Handbook of Research on Cooperatives and Mutuals 1802202609, 9781802202601

Table of contents :
Front Matter
Copyright
Contents
Contributors
Acknowledgements
Introduction to the Handbook of Research on Cooperatives and Mutuals
PART I THEORY
1. The economic theory of agricultural and consumer cooperatives
2. The new institutional economic theory of cooperatives: taking stock, looking ahead
PART II ORGANIZATION
3. Organizational costs in agricultural cooperatives: comparison of European and US approaches
4. New generation cooperatives: what we know and need to learn
5. Cooperative business structures: access to capital via equity and credit
PART III GOVERNANCE
6. Social capital and governance of agricultural cooperatives
7. Leadership in agricultural cooperatives
8. Measuring cooperative performance using organizational effectiveness and member participation
9. A framework for understanding the role of producers in governance of supply chains
10. The role of the farmer and their cooperative in supply chain governance: a Latin American small producer perspective
11. The role of the farmer and their cooperative in supply chain governance: a US perspective
12. The role of the farmer and their cooperative in supply chain governance: an Irish perspective
PART IV CROSS-SECTOR APPLICATIONS
13. Risk and uncertainty in cooperative business
14. The role of the marketing year and its implications for business strategy and finance
15. Towards a framework for formulating cooperative strategy
16. Profit distribution and financial performance in cooperative firms
17. The implications of taxation and tax policies for cooperatives and members
18. Capitalization, equity, and growth in cooperative firms
PART V SOCIAL, ENVIRONMENTAL AND ECONOMIC IMPACTS
19. Differential economic impacts for cooperative business structures: an application to farmer-owned cooperatives in New York State
20. Agricultural cooperatives and the transition to environmentally sustainable food systems
21. The development of cooperative-designed indicators for the SDGs
22. African American cooperatives: from economic survival to economic justice
PART VI REGIONAL AND CULTURAL FEATURES
23. Recent developments among dairy cooperatives in the European Union
24. Social relations and cooperative development in rural China
25. Farmer cooperatives in China: frontiers in development and research
26. Agricultural cooperatives in Latin America: the case of dairy
27. Unique features of agricultural cooperatives in sub-Saharan Africa
PART VII SPECIAL SECTORS AND TOPICS
28. Consumer cooperatives: purpose and possibilities
29. Product innovation and promotion of value-added products via marketing cooperatives
30. Mutuals
31. Worker cooperatives: solidarity at work
32. Multi-stakeholder cooperatives
Epilogue: future directions on research and education on cooperatives and mutualism
Index

Citation preview

HANDBOOK OF RESEARCH ON COOPERATIVES AND MUTUALS

We dedicate this book to Professor Michael L. Cook, who continues to have a profound influence on the cooperative literature and is an extraordinary colleague, teacher, and mentor.

Handbook of Research on Cooperatives and Mutuals Edited by

Matthew S. Elliott Ph.D., Associate Professor, Ness School of Management and Economics, South Dakota State University, USA

Michael A. Boland Ph.D., Professor of Agricultural Economics and the Koller Endowed Chairholder in Agribusiness Management and Information Technology, University of Minnesota, USA

Cheltenham, UK • Northampton, MA, USA

© Editors and Contributors severally 2023

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2022950873 This book is available electronically in the Economics subject collection http://dx.doi.org/10.4337/9781802202618

ISBN 978 1 80220 260 1 (cased) ISBN 978 1 80220 261 8 (eBook)

EEP BoX

Contents

List of contributorsviii Acknowledgementsxvi Introduction to the Handbook of Research on Cooperatives and Mutuals1 Matthew S. Elliott and Michael A. Boland PART I

THEORY

1

The economic theory of agricultural and consumer cooperatives Jeffrey S. Royer

2

The new institutional economic theory of cooperatives: taking stock, looking ahead Matthew S. Elliott and Frayne Olson

PART II

9

22

ORGANIZATION

3

Organizational costs in agricultural cooperatives: comparison of European and US approaches Constantine Iliopoulos and Michael L. Cook

4

New generation cooperatives: what we know and need to learn Jason Franken and Jasper Grashuis

5

Cooperative business structures: access to capital via equity and credit Christopher J. Kopka

52 83 100

PART III GOVERNANCE 6

Social capital and governance of agricultural cooperatives Jerker Nilsson

116

7

Leadership in agricultural cooperatives John L. Park, Diane B. Friend, Matthew T. Manley and Barry L. Boyd

135

8

Measuring cooperative performance using organizational effectiveness and member participation Sanjib Bhuyan and Kostas Karantininis

v

148

vi  Handbook of research on cooperatives and mutuals 9

A framework for understanding the role of producers in governance of supply chains Michael A. Boland, Noreen Byrne, Bridget Carroll, Olive McCarthy, Stephen Pitts, and William Secor

10

The role of the farmer and their cooperative in supply chain governance: a Latin American small producer perspective Stephen Pitts

172

11

The role of the farmer and their cooperative in supply chain governance: a US perspective Michael A. Boland and William Secor

185

12

The role of the farmer and their cooperative in supply chain governance: an Irish perspective Bridget Carroll, Olive McCarthy, Noreen Byrne, Michael A. Boland and Michael Ward

166

193

PART IV CROSS-SECTOR APPLICATIONS 13

Risk and uncertainty in cooperative business Frayne Olson and Matthew S. Elliott

14

The role of the marketing year and its implications for business strategy and finance Michael A. Boland

15

Towards a framework for formulating cooperative strategy Matthew S. Elliott, Frayne Olson, and Jasper Grashuis

236

16

Profit distribution and financial performance in cooperative firms Phil Kenkel, Brian Briggeman, and Keri Jacobs

252

17

The implications of taxation and tax policies for cooperatives and members Phil Kenkel, Keri Jacobs, and Brian Briggeman

265

18

Capitalization, equity, and growth in cooperative firms Keri Jacobs, Phil Kenkel, and Brian Briggeman

277

PART V

209

230

SOCIAL, ENVIRONMENTAL AND ECONOMIC IMPACTS

19

Differential economic impacts for cooperative business structures: an application to farmer-owned cooperatives in New York State Todd M. Schmit, Frederick C. Tamarkin, and Roberta M. Severson

292

20

Agricultural cooperatives and the transition to environmentally sustainable food systems Jos Bijman and Julia Höhler

313

Contents  vii 21

The development of cooperative-designed indicators for the SDGs Fiona Duguid and Daphne Rixon

333

22

African American cooperatives: from economic survival to economic justice Jessica Gordon Nembhard

354

PART VI REGIONAL AND CULTURAL FEATURES 23

Recent developments among dairy cooperatives in the European Union Julia Höhler and Jos Bijman

371

24

Social relations and cooperative development in rural China Qian Wan, Eric Micheels, and Murray Fulton

389

25

Farmer cooperatives in China: frontiers in development and research Qiao Liang and Ziming Han

406

26

Agricultural cooperatives in Latin America: the case of dairy Alejandro Galetto and Gustavo Rossini

422

27

Unique features of agricultural cooperatives in sub-Saharan Africa Nicola Francesconi, Fleur Wouterse, Michael L. Cook and Gashaw T. Abate

440

PART VII SPECIAL SECTORS AND TOPICS 28

Consumer cooperatives: purpose and possibilities Zoë T. Plakias and Jason S. Entsminger

29

Product innovation and promotion of value-added products via marketing cooperatives Kristin Kiesel, Sean Kiely, and Rachael E. Goodhue

454

474

30 Mutuals James M. White

494

31

Worker cooperatives: solidarity at work Sonja Novkovic and Jessica Gordon Nembhard

517

32

Multi-stakeholder cooperatives Margaret Lund and Sonja Novkovic

531

Epilogue: future directions on research and education on cooperatives and mutualism Matthew S. Elliott and Michael A. Boland

549

Index553

Contributors

Gashaw T. Abate is a research fellow in the Markets, Trade and Institutions Division of the International Food Policy Research Institute (IFPRI). His research focuses on agricultural value-chains, producers organization, and program evaluation. Sanjib Bhuyan is an associate professor of agricultural economics at Rutgers University, New Jersey, USA. He is also visiting faculty at the Instituto Agronomico Mediterraneo de Zaragoza (IAMZ), CIHEAM, Zaragoza, Spain. Dr Bhuyan’s research and teaching interests are in the economics of food industries, focusing on how food is marketed and consumed and its health impacts; how food industry participants, including cooperatives, behave; and how food industry organization and behavior impacts food marketing systems. Dr Bhuyan has published numerous articles in world’s leading agricultural and applied economics journals, such as the American Jr. of Agric. Econ., Jr. of Agric. Econ. (UK), Canadian Jr. of Agric. Econ., Jr. Applied Econ., Indian Jr. of Econ and Dev., Competition and Trade, and others. In addition, he has authored or co-authored multiple book chapters. Dr Bhuyan has served as an associate editor and/or book review editor for several leading journals in agricultural and agribusiness economics, development economics, and management sciences. He regularly serves as a reviewer of manuscripts for academic journals and academic book chapters. Jos Bijman is an associate professor of cooperative organizations in the Business, Management and Organisation Group, Wageningen University, The Netherlands. He teaches a course on the evolution and organizational characteristics of (ag) cooperatives. His research focuses on business collaboration, inter-organizational relationships in agrifood value chains, and sustainable business models. He is an expert on the evolution of cooperatives and producer organizations in the agrifood sector, in both developed and emerging economies. He has managed multiple national and international research projects on agricultural cooperatives and producer organizations. Michael A. Boland holds the Koller endowed professorship in agribusiness management at the University of Minnesota. He teaches classes on cooperatives (in the law school and agricultural school) and agricultural supply chains, and a graduate course in agribusiness management at the Carson School of Management. Mike serves on numerous state cooperative council planning committees and has worked with more than 100 cooperative boards globally on educational programs. His research program is focused on the governance of agricultural supply and value chains and the role of participants and stakeholders. Barry L. Boyd is an associate professor in the Department of Agricultural Leadership, Education, & Communications (ALEC) at Texas A&M University. He holds the Thaman Professorship in Undergraduate Teaching Excellence. Dr Boyd earned his doctorate from Texas A&M in 1991 with an emphasis on leadership education and instruction. He teaches courses on personal and organizational leadership development, developing youth leadership organizations, and applied ethics in leadership. Dr Boyd’s research includes teaching and viii

Contributors  ix assessing critical thinking and using critical thinking in ethical decision-making. His team developed the QUEEN Model of Critical Thinking as part of a NIFA Higher Education grant. Brian Briggeman is a professor and director of the Arthur Capper Cooperative Center in the Department of Agricultural Economics at Kansas State University. His research interests include agricultural finance, agribusiness and cooperative management, and macroeconomic implications for US agriculture. He provides expert commentary on agricultural and rural-related issues to local, national, and international audiences. Dr Briggeman also teaches agricultural finance and cooperative management to undergraduates. Noreen Byrne is a researcher at the Centre for Co-operative Studies at University College Cork. Dr Byrne’s main research interests are in co-operatives, member relationship and member driven innovation, place-based development, agri-food and sustainability. She teaches on a range of undergraduate and postgraduate classes. Bridget Carroll is a researcher with the Centre for Co-operative Studies, University College Cork. Her research interests include cooperative development, legislation and regulation. Dr Carroll teaches on a range of undergraduate and postgraduate programs and is academic director of the Diploma in Corporate Direction (Food Business) developed for directors of agricultural co-operatives. Michael L. Cook is a professor in the Department of Agricultural and Applied Economics, Partridge Chair of Cooperative Leadership, and Executive Director of the Graduate Institute of Cooperative Leadership at the University of Missouri-Columbia, USA. Dr Cook’s research emphasizes cooperative firm theory and economic design of the cooperative life cycle framework, with an interest in identifying solutions to organizational inefficiencies. Cook leads the Graduate Institute of Cooperative Leadership (GICL), providing research-oriented executive education programs for senior management and boards of directors for US and international cooperatives. Fiona Duguid has a PhD from University of Toronto in Adult Education and Community Development. Fiona is currently assistant professor (term) in the Shannon School of Business, MBA program (Community Economic Development) at Cape Breton University, an adjunct professor in the Saint Mary’s University (SMU) Co-operative Business Management program, and a research fellow with the Centre of Excellence on Accounting and Reporting of Co-operatives (CEARC, SMU). She conducts research focusing on co-operatives, social economy, sustainability, and community economic development, while teaching about co-operatives, community economic development and research methodologies. She is the past-president of the Canadian Association for the Study of Co-operation (CASC). Matthew S. Elliott is an associate professor in the Ness School of Management and Economics at South Dakota State University. Matthew teaches an advanced agribusiness course and is co-founder of an Ag-tech start-up company focused on risk management. Matthew conducts research on farm and agribusiness management, cooperatives, contracts, ag land assessment policy, data analytics, and risk assessment. Matthew received a PhD in Agricultural and Applied Economics from the University of Missouri-Columbia in 2012. Jason S. Entsminger, PhD, is Assistant Professor of Entrepreneurship and Innovation and State Extension Specialist for Small Business at the University of Maine. His research includes

x  Handbook of research on cooperatives and mutuals investigations of collective intermediaries in the food system (food hubs), organizational identification and commitment in cooperatives, and the social networks of cooperative members. Work for this volume was conducted in part when he was Associate Director of the Northeast Regional Center for Rural Development and Assistant Research Professor at the Pennsylvania State University. Nicola Francesconi holds a PhD in Development Economics from Wageningen University and has 17 years of work experience, mostly based in Africa. He has worked for the CGIAR (IFPRI, CIAT and ILRI), CTA-EU-ACP, USAID-OCDC, and is currently working as a senior economist at the Royal Tropical Institute (KIT) in the Netherlands. Throughout his career Nicola has researched and trained more than 2,000 agricultural cooperatives across 15 sub-Saharan countries. Jason Franken is a professor of agricultural economics in the School of Agriculture at Western Illinois University. He teaches undergraduate and graduate courses in agribusiness management, marketing, futures and options trading, and agricultural law. Jason co-advises the Agribusiness Club and Alpha Zeta at WIU. His research is interdisciplinary by nature, drawing from economic, marketing, and decision sciences to understand the organization of supply chains and marketing channels for managing risk and adding value. Jason received his BS and MS from the University of Missouri and his PhD from the University of Illinois. He remains involved in his family’s farm in Central Missouri. Diane B. Friend is a leading researcher in cooperative governance and is a professor of agribusiness at Texas A&M University—Kingsville. After a 30+ year career in business and production agriculture, Friend now heads the Agribusiness department at the Texas A&M University System RELLIS campus and serves as advisor for the Ag Ambassador program in College Station, Texas. Friend also serves on the Texas Agricultural Cooperative Council on the education committee. Murray Fulton is professor emeritus in the Johnson Shoyama Graduate School of Public Policy and Fellow in Co-operatives and Public Policy with the Canadian Centre for the Study of Co-operatives, University of Saskatchewan. His current research is focused on governance in public agencies and cooperatives and on behavioral economics and its application to business strategy and public policy formation. Alejandro Galetto is Professor of Agribusiness and Farm Management in the Department of Business, Universidad Austral (Rosario, Argentina). He has 20+ years of experience in dairy and cooperatives both in Argentina and Latin America. Rachael E. Goodhue is Professor and Department Chair in Agricultural and Resource Economics, University of California, Davis. Her research interests include agricultural and agri-environmental policy and industrial organization, and agricultural production. Selected awards include Outstanding Published Paper—Specialty Crop Economics Discipline, Specialty Crop Economics section, Agricultural and Applied Economics Association; European Association of Agricultural Economics Best Policy Contribution; the Western Agricultural Economics Association Best Published Article; and the Verona d’Oenometric Award for the Outstanding Conference Paper. Jessica Gordon Nembhard is the author of Collective Courage: A History of African

Contributors  xi American Cooperative Economic Thought and Practice (2014) and 2016 inductee into the US Cooperative Hall of Fame. Jessica Gordon-Nembhard, PhD is also Professor of Community Justice and Social Economic Development in the Department of Africana Studies at John Jay College, City University of New York. She is a political economist specializing in cooperative and solidarity economics, community economic development, racial wealth inequality, and Black Political Economy. She is a member of the Cooperative Economics Council of NCBA/ CLUSA and the ICA Committee on Co-operative Research; a collective member of Grassroots Economic Organizing Newsletter (of the Ecological Democracy Institute of North American); an affiliate scholar with the Centre for the Study of Co-operatives, University of Saskatchewan; Faculty Fellow and mentor with the Institute for the Study of Employee Ownership and Profit Sharing at Rutgers University School of Management and Labor Relations; and a past board member of the Association of Cooperative Educators. Jasper Grashuis is an assistant research professor in the Division of Applied Social Sciences at the University of Missouri. His position is in part affiliated with the Graduate Institute of Cooperative Leadership, which is the premier provider of executive education to leaders and representatives of farmer cooperatives. Most of his research publications relate to the ownership, governance, strategy, and performance of farmer cooperatives. Other research interests include food and drink innovation, industrial organization, and spatial competition. Ziming Han is a PhD student in agricultural economics and management at the School of Public Affairs, Zhejiang University. He mainly focuses on research topics related to agricultural organization, cooperatives, digital economy and rural development. Julia Höhler is an assistant professor in the Business Economics Group of Wageningen University, The Netherlands. She teaches classes on corporate financial management, sustainability analysis, cooperatives, and business economics. Her research is focused on behavioral economics, cooperatives, and sustainability in the food supply chain. Constantine Iliopoulos serves as director of and senior researcher at AGRERI (www​.agreri​ .gr) and as Adjunct Professor of Strategy at the MBA in Agribusiness Program, Agricultural University of Athens, and is co-founder of the Co-opAbility Institute (www​.coopability​.org). Currently, he is a visiting research fellow at the Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Germany. His research program focuses on the organization, governance, and strategy of cooperatives, and he is widely published in academic journals. Dr Iliopoulos is regularly invited to speak at international events and has prolonged international experience in working with cooperative leaders and members in numerous countries to co-design solutions to pressing organizational challenges. Keri Jacobs is an associate professor of agriculture and applied economics in the College of Agriculture, Food and Natural Resources at the University of Missouri. She holds the MFA Chair in Agribusiness and is a fellow of the Graduate Institute of Cooperative Leadership. Keri’s outreach focuses on governance and financial development of directors, employees, and members, and her research considers producers’ supply chain opportunities and the causes and consequences of agricultural industry consolidation. Konstantinos (Kostas) Karantininis is professor of business economics at the Department of People & Society, Swedish University of Agricultural Sciences (SLU), and Van Vliet Chair Professor at the University of Saskatchewan, Canada (2018). His research and teaching is in

xii  Handbook of research on cooperatives and mutuals the area of domestic and international sustainable agri-food industries and value chains, cooperatives, agricultural policy, international trade, economic development, industrial organization, institutional economics, and econometrics. He co-edited the book Vertical Markets and Cooperative Hierarchies (Springer, 2007) and authored the book A New Paradigm for Greek Agriculture (Palgrave, 2017). Phil Kenkel is Regents Professor and holds the Bill Fitzwater Cooperative Chair in the Department of Agricultural Economics at Oklahoma State University. His research interest includes cooperative finance and governance, agribusiness operations, and feasibility. His outreach efforts focuses on cooperative governance and finance. Dr Kenkel also serves as editor of the Journal of Cooperatives. Sean Kiely is a PhD student in agricultural and resource economics at University of California, Davis. His research interests include agricultural, development, and behavioral economics. Kristin Kiesel is an associate professor of teaching in agricultural and resource economics, University of California, Davis. She teaches a variety of classes, including cooperative business enterprises and marketing. Her research interests include consumer behavior, industrial organization, and food policy. Select awards include being named a Community Engaged Learning Faculty Fellow and receiving multi-year funding to implement a new Diversity and Inclusion in Research, Education, and Career Training Program. Christopher J. Kopka is a non-practicing attorney with more than 20 years of senior and executive leadership in financial services, a co-founder of the Center for Agricultural Cooperative Director Development, and an independent researcher. Qiao Liang is a professor in agricultural economics and management at the School of Public Affairs, Zhejiang University. She finished double PhDs at Zhejiang University (China) in March 2011 and at Erasmus University (The Netherlands) in March 2013. Her main research interests are farmer cooperatives, agricultural supply chains, and food safety. Margaret Lund is an independent consultant specializing in the areas of community development finance and shared ownership strategies. Throughout her 30-year career she has worked with enterprises in every major cooperative sector. Lund is the author of several publications on timely cooperative topics, including Cooperative Equity and Ownership, published by the University of Wisconsin Center for Cooperatives. Her manual Solidarity as a Business Model: A Multi-stakeholder Cooperative Manual is a frequently cited resource on the topic, both domestically and internationally. Matthew T. Manley is a professor of computer science at Brigham Young University— Idaho. His work focuses on developing and teaching programming to undergraduate students. He is particularly interested in developing new approaches for teaching and learning technical teamwork skills and leadership. Dr Manley worked as a software engineer for several years before joining academia. Olive McCarthy is Director of the Centre for Co-operative Studies at University College Cork. Her research has been conducted on a wide range of co-operatives, including in agriculture, food and credit unions, on which she has published widely. Dr McCarthy is the academic co-director of the MSc in Co-operatives, Agri-Food and Sustainable Development and teaches

