognized as one or more of the following: the need no longer exists; inability to realize objectives; incompetent management; or finishing the term for which the cooperative was created [Abrahamsen, pp.386-387]. The liquidation procedure for cooperatives is regulated by state law. For example, according to the Minnesota Cooperative Law (Chapter 308A) liquidation may be authorized by cooperative members at the general meeting. The notice of the members' meeting must include a statement that the disposition of the property of the cooperative will be considered at the meeting. If a quorum is present, the resolution approving of the liquidation is adopted by two-thirds of the votes cast or, for special cases, by number or voters required in articles of incorporation or bylaws. Property of cooperative should be appropriated among members after covering all debts and obligations of the cooperative. Most cooperative laws are carefully written to protect members in the liquidation process [Vilstrup, et al., p.394].

In the future the role of agricultural cooperatives must change in response to the opportunities and challenges created by dynamic external forces and changing member requirements. Therefore, cooperatives must remain flexible to meet the changing role without loosing sight of fundamental principles of user benefits, ownership, and control. They will be needed for ordinary farmers to capture advantages of large scale processing and marketing.

A favorable environment for the development of cooperatives is necessary. This environment includes freedom of contract, equitable tax laws, antitrust legislation that permits farmers to develop equitable market power, trained facilitators and organizers, education of members, and the transfer or compensation for the burden of social programs that have traditionally been carried by agricultural enterprises.