Contributors  xiii undergraduate and postgraduate classes on various aspects of co-operative governance and finance. Eric Micheels is an associate professor in the Department of Agricultural and Resource Economics and Fellow in Agribusiness Co-operatives at the Canadian Centre for the Study of Co-operatives at the University of Saskatchewan. His current research focuses on farm-level decision making, entrepreneurship, and innovation. Jerker Nilsson is a professor of cooperative business and marketing at the Swedish University of Agricultural Sciences (SLU), Uppsala, Sweden. He earned his PhD in marketing in 1980 from Lund University, Sweden. His current research interests are structural changes in agrifood industries and organizational models for agricultural cooperatives. Jerker Nilsson’s most recent papers are published in Agribusiness, Post-Communist Economics, Forest Policy and Economics, Annals of Public and Cooperative Economics, Frontiers in Environmental Science, Sustainability, and Outlook on Agriculture. Sonja Novkovic is a professor of economics and academic director of the International Centre for Co-operative Management at Saint Mary’s University in Halifax, Canada. Her research interests include theory of worker and multistakeholder cooperatives, humanistic governance and cooperative management, and measures of socio-economic sustainability performance in democratic organizations. She has co-edited numerous books on the social economy, cooperative business model and cooperative economics. She is a member of the Cooperative Economics Council of NCBA/CLUSA and the ICA Committee on Co-operative Research. Frayne Olson is Associate Professor in the Department of Agribusiness and Applied Economics at North Dakota State University, Director of the Quentin Burdick Center for Cooperatives and Crop Economist/Marketing Specialist with NDSU Extension. As Director of the Center for Cooperatives, he teaches a senior-level course on cooperative business management and conducts executive education for cooperative boards of directors and management. John L. Park holds the Roy B. Davis Endowed Professorship in agricultural cooperation at Texas A&M University, where he teaches courses on cooperatives, agribusiness, and strategic agribusiness management. His research and extension programs are known for providing cooperative boards with thought-provoking ideas on director development, leadership, and strategic planning. He serves as a director of the Texas Agricultural Cooperative Council and the Association of Cooperative Educators. Stephen Pitts, SJ is a PhD student in applied economics at the University of Minnesota, where he specializes in agricultural development and labor economics. He has done pastoral work with migrants on the US/Mexico border in Tijuana, Baja California and El Paso, Texas. He also has a long-standing relationship with the Tsumbalil Xitala coffee cooperative in Bachajón, Chiapas, Mexico. With local colleagues, he supervised 600 household surveys in the indigenous Tseltal community from 2017 to 2018. At present, he is preparing a followup research project involving price risk and local intermediaries. He is a Roman Catholic priest and member of the Society of Jesus. Zoë T. Plakias, PhD, is an assistant professor in the Department of Economics at Western Washington University. She is an agricultural and food systems economist. Her research consists of: (1) evaluating food system investments and innovations; (2) evaluating food and

xiv  Handbook of research on cooperatives and mutuals agricultural policy; (3) exploring the role of democratic organizations in the food system; and (4) reflecting on the work of higher education. She is also an experienced cooperative leader and organizer and is past President of the Board of Directors of the Davis Food Co-op in Davis, CA. Work for this volume was conducted in part when she was an Assistant Professor in the Department of Agricultural, Environmental, and Development Economics at The Ohio State University. Daphne Rixon, PhD, is an associate professor of accounting at Saint Mary’s University and is also the Executive Director of the Centre of Excellence in Accounting and Reporting for Co-operatives (CEARC). She has a PhD from the University of Warwick, United Kingdom and is a Chartered Professional Accountant (CPA) and Certified Management Accountant (CMA). She is editor-in-chief of the International Journal of Co-operative Accounting and Management. Dr Rixon has more than 100 peer-reviewed publications and conference presentations. Her research has resulted in several awards, including the 2018 Emerald Literati award for “A dramaturgical accounting of cooperative performance indicators,” co-authored with Dr Larry Corrigan. Gustavo Rossini is a Professor at the Department of Economics, Universidad Nacional del Litoral, Santa Fe, Argentina. His research focuses on issues related to livestock and dairy market and policies, supply and demand estimation, and agricultural cooperatives. Jeffrey S. Royer is Professor Emeritus of Agricultural Economics at the University of Nebraska–Lincoln, where he taught and conducted research in agricultural marketing and agribusiness management. He previously served ten years with the Agricultural Cooperative Service of the US Department of Agriculture, where he led the agency’s program of research, technical assistance, and education in financing farmer cooperatives. He is well known for his contributions in the fields of cooperative finance, theory, and taxation. He currently conducts research and provides consulting services on equity capitalization strategies for agricultural and rural electric cooperatives and employment relationships in higher education. Todd M. Schmit is a professor in the Charles H. Dyson School of Applied Economics and Management at Cornell University, where he teaches classes on cooperative business management to undergraduate and graduate students. The majority of Todd’s applied research and extension programming considers how a better understanding of firm behavior and market conditions leads to more effective agricultural industry development policies. Areas of emphasis include cooperative business strategy, local and regional food systems performance, economic impact analysis, and rural economic development. William (Will) Secor is an assistant professor in the Department of Agricultural and Applied Economics at the University of Georgia. His research and teaching interests are in agribusiness marketing, finance, and management. Dr Secor’s current research spans the entire food value chain, from grain marketing to food retail management. Roberta M. Severson serves as Executive Director of the Cornell Cooperative Enterprise Program and Executive Secretary of the Northeast Cooperative Council. She develops executive education programs for cooperative leaders and fosters opportunities for college students to learn more about cooperative-structured businesses. She has assisted with applied research projects examining the value of membership to milk cooperatives, economic impact of agri-

Contributors  xv cultural cooperatives in New York State, customer experience at farmers’ markets, and food hub development. Frederick (Fred) C. Tamarkin is a 2019 graduate of the Dyson School concentrating in entrepreneurship and strategy and a former Hunter R. Rawlings III Cornell Presidential Research Scholar. He is currently a senior associate at EY-Parthenon in Corporate and Growth Strategy. Qian Wan is a PhD candidate in agricultural economics at the University of Saskatchewan and a cooperative specialist at the Cooperative Development Foundation of Canada. His research focuses on agricultural cooperatives and rural development. Through his work at the Cooperative Development Foundation of Canada, Qian has been engaged in cooperative development in Peru, Ghana, Ethiopia, Kenya, Ukraine, Senegal, Malawi, and Indonesia. He received the Canadian Association for Studies in Co-operation (CASC) Scholarship in 2020. Michael Ward is Professor Emeritus at University College Cork. James (Jim) M. White is an associate professor in the Agricultural Economics department at the University of Wisconsin–River Falls (UWRF). He teaches courses on entrepreneurial development, professional selling, general management, and other topics. His research has been primarily in the areas of agricultural cooperatives and collective action, dairy farm profitability, and rural economic development. He has served on and chaired a number of professional committees at UWRF and across the agricultural economics field, and he has developed marketing and entrepreneurial management courses for the Agricultural Economics department as well as the curriculum for an agribusiness emphasis for UWRF’s MBA. Fleur Wouterse is Director of Research at the Global Center on Adaptation based in Rotterdam, the Netherlands. A development economist, she is mainly concerned with research on climate change adaptation and resilience of rural households. Fleur has more than 15 years of experience studying the economic behavior of smallholder farmers in Africa and the role of human capital therein and has published widely on the topic in, among others, Climatic Change, World Development, Agricultural Economics and Journal of Development Studies. In a separate strand of research, she has studied the role of institutions such as cooperatives in a sustainable rural transformation. As editor, she has overseen the publication of the 2018 Annual Trends and Outlook Report of ReSAKSS, Africa’s Strategic Analysis and Knowledge Support System; a book on Transformation and Growth in Niger’s Agricultural Sector; and a series of thematic research notes. Fleur obtained her PhD from Wageningen University in 2006 and was Senior Research Fellow and Head of IFPRI’s West and Central Africa office in Dakar prior to joining GCA.

Acknowledgements

We have enjoyed serving as co-editors of this Handbook. We have made new friends and colleagues that may lead to future research collaboration. The Handbook was written amid a global pandemic, and we appreciate the ability of the authors to complete the work within the specified time frame under unusual circumstances. In addition, we want to thank those who contributed to our weekly discussions. The quality reviewer feedback for each chapter was greatly appreciated and has resulted in a better product. Thanks to everyone who has contributed to this Handbook! Finally, we would be remiss if we did not thank our families for putting up with the extra hours spent on this Handbook. Matt extends thanks to South Dakota State University, and Michael thanks the University of Minnesota, for support throughout the process.

xvi

Introduction to the Handbook of Research on Cooperatives and Mutuals Matthew S. Elliott and Michael A. Boland

This Handbook was a global effort to update the state of knowledge in cooperation and mutualism and describe future directions for research and education. It has been a monumental effort. The process began with seeking a representative mix of emerging and established scholars from across the globe, in various disciplines and professions, to help contribute content. We encouraged contributors to focus on reaching a broad audience, including university students studying cooperatives, leaders of cooperatives and mutuals, researchers in academia, and non-traditional readers interested in cooperatives and mutuals. Thus, we have tried to keep “academic jargon” and formal modeling to a minimum and provide citations for readers who wish to access the more technical parts of the topic. Our approach began with a call to our colleagues for chapter topics. We took our colleagues’ suggestions for content and identified gaps, where we commissioned chapters on specific issues. The result is a Handbook with 32 chapters representing 51 authors affiliated with 33 universities, institutes or other organizations. The cooperation and discussions between contributors was outstanding! During the fall of 2021, the contributors met weekly for 90 minutes to discuss each chapter. After the discussion, two reviewers provided critical feedback and their perspectives on topic outlines and directions for future research. Each contributor(s) provided a written draft in December 2021 that was peer-reviewed by two reviewers using a one-way blind review process. Each contributor(s) provided a revised chapter and responses to the reviewers’ comments by April 2022. The Handbook is divided into seven Parts: Theory; Organization; Governance; Cross-Sector Applications; Social, Environmental, and Economic Impacts; Regional and Cultural Features; and Special Sectors and Topics. The final chapter summarizes the future research identified by the authors into a broad set of recommendations and topic areas.

PART I: THEORY Similar to the theory of firms, the theoretical understanding of cooperatives has evolved over the past century. Part I on Theory describes the state of cooperative theory from two broad theoretical perspectives about cooperatives. Jeffrey Royer describes the neoclassical theory of cooperation, and Matthew Elliott and Frayne Olson introduce the new institutional economics and discuss its applications to further understanding cooperatives and mutuals. The content will be familiar to many readers, but what is new is that this is the first time both are discussed extensively, emphasizing reaching a broad audience. Royer’s description synthesizes contributions to cooperative behavior using mechanistic models developed over many decades. Elliott and Olson build on Royer’s discussion by applying new institutional economics concepts that advance our understanding of cooperative diversity, issues, purpose, and performance. Both 1

2  Handbook of research on cooperatives and mutuals chapters discuss the continued need for further work to develop the theories conceptually and test empirically—which has been scarce due to data availability.

PART II: ORGANIZATION Part II on Organization examines the unique features of cooperatives and changes to the cooperative organization because of capital constraints, vaguely defined property rights, and organizational costs. The first chapter in this section is written by long-time collaborators Constantine Iliopoulos and Michael Cook, on organizational costs and a cooperative’s ability to adapt. Constantine and Michael decompose organizational costs into formation and maintenance costs that cooperative members and leaders must minimize. They focus on how successful cooperatives in the EU and US frequently ameliorate problems and minimize maintenance costs throughout the life of the cooperative by being alert to problems and tinkering with cooperative institutions. This chapter is followed by a discussion of so-called new generation cooperatives by Jason Franken and Jasper Grashuis. They describe how a new form of cooperatives (primarily marketing) emerged from a structural change in traditional cooperatives and possesses membership rights that are more defined or restricted but transferable and allowed to appreciate. The intent is to define vague property rights in cooperatives and pursue value-added opportunities. Chris Kopka reexamines the cooperative’s capital investment constraint, which has been discussed frequently in the academic literature. By focusing on the original Rochdale Society, Chris identifies how the original cooperative principles established the guideline that equity should come from the cooperative’s members—thus leading to a capital constraint. Chris traces the use of member capital and credit across cooperatives to the present day and discusses how the principle of cooperative members providing equity is typically embedded in statutory legislation for cooperatives. More recently, some changes have occurred to cooperative incorporation laws to allow more flexible forms of capital acquisition, but use has been limited.

PART III: GOVERNANCE Effective governance of cooperatives is critical to the sustainability of the cooperative form. The part of the book dedicated to Governance is divided into two themes. The first focuses on issues related to membership trust and participation in cooperatives. The remaining chapters focus on regional features and the various rationales for producers’ role in supply chain governance. The first chapter in this part is by Jerker Nilsson, who has spent a considerable part of his career studying the issue of social capital in cooperative societies and their members. Jerker contends that social capital is a critical factor in long-term cooperative performance differences. He discusses social capital as the glue to collectively bond members to provide effective governance. There are two types of social capital, bonding and bridging: both affect the cooperative’s ability to minimize organizational costs. John Park, Diane Friend, Matthew Manley, and Barry Boyd discuss cooperative leadership and the key attribute for good leadership: influence. They describe their Multidimensional Influence Model and the six competencies as a leadership framework. They have used the

Introduction  3 Multidimensional Influence Model for cooperative leadership training to improve governance. This model and framework continue to develop as more director surveys and case studies are added. A fitting end to this theme is the chapter by Sanjib Bhuyan and Kostas Karantininis. They discuss how cooperative performance, or effectiveness, is described in economic and non-economic terms. Sanjib and Kostas provide a framework for how members are motivated by personal and group incentives. Motivation drives members to participate, and participation is a crucial element in determining the organizational effectiveness of cooperatives. Organizational effectiveness, however, has a feedback loop that influences member motivation to participate further. Thus, cooperative performance is dependent on maintaining a positive feedback loop between organizational effectiveness and participation and avoiding a negative spiral that leads to less participation and cooperative demise. The second theme of cooperative governance is the role of producers in the governance of supply chains. This theme examines various forms and rationales for farmer governance of supply chains. The purpose is to distinguish the multiple motivations for farmer governance to capture value in their supply chains in different regions. Stephen Pitts discusses Latin America; William Secor and Michael Boland discuss North America; and Bridget Carroll, Olive McCarthy, Noreen Byrne, Michael Boland, and Michael Ward discuss Ireland. Stephen focuses on smallholder farmers in Latin America and their use of cooperatives to help market their agricultural products and participate in global supply chains through organizations such as FairTrade. Stephen discusses the importance of cooperatives for improving small farmer incomes and gaining technical acumen in many Latin American countries. William and Michael describe how US farmers use their cooperatives to provide low-cost agricultural inputs and services, market their farm products, and provide related services. The final chapter in this part examines dairy cooperatives in Ireland and their diversification strategies and mergers with public companies. The strategies used by some Irish dairy cooperatives have led some cooperatives to ‘demutualize’ in some respects. However, the same cooperatives have been ‘re-mutualizing’ in recent years as they expand globally in dairy manufacturing and value-added dairy products.

PART IV: CROSS SECTOR APPLICATIONS Cross-sector applications describe common topics applied to many businesses but emphasize the unique aspects of business decisions within a cooperative organization. Part IV on cross-sector applications has two themes. The first theme is a set of three chapters that examine strategy, branding, and the assessment of risk. In the first, Matthew Elliott, Frayne Olson, and Jasper Grashuis work toward a new framework to understand and formulate cooperative strategy. They discuss the challenge of building a framework to understand cooperative strategy because of the uniqueness and range of cooperative objectives. Further, they describe the levels and responsibilities when formulating a cooperative’s strategy as more complicated than investor-owned firms. The second chapter in the part discusses the role of the marketing year in the development of cooperative brands by Michael Boland. The role of the marketing year is an important concept when understanding marketing cooperatives and their continued success in a business model built by pooling member commodities over time, adding value throughout the marketing year, and helping the price discovery process for members. In the final chapter

4  Handbook of research on cooperatives and mutuals on this theme, Frayne Olson and Matthew Elliott describe the types and sources of exposed risk to agricultural cooperatives. They develop a framework for cooperative members to identify risks in any sector to determine the best strategies for risk management, given their unique supply chains. The second theme in the cross-sector applications section is three chapters related to finance and financial management. It begins with a chapter on profit distribution by Phil Kenkel, Brian Briggeman, and Keri Jacobs. They discuss the uniqueness of the cooperative business model as profits are distributed in proportion to use and not ownership. Cooperatives are often called participatory organizations because of the unique profit distribution mechanisms and equity rights. The next chapter, also by Phil, Keri, and Brian, complements the discussion of profit distribution and further discussion on US tax policy’s effects on cooperative equity decisions. Changes in US cooperative tax policy have led to various choices on distribution and creation of tax deductions that cooperative leaders must decide upon while considering cooperative equity and cashflow needs. The choice of how to distribute tax deductions can have long-term implications for cooperative equity growth and member value. The final chapter in this theme, by the same authors, summarizes the uniqueness of a cooperative’s capitalization and management of equity that arises from the user-owner principle, tax policy, and a revolving equity structure.

PART V: SOCIAL, ENVIRONMENTAL, AND ECONOMIC IMPACTS Part V, on social, environmental, and economic impacts, provides an array of impacts that cooperatives can have on an economy, environment, and social mobility. The section begins with a chapter by Todd Schmit, Frederick Tamarkin, and Roberta Severson. Their empirical study uses an input–output model to estimate the economic impact of agricultural cooperatives in New York State. They report higher levels of localized spending relative to non-cooperatives. Their measuring of economic impact provides a model to measure cooperative economic impact in other regions. Jos Bijman and Julia Hӧhler use a transition theory framework to present an extensive literature review on what cooperatives do regarding sustainability and what they could do. They contend that cooperatives can play a broader role in making agriculture and the food economy sustainable. This chapter is followed by Daphne Rixon and Fiona Duguid, who examine the United Nations Sustainability Development Goal metrics and link them to the seven common principles of cooperation. The authors suggest cooperative principles could help cooperatives communicate their unique social, environmental, and economic impacts using the sustainability metrics defined by the United Nations. The final chapter in this part is by Jessica Gordon-Nembhard, who focuses on US African-American efforts in mutualism and cooperation. Jessica provides a compelling case for how cooperatives provide positive social impacts to alleviate poverty and empower individuals to build flourishing communities when markets fail or groups are socially and economically oppressed.

Introduction  5

PART VI: REGIONAL AND CULTURAL FEATURES The regional and cultural features section explores cooperatives in specific sectors and geographic regions and their unique features. The literature often discusses how unique institutional environments play essential roles in cooperative formation and persistence but the relationship of regional features to cooperative performance is confounding. Julia Hӧhler and Jos Bijman describe changes in the EU dairy industry during the period in which quotas were in place before 2016 and in the post-quota period starting in 2016. The authors focus on the dairy sector due to its critical importance in many EU member countries and the recent changes to EU dairy policies. They make comparisons between cooperatives and investor-owned firms in the EU dairy sector. Qian Wan, Eric Micheels, and Murray Fulton then discuss how cooperative formation has rapidly changed since China passed a cooperative law in 2007. The authors point to the importance of social relationships in China for cooperative formation. They propose a typology framework for cooperatives in China based on the cooperative’s embedded network of social relationships. The third chapter in this part, by Qiao Liang and Ziming Han, further discusses cooperatives in China after the cooperative law in 2007. They discuss why many Chinese agricultural cooperatives are relatively small due to land constraints and the size of the rural population. They note that a small group of core members contribute most of the capital and control the cooperative in China. They further discuss the diverse views of cooperatives in China, specifically whether cooperatives are authentic or zombie cooperatives because of core and common member rights and government interventions that have led to different organizational forms compared to western cooperatives. Alejandro Galetto and Gustavo Rossini describe dairy cooperatives in Latin America, focusing on each country’s cooperative formation and current status. This chapter helps to understand changes to Latin American dairy cooperatives, given the eclectic mix of cooperative policies and economic and social history in the region. In this part’s fifth and final chapter, Nicola Francesconi, Fleur Wouterse, Michael Cook, and Gashaw Abate Tadesse discuss and provide evidence that missing managerial capital or a general lack of income and employment generating capacity is common across agricultural cooperatives in Sub-Saharan Africa. The authors further describe how cooperative formation in North America and the EU member states was facilitated by stable land property rights and farmland consolidation. However, sub-Saharan Africa has more insecure farmland property rights and lacks similar farm consolidation. They propose an alternative cooperative model that would be more suitable for building managerial capital in Sub-Saharan Africa, given the constraints in the institutional environment and recent efforts to consolidate farmland through Land Shareholding Cooperatives.

PART VII: SPECIAL SECTORS AND TOPICS Part VII is dedicated to special sectors and topics, and discusses sectors where the cooperative model is widely used but often neglected in the academic literature. Zoë Plakias and Jason Entsminger describe why consumer cooperatives are commonly found in many sectors of the

6  Handbook of research on cooperatives and mutuals economy. The authors discuss the continued success of consumer cooperatives and explain why they are understudied relative to agricultural cooperatives. Kristin Kiesel, Sean Kiely, and Rachael Goodhue discuss marketing cooperatives and their unique ability to communicate product qualities where information asymmetries exist between consumers and producers. Kristen, Sean, and Rachel outline how marketing cooperatives are being used to capture value for members beyond enhancing members’ bargaining positions. The authors cite examples where cooperatives enhance the credibility of health, sustainability, and local production claims. They note that cooperatives can have unique advantages in product differentiation when marketing cooperatives coordinate research, product innovation, and brand promotion with market research and promotion organizations. James White describes the formation of mutual aid societies and their importance in forming insurance markets in the US. He describes the evolution of mutuals from informal societies into formal institutions. James discusses whether current forms of mutuals resemble their original character or are substantively different from investor-owned insurance companies that have gained market share. Many mutuals and societies have declined because of competition, consolidation, and exit. Sonja Novkovic and Jessica Gordon-Nembhard contribute to our understanding of an often neglected sector: worker cooperatives. They summarize the literature on worker cooperatives and show that worker cooperatives are not the transitory and unstable organizational structures conjectured by neoclassical theory. For example, neoclassical models assume workers are purely individual utility-maximizing individuals. Instead, Sonja and Jessica contend that workers have complex calculations of behavior that lead to stronger motivations to pursue organizational objectives than is often assumed. Thus worker cooperatives have demonstrated better performance and stability than presumed. The final chapter in this part is by Margaret Lund and Sonja Novkovic, and discusses multi-stakeholder cooperatives. The topic of multi-stakeholder cooperatives is not well studied, and this chapter makes an essential contribution to our understanding of this form of cooperation. The authors note that multi-stakeholder cooperatives include more than one type of member in their ownership and governance structures and are growing in France, Italy, and Quebec (Canada) due to enabling legislation and the ability to solve market failures across diverse interests. They contend that the success of multi-stakeholder cooperatives runs counter to the existing theory of cooperatives that suggests the increased member heterogeneity from multi-stakeholders would be costly.

SUMMARY The goal of the Handbook was to develop a comprehensive collection of theories, frameworks, special topics, and mini case studies on cooperatives and mutuals. The intent was to develop a resource that could advise on future research directions for academics, assist in teaching university students about cooperatives and mutualism, and aid in conducting cooperative leader and member education programs. The contributors were chosen because they have expertise and diverse perspectives in specific topic areas regarding cooperation and mutualism. Topics were chosen that provide a wide array of issues on cooperatives and mutuals that require future research and educational programs. We selected the Handbook format for dissemination to integrate the broad topics and discussion into a single resource that could be accessible to

Introduction  7 a broad audience. The Handbook concludes by summarizing the future directions of research and education on cooperatives and mutuals that the contributors identified during development of the research.

PART I THEORY

1. The economic theory of agricultural and consumer cooperatives Jeffrey S. Royer1

INTRODUCTION The objective of this chapter is to describe the economic theory of agricultural and consumer cooperatives from the perspective of the neoclassical paradigm. This chapter describes the theory of agricultural marketing, farm supply, and consumer cooperatives and the implications of that theory for the economic efficiency of cooperatives and the effect of cooperatives on market performance. In the neoclassical paradigm, the value of products and the allocation of resources are determined by the costs of production and consumer preferences. The paradigm relies on marginal analysis, in which the quantity of a product that is purchased or sold is based on the additional utility, revenue, or cost associated with the last unit. Although economic theory based on the neoclassical paradigm is well developed, the theory of the firm found in most economics textbooks is inadequate for understanding the behavior of cooperatives. The theory is usually based on the assertion that firms maximize profits, whereas theorists generally ascribe other objectives to cooperatives. Cooperatives also differ from other firms because they return net earnings to their members as patronage refunds or rebates. This chapter begins with a discussion of the assertions about cooperatives that form the basis for cooperative theory.

UNDERLYING ASSERTIONS ABOUT COOPERATIVE BEHAVIOR Roles of the Manager, Board of Directors, and Members Although most economic analyses of the firm are based on the assertion that firms maximize profits, there is no clear consensus about the objective of cooperatives. Indeed, while the standard theory of the firm is based on the existence of an entrepreneur who makes decisions about the allocation of capital, labor, and other factors of production in the creation of profits, there has been disagreement about who the decision-maker is in a cooperative. Early analyses of cooperatives, such as those by Emelianoff (1942) and Phillips (1953), viewed cooperatives as vertical extensions of their members’ farming operations. For example, Phillips conceived of a cooperative as a jointly operated plant and assigned the decision-making role to members, who individually allocated their resources between their farms and the cooperative. Later, Helmberger and Hoos (1962) presented a model of a marketing cooperative in which the cooperative was given a decision-making role and the objective of maximizing the price it paid its members for the raw product. Helmberger and Hoos did not specify whether management or the board of directors played this decision-making role. Instead, they assumed the existence of a “peak coordinator,” consisting of an individual or group of individuals who 9

10  Handbook of research on cooperatives and mutuals wielded effective control over the organization, specified the cooperative’s objective, and engaged in strategies to achieve it. Since Helmberger and Hoos, neoclassical models of cooperatives generally have assigned the decision-making role to the cooperative, although not addressing the issue of whether management or the board of directors was in control. Some of those models have been based in part on the Helmberger and Hoos model, and they have assumed the objective of maximizing the raw product price paid members. However, other cooperative objectives have also been used or discussed. Possible Cooperative Objectives Numerous objectives have been advanced for cooperatives in addition to the Helmberger– Hoos objective of maximizing the raw product price paid members. Here we will consider four objectives for a marketing cooperative often mentioned in the literature (LeVay, 1983a; Sexton, 1984; Cotterill, 1987). They include maximization of cooperative net earnings, maximization of total member returns, maximization of the net raw product price, and maximization of sales. There are several reasons why a cooperative may seek to maximize net earnings like a profit-maximizing firm. By pursuing this objective, a cooperative will maximize funds available for paying patronage refunds or internally financing growth. This objective may also result in higher measures of financial performance. To the extent that cooperative managers, boards of directors, and members use financial standards based on profit maximization, the pursuit of other objectives may result in poorer comparisons. The maximization of net earnings may also become part of a cooperative’s corporate culture through hiring managers from other firms or because it is the objective directors pursue in their own farming operations. Other objectives may stem from recognition of the concept that the purpose of a cooperative is to operate not for its own economic gain, but for the benefit of its members. Maximization of total member returns is equivalent to maximizing joint profits or earnings on the raw and processed products. This objective balances the dual roles of members as suppliers of the raw product, for which they receive a cash price, and owners of the cooperative, for which they receive their share of the cooperative’s net earnings as a patronage refund. For analytical purposes, it is sometimes useful to express this objective as maximizing the sum of the cooperative’s net earnings and the producer surplus members receive from sale of the raw product. Maximization of the net price paid members for the raw product is another objective consistent with the concept that a cooperative’s purpose is to benefit its members. This objective differs from the Helmberger–Hoos objective in that net price consists of the gross or cash price plus the per-unit patronage refund. Finally, there are reasons why a cooperative may seek to maximize the sales of the product it markets for its members. Managers, boards of directors, and members may be inclined to judge the cooperative’s success in terms of its size and growth. In fact, in some cases, management salaries may be linked to sales or turnover. A cooperative may also seek to maximize volume to achieve economies of scale, reduce excess capacity, or increase its market share. Maximization of sales is generally considered subject to a no-loss constraint for obvious reasons. It will be shown that this objective is equivalent to the Helmberger–Hoos objective of maximizing the gross price.

The economic theory of agricultural and consumer cooperatives  11 Similar objectives will be considered for farm supply cooperatives. In fact, the objectives for a farm supply cooperative are identical to those for a marketing cooperative except that the net price for a farm input consists of the cash price less the patronage refund, and both the net and gross prices are minimized. Consumer cooperatives are fundamentally different in nature because members are assumed to maximize utility instead of profits. Thus, their demand for a consumer good is derived from its marginal utility instead of the marginal revenue product of a farm input. Nonetheless, the four objectives considered for a farm supply cooperative will also apply to consumer cooperatives. Indeed, in an early analysis of consumer cooperatives, Enke (1945) considered four objectives. They include maximization of the cooperative’s profits (net earnings), maximization of net consumer surplus, and minimization of either the gross or net price paid by members. Net consumer surplus consists of consumer surplus on the purchase of a good plus the cooperative’s net earnings, which are assumed to be returned to members as patronage rebates. Net price consists of the gross or cash price less the per-unit rebate. Maximization of the gross price is equivalent to maximization of sales subject to a no-loss constraint. In our analysis of farm supply and consumer cooperatives, it will be convenient to refer to the maximization of member net consumer surplus because it is applicable to both cooperative types.

AGRICULTURAL MARKETING COOPERATIVES Consider a cooperative that uses a raw product it purchases from members to produce a processed product it sells to consumers. For convenience, assume a fixed-proportions production technology by which one unit of the raw product produces one unit of processed product. The model can be applied to a cooperative that simply markets the raw product for its members by letting the processing costs represent the costs of transporting or marketing the raw product. Analyses of the pricing and output decisions of a processing firm frequently utilize the net average revenue product (NARP) and net marginal revenue product (NMRP) curves, which facilitates graphical representations by combining revenues and costs at the processing level. Derivation of the NARP and NMRP curves begins with the net revenue product, which is defined as the processor’s total revenue less the total cost of processing the raw product exclusive of the cost of the raw product. NARP is defined as net revenue product divided by the quantity of product. It is equivalent to the price received by the processor less its average processing cost. It represents the amount per unit that is available for raw product payment and earnings. NMRP is defined as the change in net revenue product from processing an additional unit of raw product, and it is equivalent to marginal revenue less marginal processing cost.2 Price and Output Solutions Price and output solutions are displayed in Table 1.1 and shown graphically in Figure 1.1 for the four cooperative objectives under consideration. In the figure, the raw product supply curve is represented by S. Its positive slope may reflect increasing marginal production costs or the spatial distribution of producers. The marginal expenditures curve (ME) represents how much each additional unit of the raw product will cost the processor.

12  Handbook of research on cooperatives and mutuals Table 1.1

Price and output solutions for marketing cooperatives Objective

Maximization of cooperative net earnings Maximization of total member returns Maximization of net price Maximization of sales subject to no-loss constraint (breakeven)

Optimality condition

Quantity

NMRP = ME

Qc

Rc

Nc – Rc

Nc

NMRP = S

Qm

Rm

Nm – Rm

Nm

Qs

Rs

0

Rs

NMRP = NARP NARP = S

Qp

Cash price Patronage refund

Rp

Np – Rp

Net price

Np

Source: Royer (2014).

Source: Royer (2014).

Figure 1.1

Price and output solutions for marketing cooperatives

A cooperative maximizes net earnings by setting output Qc according to NMRP = ME. The respective cash prices for the raw and processed products are Rc and Nc. Net earnings are (Nc – Rc) Qc. The net price received by members is Nc after adding the per-unit patronage refund Nc – Rc. Similar notation is used for the other solutions. Total member returns are maximized at Qm where NMRP = S. The cooperative’s net earnings are (Nm – Rm) Qm. Producer surplus is the area below the cash price Rm and above S. Output under this objective is greater than if the cooperative maximizes earnings alone. Maximization of net price occurs at Qp, determined by NMRP = NARP at the apex of the NARP curve. Maximization of sales occurs at Qs where NARP = S. Because NARP is exhausted by the raw product price, cooperative net earnings and patronage refunds are zero. Thus, the solution

The economic theory of agricultural and consumer cooperatives  13 has been referred to as the breakeven solution. Because S is upward-sloping, this objective is equivalent to maximizing the cash or gross price for the raw product. Stability of Solutions The existence of patronage refunds calls into question any assumption that the supply of raw product is based solely on the market price. It has often been argued that the receipt of patronage refunds provides members an incentive to increase production until it reaches the breakeven level at Qs. Cotterill (1987) presents a model to explain the process by which a cooperative tends toward that equilibrium. In the model, which is based on a simple lagged adjustment mechanism, the locus of the raw product price and quantity follows a cobweb path until equilibrium is established at price Rs and quantity Qs. Because of the incentive to expand production, many authors have concluded that the breakeven solution represents the only possible equilibrium. Others have argued that equilibria associated with other cooperative objectives are achievable. LeVay (1983a) suggests that members may consider patronage refunds unimportant because of size, time preferences, and other factors. Rhodes (1983) observes that not all processors have an obligation to accept all the raw product producers choose to deliver. Lopez and Spreen (1985) argue that cooperatives can use nonprice instruments such as delivery quotas, processing rights, and penalty schemes to restrain output. Sexton, Wilson, and Wann (1989) mention multipart pricing schemes. Royer and Smith (2007) present a dynamic model of a processing cooperative that demonstrates that cooperatives may be able to use pricing strategies to achieve and maintain output levels consistent with other objectives. Membership Policy and Long-run Equilibria In the long run, a cooperative that maximizes the raw product price paid members will seek to operate at the peak of its NARP curve. If the cooperative operates along the upward-sloping portion of the curve, it can increase the raw product price by adopting an open-membership policy and expanding production. If it operates on the downward portion, it can increase the price by adopting a closed-membership policy. Thus, the long-run equilibrium depends on the cooperative’s membership policy. A closed-membership cooperative will restrict membership, so the supply curve is S´. Equilibrium output is Qp, determined by S´ = NARP. In the case of an open-membership cooperative, expanding membership will increase output, so the supply curve is S and equilibrium output is Qs. Equilibrium output is Qm for a cooperative that maximizes member returns, and Qp for a cooperative that maximizes the net price as long as the cooperatives can control supply. Graphically, the equilibrium for a perfectly competitive industry is identical to that of a closed-membership cooperative. Under perfect competition, all firms, regardless of organizational form, will operate at the apex of the NARP curve, pay price Np, and earn zero excess profits. There is an important difference, however. By controlling supply, the cooperative increases the returns to its members at the expense of other producers who are precluded from the market.

14  Handbook of research on cooperatives and mutuals Table 1.2

Price and output solutions for farm supply and consumer cooperatives Objective

Maximization of cooperative net earnings Maximization of member net consumer surplus Minimization of net price Maximization of sales (minimization of gross price)

Optimality

Quantity

Gross price

Patronage refund

Net price

MR = MC

Qc

Pc

Pc – Cc

Cc

AR = MC

Qm

Pm

Pm – Cm

Cm

MC = ATC

Qp

Pp

Pp – Cp

Cp

AR = ATC

Qs

Ps

0

Ps

condition

Source: Royer (2014).

FARM SUPPLY AND CONSUMER COOPERATIVES Youde (1967) offered a model of a farm supply cooperative in which the objective is to minimize the price members pay for a farm input. Similar to the Helmberger and Hoos model (1962), equilibrium occurs where the average cost curve intersects the demand curve. Earlier, Enke (1945) presented a model of a consumer cooperative that considered all four of the objectives considered here. Both models rely on cost and demand curves similar to those in the standard theory of the firm. Price and output solutions for farm supply and consumer cooperatives are displayed in Table 1.2 and Figure 1.2. For a cooperative that maximizes net earnings, the quantity solution is determined by the familiar MR = MC condition. Quantity is Qc, price is Pc, and the average total cost is Cc. Net earnings are (Pc – Cc) Qc, the per-unit patronage refund or rebate is Pc – Cc, and the net price is Cc. Member net consumer surplus is maximized at Qm. In this solution, the cooperative’s net earnings are (Pm – Cm) Qm, and consumer surplus is the area below D and above the cash price Pm. Because this objective considers the roles of members as both customers and owners of the cooperative, output exceeds that of a cooperative that maximizes net earnings alone. Minimization of the net price occurs at Qp, corresponding to the minimum of the ATC curve where MC = ATC. As shown, the output is lower than for a profit-maximizing firm. Maximization of sales occurs at Qs. Because the average cost equals the price of the good or input, this is a breakeven solution. Thus, net earnings and patronage refunds or rebates are zero. Because Ps is the highest obtainable price given D is upward-sloping, this objective is equivalent to maximization of the gross price. If a cooperative is a price-taker, the downward-sloping demand curve in Figure 1.2 is replaced with a horizontal one and AR = MR. As a result, the optimality conditions for maximization of cooperative net earnings and maximization of member net consumer surplus are identical. In the long run, the market price equals the minimum average cost under perfect competition. The solution conditions for a cooperative are identical to that of a profit-maximizing firm regardless of its objective because AR = ATC = MC. In equilibrium, members pay the cooperative the market price, cooperative net earnings are zero, and members do not receive patronage refunds or rebates. The outcome under monopolistic competition depends on additional assumptions about market structure and cooperative behavior. In one model of a single cooperative and several

The economic theory of agricultural and consumer cooperatives  15

Source: Royer (2014).

Figure 1.2

Price and output solutions for farm supply and consumer cooperatives

profit-maximizing rivals (Royer 2014), the cooperative is assumed to accept the market price determined by competition among the other firms. If the cooperative pursues one of the other three objectives, it will sell a greater quantity than the other firms, usually at a lower average cost.

EFFECTS OF COOPERATIVES ON MARKET PERFORMANCE Firm Behavior and Economic Welfare Cooperatives have benefited from favorable public policies because they are usually considered pro-competitive forces that improve the performance of imperfect markets and increase economic welfare. However, there are arguments to suggest that cooperatives may exhibit poorer market performance than other firms under certain conditions. The performance of a marketing cooperative is often analyzed in terms of its membership policy. Compare the closed-membership cooperative facing the raw product supply curve S´ in Figure 1.1 to a profit-maximizing processor facing supply curve S. Helmberger (1964) notes that the cooperative’s output at Qp is more restrictive than a profit-maximizing processor that behaves as a monopsonist and produces output Qc. In contrast, a cooperative with an open-membership policy would produce Qs, which exceeds the monopsonist’s output.

16  Handbook of research on cooperatives and mutuals Helmberger concludes that a closed-membership policy leads to socially undesirable market performance because Np, the high price paid members, does not compensate for those producers who are precluded from the market. Similarly, in an analysis of spatial oligopoly, Sexton (1990) found that a closed-membership cooperative could result in poorer performance than an industry consisting of profit-maximizing processors.3 LeVay (1983a) advocates the maximization of total member returns, by which a cooperative would produce an output of Qm. That output is greater than that of a monopsonist but is less than that of an open-membership cooperative, which LeVay argues leads to output that exceeds the social optimum because the value of the raw product input exceeds its derived demand. The conditions under which a processor maximizes economic welfare are laid out in Royer (2001). The condition for allocative efficiency, that is, the condition that ensures economic welfare is maximized, calls for the resources used to produce and process the last unit of output, as represented by the sum of the marginal costs of production and processing, to equal the price paid by consumers. In Figure 1.1, P – MPC represents the processed product price minus the marginal processing cost, and S can represent the marginal cost of producing the raw product. Economic welfare is maximized at Q*. If a processor is a price-taker in the processed product market, the NMRP and P – MPC curves are identical. Thus, maximization of total member returns, dubbed the welfare-maximizing objective by Sexton (1984), results in the socially optimal output because Qm = Q*. Otherwise, the social optimum is not attained since Qm < Q*. A profit-maximizing processor will not produce at Q* as long as it faces a downward-sloping processed product demand curve or an upward-sloping supply curve. A cooperative that processes whatever quantity of raw product members deliver will produce Q* only if its marginal and average processing costs are equal, that is, there are constant returns to scale. Otherwise, Qs > Q*, as LeVay concludes. A similar analysis applies to farm supply and consumer cooperatives (Royer, 2014). Competitive Yardstick Effect of Cooperatives An important dimension of the economic performance of cooperatives concerns the effects cooperatives have on other firms, in what is called the competitive yardstick effect. The essence of the effect, which is attributed to Nourse (1945), is that the existence of a cooperative in an imperfect market is expected to have a positive effect on the market’s performance by forcing profit-maximizing firms to behave more competitively. The effect can be illustrated by a simple model of an oligopsony by Cotterill (1987). In the model, a cooperative with an open-membership policy is one of several processing firms that acquire a raw product from producers. The processors have identical NARP curves and are assumed to maximize profits. However, the cooperative raises the price it pays members by setting its price according to the intersection of its NARP curve and the supply curve it expects to face if the rival firms match its price. If the rival firms do indeed match the cooperative’s price, producers receive a higher price from all processors. If the rival firms do not match its price, the cooperative experiences an increase in supply as members increase their output and other producers switch to it from the rivals. Although the other processors do not raise the price they pay producers, the cooperative’s actions result in a reduction in their market share.

The economic theory of agricultural and consumer cooperatives  17 Unless they eventually raise their prices, the erosion in market share can continue. In either case, there is a competitive yardstick result. Note that the outcomes in this model are dependent on the assumption that the cooperative maintains an open-membership policy. If the cooperative has a closed-membership policy, it is free to pay members a higher price, but its action will have no impact on rival firms because producers cannot switch to the cooperative. Cotterill (1997) offers similar models with differentiated products. Conjectural Variations Models Conjectural variations have been used to analyze the effects of cooperatives on markets characterized by oligopoly or oligopsony. The analyses usually consist of comparing the performance of a pure industry consisting of profit-maximizing firms to a mixed industry with at least one cooperative. Firms are assumed to engage in either Cournot or Bertrand competition, and cooperatives are assumed to maximize joint profits on the raw and processed products, if marketing cooperatives, or net consumer surplus, if consumer cooperatives. Such analyses have been used to explore a variety of topics related to cooperatives, including the incentives of producers to form or join cooperatives, member commitment, the effects of cooperatives on industry quality and innovation, and the incentives for and impacts from cooperative vertical integration. An early example by Tennbackk (1995) is typical. In it, a pure duopoly consisting of profit-maximizing firms is compared to a mixed duopoly with a cooperative. The firms are assumed to engage in Cournot competition by simultaneously setting quantities while assuming the other firm will not vary its output in response, and the cooperative is assumed to maximize joint profits. Both industry output and economic welfare are greater in the mixed industry. However, the existence of the cooperative does not induce the other firm to increase its output. Instead, the other firm reduces its output, and industry output is greater only because the cooperative increases its output. Marini and Zevi (2011) produce similar results for consumer cooperatives in a mixed oligopoly with Cournot competition. Although conjectural variations models may seem to imply dynamic processes, they are static, short-run models that cannot be given dynamic interpretations (Friedman, 1983). In cooperative applications of the models, profit-maximizing firms and cooperatives make their output or price decisions simultaneously. The models lack mechanisms by which a cooperative affects the behavior of profit-maximizing rivals in the dynamic sense of the cooperative yardstick models described by Cotterill (1987, 1997).

ECONOMIC EFFICIENCY OF COOPERATIVES The neoclassical theory of cooperatives has implications for the economic efficiency of cooperatives. Hypotheses based on neoclassical theory usually reflect expectations that the economic performance of cooperatives is inferior to the performance of profit-maximizing firms because of characteristics inherent in the cooperative organizational form. Although the new institutional economics approach also suggests hypotheses about cooperative economic performance, this discussion is limited to those arising from neoclassical theory.

18  Handbook of research on cooperatives and mutuals Technical efficiency concerns a firm’s ability to produce the greatest possible output from a given set of inputs (output-oriented technical efficiency) or produce a given level of output with the least amount of inputs (input-oriented technical efficiency). Cooperatives are expected to exhibit lower levels of input-oriented technical efficiency because their purpose often is to market or process whatever raw product their members produce. Consequently, they must focus on the returns their members receive from their product. In contrast, profit-maximizing firms with variable-proportions production technology can vary their use of the raw product to achieve the optimal mix of inputs. Allocative efficiency measures the ability of a technologically efficient firm to minimize production costs given input prices. Firms must minimize costs to maximize profits. Because cooperatives cannot be expected to minimize costs with respect to the raw product, they are expected to exhibit lower levels of allocative efficiency. Scale efficiency measures the extent to which a firm operates at the optimal scale, that is, the plant size that minimizes the long-run average variable cost of production. Cooperatives are expected to be scale-inefficient because their size is dictated by the volume of raw product their members choose to market instead of the scale appropriate for cost minimization. Authors have argued that cooperatives are scale-inefficient because member supply is inadequate for achieving the optimal scale (Porter & Scully, 1987), or it exceeds the optimal scale (LeVay, 1983b). Numerous empirical studies have examined the economic efficiency of cooperatives. Many of those studies employ financial ratios, which lack a sound theoretical basis or statistical interpretation (Soboh, Lansink, Giesen, & van Dijk, 2009). Those studies that are based on theoretical models of economic behavior have yielded mixed results about the efficiency of cooperatives compared to other firms. Soboh, Lansink, and van Dijk (2012) attribute some of the poorer performance of cooperatives to the use of efficiency measures that are based on profit maximization without consideration of cooperative objectives. They demonstrated that the relative performance of cooperatives in the European dairy industry improved when the definition of technical efficiency was changed to account for the role of members as producers of the raw product. Several studies have provided insights into the objectives cooperatives pursue. In a study of California cotton-ginning cooperatives, Sexton, Wilson, and Wann (1989) concluded that their data indicated that the cooperatives operated near the maximum of the NARP curve, a result consistent with the Helmberger–Hoos objective of maximizing the raw product price. Featherstone and Rahman (1996) conducted a study of Midwestern farm supply and marketing cooperatives and concluded there was strong support for the minimization of average cost and little support for profit maximization. That result was challenged in a study by Clymer, Bowman, Yeager, and Briggeman (2021), which concluded that Midwestern farm supply and marketing cooperatives maximized profits instead of minimized cost. In a study of Irish dairy-processing cooperatives, Boyle (2004) concluded that the rule the cooperatives used to price milk was based on the NMRP curve rather than the NARP curve, a finding consistent with an objective of maximizing either profits or the joint profits on both inputs and output.

The economic theory of agricultural and consumer cooperatives  19

CONCLUSION The neoclassical theory of cooperatives has provided useful insights into the behavior, economic efficiency, and market performance of agricultural marketing, farm supply, and consumer cooperatives. Yet, there are topics that warrant additional investigation. The competitive yardstick effect is an important concept that has been used to explain the presumed positive effects of cooperatives on the behavior of other firms in imperfect markets and to justify favorable public policies toward cooperatives. However, existing models on the competitive yardstick are largely descriptive. Although numerous conjectural variations models purport to explain the effects of cooperatives on imperfect markets, they fail to provide a mechanism by which a cooperative affects the behavior of other firms in a dynamic sense. Mathematical models that incorporate such a mechanism could improve our understanding of the competitive yardstick effect. Such models may need tools from game theory to create the necessary dynamics. Both farm supply cooperatives and consumer cooperatives are likely to operate in markets characterized by monopolistic competition due to product differentiation or the spatial distribution of competing firms. However, the behavior of cooperatives in such markets has received little theoretical attention. The additional insights such research would provide justify more effort in this area. Finally, in terms of empirical analysis, additional work examining the economic efficiency of cooperatives, particularly in comparison to other firms, would be valuable. It would, however, be important for that work to be firmly based on rigorous theoretical underpinnings. That would include a recognition that cooperatives, because of their nature, may pursue objectives other than profit maximization. Analyses based on definitions of efficiency that take cooperative objectives into account would seem to hold the most promise.

NOTES 1. The author appreciates the helpful comments of two anonymous reviewers. 2. The NARP curve is constructed by subtracting the average processing cost curve from the demand curve (average revenue) for the processed product. The NMRP curve is constructed by subtracting the marginal processing cost curve from the marginal revenue curve. For a graphical illustration, see Royer (2014, pp.18–20). 3. Concerns about the potential for anticompetitive behavior have drawn attention to Section 2 of the Capper–Volstead Act, which prohibits cooperatives from unduly enhancing agricultural prices by monopolization or the restraint of trade (e.g., Jesse, Johnson, Marion, & Manchester, 1982). Using a model based on Helmberger (1964), Jesse and Johnson (1980) analyzed cooperative behavior within several market structures. In the absence of price discrimination, the performance of open-membership cooperatives was always at least as good as that of profit-maximizing firms and often equivalent to perfect competition. On the other hand, the performance of closed-membership cooperatives was usually inferior to perfect competition and sometimes inferior to the performance of profit-maximizing firms. In general, enhanced process product prices were dependent on a firm’s ability to control output. Cooperative restrictions on membership and supply were likely to provide greater benefits to nonmembers, thus encouraging free-riders and diminishing the effectiveness of cooperative attempts to control supply. Masson and Eisenstat (1978) also used a model based on Helmberger’s work to study cooperative behavior within various market structures, but their analyses were limited to open-membership cooperatives.

20  Handbook of research on cooperatives and mutuals

REFERENCES Boyle, G.E. (2004). The economic efficiency of Irish dairy marketing co-operatives. Agribusiness, 20, 143–53. Clymer, A., Bowman, W., Yeager, E.A., & Briggeman, B.C. (2021). Are cooperatives transitioning from cost minimizers to profit maximizers? Agricultural Finance Review, 81, 568–77. Cotterill, R.W. (1987). Agricultural cooperatives: a unified theory of pricing, finance, and investment. In J.S. Royer (ed.) Cooperative theory: new approaches (ACS Service Report 18, pp. 171–258). US Department of Agriculture. Cotterill, R.W. (1997). The performance of agricultural marketing cooperatives in differentiated product markets. Journal of Cooperatives, 12, 23–34. Emelianoff, I.V. (1942). Economic theory of cooperation: economic structure of cooperative organizations. Author. Enke, S. (1945). Consumer coöperatives and economic efficiency. American Economic Review, 35, 148–55. Featherstone, A.M., & Rahman, M.H. (1996). Nonparametric analysis of the optimizing behavior of Midwestern cooperatives. Review of Agricultural Economics, 18, 265–73. Friedman, J.W. (1983). Oligopoly theory. Cambridge University Press. Helmberger, P.G. (1964). Cooperative enterprise as a structural dimension of farm markets. Journal of Farm Economics, 46, 603–17. Helmberger, P., & Hoos, S. (1962). Cooperative enterprise and organization theory. Journal of Farm Economics, 44, 275–90. Jesse, E.V., & Johnson, A.C. Jr (1980). Marketing cooperatives and undue price enhancement: a theoretical perspective (Working Paper Series WP-46). North Central Regional Research Committee 117. Jesse, E.V., Johnson, A.C. Jr, Marion, B.W., & Manchester, A.C. (1982). Interpreting and enforcing Section 2 of the Capper-Volstead Act. American Journal of Agricultural Economics, 64, 431–43. LeVay, C. (1983a). Agricultural co-operative theory: a review. Journal of Agricultural Economics, 34, 1–44. LeVay, C. (1983b). Some problems of agricultural marketing co-operatives’ price/output determination in imperfect competition. Canadian Journal of Agricultural Economics, 31, 105–10. Lopez, R.A., & Spreen, T.H. (1985). Co-ordination strategies and non-members’ trade in processing co-operatives. Journal of Agricultural Economics, 36, 385–96. Marini, M.A., & Zevi, A. (2011). ‘Just one of us’: consumers playing oligopoly in mixed markets. Journal of Economics, 104, 239–63. Masson, R.T., & Eisenstat, P. (1978). Capper-Volstead and milk cooperative market power: some theoretical issues. In B.W. Marion (ed.), Agricultural cooperatives in the public interest (Monograph 4, pp. 51–68). North Central Regional Research Committee 117. Nourse, E.G. (1945). The place of the cooperative in our national economy. American Cooperation, 1942–1945 (pp. 33–9). American Institute of Cooperation. Phillips, R. (1953). Economic nature of the cooperative association. Journal of Farm Economics, 35, 74–87. Porter, P.K., & Scully, G.W. (1987). Economic efficiency in cooperatives. Journal of Law and Economics, 30, 489–512. Rhodes, V.J. (1983). The large agricultural cooperative as a competitor. American Journal of Agricultural Economics, 65, 1090–5. Royer, J.S. (2001). Agricultural marketing cooperatives, allocative efficiency, and corporate taxation. Journal of Cooperatives, 16, 1–13. Royer, J.S. (2014). The theory of agricultural cooperatives: a neoclassical primer (Agricultural Economics Faculty Publications 123). DigitalCommons@​University of Nebraska–Lincoln. Retrieved from https://​digitalcommons​.unl​.edu/​ageconfacpub/​123/​ Royer, J.S., & Smith, D.B. (2007). Patronage refunds, producer expectations, and optimal pricing by agricultural cooperatives. Journal of Cooperatives, 20, 1–16. Sexton, R.J. (1984). Perspectives on the development of the economic theory of co-operatives. Canadian Journal of Agricultural Economics, 32, 423–36.

The economic theory of agricultural and consumer cooperatives  21 Sexton, R.J. (1990). Imperfect competition in agricultural markets and the role of cooperatives: a spatial analysis. American Journal of Agricultural Economics, 72, 709–20. Sexton, R.J., Wilson, B.M., & Wann, J.J. (1989). Some tests of the economic theory of cooperatives: methodology and application to cotton ginning. Western Journal of Agricultural Economics, 14, 56–66. Soboh, R.A.M.E., Lansink, A.O., Giesen, G., and van Dijk, G. (2009). Performance measurement of the agricultural marketing cooperatives: the gap between theory and practice. Review of Agricultural Economics, 31, 446–69. Soboh, R., Lansink A.O., and van Dijk, G. (2012). Efficiency of cooperatives and investor owned firms revisited. Journal of Agricultural Economics 63, 142–57. Tennbakk, B. (1995). Marketing cooperatives in mixed duopolies. Journal of Agricultural Economics, 46, 33–45. Youde, J.G. (1967). A theory of farm purchasing cooperatives. Proceedings of the Western Farm Economics Association, 40, 33–7.

2. The new institutional economic theory of cooperatives: taking stock, looking ahead Matthew S. Elliott and Frayne Olson

INTRODUCTION New Institutional Economics (NIE) combines law, organization theory, political science, sociology, and anthropology to enhance micro-analytical tools from neoclassical economics. The purpose is to account for the humanly devised restraints (institutions) governing society in economic decisions. Institutions can be informal, such as norms, culture, beliefs, and customs; or formal, such as rules, bylaws, laws, and contracts. Institutions are often described simply as the “rules of the game.” Like neoclassical economics, NIE seeks to understand the dynamics of product supply and demand, the price mechanism, the effects of market power, productivity, and the determination of the value of products. However, NIE suggests that the layers of institutions constructed by society significantly impact economic decision-making. For example, NIE often assumes that firms are motivated by profit maximization; however, agents in firms are utility-maximizing and thus pursue personal motives when not constrained or incentivized by institutions to pursue firm objectives. Institutions can be informally embedded in society, formalized in the economic environment, and implemented by governance organizations. Institutions vary by region, culture, and time. As a result, agents demonstrate diverse cases of altruism and complex calculations of behavior that are not assumed in neoclassical models. Thus, economic models can be enhanced by accounting for existing—and historical—institutions that constrain or incentivize personal decision-making. This chapter discusses the emergence of NIE and how concepts have been applied to advance cooperative theory. We discuss the theoretical building blocks of NIE, the different levels of comparative institutional analysis researchers can conduct, three approaches to cooperative theory that use NIE, and four critical NIE concepts that we deem able to advance cooperative theory (see Figure 2.1). We conclude by suggesting specific NIE concepts and areas of research that can continue to advance our understanding of cooperative behavior, purpose, and performance.

EMERGENCE AND DISTINCTION OF NEW INSTITUTIONAL ECONOMICS A Byproduct of Neoclassical Economics and Old Institutional Economics NIE emerged due to criticisms of two clusters of economic literature: neoclassical economics and old institutional economics. Criticism of neoclassical literature arose because of the ina22

The new institutional economic theory of cooperatives  23

Source: Authors.

Figure 2.1

Theoretical building blocks of NIE, levels of anaylsis, approaches to cooperative theory, and NIE concepts

bility to explain differences in economic behavior because of culture or to explain periods of rapid and broad economic and social change. Indeed, neoclassical economics fails to account for the persistent diversity of economic performance among cultures, nations, or firms, or to anticipate endogenous, evolutionary changes to institutions that result in rapid changes in the value of products or productivity. Old institutional economists were critical of neoclassical economics for abstracting away from institutions to adhere to uniform laws of human behavior only observed through exchanging goods at specific prices (see for example Veblen, 1900; Commons, 1931; 1936). Alternatively, neoclassical economists were critical of old institutionalists for being too descriptive, being void of formal theory, and lacking deductive reasoning and testable hypotheses. Indeed, old institutionalists were focused on descriptive observations of institutions, collective behavior as opposed to individual behavior, and the evolutionary change in institutions. Like old institutional economics, NIE focuses on the diversity and importance of institutions in economic decisions. However, NIE remains grounded in economics and seeks to maintain a theoretical approach to anticipate broad economic changes and the impact of institutions using similar micro-analytical tools as neoclassical economics. For example, NIE adheres to strict methodological individualism by describing individual behaviors as goals,

24  Handbook of research on cooperatives and mutuals objectives, and plans (explanans) that researchers use to explain a collective, cooperative, or a firm (explanandum) (Klein, 1998; 2010). Using comparative institutional analysis, NIE builds theory using empirical evidence, inductive reasoning, and deductive logic from mechanistic models. Early Focus on the Firm versus Markets NIE emerged from Ronald Coase’s seminal work “The Nature of the Firm” (1937). Coase (1937) asked a simple question: if the price mechanism, or markets, are so efficient in governing the allocation of resources, then why do we observe firms that govern many transactions? Alternatively, Coase (1937) asked: why don’t we observe one large firm? The simple answer in Coase’s thesis was that markets were not costless, but neither were firms! Coase conjectured that firms could allocate resources more efficiently than a market when specific transaction attributes made transacting costly using a market. Coase (1937) suggested that the autocratic authority of the firm entrepreneur(s) to direct the allocation of resources could reduce the transaction costs, making the firm an ideal choice for governing some transactions. Alternatively, a market could allocate resources more efficiently than a firm under different transaction attributes because of the avoidance of organizational costs. Thus, the firm’s boundary can be defined where the marginal tradeoff between organizational costs of using the firm is less than the transaction costs of using the market to govern the transaction. Later authors suggested organizational costs were often similar to costs using a market and uniformly defined them as transaction costs. The transaction costs that need to be minimized by choice of a market or firm governance are described as: ● ● ● ●

search costs; the costs to bargain or ‘haggle’; the costs to unknown attributes of the exchanged goods or service; costs imposed on agents as a result of the transaction even when agents are not a part of the transaction (that is, externalities); and ● monitoring and enforcement costs to ensure neither party shirks on the transaction. Coase conjectures that one governance type (firm or market) is superior to the other in minimizing transaction costs depending on the nature of the transaction. Property Rights Approach to the Theory of the Firm Alcian and Demsetz (1972) furthered the discussion of the advantages of a firm compared to a market by discussing the unique bundle of property rights1,2,3 obtained when a firm governs a transaction compared to a market. A bundle of property rights of an asset includes decision rights on using, consuming, or exchanging the asset that is not inconsistent with a prior contract, custom, or law. Alcian and Demsetz (1972) disagreed with Coase’s (1937) perspective that the firm offered transaction cost economizing advantages over a market because of a single property right to direct resource allocation and production decisions. Rather, they contend that any customer has the right to tell a firm what to produce, and the customer has the same right to end the relationship with a business that does not supply a product that an entrepreneur has to terminate an employee for not producing what is directed. Instead, the

The new institutional economic theory of cooperatives  25 critical property rights in firms that reduce transaction costs are the rights to monitor input and decide rewards in team production. A key difference raised by Alcian and Demsetz (1972) is that firm performance is dependent on efficient monitoring and rewarding the marginal value of the input in production—not directing what to produce or the optimal amount of input. Indeed, it is difficult to decompose the output value to each input in some team productions. Monitoring and rewarding inputs is especially problematic when the input is labor effort and the firm consists of many employees. As a result, it may be too difficult for the firm to incentivize or enforce the desired input levels or the optimal use of effort to specific labor tasks to maximize profits. Thus, ineffective monitoring of the inputs in team production or assigning rewards to non-contributing team members would negatively affect firm performance. Multiple authors have discussed the variations in property right allocations that change a firm’s owners’ ability to monitor, incentivize, or constrain agent actions toward desired firm objectives (see for example Bearle & Means, 1932; Fama & Jensen, 1983). The literature often focuses on how two types of property rights are allocated in organizations: control and residual rights. The research emphasizes organizations that separate control rights from residual rights (or ownership) and the costs and advantages. An organization’s residual rights typically include claims to the difference in the unknown organizational income and payments promised under fixed claim contracts (Fama & Jensen, 1983, p.302). Control rights are the rights to make decisions regarding assets owned by the firm. In separated ownership and control firms, managers typically have limited control rights to decide the daily use of the assets, implement organizational policies that meet residual rights holders’ objectives, and hire and monitor additional management. Residual rights holders typically reserve some rights of control. For example, the rights to reward top managers, determine top management termination, monitor management activities, and ratify organizational policies are rights usually reserved by residual rights holders. “Ownership” in an organization is a legal term to determine who has property rights when not explicitly or implicitly allocated to other parties in a prior contract, custom, or law. “Ownership” is not an economic term that identifies who makes resource allocation decisions! Indeed, in a zero-transaction costs analysis, the determination of ownership is irrelevant to resource allocation (Coase, 1960). Alternatively, when transaction costs are prevalent, the allocation of ownership rights can significantly affect resource allocation. Ownership rights usually include the previously mentioned bundle of residual rights to the unknown income minus fixed payments and formal residual rights of control to make important decisions on the use of assets. Organizations with ownership rights separated from control rights are suboptimal because of the complexity of transactions and bounded rationality of agents. For example, it would be challenging to specify all residual rights and enforce agents to maximize the value of the residual rights through perfectly structured incentives—particularly as the nature of the relationship changes due to external factors (see for example Simon, 1955). Consequently, separated ownership and control firms are unlikely to have a single profit-maximizing motive; instead, they are organizations made up of individuals seeking to maximize their constrained or incentivized utility, which is likely misaligned—at least to a certain extent—with a firm objective to maximize profit or residual claims, for example. Thus, NIE discusses agency costs as the primary organizational costs to the firm when using a property rights approach, and there is separation of ownership and control.

26  Handbook of research on cooperatives and mutuals Agency Theory Agency costs arise when the agent who makes decisions does not bear the costs of their decisions. The agent is said to have control rights to assets but does not possess the complete set of ownership—or residual rights—to those assets. Consequently, agents may use their decision rights to enhance or capture value for themselves at the expense of value to the claims by owners. For example, agency costs arise in firms because managers: ● augment their income by consuming nonpecuniary goods; ● opportunistically maximize their contractual wage without pursuing the objective of the owners; ● have limited information on the impact of their decisions on the value of residual rights; and ● are bounded rationally from ranking all decision sets based on the impact to the owners’ welfare. There is a desire to use agents despite agency costs because of specific advantages. These advantages include: ● ● ● ●

enhancing management expertise; reducing transaction costs by integrating a broader scope of transactions; obtaining or achieving scale and scope efficiencies; and capturing efficiencies through specialization in risk-bearing.

A line of research has explored the features of cash, share, and wage contracts with wholly-owned firms in agriculture production as a microcosm of agency and risk-bearing issues for all firm types and sectors. The literature identifies the impacts of agency costs on farm performance and the offsetting advantages of having an agent manage the farm instead of a sole proprietor or partner. The choice of which governance systems are optimal depends on the uncertainty of farm production and the willingness to bear the risk (see for example Stiglitz, 1974; Allen & Lueck, 1998; Elliott & James, 2017). The Firm as a Nexus of Contracts Jensen and Meckling (1976) extended the property rights approach and the importance of agency costs by viewing the firm as a “nexus of contracts,” not an entity directed by an entrepreneur in the Coasian (1937) sense, or a team, as described by Alcian and Demsetz (1972). Indeed, the firm is purely a legal counterparty in contracts and not a transaction governance structure in itself. Thus, each contract in the nexus governs transactions and reduces transaction costs by allocating property rights, defining incentives, non-performance, contingencies, and rights to monitor activities. In the nexus of contracts approach, firm performance differences can be traced to an analysis of the optimality of contracts with individuals and entities associated with the firm and not the discrete choice to use a firm or a market. Consequently, Jensen and Meckling (1976) argue that the firm’s boundaries are not essential to understanding the firm’s performance. Instead, a focus on the performance of contracts that govern and align incentives with firm objectives in many complex relationships inside and outside the firm is necessary.

The new institutional economic theory of cooperatives  27 Unlike the discrete governance type (market or firm) that best minimized the costs for each transaction described by Coase (1937), firms can adopt multiple or mixes of contracts that govern the same type of relationship in the nexus of contracts approach. For example, Jensen and Meckling (1976) used their nexus of contracts framework to emphasize that agency costs are why we observe the diversity of equity contracts and the bond and equity capital mix used to capitalize many corporate firms. Moreover, Parmigiani (2007) explained why some firms make some inputs internally while simultaneously purchasing the same inputs using a market—a condition that is not entirely conceivable if one were determining whether to use a firm or market based on the tradeoff of internal and external transaction costs. New Institutional Economics Broadens the Comparative Analysis to All Levels of Institutions The emphasis on contracts that allocate property rights inside and outside the firm led to a broader study of institutions to understand the firm. The broader study of institutions included the legal and political environment (for example, social contracts) and embedded social relationships and norms. Some embedded and environmental property rights patterns lead to persistent economic underperformance. Thus, there may be brief periods of broad institutional change where institutions at different levels are reinvented to improve economic performance. Williamson (2000) provided a framework to understand the different levels of institutions governing the allocation of resources in a firm and the economy (Table 2.1). In Williamson’s framework, embeddedness, environment, and governance levels provide institutional restraints on individual and organizational choices that affect resource allocation. As a result, NIE contends that a comprehensive comparative institutional analysis is needed at all levels of institutions to understand the differences in firms’ economic performance and economies in general. Embeddedness The first level of institutions that constrains the utility-maximizing behavior of agents is embedded institutions. Embeddedness includes the informal beliefs, values, norms, and customs that vary among different cultures and regions. Individuals construct embedded institutions to formulate behavior in the presence of uncertainty. A local community or network typically enforces embedded institutions using shunning or ostracizing individuals who do not adhere to the institutions. Embedded institutions are slow to change and rare to observe rapid, broad changes to improve economic performance. Williamson (2000) conjectured that modifications to embedded institutions might only occur every 100 years. Some notable contributions to the better understanding of embedded institutions on economic performance include Putnam (1993) and Ellickson (1989). For example, Helliwell and Putnam (1995) theorized that the differences in economic growth and well-being in Northern Italy versus Southern Italy were due to a greater sense of civic duty of northern Italians that led to high participation in democratic governance. Putnam (1993) suggests that a more supportive institutional environment for firms and economic performance results when individuals participate in democratic governance and have extensive social networks. Ellickson (1989) studied the conflict-resolution mechanisms of whalers in the eighteenth and nineteenth centuries. Ellickson described how the close-knit group of whalers developed

28  Handbook of research on cooperatives and mutuals Table 2.1

Levels of institutional analysis for cooperatives, frequency of change, purpose, and objective

Level

Frequency of Change

Purpose

Economic Objective Function

Embeddedness

Rare, slow

Protect against “alien values” (e.g.,

Beliefs, Values, and Norms Used to

Rochdale Principles)

Formulate Behavior In the Presence

(informal)

of Uncertainty Environment

10 to 100 years

(formal)

Social Contract (e.g., Incentivize

Maximize Social Welfare Subject to

Cooperative Development

Embeddedness Constraints

Taxation Policy Determine Limits of Cooperative Antitrust Exemption) Governance Resource

1 to 10 years Continuous

Allocation

Economize on Agency, Transaction,

Minimize Transaction Costs Subject

and Collective Decision-Making Costs

to Environmental Constraints

Maximize member welfare

Maximize profit/utility Subject to Environmental & Governance Constraints

Source: Adapted from Williamson (2000).

rules for determining ownership of harvested whales in the open seas and enforcing those rules through group action. The salient point made by Ellickson is that a state is not always necessary to enforce property rights. Rather, informal norms and customs can emerge, and social groups can enforce property rights and resolve conflicts efficiently, as they did in this case, without state enforcement. Environment The environment is the second level of institutions that constrain the utility-maximizing behavior of agents and impose constraints on organizations or incentives through favorable taxation and other support. Institutions at the environment level are often formal rules (for example, statutes) by federal, state, and local governments and enforced by judicial systems. Some formal laws can persist for many years and rarely change (for example, the United States Constitution, the Capper–Volstead Act). However, changes to the institutional environment occur more frequently than at the embeddedness level. Research on the institutional environment examines the objective of governments to maximize social welfare through social contracts, the governing rules adopted that are influenced by the embeddedness level of institutions, and the judicial systems used to enforce property rights. Seminal research on the effects of the institutional environment level on economic performance has been conducted by North and Weingast (1989) and Acemoglu, Johnson, and Robinson (2001). For example, North and Weingast (1989) describe the constitutional changes in seventeenth-century England that limited the monarch from changing financial agreements unilaterally. Instead, after the Glorious Revolution of 1688, the monarch of England had to gain the consent of parliament to change any financial contract. The effect of the change was a credible commitment to private property holders that the monarch would not confiscate property if under financial stress. North and Weingast (1989) argue that this change to the constitution at the environment level was the cause of greater economic activity that led to the

The new institutional economic theory of cooperatives  29 industrial revolution. They posited that improved economic performance and factor productivity resulted from firms’ more secure private property rights. Changes in the institutions at the environment level are often path-dependent. Path dependency causes changes in institutions to preserve the historical resemblance of older institutions but with minor tinkering in areas that have caused the most significant economic underperformance. For example, Acemoglu, Johnson, and Robinson (2001) suggest that regions with a favorable settlement for Europeans during the seventeenth and eighteenth centuries led to superior economic institutions being implemented by the colonists that secured property rights and improved economic growth in those regions during the twentieth century. Alternatively, poorer institutions and insecure property rights prevailed when European colonization was challenging because of the high mortality of settlers. Consequently, Acemoglu, Johnson, and Robinson (2001) found that these regions generally had poor economic growth in the twentieth century. The consequence of path dependency is that institutions and institutional change may cause a further divergence—or at least a persistence in differences—in institutions among different societies, cultures, regions, and organizations. As a result, differences in economic performance across regions and firms will likely persist, necessitating a focus on institutions unless there are widespread changes to institutions and convergence in institutional paths. Governance: Collective Action and Transaction Cost Economics The third level of institutional analysis is governance. The governance level includes the organizational structure that governs many exchanges of goods and services in an economy. The early focus was on the firm versus the market to govern transactions. Later discussions incorporated novel organizations to facilitate collective action and coordinated investment besides a firm and a market, including bilateral contracts, cooperatives, alliances, associations, informal communities, and societies, to name a few. The type of governance used for each transaction can change with greater frequency than the embeddedness or environment level. For example, firms frequently evaluate whether to make or buy (for example, to outsource or make in-house) inputs critical to their final output. Also, firms can evolve from a cooperative to an investor-owned firm or evolve from an informal community network into a formalized society or mutual. There are two primary approaches of theory on optimal governance structures: collective action and transaction cost economics. Collective action is focused on institutions to facilitate collective action, mainly when the resources are held in common and governed by a community. Transaction cost economics focuses on the attributes of the transaction and the optimal governance structure to economize on transaction costs, mainly when assets are mutually dependent on each other to maintain their highest value. Collective Action, Common-pool Resources, and Vaguely Defined Property Rights The collective action approach is often framed as a tragedy of the commons (Ostrom, 1990). An early description of the tragedy of the commons was the impact of overgrazing on publicly owned land (Hardin, 1968). In the overgrazing example, a herder using an open range can maximize their utility by adding more animals to graze on the open range. Unfortunately, if each herder pursues its maximum utility, the number of animals grazing on the land would

30  Handbook of research on cooperatives and mutuals exceed its carrying capacity. As a result, the range would quickly degrade because of overuse. Thus, the cost of each additional animal of any herdsman in the open range is borne by all the herders that use the open range, but the returns of each animal using the range are captured by the individual herdsman. If all the herders do not collectively govern the number of animals grazing on the open range, each would be deprived of the open range for livestock production due to overgrazing. The theory of whether collective action will occur to govern and provide collective goods was advanced by Olson (1965). Olson’s approach to collective action differed from previous research because of his focus on individual action in groups instead of the group itself. Using deductive logic, Olson (1965) challenged two axioms regarding collective action. First, Olson suggested that a group having a common interest to provide a collective good was a necessary but not a sufficient condition for the collective action to occur. He reasoned that collective action is uncertain due to freeriding by individuals. Second, Olson suggested that minority members may exploit majority members because minority members are more likely to freeride in the collective action than majority members—contrary to the widely held belief that the majority tyrannizes the minority in collective action. Freeriding during collective action is particularly prevalent when the collective good is non-excludable and non-rivalrous (that is, when the consumption of the collective good by one member does not reduce the benefit of the collective good by another member). For example, in the previous case of grazing on an open range without exclusion, each herder using the open range would prefer to maintain the same amount of animals and force other herders to reduce their herds to prevent degradation. When there is an optimal, or less than the optimal, number of animals grazing on the open range, the open range is non-rivalrous because the range can renew sufficient pasturage for each animal. A non-excludable and non-rivalrous open range is similar to the collective benefit of an open cooperative that frequently offers better prices and market competition to members and non-members when the cooperative is not overused and the value becomes degraded. Olson argued that collective action might occur despite free riders when members obtain disproportionate benefits (for example, a single individual receives a large portion of the collective action benefits) or when groups are small and enforcement to prevent freeriding is less costly. However, members would likely undersupply the collective good compared to the optimal amount. For example, using the previous example of an open range, suppose one herder that used the open range possessed thousands of animals while another herdsman only possessed a few animals. Then the large herdsman would be more likely to reduce their herd to preserve the open range. The level of reduction would be at least where the pasturage would renew for the large herder’s animals because they would largely bear the costs if the open range degraded. On the other hand, the small herdsman would likely free ride and not reduce their herd unless forced to by the larger herdsmen since any changes to the small number of animals they possessed would have less impact on the renewability of the open range. Thus, it is unlikely that either herder would choose the optimal number of animals through their individual choices. Rather, the larger herder would not consider other herder benefits when determining their herd reduction, and the small herder would freeride without costly enforcement. Because of free riders, Olson (1965) suggests that collective action would be unlikely as the number of group members increases and the members receive increasingly smaller benefits, regardless of common interest. Additionally, even if collective action occurred, collective action would likely be suboptimal—even in small groups—unless there was low-cost coer-

The new institutional economic theory of cooperatives  31 cion or selective incentives to ensure each individual chose the optimal amount of collective good to supply. Thus, efficient collective action is only attainable if selective incentives can be employed where benefits and costs are shared efficiently and proportionately across all members with a common interest for a collective good. Olson described how federation is a common strategy that groups employ to achieve larger collective action but efficiently govern freeriding. Federation allows collective action to be conducted by smaller groups with lower enforcement costs but still captures some benefits from collective action among more members. The commons’ tragedy and collective action problems from freeriding have been applied to many community-owned property cases, particularly cooperatives, to understand the variety of solutions governing the resources to maximize production, utility, and profits without depleting the resources. However, common-pool resources are costly to govern because of vaguely defined property rights. For example, enforcing selective incentives that result in optimal collective action is challenging when rights to enforce collective action or rights to the collective good from coordinated action are vague.4 A well-defined property rights system typically has five underlying qualities: ● ● ● ● ●

the right to possess an asset; the right to determine the use; the right to sell and receive profits from the asset or its outputs; the ability to exclude others from using the asset; and the ability to costlessly isolate the individual effects to the assets or their outputs.

When rights to assets are deficient in one or more of the five areas, the property rights system can be considered vaguely defined (ill-defined). Barzel (1997) advanced the theory of vaguely defined property rights by contending that when a single party can contribute to the variability in the value of an asset owned in whole or part by another party (for example, agency costs)—and the individual effects cannot be costlessly isolated and charged or rewarded to the individual—the property rights can be considered vague. For example, in a sharecropping contract, landowners must invest resources to determine the size of the crop a tenant farmer produced and if the tenant applied the optimal amount of effort to maximize crop production. As a result of the costs to measure a share of the crop and monitor the effort the tenant used in production, the right is considered vaguely defined. Alternatively, if the landowner used a cash rent contract, then a property right to cash rental payment would be well-defined since no additional resources would be necessary to determine if the landowner received his rightful residual claim. Instead, it would be observed at the point of the transaction! Similarly, a cooperative member that receives a price per unit for their product plus a vague claim to a patronage payment is more vaguely defined than a producer that only receives a price per unit. Using Barzel’s (1997) emphasis on measurement costs to define vague property rights, most property rights to assets or outputs would be considered vaguely defined—it is often necessary to expend resources to measure and ensure that property rights have not been infringed or expropriated. However, as Barzel (1997) notes, a continuum of property rights systems exists where property rights systems range from more well-defined to more vaguely defined depending on the number of resources needed to protect that property from encroachment or expropriation.

32  Handbook of research on cooperatives and mutuals Property rights are typically vague and a source of tension when assets are held in common. The vagueness arises because of the inability to exclude others from using an individual’s claim of the property and the inability to isolate individual effects on the asset’s value. For example, while the cooperative’s common assets may be well-defined (for example, vast resources would not need to be expended to know what land, capital, and buildings the cooperative own), the output value from the cooperative’s assets can be affected by management or member–user activities that are not costless to isolate. Furthermore, non-members may be able to capture the value of the cooperative assets (that is, freeride) without being a member. As a result, cooperative members’ property rights are often vague due to the collective ownership of assets managed by agents and the non-excludability of collective benefits. Ostrom (1990) defined eight principles to manage common resources efficiently even when the individual’s rights to the resources may be vaguely defined. The eight principles are: 1. clearly defined boundaries with effective exclusion; 2. harmony between the resource environment and the collective action governance structure; 3. decision-making is conducted in a way to encourage greater participation of resource stakeholders; 4. rules are enforced through effective monitoring; 5. violations are punished; 6. low-cost conflict-resolution mechanisms; 7. higher-level institutions allow self-governance; and 8. rules are organized and enforced through federated organizations with more extensive collective action. The collective action approach typically uses case studies, game theory, and public choice (see for example Buchannan & Tullock, 1965) frameworks to understand various collective action governance solutions to vaguely defined property rights and common-pool resources (see for example Olson, 1965; Poteete, Janssen, & Ostrom, 2010). Transaction Cost Economics An alternative approach to understanding optimal governance is transaction cost economics (TCE). TCE builds off the early work of Coase (1937) and Alcian and Demsetz (1972). The development of transaction cost economics was primarily conducted by Williamson (1975, 1991), Grossman and Hart (1986), and Hart and Moore (1990). Tirole (1999) has further provided important advances in understanding incomplete contracting and synthesizing contract theory with TCE. TCE suggests that parties that invest in specific assets expose themselves to counterparty hazards, particularly when the transaction changes and the counterparty can opportunistically take advantage of the change to benefit themselves. Williamson (1991) describes six types of asset specificity that can create hazards and transaction costs: ● site-specificity, in which parties sink specific investments near each other to reduce transportation and inventory costs, and the assets are generally immobile; ● physical asset specificity, where relationship-specific equipment is necessary for the transaction; ● human asset specificity, where transaction-specific knowledge through specialized training or learning-by-doing is necessary;

The new institutional economic theory of cooperatives  33 ● brand-name capital, where there are intangible assets that influence the value of the asset being transacted; ● dedicated assets, where there are investments that would not have been made outside of the transaction; and ● temporal specificity, where assets must transact in a particular sequence or by a specific period to maintain their value. Various degrees of contracting can be employed to protect against the counterparty hazard created by specific assets. However, contracting has three significant costs that must be economized when choosing a contract or organization: ● costs of maladaptation from unforeseen contingencies; ● costs of describing contingencies; and ● costs of enforcing a contract. Early TCE work described the continuum of organizations to economize on transaction costs from specific investments as markets, hybrids, and hierarchies. Later, the TCE literature described the continuum as classical, neoclassical, and relational contracts. Classical contracts are typically simple, autonomous agreements that specify action and performance—“sharp in by clear agreement; sharp out by clear performance” (Macneil, 1974, p.738). Neoclassical contracts are more complicated contracts and introduce additional provisions. For example, in neoclassical contracts, the length of the contract increases, penalties are described, provisions are added for information disclosure, and specialized dispute mechanisms appear. As transactions become even more complex, contracts move to relational contracting. Relational contracts leave many of the provisions in neoclassical contracts silent or incomplete, and disputes, rewards, penalties, and monitoring are determined by an authority or authoritative body ex post the agreement. Hybrid forms of organizations, such as cooperatives, utilize multiple and mixed contracts. Many organizations appear to be hybrid forms in the agri-food sector because of the increased concentration to achieve scale and transaction cost efficiency among processors and distributors and the existence of dispersed producers and consumers on either side of the supply or value chain (Ménard, 2018a). Thus, hybrids can govern agri-food transactions to coordinate and protect specific investments through relational contracts while retaining the high-powered incentives of markets using simple, classical contracts (Klein, 1998; Ménard, 2018a). Individuals must select which discrete governance or contract protects against counterparty hazards when there are specific assets without offsetting organizational costs. For example, let us imagine one firm owns a dairy. At the same time, another firm invests in a milk-processing facility closest to the dairy. Because there is site-specificity due to the proximity of the dairy and the milk-processing facility, temporal specificity because of the perishability of milk, and physical specificity because of investment of assets specific to the production (for example, a parlor) and processing of milk (for example, a separator), there is a counterparty hazard. For example, the milk processors could try to expropriate the economic rents generated from the dairy by refusing to accept milk unless the dairy agrees to a reduced price. Alternatively, the owners of the dairies may refuse to supply milk to the processing facility and directly sell their raw milk to consumers for a lesser price or transport it to a more distant processing facility. Suppose the threats are credible and the assets are mutually dependent on maintaining the highest value. In that case, the milk-processing facility could be underutilized and have high

34  Handbook of research on cooperatives and mutuals marginal costs, and the dairy could have high transportation costs or lost value from the milk not being processed by the closest facility. When both parties have counterparty hazards, there can be a mutual “exchange of hostages,” where neither party may try to take advantage of the other without risking future opportunistic behavior. Alternatively, only one party may have a hazard. For example, the milk-processing facility value may not depend on the supply of a single dairy, or the dairy may have multiple options to deliver its milk for processing. Regardless, in either case, the parties may seek to remove the hazard using a simple, classical contract if the relationship is contractible. However, the contract would safeguard both parties only if a third-party enforcer could efficiently penalize any opportunistic behavior identified in the contract. Suppose dairy owners and the milk-processing facility cannot describe sufficient contingencies in the contract given technological advances and natural variations in milk production. For example, the dairy may not know how much milk it will produce and for how long it will need access to the processing facility. Moreover, the milk-processing facility may need a sufficient quantity of milk delivered for an extended period—but not more than its processing capacity—to recover the sunk costs of specific processing equipment. Further, there may be periods where the processing facility will need to scale back production and reduce its purchase of milk to reduce losses in processing. Alternatively, there may be periods when a dairy would like to expand and gain more delivery rights or reduce their herd, transfer delivery rights, and redeem their remaining equity. Consequently, frequent changes in the external environment, counterparty preferences, counterparty human and financial condition, milk supply, milk demand, or technology may result in unforeseen contingencies and require a renegotiation of contract terms between the dairy and the milk-processing facility throughout the life of the milk-processing assets. Thus, specifying all types of contingencies for a repeated, complex transaction ex ante may be challenging, particularly when the enforcement of the contract requires the third party to punish non-performance. As a result, it may be too costly to design a classical contract where all possible contingencies are described explicitly, what constitutes non-performance, and how rewards to each party will be meted out. Instead, it may be more efficient to have an association of dairy owners own the milk-processing facility where supply requirements and other aspects are left undefined, vague, or silent. The dairy owners would mutually agree upon such policies as circumstances change in an association. However, the incomplete nature of the contract for an association of dairies may lead to high organizational costs because of vaguely defined rights. For example, the association may be inefficient in governing the same issues the dairy and processing firm could not formalize in a long-term contract. Would the association efficiently govern how each dairy owns, monitors, and controls the milk-processing facility? Would the association determine when each dairy would recoup its investment to purchase or build the processing facility? How much would each dairy be allowed to supply to minimize processing costs, and what types of techniques and milk quality would be required for processing? Would the association renegotiate terms in good faith as external circumstances change? Suppose the association does not develop an efficient decision-making apparatus to determine optimal governance of the transaction as circumstances change. Then the association may incur high costs and risk financial loss because of maladaptation. Thus, it may be necessary to have an integrated relationship between all the dairies and the milk-processing facility under one firm. An integrated relational contract would bestow extensive authority to a primary decision-maker to adapt resource allocation, conduct monitoring, and meter rewards

The new institutional economic theory of cooperatives  35 in a changing environment. However, the central decision-maker will have to directly monitor and meter rewards to production at all the dairies and the processing facility. The task of monitoring and metering rewards efficiently becomes daunting, particularly as circumstances change. As a result, agency costs would likely increase under the integrated approach because each dairy manager and processing firm manager’s incentives may not align with maximizing the residual claims to processed milk production (for example, see the failure of bonanza farms: Allen & Lueck, 2004). Williamson (1975; 1991), Grossman and Hart (1986), and Hart and Moore (1990) provided similar models on the most efficient governance structure to minimize transaction costs when assets are specific. However, significant differences between Williamson’s model and the Grossman, Hart, and Moore model remain. The most crucial difference is that Williamson views the opportunism of agents after (ex post) specific investment as the most critical hazard in an economy that needs efficient safeguards to reduce costs from renegotiation or maladaptation. For example, the dairy owners already made the investments in the previous example. The milk-processor investment then occurred, and the hazard arose, necessitating an efficient governance relationship to reduce costs after the investment. Alternatively, Grossman and Hart view bargaining and contracting costs before (ex ante) specific investment as the most significant hazard that could prevent coordinated investment in mutually dependent, efficient assets without an efficient governance structure to reduce costs. For example, in the previous case, investment in a nearby efficient milk processing firm may not have occurred without a preexisting mutually agreed contract with the dairies. Grossman and Hart’s model identifies who should own both assets if asset specificity is high. Williamson’s model does not specify who should own or control the assets. Instead, Williamson’s model identifies whether the parties should integrate the assets. TCE generally suggests that ownership of assets should favor the party whose assets are most sensitive to the use of the counterparty asset to maintain the highest value. Similar transaction attributes are examined in both models of TCE to determine the optimal governance structure to minimize transaction costs and provide safeguards to counterparty hazards to facilitate trade. The transaction attributes examined in each approach include: ● the frequency, where low frequency may be solved by a simple contract, while high frequency and complexity may increase transaction costs; ● the uncertainty, where more uncertainty requires more frequent renegotiation and adaptation; ● the complexity, where transactions that are more complex raise transaction costs and likelihood for maladaptation; and ● the specificity of assets, where the more specific the investment, the higher the transaction costs from hazards, enforcement, and maladaptation. Most empirical work has been conducted using Williamson’s post-asset-specific investment approach and has found general support. Alternatively, Grossman and Hart’s ex ante specific investment and contracting costs problem is more difficult to empirically examine because of limitations in analyzing pre-investment bargaining, negotiations, and contractual costs (Shelanski & Klein, 1995).

36  Handbook of research on cooperatives and mutuals Table 2.2

The distinction of the NIE firm from a neoclassical economics firm

Economic Concepts

Neoclassical Economics

New Institutional Economics

Description of the firm

An entity where labor, capital, and inputs are

A structure to govern the allocation of resources

mixed to produce output

in transactions or a counterparty in a contract that governs the transaction.

The objective of the firm

Profit maximization

Motivated by profit maximization

Decision-making

Marginal costs equal marginal revenue, and

Utility maximization of agents constrained by

marginal utility equals the marginal substitution

formal and informal institutions.

rate. Performance differences

Differences in scale and scope efficiencies,

Differences in embedded and environmental

risk-taking, and technology

institutions that secure property rights and enforce implicit and explicit contracts.

Diversity of organization types

Not addressed

Firms are diverse because each type has advantages and disadvantages in minimizing transaction costs. Also, some firm types are restricted from altering property right allocations because of embedded and environmental institutions.

Source: Authors.

SYNTHESIZING THE DISTINCTION OF NIE FIRM COMPARED TO A NEOCLASSICAL ECONOMICS FIRM NIE is distinct from neoclassical economics in several fundamental ways (see Table 2.2). The main difference is that NIE views the firm and market as a type of governance structure to allocate resources—a firm being the polar opposite governance type of a market. Neoclassical economics, on the other hand, simply views the firm as a production function where various inputs, labor, and capital are mixed to produce output, and the market is a transaction(s) venue that uses a price mechanism. Neoclassical economics does not account for agency costs in firm decisions. Alternatively, NIE identifies firms have organizational costs primarily because agents who make firm decisions seek to maximize their utility and not necessarily profit or the firm’s objective. Suboptimal property rights allocations that raise costs for monitoring, make residual claims insecure and vague, and misalign rewards to firm objectives can cause poor performance. Consequently, NIE refocused on various mechanisms which organizations use to secure residual claims and align multiple agent incentives, including piecemeal rates, monitoring, profit sharing, capital markets, and performance-based salary. NIE contends that the property right allocations may be difficult to change because of the embeddedness of norms and the need to change laws at the environment level to allow for more secure property rights that enhance firm performance. Alternatively, neoclassical economics fails to fully consider the broader constraints of the environment and embedded institutions that affect firm behavior and performance. Instead, neoclassical economics assumes a firm has a single profit maximization motive and that property rights to production, factors of production, and to profit streams are secure and costless to enforce. Neoclassical economics further assumes optimal decisions regarding firms’ allocation of resources are mainly costless and uniform across cultures and regions.

The new institutional economic theory of cooperatives  37 Neoclassical economics provides a limited analysis of the choice of alternative forms of firm organization and contracts and the impact on firm productivity and performance. Alternatively, NIE examines the continuum of alternative forms to organize, transact, and allocate resources for production (for example, a cooperative versus an investor-owned firm). NIE conjectures that a continuum of contracts exists to reduce transaction costs while assuming varying levels of organizational costs. Further, researchers can study several attributes of the transaction (that is, asset specificity, frequency, complexity, and uncertainty) that can be used to predict what type of governance structure is optimal to minimize transaction costs and organizational costs. However, NIE acknowledges that the empirical support for choosing a single contract or set of contracts is still underdeveloped. For example, firms can employ a mix of arrangements for the same type of transaction, and implicit norms and mutual dependence may negate a need for formal contacts even when there is a counterparty hazard.

EARLY COOPERATIVE THEORY AND THE EMERGENCE OF NEW INSTITUTIONAL ECONOMIC CONCEPTS NIE has enabled multiple areas of advancement to understand cooperatives’ issues, purpose, and diversity compared to early neoclassical models describing the cooperative. Specific concepts of NIE integrated into cooperative theory are transaction costs resulting from asset specificity, efficient safeguards to protect counterparty hazards, problems when governing common-pool resources, emphasis on varying property rights allocations to solve transaction cost problems, constraints of embedded and environmental institutions, and agency relationships. Several authors have conducted more extensive reviews of the early cooperative theory and developments due to NIE concepts (for example, Bateman, Edwards, & LeVay, 1979; LeVay, 1983; Vitaliano, 1983; Sexton, 1984; Staatz, 1989; Royer, 1987, 1994; Cook, Chaddad, & Illipolous, 2004). We will briefly discuss early cooperative theoretical work and expand on the four critical NIE concepts we deem to have led to the most significant advancements in cooperative theory. The Cooperative as a Coalition (Team) Early work on cooperative theory viewed the cooperative as a coalition of farms extending to a processing plant. Using existing neoclassical models of a multi-plant investor-owned firm, the authors determined optimal decisions of the cooperative production by a sum of all the marginal costs of members (for example, Emelianoff, 1948; Philips, 1953; Robotka, 1957). In these early models, the purpose of a cooperative was to capture resource allocation efficiencies through vertical integration to a downstream processing plant. The models inaccurately determined that the farmer members reacted to and bore all the profits and losses at the cooperative. For example, the authors assumed that each member would change their supply behavior at their farm to maximize profit for all member farms in the cooperative. Early authors recognized that the assumption that individual cooperative members would seek to maximize returns in a cooperative at the expense of their farm was poor (for example, Ohm, 1956; Trifon, 1961). Rather, each cooperative member has an incentive to maximize the use of the cooperative to enhance the profitability of their farm, for example, but not necessarily the profitability of the cooperative or other members. Indeed, the misaligned incentives of

38  Handbook of research on cooperatives and mutuals members to maximize profit on their farm at the expense of all members is similar to a herdsman using an open range to maximize their welfare, as described in the commons tragedy earlier in this chapter! The Cooperative as a Firm Enke (1945) proposed a solution to the modeling of the cooperative as a coalition by viewing the consumer cooperative as a firm with a central decision-maker. With a central decision-maker with the extensive authority to coordinate members’ consumption to maximize member welfare, cooperative behavior and objectives were similar to those of a neoclassical economics firm with a single objective. However, unlike a neoclassical firm that maximized profit, the cooperative would ideally set prices and the level of patronage to maximize the welfare of members. The cooperative’s producer surplus would be returned as a patronage dividend, and members would gain consumer surplus through better prices for products consumed. The cooperative solution would be socially optimal compared to non-competitive markets because cooperative members would gain producer and consumer surpluses from a more competitive market. However, Enke’s optimal solution introduced new issues when a central decision-maker did not wholly control the cooperative policies or member actions, members had varying preferences, and managers did not altruistically maximize member welfare. For example, suppose the cooperative made patronage dividends after the member consumed the products to maintain capital for organizational needs. In that case, new members with little investment in the cooperative, but an equal vote to determine policies, would seek to force the manager to lower (raise) prices for consumed (produced) goods past the optimal point to gain more immediate benefits where past members would bear the loss. Alternatively, past members invested in the cooperative would use their voting power to force the manager to maximize patronage dividends and not lower the price of goods to new member-consumers. The managers may also try to use investment in the cooperative, or gains from non-member trade, to maintain the cooperative and the management’s benefits past the useful life of the cooperative. More importantly, if the central decision-maker did not control the level at which members patronize the cooperative, members would be incentivized to overuse and degrade the cooperative value because members would perceive the patronage dividends as a price discount (premium). When there was no surplus to be gained from using the cooperative—because of a competitive market or a non-competitive market where competitors altered their pricing behavior—members might not use the cooperative at all, resulting in cooperative failure and exit. Exit could be harmful to members who frequently used the cooperative and accumulated large amounts of unredeemed investment, particularly if the cooperative used members’ investments to purchase specific assets with little value outside the relationship. Thus, the optimal equilibriums identified in early cooperative models would be fragile when members and managers act to maximize their utility despite a central, authoritative decision-maker who would theoretically seek to maximize member welfare jointly. Helmberger and Hoos (1962) suggested that pursuing only minimum (maximum) prices given an at-cost constraint and closing the cooperative to prevent overuse and increasing average costs would lead to a sustainable long-term equilibrium for cooperatives. In their model, in the long run, the members would seek to expand membership, or non-member business, when additional consumption (production) would capture a more significant return

The new institutional economic theory of cooperatives  39 per unit of costs at the cooperative. When additional membership would cause the cooperative to have higher per-unit costs and higher (lower) per-unit prices, it would be in the interest of existing members to implement policies to restrict patronage or close membership. As a result, the cooperative could change the property rights of membership, in the long run, to adjust the level of patronage and maintain the minimum (maximum) prices per unit for existing members and a break-even level. Alternatively, an open member cooperative would cause members to overuse the cooperative to a point where the per-unit prices would be too high (low) for additional members to enter the cooperative. Helmberger and Hoos (1962) identify that when existing members control prices and policies of the cooperative, the maximum return per unit equilibrium will result. On the other hand, when new members and managers control prices and policies, the cooperative may seek to expand business where the cooperative would maximize throughput and the number of members. While the neoclassical solutions in the Helmberger and Hoos (1962) and Enke (1945) models were determinant, they created a range of objectives from which cooperatives could choose (for example, maximize producer returns per unit, maximize member welfare, or maximize prices with an at-cost constraint at the cooperative) (Bateman, Edwards, & LeVay, 1979). Additionally, the models assumed hyper rationality and altruism on the part of the manager to know optimal levels of patronage, prices, marginal costs, and members to maximize returns per unit, for example. More glaringly, the authors assumed managers or a central authority had unrestricted rights to control member actions, specifically through the prices offered or quantity received. Indeed, the authors assume there would be zero transaction costs when enforcing the level of patronage (that is, quantity and quality) by members. A robust, optimal solution for cooperatives is further doubtful when the solutions for stability are not in harmony with the embedded principle values of the cooperative and environmental constraints. For example, cooperatives that pursued proportional voting to prevent the expropriation of existing member investment conflict with embedded principles (Rochdale Principles) of the cooperative where each member has one vote regardless of patronage (for example, Phillips, 1953). In addition, closed cooperatives that pursued profit or maximum returns per unit would potentially conflict with the spirit of laws that grant antitrust exemption to cooperatives to improve non-competitive markets (for example, Cotterill, 1993). Because of the neoclassical assumptions to obtain single, optimal objectives, multiple authors suggested that a robust, unique optimum in a cooperative would be unlikely with membership heterogeneity, agency issues, bounded rationality, and transaction costs (for example, LeVay, 1983). For example, Enke suggested that maintaining the optimal cooperative objective would likely devolve into member and manager tensions. Specifically, cooperative objectives may gravitate between ‘financial conservatism (e.g., conventional pricing, maximizing of profits, and reinvestment of resultant surpluses) versus member impatience (e.g., low retail prices, full patronage dividends, and greater volume)’ (Enke, 1945, p.153). Some authors took the logical deductions from the neoclassical theory of cooperatives to conjecture that the cooperative could not survive long-term without a single objective, greater access to capital, and control of member activities (for example, Helmberger, 1966). However, those predictions have not been empirically supported (LeVay, 1983; Cook, 1995; Iliopoulos & Valentinov, 2018). Indeed, cooperatives remain extensive, and rampant loss of market share to fully integrated supply chains has not generally been observed.5 Still, unsurprisingly, members and management have persistent and competing views and desires for institutional change (for example, Dunn et al., 2002). Nevertheless, US ag cooperative gross business

40  Handbook of research on cooperatives and mutuals volume was found to have been relatively stable for the past 35 years (for example, Elliott, Elliott, & Van der Sluis, 2018) and cooperatives globally have remained similarly stable even during periods of severe economic turbulence (for example, Bijman, 2018; Birchall & Ketilson, 2009). Shift in the Theory of Cooperatives due to NIE The introduction of concepts from NIE into cooperative theory has shifted theoretical attention from an optimal, uniform behavior of cooperatives and a single economic rationale for the existence of cooperatives (for example, see Cook’s (1995) descriptions of the “competitive yardstick,” “pacemaker,” “mop-up,” and “wave theory”) to assuming cooperatives provide a second-best contractual solution to reduce transaction costs and provide collective goods and added value using assets held in common. As discussed above, in a first-best contractual solution, the cooperative would have unbounded knowledge of incentivizing or constraining member actions and managers to maximize member welfare using common-pool resources (that is, Enke’s optimal solution). Further, a first-best contractual solution would efficiently determine if a cooperative is necessary given the competition, specificity of assets, hazards, and members’ willingness to bear risk. On the other hand, a second-best contractual solution, while not optimal, provides sufficient incentives for members and managers to patronize and manage the cooperative using imperfect signals and institutional constraints on member action and management activities to meet member objectives. Still, there are additional costs (for example, monitoring, measuring, and bonding), and economic gains are lost (for example, residual loss) or inefficiently assigned. However, the cooperative can remain a second-best contractual solution if it can provide collective goods and value-added more efficiently than other contractual solutions. Indeed, the inimitable efficiency and thus sustainability of the cooperative form of organization could result from being the second-best contractual solution to: 1. coordinating collective investment in specific assets; 2. countervailing market power; 3. countervailing political power; 4. reducing asymmetric information in the value chain; 5. pooling risk; 6. establishing new products and markets; 7. reducing transaction costs for investment in high frequency, long-term, and uncertain transactions; and 8. maintaining markets when markets are declining or highly cyclical (for example, Staatz, 1987; Cook 1995). As alternative contracts or property right allocations are discovered to provide similar cooperative products and coordinated investment, none are likely ever to be optimal or first-best. However, new contracts can emerge where rights are dramatically altered (reinvented), or incrementally tinkered with, to secure property rights, reduce costs, and enhance returns better. Such contracts become second-best when they do, but the first-best will likely remain infeasible or challenging to sustain because of transaction costs (for example, Coase, 1964).

The new institutional economic theory of cooperatives  41 The Cooperative as a Nexus of Contracts As a result of a shift in the theory of cooperatives, research has shifted the unit of analysis from the cooperative as a firm with a central decision-maker to the variety of contractual solutions that attempt to solve the cooperative bargaining conflicts, secure vaguely defined property rights to common resources, and broaden the collective action to more members. In the nexus of contracts approach the debate as to whether the cooperative is a firm, a hybrid, or an extension of a member’s business is not relevant. Rather, the second-best optimality of implicit and explicit contracts that include the cooperative as a counterparty is relevant (for example, Sykuta & Cook, 2001). The nexus of contracts approach to cooperative theory views the cooperative as a legal entity in contractual agreements with members, managers, and entities outside the cooperative. For example, the members typically control the cooperative via the board of directors—at least nominally—as outlined in the organization’s bylaws. Members join the cooperative by agreeing to a membership agreement to gain residual rights to value-added activities, price enhancements, political action, or access to specific assets, to name a few. Managers obtain limited control rights to the cooperative assets to pursue various objectives when they agree to an employment contract. Managers can have varying decision rights to control prices, member supply, patronage, member investment, equity redemptions described in supply contracts, bylaws, articles of incorporation, and organizational policies. Managers pursue their interests when they do not have well-constructed incentive contracts, defined objectives, and adequate monitoring. Members typically reserve the right to monitor and ratify manager policies through an elected board of directors described—at least implicitly—in the organization’s bylaws or articles of incorporation (that is, residual rights of control). Cooperative contracts must abide by formal rules and enforcement mechanisms in the economic environment. For example, implicit contractual agreements, culture, norms, and embedded enforcement influence cooperative members’ and managers’ behavior, particularly when incomplete contracts and uncertainty are prevalent. Cooperative contracts in the nexus have incrementally evolved because initial contracts were unnecessarily incomplete, were vaguely defined, and led to common-pool resource problems (LeVay, 1983; Vitaliano, 1983). Cook (1995) categorized the specific problems of cooperatives when rights are vaguely defined as ● the free-rider problem, where members underinvest and overuse the cooperative or non-members capture the collective good without bearing the costs; ● the horizon problem, where members have varying preferences for the longevity of investment and are subjected to maintaining investment for longer periods than preferred because of non-transferability and non-marketability; ● the portfolio problem, where members have varying preferences for the scope and risks of cooperative activities and are subjected to maintaining their cooperative investment and bearing the risk because of non-transferability and non-marketability; ● the control problem, where members and managers have conflicting goals and objectives and policies to align them are too complex to describe or too costly to enforce; and ● the influence costs problem, where a faction of members seek to influence management to use their control of the cooperative to align the cooperative’s activities and objectives with the faction at the expense of the larger membership.

42  Handbook of research on cooperatives and mutuals The literature has highlighted a continuum of different types of residual claims observed in cooperative member agreements and variations in the allocation of the decision process among agents to ameliorate the common-pool resource problems (Vitaliano, 1983; Chaddad & Cook, 2004a; Chaddad & Iliopoulos, 2013). Other authors have employed a game-theoretic model or principal-agent modeling to more formally analyze different outcomes of various contractual parameters or organizational choices in a cooperative nexus of contracts. For example, Zusman (1992) focused on the early phase of cooperative conflict agreement that resulted in variances of bylaws given membership heterogeneity. Hendrikse and Veerman (2001a, 2001b) have examined different governance structure contractual choices for a farmer marketing products through a downstream processor. Albaelk and Schultz (1997) examined whether the one member, one vote principle could lead to inefficient member investment in cooperatives. Eilers and Hanf (1999) examined the optimality of contract design given the quality and quantity of member production and who had the control to design the supply contract. Researchers have described the cycle of adjusting (tinkering) contracts throughout the life of the cooperative (for example, Cook & Iliopoulos, 2016; Cook, 2018). Still, much work needs to be done to further our understanding of contracts in cooperatives and develop appropriate methods and data collection to quantify or qualify changes to contracts and performance objectively (for example, Hueth, Ligon, & Dimitri, 2007). Using the nexus of contracts approach, advances in cooperative theory will continue to explore the optimality of specific cooperative contracts to address agency issues, coordinate collective asset-specific investment, provide safeguards against hazards, reduce common-pool resource problems, and secure property rights. The research will examine changes to contracts that remain in harmony with institutional constraints. Specific formal contracts examined in the nexus include member agreements; federated member agreements; bylaws; articles of incorporation; capital plans; supply, marketing, and consumption contracts; joint venture agreements; and manager employment contracts, to name a few. Higher levels of formal and informal institutions and enforcement mechanisms in the nexus need to be also considered. The higher-level formal institutions include formalized laws regarding cooperatives, taxation policies, and legal enforcement that constrain cooperative organization, or regarding state support to organize as a cooperative. Higher-level informal institutions examined will include culture, social capital, and the level of trust of members and management used to reach agreements and protect against hazards that may not be removed by formal contracting or integration. Informal embedded institutions to enforcement such as reputation in a close-knit society may prevent members from taking advantage of a cooperative, for example, even if the opportunity exists to exploit the relationship because of insecure property rights.

FOUR IMPORTANT NIE CONCEPTS APPLIED TO COOPERATIVE THEORY AND AREAS FOR FUTURE RESEARCH Agency Issues The examination of agency problems in cooperatives is still underdeveloped despite agency issues being identified as the primary organizational cost of firms and cooperatives. Cook (1994) described the degree of difficulty in managing cooperatives relative to investor-oriented

The new institutional economic theory of cooperatives  43 firms. He argued that cooperative managers must be particularly adept at conflict resolution, resource allocation with limited equity, serving as information spokespersons, emphasizing the positive aspects of the cooperative model, and providing leadership that maintains member loyalty. Later, Fulton and Giannakas (2007) developed an agency theoretical framework for why cooperative boards of directors hire poor managers, leading to further agency costs that result in poor member loyalty in cooperatives. For example, they showed that when cooperative board members believe they have strong member commitment, the directors do not invest in screening to hire managers with good leadership qualities that enhance member commitment. As a result, cooperatives sow the seeds of their demise because directors shirk their roles to conduct diligent screening of managers. Thus, agency issues at the director level result in a higher probability of hiring managers with poor leadership and higher agency issues at the management level. Along the lines of Fulton and Giannakas (2007), Chaddad and Iliopoulos (2013), and Bijman, Hendrikse, and Van Oijen (2013), additional research is needed to understand better the boards of directors’ role in monitoring managers in pursuing member objectives and reducing agency costs in cooperatives. Because the boards of directors are members, they would ostensibly provide an optimal oversight role to maximize member interests. However, the boards of directors of cooperatives are agents themselves. Consequently, they may be too oriented to their own needs, not experts in monitoring management activities, and not alert to opportunities to enhance value for the at-large membership (for example, Deng & Hendrikse, 2015). For example, the board of directors of an agricultural marketing cooperative may fail to be alert to consumer value-added opportunities from changing production methods. Instead, the boards of directors may be overly focused on potential added costs to their operation. On the other hand, including external managers of cooperatives on the board of directors or having independent advisory board members who specialize in specific areas of cooperative management may not enhance membership value. Indeed, manager-dominated boards may lead to additional agency issues because they would pursue opportunities and ratify policies that maximize the cooperative’s profit and not member returns per unit or member welfare. Using the previous example, a manager-dominated cooperative may pursue changes in production practices of members to capture greater marketing gains without full consideration of the combination of higher costs imposed on members and the weak incentives offered to members. Future research seems necessary to determine if there is an optimal matching of attributes of the board of directors, member objectives, and expertise when determining potential impacts on cooperative performance and member satisfaction. There is a dearth of empirical or qualitative information on boards of directors or alternative advisory boards and their impact on cooperative performance—particularly as the objective of the cooperative varies (for example, maximize patronage dividends, maximize member return per unit, maximize member welfare, maximize membership). Additionally, an objective analysis of manager performance is needed to design optimal incentive contracts. As discussed earlier in the chapter, cooperatives could have multiple or varying objectives, and managers need a broad set of skills to make cooperatives successful. It is necessary to determine the optimal signal of management performance or set of attributes that can efficiently screen poor cooperative leaders given varying cooperative objectives. Currently, hiring selection and structuring employment contracts that use signals to reduce

44  Handbook of research on cooperatives and mutuals agency costs are presumably suboptimal and subjective. However, there is not adequate research to know the general makeup of these contracts or what performance incentives may be used. Consequently, the literature could advance the development of management contract design by identifying and cataloging accurate signals of good cooperative leaders. The signals need to be conditional on various objectives and the nature of the cooperative business. Vaguely Defined Property Rights and Common-pool Resource Problems Arguably, the most applied NIE concepts to cooperatives have discussed the problems resulting from vaguely defined property rights when there are common-pool resources. More recently, that discussion has shifted from the problems to generic contractual solutions to ameliorate the problems (for example, Cook & Iliopoulos, 2016; Chaddad & Cook, 2004a; Chaddad & Iliopoulos, 2013). For example, in traditional cooperative agreements, members are incentivized to underinvest and overuse the cooperative (freeride) to capture gains without bearing the costs. As a result, some cooperatives have changed their residual rights from non-transferable, non-proportional, non-appreciable, and redeemable to non-redeemable, appreciable, proportional, and transferable to secure equity rights, encourage investment, and ameliorate member tensions. However, changes to residual rights allocations to better define equity in cooperatives seem limited or fragile empirically (for example, Grashuis & Cook, 2017, 2018). Indeed, some managers and members may favor traditional cooperative property rights regarding capital accumulation, equity rights, and inclusive use—particularly when the use generates unallocated equity from non-member trade. Indeed, members and managers can use unallocated equity as a “rainy day fund” to ensure redemptions of allocated equity even during down cycles. Thus, there is an odd dichotomy where members and managers persistently seek to accumulate insecure, unallocated equity (that is, “permanent equity”) while lamenting the vaguely defined rights, capital constraints, and underinvestment by cooperative members. While considerable research discusses common-pool resource problems and changes to residual rights that could ameliorate problems, less research discusses how cooperatives and members manage insecure, unallocated investment when they do not change residual rights. Indeed, unallocated equity has grown significantly in Northern Plains US agriculture cooperatives in the past 30 years (for example, Elliott & Olson, 2020). The observation raises the question: do implicit norms prevent managers and a faction of members from opportunistically taking advantage of pools of insecure capital for their interests? Alternatively, has the increased proportion of unallocated equity led to more widespread abuse and member tensions that could accelerate changes to define equity rights or demutualization (for example, Chaddad & Cook, 2004b)? Research has not examined all possible informal and formal governance mechanisms cooperatives could use to manage common resources in the cooperative—particularly when changes to formal residual rights discussed in the literature are not made. Indeed, many mechanisms used do not appear to fit the standard typology models in the literature (Grashuis & Cook, 2017). A clearer understanding of why some cooperatives choose not to pursue alternative residual rights, for example, needs to command the same attention as the cooperatives that do change their residual rights.

The new institutional economic theory of cooperatives  45 Transaction Cost Economics Cooperative organizations rarely provide an optimum solution to economizing on transaction costs or coordinating specific asset investments. Rather, cooperatives are likely considered a second-best contract that enables coordinated investment with some protection from hazards. As a result, performance must be assessed comparatively to other organizations or contracts to provide similar specific assets and services (Ménard, 2018a). This task is not easy; members may not appreciate the value of cooperatives providing access to specific assets and become overly pessimistic about the cooperative contract’s vaguely defined property rights. As a result, members may seek an alternative contractual solution that may be beneficial for a short period while unforeseen contingencies have not arisen, then realize the value of the cooperative contract when circumstances arise that alternative solutions fail to solve. Thus, researchers need to quantify how cooperatives are more willing to invest in assets than alternative governance structures and maintain markets and access to specific assets during cyclical markets and unforeseen contingencies. Further, the research can empirically confirm or refute the notion that coordinated specific asset investment through turbulent periods is a primary reason for the cooperative organization’s survival. As stated previously, multiple types of asset specificity are involved in transactions and investments with members and cooperatives. For example, we described the dairy and milk-processing facility’s physical, site, and temporal specificity. There are probably more dimensions of asset specificity than those three in that example. However, only a few may be the critical dimensions that require relational contracting or integration. It seems prudent that researchers seek to identify the critical dimensions of asset specificity that cooperatives enable coordinated investment with protection. The critical dimension likely changes when there are changes in the product or service being transacted. However, a framework for what specificity in assets is critical based on transaction attributes would be invaluable. Saitone and Sexton (2017) have argued that traditional cooperative contracts and property right allocation are not conducive to supplying high-quality and differentiated products or new and innovative products. Instead, they contend that cooperatives that support member heterogeneity and appropriately reward heterogeneity thrive. Consequently, farmer cooperatives’ primary role of efficiency may be shifting from an organization to countervail market power in regional areas with site-specificity to generating rents for farmers by creating differentiated products across wider regions using brand quality. So far, research has not quantified or qualified whether this shift is occurring in contracts and what contract mechanisms cooperatives use to protect the brand capital-specific investment. However, suppose the future of cooperative sustainability is dependent on the shift. In that case, research should aid in developing strategies and contracts to coordinate investment and determine alternative property rights allocations to enhance the effort. Impact of Embedded and Environmental Institutions on Cooperative Performance Considerable research needs to be carried out to understand why cooperatives persist and continue to adapt and do well in some regions and frequently exit in other regions. Indeed, the empirical importance of regional influences to cooperative stability and performance is stark (for example, Elliott, Elliott, & Van der Sluis, 2018). However, the reason and decomposition of the importance to the region are not clear. For example, regional influences may have to do

46  Handbook of research on cooperatives and mutuals with the nature of the transaction or competition (for example, Sexton, 1990). Alternatively, a region’s embedded norms, culture, and extensive networks may make cooperatives more efficient, stable, and higher performing. Indeed, James and Sykuta (2005) found that trust, homogeneity of member interests, and cooperative organizational attributes that better defined property rights were all correlated in a survey of cooperative members in the US. The results imply that critical embedded features that enable trust may allow cooperatives to renegotiate and develop policies to secure vaguely defined property rights and to govern transactions more efficiently. On the other hand, there have been numerous cases where too much trust by members has led to rampant fraud and abuse. It is unclear how trust, networks, and culture may lead to superior embedded cooperative institutions and affect cooperative performance. An alternative emerging research area for cooperatives is new meso-institutions restricting cooperative behavior. The meso-institution dimension can be characterized as a hybrid organization between the institutional environment and governance level (Ménard, 2018b; Ménard et al., 2022). For example, there is a focused effort to reduce externalities in the agri-food sector through the private sector representative multi-stakeholder sustainability alliances (MSSA). MSSAs are intended as a voluntary, private sector collective action solution to correct a market failure. The market failure is a consequence of inadequate signaling of stakeholder preferences for sustainability in agri-food production. Agri-food sustainability alliances can consist of growers, retailers, agribusinesses, knowledge institutions, and conservationists (for example, Dentoni and Peterson, 2011). Their stated purpose is to define an agreed-upon metric for sustainability and assess potential collective action that can improve sustainability practices for effective signaling to external stakeholders. Consequently, MSSAs establish a new dimension for bargaining power in the agri-food sector and brand-specific investment. However, the impacts on cooperative governance, performance, and collective decision-making costs because of the meso-institutions are largely unknown.

THREE GENERAL QUESTIONS FOR FUTURE RESEARCH IN COOPERATIVES USING NIE While we provide some specific areas above where cooperative theory can continue to be advanced using NIE concepts, we see three broad questions for future research on cooperatives where NIE can be liberally applied. These three questions have been the same questions since the early cooperative models. Still, they are as important today, and remain largely unanswered. Why Has the Cooperative Formed and Persisted? While the theory for the sustainability and longevity of cooperatives has shifted, questions remain as to the precise reason(s). For example, more recent literature has offered multiple reasons for the cooperative’s sustainability (we described eight reasons in this chapter). Little research has tried to quantify or rank those reasons to identify what is most important, whether that importance has changed, and how cooperatives can further harness the advantages to remain sustainable.

The new institutional economic theory of cooperatives  47 What Motivates Members to Continue Investing in and Patronizing a Cooperative? Who joins cooperatives? Are they large users, or small, highly specialized enterprises? Has the composition of members changed over time? Has their diversity increased or decreased? This type of research has and will remain relevant, particularly as the scope of cooperative organization changes. Cooperative researchers and members can gain insights into particular sectors and regions where cooperatives seemingly have advantages or disadvantages by tracking the membership composition and changes. Further, knowing the differences in participation constraints of members and non-members of cooperatives would aid our understanding of the feasible contractual space for cooperatives, members, and managers. How Does a Cooperative Continue to Generate Value? Similar to the first question, how cooperatives create efficiencies in the supply and value chain and return that value to members is paramount. There could be multiple chains and value-added aspects that the cooperatives provide. A decomposition of the importance and identification of precise value-addition is necessary to enhance the value-added streams further.

NOTES 1. The bundle of rights that are obtained as owner(s) of a firm includes being the residual claimant, the right to monitor input behavior, the right to be the central party for all contracts and inputs, the right to alter the rights of team members (membership and rewards), and the right to sell the bundle of rights. 2. Property rights define the theoretical and legal ownership of firm resources and how they can be used. These resources can be tangible or intangible and can be owned by individuals, businesses, and governments. Specific interest in the property rights approach to the firm is in how individuals make decisions on rewards, resource allocation, and monitoring of other agents and activities of the firm given different arrangements of property rights to different types of owners. 3. Barzel (1997) later distinguished between economic rights and legal rights. Economic rights, he argued, are the rights to consume or use assets, while legal rights are used to accommodate third-party adjudication and enforcement. In the absence of legal rights, economic rights may still be valued, but their exchange must then be self-enforced. 4. Selective incentives are goods made available to members of collective action when they contribute to capturing the collective good. Selective incentives can either be rewards or penalties. 5. Helmberger (1966) conjectured cooperatives would lose market share to vertically-integrated supply chains in sugarbeet processing. On the contrary, cooperatives have gained a complete market share.

REFERENCES Acemoglu, D., Johnson, S., & Robinson, J.A. (2001). The colonial origins of comparative development: an empirical investigation. American Economic Review, 91(5), 1369–1401. Albæk, S., & Schultz, C. (1997). One cow, one vote? Scandinavian Journal of Economics, 99(4), 597–615. Alchian, A.A., & Demsetz, H. (1972). Production, information costs, and economic organization. The American Economic Review, 62(5), 777–95. Allen, D.W., & Lueck, D. (1998). The nature of the farm. Journal of Law and Economics, 41(2), 343–86.

48  Handbook of research on cooperatives and mutuals Allen, D.W., & Lueck, D. (2004). The Nature of the Farm: Contracts, Risk, and Organization in Agriculture. MIT Press. Bateman, D.I., Edwards, J.R., & LeVay, C. (1979). Agricultural cooperatives and the theory of the firm. Oxford Agrarian Studies, 8(1), 63–81. Bateman, D.I., Edwards, J.A., & LeVay, C. (1979). Problems of defining a cooperative as an economic organisation. Oxford Agrarian Studies, 8(1), 53–62. Barzel, Y. (1997). Economic Analysis of Property Rights. Cambridge University Press. Bearle, A., & Means, G. (1932). The Modern Corporation and Private Property. Macmillan. Bijman, J. (2018). Exploring the sustainability of the cooperative model in dairy: the case of the Netherlands. Sustainability, 10(7), 24–98. Bijman, J., Hendrikse, G., & Van Oijen, A. (2013). Accommodating two worlds in one organisation: changing board models in agricultural cooperatives. Managerial and Decision Economics, 34(3–5), 204–17. Birchall, J., & Hammond Ketilson, L. (2009). Resilience of the Co-operative Business Model in Times of Crisis. International Labour Organisation. Buchanan, J.M., & Tullock, G. (1965). The Calculus of Consent: Logical Foundations of Constitutional Democracy (Vol. 100). University of Michigan Press. Chaddad, F.R., & Cook, M.L. (2004a). Understanding new cooperative models: an ownership–control rights typology. Applied Economic Perspectives and Policy, 26(3), 348–60. Chaddad, F.R., & Cook, M.L. (2004b). The economics of organization structure changes: a US perspective on demutualization. Annals of Public and Cooperative Economics, 75(4), 575–94. Chaddad, F., & Iliopoulos, C. (2013). Control rights, governance, and the costs of ownership in agricultural cooperatives. Agribusiness, 29(1), 3–22. Coase, R.H. (1937). The nature of the firm. Economica, 4(16), 386–405. Coase, R.H. (1960). The problem of social cost. Journal of Law and Economics, 3, 1–44. Coase, R.H. (1964). The regulated industries—discussion. American Economic Review, 54(3), 192–7. Commons, J.R. (1931). Institutional economics. American Economic Review, 21, 648–57. Commons, J.R. (1936). Institutional economics. American Economic Review, 26(1), 237–49. Cook, M.L. (1994). The role of management behavior in agricultural cooperatives.  Journal of Agriculture Cooperatives, 9 (July), 42–58. Cook, M.L. (1995). The future of US agricultural cooperatives: a neo-institutional approach. American Journal of Agricultural Economics, 77(5), 1153–9. Cook, M.L. (2018). A life cycle explanation of cooperative longevity. Sustainability, 10(5), 1586. Cook, M.L., Chaddad, F.R., & Iliopoulos, C. (2004). Advances in cooperative theory since 1990: A review of the agricultural economics literature. In Restructuring Agricultural Cooperatives, G.W.J. Hendrikse, ed. Erasmus University Rotterdam. Cook, M.L., & Iliopoulos, C. (2016). Generic solutions to coordination and organizational costs: informing cooperative longevity. Journal on Chain and Network Science, 16(1), 19–27. Cotterill, R. (1993). Performance Consequences of the Agricultural Cooperative Exemption (No. 1585-2016-134140). Deng, W., & Hendrikse, G.W. (2015). Managerial vision bias and cooperative governance. European Review of Agricultural Economics, 42(5), 797–828. Dentoni, D., & Peterson, H.C. (2011). Multi-stakeholder sustainability alliances in agri-food chains: a framework for multi-disciplinary research. International Food and Agribusiness Management Review, 14, 83–108. Dunn, J.R., Crooks, A.C., Frederick, D.A., Kennedy, T.L., & Wadsworth, J.W. (2002). Agricultural Cooperatives in the 21st Century (No. 2161-2018-7972). Eilers, C., & Hanf, C.H. (1999). Contracts between farmers and farmers’ processing co-operatives: a principal-agent approach for the potato starch industry. In Vertical Relationships and Coordination in the Food System (pp.267–84). Physica-Verlag HD. Ellickson, R.C. (1989). A hypothesis of wealth-maximizing norms: evidence from the whaling industry. Journal of Law, Economics, & Organization, 5, 83. Elliott, M., & James, H.S. (2017). Nature of the farm: revisited. Agricultural and Resource Economics Review, 46(1), 123–45.

The new institutional economic theory of cooperatives  49 Elliott, M., Elliott, L., & Van der Sluis, E. (2018). A predictive analytics understanding of cooperative membership heterogeneity and sustainability. Sustainability, 10(6), 2048. Elliott, M. & Olson, F. (2020). Determinants of Northern Plains Cooperative Risk. Presentation at NCERA-210, St. Paul, Minnesota. Emelianoff, I.V. (1948). Economic Theory of Cooperation: Economic Structure of Cooperative Organizations (No. 1567-2016-133427). Enke, S. (1945). Consumer coöperatives and economic efficiency. The American Economic Review, 148–55. Fama, E.F., & Jensen, M.C. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301–25. Fulton, M., & Giannakas, K. (2007). Agency and leadership in cooperatives. In Vertical Markets and Cooperative Hierarchies (pp.93–113). Springer. Grashuis, J., & Cook, M.L. (2017). Toward an updated typology of US farmer cooperatives: survey evidence of recent hybrid ownership restructuring. In Management and Governance of Networks (pp.149–70). Springer. Grashuis, J., & Cook, M. (2018). An examination of new generation cooperatives in the upper midwest: successes, failures, and limitations. Annals of Public and Cooperative Economics, 89(4), 623–44. Grossman, S.J., & Hart, O.D. (1986). The costs and benefits of ownership: a theory of vertical and lateral integration. Journal of Political Economy, 94(4), 691–719. Hardin, G. (1968). The tragedy of the commons: the population problem has no technical solution; it requires a fundamental extension in morality. Science, 162(3859), 1243–8. Hart, O., & Moore, J. (1990). Property rights and the nature of the firm. Journal of Political Economy, 98(6), 1119–58. Helliwell, J.F., & Putnam, R.D. (1995). Economic growth and social capital in Italy. Eastern Economic Journal, 21(3), 295–307. Helmberger, P. (1966). Future roles for agricultural cooperatives. Journal of Farm Economics, 48(5), 1427–35. Helmberger, P., & Hoos, S. (1962). Cooperative enterprise and organization theory. Journal of Farm Economics, 44(2), 275–90. Hendrikse, G.W., & Veerman, C.P. (2001a). Marketing cooperatives and financial structure: a transaction costs economics analysis. Agricultural Economics, 26(3), 205–16. Hendrikse, G.W., & Veerman, C.P. (2001b). Marketing co-operatives: an incomplete contracting perspective. Journal of Agricultural Economics, 52(1), 53–64. Hueth, B., Ligon, E., & Dimitri, C. (2007). Agricultural contracts: data and research needs. American Journal of Agricultural Economics, 89(5), 1276–81. Iliopoulos, C., & Valentinov, V. (2018). Cooperative longevity: why are so many cooperatives so successful? Sustainability, 10(10), 3449. James Jr, H.S., & Sykuta, M.E. (2005). Property right and organizational characteristics of producer‐ owned firms and organizational trust. Annals of Public and Cooperative Economics, 76(4), 545–80. Jensen, M.C., & Meckling, W.H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305-360. Klein, P.G. (1998). New institutional economics. Available at SSRN 115811. Klein, P.G. (2005). The make-or-buy decision: lessons from empirical studies. In Handbook of New Institutional Economics (pp.435–64). Springer. Klein, P.G. (2010). Transaction cost economics and the new institutional economics. In The Elgar Companion to Transaction Cost Economics. Edward Elgar Publishing. LeVay, C. (1983). Agricultural co‐operative theory: a review. Journal of Agricultural Economics, 34(1), 1–44. Macneil, I.R. (1974). The many futures of contracts. Southern California Law Review, 47(2), 691–816. Ménard, C. (2018a). Organization and governance in the agrifood sector: how can we capture their variety? Agribusiness, 34(1), 142–60. Ménard, C. (2018b). Research frontiers of new institutional economics. RAUSP Management Journal, 53, 3–10.

50  Handbook of research on cooperatives and mutuals Ménard, C., Martino, G., de Oliveira, G.M., Royer, A., Saes, M.S.M., & Schnaider, P.S.B. (2022). Governing food safety through meso-institutions: a cross-country analysis of the dairy sector. Applied Economic Perspectives and Policy 1–20. North, D.C., & Weingast, B.R. (1989). Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England. The Journal of Economic History, 49(4), 803–32. Ohm, H. (1956). Member behavior and optimal pricing in marketing cooperatives. Journal of Farm Economics, 38(2), 613–21. Olson, M. (1965). The Logic of Collective Action. Harvard University Press. Ostrom, E. (1990). Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge University Press. Parmigiani, A. (2007). Why do firms both make and buy? An investigation of concurrent sourcing. Strategic Management Journal, 28(3), 285–311. Phillips, R. (1953). Economic nature of the cooperative association. Journal of Farm Economics, 35(1), 74–87. Poteete, A.R., Janssen, M.A., & Ostrom, E. (2010). Working Together. Princeton University Press. Putnam, R. (1993). The prosperous community: social capital and public life. The American Prospect, www​.prospect​.org/​print/​vol/​13 (accessed 7 April 2003). Robotka, F. (1957). Philosophy of Cooperation. Agricultural Cooperation, Selected Readings, University of Minnesota Press. Royer, J.S. (ed.). (1987). Cooperative Theory: New Approaches. US Department of Agriculture, Agricultural Cooperative Service. Royer, J.S. (1994). Economic nature of the cooperative association: a retrospective appraisal. Journal of Agricultural Cooperation, 9, 86–94. Saitone, T.L., & Sexton, R.J. (2017). Agri-food supply chain: evolution and performance with conflicting consumer and societal demands. European Review of Agricultural Economics, 44(4), 634–57. Sexton, R.J. (1984). Perspectives on the development of the economic theory of co‐operatives. Canadian Journal of Agricultural Economics/Revue canadienne d’agroeconomie, 32(2), 423–36. Sexton, R.J. (1990). Imperfect competition in agricultural markets and the role of cooperatives: a spatial analysis. American Journal of Agricultural Economics, 72(3), 709–20. Shelanski, H.A., & Klein, P.G. (1995). Empirical research in transaction cost economics: a review and assessment. Journal of Law, Economics, & Organization, 335–61. Simon, H.A. (1955). A behavioral model of rational choice. Quarterly Journal of Economics, 69(1), 99–118. Staatz, J.M. (1987). Farmers’ incentives to take collective action via cooperatives: a transaction cost approach. Cooperative Theory: New Approaches, 18, 87–107. Staatz, J.M. (1989). Farmer Cooperative Theory: Recent Developments (ACS Research Report 84). US Department of Agriculture. Stiglitz, J.E. (1974). Incentives and risk-sharing in sharecropping. Review of Economic Studies, 41(2), 219–55. Sykuta, M.E., & Cook, ML. (2001). A new institutional economics approach to contracts and cooperatives. American Journal of Agricultural Economics, 83(5), 1273–9. Tirole, J. (1999). Incomplete contracts: where do we stand? Econometrica, 67(4), 741–81. Trifon, R. (1961). The economics of cooperative ventures: further comments. Journal of Farm Economics, 43(2), 215–35. Veblen, T. (1900). The preconceptions of economic science. The Quarterly Journal of Economics, 14(2), 240–69. Vitaliano, P. (1983). Cooperative enterprise: an alternative conceptual basis for analyzing a complex institution. American Journal of Agricultural Economics, 65(5), 1078–83. Williamson, O.E. (1975). Markets and Hierarchies. Free Press. Williamson, O.E. (1991). Comparative economic organization: the analysis of discrete structural alternatives, Administrative Science Quarterly, 36, 269–96. Williamson, O.E. (2000). The new institutional economics: taking stock, looking ahead. Journal of Economic Literature, 38(3), 595–613. Zusman, P. (1992). Constitutional selection of collective-choice rules in a cooperative enterprise. Journal of Economic Behavior & Organization, 17(3), 353–62.

PART II ORGANIZATION

3. Organizational costs in agricultural cooperatives: comparison of European and US approaches Constantine Iliopoulos and Michael L. Cook1

INTRODUCTION Organizational costs are inherent in any economic organization. Due to their unique ownership and governance structures, agricultural cooperatives may incur additional or higher organizational costs. Such costs are important as they affect several critical intra-organizational decisions, which might improve or threaten a cooperative’s longevity (Cook, 2018). Organizational costs incurred in the formation of an organization determine whether one or more individuals have a strong incentive to found that organization (for example, Olson, 1965; Hirschman, 1970; Masten et al., 1991). Maintaining the organization sustainably is also associated with substantial organizational costs. Such costs include, among others, resources expended to maintain efficient and effective communication channels, exchanging information, reaching agreements, addressing emerging frictions and the underlying causes, and so on (Bradburd and Mead Over Jr, 1982; Williamson, 1985). Organizations that have significantly lower maintenance organizational costs compared to competitors enjoy a critical competitive advantage (for example, Jones and Hill, 1988; Madhok, 1996). The current chapter reviews extant literature on organizational costs incurred by agricultural cooperatives, discusses the importance of these costs, and introduces a novel framework for studying organizational costs in these business enterprises. The framework is based on the observation that when a cooperative is founded, original members are faced with substantial formation-related organizational costs in bringing to life their cooperative. However, they are unaware of the significant maintenance-related organizational costs they will have to address in subsequent phases of their cooperative’s evolution. Introducing this temporal dimension enables us to shed new light on the root causes of organizational costs and compare solutions adopted by agricultural cooperatives in Europe and the US in order to ameliorate the underlying intra-organizational constraints.

WHAT ARE ORGANIZATIONAL COSTS AND WHY DO AGRICULTURAL COOPERATIVES INCUR THEM? Definitions and Typologies of Organizational Costs Economic organizations are entities created by individuals and their institutions. People interact within and through these entities to reach individual and collective economic goals 52

Organizational costs in agricultural cooperatives  53 (Milgrom and Roberts, 1992). Any form of economic organization is characterized by corresponding non-production-related costs: organizational costs (Coase, 1937). Several different definitions and typologies of such organizational costs exist, some of which place emphasis on different sets of costs (for example, Williamson, 1985; Barzel, 1989; Milgrom and Roberts, 1992; Hansmann, 1996). The original school of institutional economists probably were the first to identify non-production-related costs associated with economic organization (for example, Commons, 1934; Veblen, 1904). Coase (1937) made the transition from the original school to New Institutional Economics by identifying transaction costs as the major or sole type of organizational costs in firms and other economic organizations. Williamson expanded on Coase’s arguments regarding the transactions costs of organizing economic activities (for example, Williamson, 1975; 1985; 1996; 2000). He identified two types of generic non-production-related costs associated with a transaction: 1. Market contracting costs, which include costs arising due to inefficient decision making and hold-up problems of various types. 2. Intra-firm organizational costs, which include costs arising due to low-powered incentives, rent seeking, and informational bottlenecks (Williamson, 1985). Market contracting costs refer to all the costs associated with the coordination and motivation problems. The coordination problem surfaces because of the need to determine prices and other details of the transaction, to make the existence and the location of potential buyers and sellers known to one another, and to bring buyers and sellers together to transact. The motivation problem arises due to two sets of costs: the first is associated with informational incompleteness and asymmetries, while the second results from imperfect commitment that fuels various hold-up-related inefficiencies in the market system (Milgrom and Roberts, 1992, p.29). Milgrom and Roberts (1992) identified four types of organizational costs, namely, incomplete contracts, bargaining costs, moral hazard, and influence costs. The latter are very similar to Williamson’s rent-seeking costs. In his seminal book related to enterprise ownership, Hansmann (1996) proposed two types of organizational costs: market contracting costs and ownership costs. Market contracting costs include simple market power, ex post market power, risks of long-term contracting, asymmetric information, strategic bargaining, communication of patron preferences, compromising among diverse patron preferences, and alienation. Ownership costs include the costs of controlling the managers (that is, monitoring and managerial opportunism), collective decision-making costs (that is, costly decisions, costly process, resolving conflicts and participation), and risk-bearing costs. In the current chapter we expand on the insights proffered by Williamson, Milgrom and Roberts, Coase, and Hansmann. We introduce a temporal approach where organizational costs are divided into two distinct time periods: organizational costs incurred in the formation of the organization, and organizational costs incurred in maintaining the organizational structure (Bradburd and Mead Over Jr, 1982).

54  Handbook of research on cooperatives and mutuals Importance of Organizational Costs But why are organizational costs important? Organizational costs incurred in the formation of an organization determine whether one or more individuals have a strong incentive to found the organization (for example, Olson, 1965; Hirschman, 1970; Masten et al., 1991). These include the fixed costs resulting from the establishment of communication channels, signaling mechanisms, and other rules of behavior which govern the operation of the organization, as well as the initial determination of how the costs and benefits are to be apportioned (Bradburd and Mead Over Jr, 1982). Therefore, the very decision to create an organization depends on the magnitude of these organizational costs, relative, of course, to the costs that would be incurred under feasible alternative scenarios of economic organization or no organization at all. Because organization is not always a smooth process, these initial costs of formation may be quite substantial (for example, Bradburd and Mead Over Jr, 1982; Hansmann, 1996). Furthermore, as the number of founders increases, these organizational costs tend to rise considerably (Olson, 1965). Organizational costs also matter because they determine the boundaries of an organization, that is, which transactions are organized internally and which are organized through arm’s-length transactions (Williamson, 1985; 1996). The issue of organizational boundaries was first introduced by Coase, who focused on the efficient scope (or boundary) of an individual firm (Coase, 1937). Vertical integration has subsequently been studied from the New Institutional Economics school of thought as an efficient response to contractual friction (for example, Williamson, 1971). Subsequently, scholars turned their attention to the myriads of hybrid organizational arrangements that exist between the market and vertically integrated firms (for example, Williamson, 1985, 1996; Iliopoulos, 2003; Ménard, 2004; Chaddad, 2012). These hybrids combine elements of both vertical hierarchies and market transactions in order to provide efficient and effective coordination and motivation of economic actors (Ménard, 2004). Maintaining the organization sustainably is also associated with substantial organizational costs. Such costs include, among others, resources expended to maintain efficient and effective communication channels, exchanging information, reaching agreements, addressing emerging frictions and the underlying causes, and so on (Bradburd and Mead Over Jr, 1982; Williamson, 1985). Organizations that have significantly lower maintenance organizational costs compared to competitors enjoy a critical competitive advantage (for example, Jones and Hill, 1988; Madhok, 1996). Similar to the costs incurred in the formation of an organization, maintenance costs also tend to increase as the number of owners increases, particularly if these owners command similar percentages of ownership and/or exhibit incompatible preferences (Olson, 1965; Ostrom, 1990; Lichbach, 1996; Hansmann, 1996; Cook and Iliopoulos, 1998; 2016). Organizational Costs in Agricultural Cooperatives: An Overview Assuming that farmers decided to act collectively, they will necessarily incur the organizational costs associated with forming and maintaining their organization.

Organizational costs in agricultural cooperatives  55 Organizational costs of forming the cooperative In addition to administrative, legal, and consultancy fees, farmers who come together to form a new agricultural cooperative have to invest significant resources (time and money) at least in: ● Identifying and agreeing on their common intent, purpose, vision, and objectives. ● Deciding the appropriate boundaries of their cooperative: which activities will be organized internally, versus which ones will be outsourced. For example, when formed to address a market failure, a cooperative needs to do so at the vertical level of the supply chain where the market failure occurs, otherwise the failure will not be addressed successfully (for example, Sexton and Iskow, 1988). ● Designing the organizational architecture of their cooperative, which includes the ownership structure (definition and allocation of residual claimant and control rights among members and other stakeholders) (see Chaddad and Cook, 2004; King, 2012), governance model (traditional, extended traditional, managerial, or corporate) (see Chaddad and Iliopoulos, 2013), and performance measurement metrics (see Cook, 2018). Organizational architecture design takes into account the market structure of the industry and the reaction of rivals and potential rivals. ● Agreeing and implementing the cooperative’s dominant organizational culture, including signaling mechanisms and other rules of operation that govern the operation of the organization. For example, choosing to be an aggressive, opportunity-seeking organization requires a substantially different collective attitude as compared to being a solid, defensive organization. ● Agreeing on the profile of the top professional executive to be employed, and hiring that person. ● Establishing efficient and effective communication channels between and among members, board members, and management. ● Agreeing on how the cooperative will be funded and establishing equity acquisition and redemption plans. Of course, this list is non-exhaustive and might include other costs that are unique to a certain cooperative or are generated due to the peculiarities of the institutional and legal framework within which the cooperative operates. Organizational costs of maintaining the cooperative The maintenance of the cooperative is also costly. While maintenance organizational costs are incurred by all forms of organization, agricultural cooperatives are characterized by several idiosyncrasies that turn these costs into life-threatening constraints (Fulton and Hueth, 2009; Cook, 2018). Agricultural cooperatives and investor-oriented firms (IOFs) seek to achieve very different goals (Cook, 1994; Nilsson, 2001; Valentinov, 2007; Hendrikse and Feng, 2013). Therefore, their governance and ownership models are non-trivially different, resulting in diverse structures and processes, some of which may generate additional organizational costs, not incurred by IOFs to the same degree (for example, Staatz, 1987; Cook et al., 2004; Cook and Iliopoulos, 2016; Valentinov and Iliopoulos, 2021). Consequently, cooperatives’ strategies also may differ from those of their IOF counterparts (for example, Cook, 1994; Peterson and Anderson, 1996; Ortiz-Miranda et al., 2010; Bijman et al., 2012; Pennerstorfer and Weiss, 2013). For example, due to their vaguely defined property

56  Handbook of research on cooperatives and mutuals rights, traditional agricultural cooperatives may lack adequate risk capital to invest in vertical integration and consequently prefer a cost leadership strategy, or may choose to be involved only in bargaining with processors (for example, Cook, 1995; Cook and Iliopoulos, 2000; Pennerstorfer and Weiss, 2013). Further, not only the content of strategies adopted by agricultural cooperatives may differ from those strategies an IOF would adopt, but also the very strategic process (for example, Cook, 1994; Wadsworth, 2001). The multiplicity of objective functions which most agricultural cooperatives seek to optimize2 results in additional organizational costs that single-purpose firms do not face (Cook, 1994; Nilsson, 2001; Iliopoulos and Valentinov, 2018, 2017). This multiplicity is present even in some single-purpose cooperatives because of diverging member preferences over time (Cook, 2018; Iliopoulos and Valentinov, 2018). As the cooperative progresses through its life cycle, member preference heterogeneity, if left unchecked through tinkering or reinvention, poses diachronically increasing organizational costs in the form of frictions and factions that make decision making cumbersome and growth of the business problematic (Cook, 2018). Similar situations may be faced by family-owned businesses (for example, Ward, 2005). Yet, the much larger number of owners and the lack of family ties in agricultural cooperatives is a harbinger of much higher organizational costs (for example, Ajates, 2019). Maintenance organizational costs in agricultural cooperatives are conveniently grouped in four subsets of costs: (i)

Risk bearing-related costs: These are the maintenance organizational costs associated with attracting, rewarding and redeeming equity capital in agricultural cooperatives. a. Free-rider constraint: The external version of the free-rider problem is incurred when current member-patrons, or current non-member-patrons, do not bear the full costs of their actions and/or do not receive the full benefits they create. The internal free-rider problem occurs when new members obtain the same income and control rights as existing members and are entitled to the same payment per unit of patronage (Cook and Iliopoulos, 2000). b. Investment horizon constraint: Manifested as members’ reluctance to contribute risk capital for long-term projects, the horizon problem is realized whenever the duration of a member’s residual income right on the net income generated by an asset is shorter than the productive life of that asset (Porter and Scully, 1987). c. Investment portfolio constraint: Because members’ investment decision is “tied” to the patronage decision, members may hold suboptimal portfolios. As a result, those who are forced to accept more risk than they prefer will pressure cooperative leaders to rearrange the cooperative’s investment portfolio, even if this means lower expected returns (Vitaliano, 1983). d. Transaction costs of external investors: These are the costs and risks incurred when the cooperative’s members do not contribute enough risk capital to pursue the growth projects selected by the board and, consequently, the organization seeks trustable, qualified outside investors. Such non-member investors may invest in a wholly or partially owned IOF created by the cooperative or directly to the cooperative. (ii) Costs of controlling managers. a. Monitoring costs: These include the agency costs of: (1) patron-owners informing themselves about the operations of the cooperative; (2) patron-owners communicating among themselves in order to exchange information and make decisions; (3)

Organizational costs in agricultural cooperatives  57 bringing these decisions to bear on the management; and (4) all the above with respect to the governance of the cooperative by the elected board of directors (Hansmann, 1996; Cook and Iliopoulos, 2016). b. Managerial and patron opportunism: In case the patron-owners fail to monitor professional management and/or elected board members effectively, these individuals have an opportunity to seek their own goals to the cost of the cooperative (Hansmann, 1996; Iliopoulos and Hendrikse, 2009; Cook and Iliopoulos, 2016). (iii) Collective decision-making costs: These arise due to heterogeneity in the preferences of patrons caused by either the different ways in which patrons transact with the cooperative (for example, distance of farm from the cooperative’s processing plant) or in their personal circumstances (for example, patrons closer to retirement may oppose long-term investments) (Hansmann, 1996). a. Costly decisions: These arise in several ways, including through the adoption of a non-representative voting system and by control over decisions falling into the hands of an unrepresentative minority which uses that control to exploit the majority of members (Hansmann, 1996). b. Costly processes: Over time, even in the absence of opportunism, making efficient decisions requires the investment of considerable amounts of time and effort in obtaining knowledge and attending meetings and other activities that lead to reaching and implementing sound decisions. Further, heterogeneity of preferences is associated with voting cycles that impose significant transaction costs to the cooperative. The adoption of methods and tools to minimize such costs also imposes costs to the organization (Hansmann, 1996). c. Resolving conflicts: These include the costs of designing, implementing, and monitoring solutions that address collective decision-making costs, but also other types of maintenance organizational costs (Cook and Iliopoulos, 2016). d. Influence costs: These refer to the distortion of the decision-making process that arises when a group of decisions must be made that can influence how the benefits and costs are distributed and shared, and where the affected parties must have open communication channels to the decision makers during the time period when decisions are being made (Milgrom and Roberts, 1992). Manifestation of the influence costs problem includes employees and members engaging in lobbying or information provision that distorts decision-making to their benefit. Another example is purposeful misreporting of skill deficiencies, sabotage, or explicit conflict between individuals or groups of cooperative stakeholders (Iliopoulos and Hendrikse, 2009). (iv) Costs of securing strategic investments: These include the costs incurred by the cooperative in the process of securing its key strategic resources and assets, including those that result from the very adoption of the cooperative hybrid form of organization (Ménard, 2018, 2021). Next, we present a novel framework for delving into the organizational costs incurred by agricultural cooperatives throughout their life cycle.

58  Handbook of research on cooperatives and mutuals

ENHANCING THE UNDERSTANDING OF ORGANIZATIONAL COSTS IN AGRICULTURAL COOPERATIVES The current state-of-the-art approach to organizational costs assumes that the prospective owners of an enterprise minimize simultaneously the sum of market contracting costs and organizational costs and, thus, select the type of ownership model that minimizes this sum (for example, Hansmann, 1996). From this assumption it follows that the time dimension of organizational costs (that is, when the owners incur them) is irrelevant to the choice of ownership form. In this section, however, we argue that these assumptions do not describe accurately the reality facing most farmers founding and operating agricultural cooperatives. Instead, we show that the two optimization problems (minimization of market contracting costs and minimization of organizational costs) are solved by farmer-owners of cooperatives in different time periods. Further, organizational costs are also not optimized simultaneously; formation organizational costs are optimized first3 and maintenance organizational costs later as the entity progresses through its life cycle. Farmers collaborate in an attempt to address pressing market contracting costs facing them individually (for example, Staatz, 1987; Sexton and Iskow, 1988; Cook, 1993). Alternatively, they come together to seize collectively a market opportunity that they would not be able to grasp individually (Cook and Plunkett, 2006). In either case, farmers will proceed to found the cooperative if the total market contracting costs (or, equivalently, the expected return on investment, in the case that the joint objective is to exploit a market opportunity) considerably exceed the formation organizational costs (FOCs). If this is the case, the cooperative is founded. Please note that farmer-owners do not incorporate into their decision-making process regarding the formation of the cooperative any of the subsequently incurred maintenance organizational costs (MOCs). At that time, farmer-owners are probably unaware of the types and magnitude of such MOCs. As the cooperative progresses through its life cycle, though, whether and how MOCs are addressed become decisive for the cooperative’s survival (Cook, 2018; Cook and Iliopoulos, 2016; Nilsson and Lind, 2015). Figure 3.1 summarizes the dynamic processes of cooperative formation and maintenance, in both of which organizational costs are of fundamental importance on achieving sustainability and longevity of the cooperative. On the upper left side we see individual farmers pressed by high market contracting costs and/or identifying one or more exciting business opportunities. Addressing these market contracting costs or seizing possible opportunities is feasible only if they act collectively. Getting together, they attempt to create what are called in-group processes and systems transformation: a “container”; a “place” (physical and mental) from which to orchestrate their collective endeavor (Scharmer, 2009). Having succeeded in that, they calculate (in many cases with the facilitation of experts and consultants) the costs they have to incur in forming a cooperative relative to the market contracting costs they will incur if they continue with individual strategies. Assuming that FOCs are lower than market contracting costs (and/or expected return on equity is higher than FOCs), farmers acting rationally will decide to found the cooperative. During the formation of the cooperative, its leaders and members make some very important decisions regarding the organizational design of their new venture (Cook, 2018). The process of organizational design answers three fundamental organizational questions: who owns, who controls, and who benefits (Milgrom and Roberts, 1992). It encompasses at least four key decisions: (1) ownership model adopted (that is, definition and allocation of income and decision

Organizational costs in agricultural cooperatives  59

Source: Author.

Figure 3.1

The evolution of organizational costs in agricultural cooperatives

rights); (2) governance model implemented (that is, definition and allocation of control rights, task and authority delegation, representation system); (3) performance measurement metrics used; and (4) dominant organizational culture espoused (Chaddad and Cook, 2004; Hogeland, 2006; Soboh et al., 2009; Chaddad and Iliopoulos, 2013; Cook, 2018). All aforementioned organizational design attributes influence the magnitude of MOCs the cooperative will incur in the near and distant future, and, consequently, its life expectancy (Cook and Iliopoulos, 2016; Cook, 2018). This influence is manifested in several ways; examples, starting with ownership models, follow. Ownership models describe how ownership rights are defined and distributed among member-patrons and other key stakeholders (for example, non-member investors, lenders). If the cooperative initially adopts a traditional ownership model,4 members may contribute risk capital and/receive benefits on an equal basis. As long as member-patrons remain very similar in terms of their farms’ size and structure, this principle works perfectly well. However, as some members grow their farms or new members with larger farms join the cooperative, they may not be happy about receiving the same control rights or ownership rights (that is, non-proportional to patronage) as farmers owning much smaller farms (for example, Apparao et al., 2019). Consequently, one or both of these subgroups of members will voice their dissatisfaction to the board and press board members to adopt a more proportional distribution of costs and benefits (Hirschman, 1970). Adapting such a proportional system will help ameliorate the problem for a while. If, however, farmer-members with even larger farms join the

60  Handbook of research on cooperatives and mutuals cooperative, they may not be satisfied even with this proportionality rule. Subsequently, such members may demand that the board provide them more privileges (for example, by charging them a lower per-unit cost for processing their produce) and threaten to exit, which leaves the cooperative with suboptimal volume to satisfy its contracts with downstream partners, generating increased operating costs. In this case, addressing the symptoms may not work, and more fundamental solutions would be in order. A similar situation may be faced due to the governance model adopted by the cooperative. Again, a one-member, one-vote traditional voting system may not be acceptable to some members as significant patronage differences among members may emerge (Reynolds et al. 1997). For example, discrepancies in the volumes delivered by member-patrons may lead to friction and, finally, the adoption of solutions such as proportional voting with an upper limit on the number of votes per member (for example, Chaddad and Cook, 2013). Ameliorating the negative consequences of such patronage differences seldom ends in long-term viable solutions; instead, it results in continual friction tinkering. This solution will also work in the short to medium term, as long as volumes delivered by members remain, more or less, unchanged. If, however, this condition of non-changing volume per member is no longer satisfied, new solutions and business models will be required. Such solutions, though, will only work up to a point, beyond which more fundamental solutions (spawning, reinvention, and so on) will become necessary—thus the argument that organizational costs are dynamic by their very nature. The process of ameliorating current frictions is called “tinkering” (Cook, 2018). It starts with identifying the maintenance costs causing friction and exploring alternative subgroup or individual solutions (Cook, 2018). The process of recognizing when tinkering is needed, analyzing alternative options, and reaching a solution that maintains the existence of the current cooperative organizational structure is called “cooperative genius” (Cook, 2018). Definitions of what is acceptable, good, or superior performance of the cooperative, and how performance should be measured, are also key organizational design attributes that affect the magnitude of MOCs incurred (for example, Cook, 2018). Simplicity and relevance are two indispensable qualities of member self-defined performance metrics that facilitate communication to members and agreement on what constitutes success or failure (for example, Benos et al., 2018; Soboh et al., 2009). As member preferences become less and less homogeneous, however, simple, one-dimensional measures of performance may not be acceptable to some members. Transactional differences, incompatible individual farm strategies of member-patrons, and increasing societal pressures for sustainability will tend to accelerate the need for more complex, holistic measures of performance (for example, Benos et al., 2018). Frictions and influence costs can rise steeply in such circumstances, particularly if the process of “cooperative genius” is not initiated (Cook, 2018). The resulting high MOCs will force leaders to tinker or, if tinkering is no longer feasible, more drastic structural or fundamental solutions will have to be considered by the entire membership. Finally, the organizational culture adopted serves as the glue that ties members together in order to identify and achieve their common intent (for example, Mierzwa, 2021; Hogeland, 2004). For example, if during its formation the cooperative’s main objective is to address an important market failure in order to protect the value of its member-owners’ farms, a defensive organizational culture may become dominant (for example, Hogeland, 2006). However, as the cooperative expands and diversifies into processing and value-added layers of the vertical food supply chain, a defensive culture may no longer serve cooperative strategies (for example,

Organizational costs in agricultural cooperatives  61 Grashuis and Cook, 2021; Cook, 2018; Fulton and Hueth, 2009). Additionally, if a subgroup of (new) members view themselves both as patrons and investors seeking rents from other parts of the chain, they will favor a more offensive strategy and corresponding organizational culture. As long as tinkering (for example, establishment of a separate-pools system) works, the cooperative will achieve MOC minimization. If, however, a majority of members is supportive of an offensive culture, fundamental solutions will be required and a strategic shift may become more attractive to cooperative members. Depending on the organizational design attributes chosen, as well as the constraints imposed and public policy support for cooperatives afforded by the particular institutional environment, the cooperative founded may incur high or low MOCs. If the cooperative experiences high MOCs, two options are available: to do nothing about them; or to design and implement means for addressing them. In the first case, the life expectancy of the cooperative is expected to be low. In the latter case, cooperative leaders implement tinkering solutions (for example, Cook and Iliopoulos, 2016; Cook, 2018). Tinkering is an action that solves a cooperatively induced “friction/problem” between two or more cooperative parties. These could be two current members or one current and one inactive one, a member and a cooperative policy or practice, management and a member or subgroup of members, cooperative managers and board, and so on. Tinkering attempts to lower immediate MOCs. It might, however, increase immediate operating costs. Tinkering solutions do not alter the organizational design of the cooperative fundamentally; instead, such solutions address only the symptoms of increasing organizational costs (for example, à la-Hirschman voice expressed by a subgroup of members dissatisfied with one or more policies of the cooperative). Tinkering can be successful in addressing increasing organizational costs, but over time heterogeneity of member preferences results in increasing MOCs. However, tinkering might address friction only temporarily, without addressing the fundamental, guilty vaguely defined property rights (VDPRs). Even if successful, since the root causes of high organizational costs remain unaddressed, organizational costs persist and the associated problems will very often return in an even more challenging way (for example, Grashuis and Cook, 2021; Valentinov and Iliopoulos, 2021; Iliopoulos and Valentinov, 2018). In either case, eventually cooperative leaders come to realize that tinkering does not work any more and more fundamental solutions are required (Cook, 2018; Iliopoulos and Valentinov, 2018). In the search for such solutions, cooperative leaders and members have three options: do nothing (status quo); exit; and reinvention (Cook, 2018). The action of tinkering is the result of cooperative genius. The latter is a process embedded in a cooperative culture that facilitates and encourages “recognition” of the need for tinkering. Whether at the level of individual member, committee, individual employee, top management, or performance results, the more “co-op-oriented” the organization, the more likely it is that cooperative genius recognizes potential cooperative friction and the more likely it is to emerges in conversation. This recognition moves up or down the management and member leadership chain, leading to quick resolution or to important meetings between the affected parties. It probably could be called “openness” to understanding—not only of the cooperative purpose but also of the cooperative elements of “patron ownership, control, and beneficiaries.” Cooperative genius leads to constant reevaluation and realignment of the specific cooperative purpose, policies, and practices. It can be sparked by a single individual but is most likely embedded in the leadership—member and management—and spreads throughout all stakeholders in the cooperative over time. In a nutshell, the process of recognition of what violates

62  Handbook of research on cooperatives and mutuals cooperative success, action to ameliorate the violation/friction in the form of tinkering, and communication as to this process constitute the essence of cooperative genius. Status quo is equivalent to praying that everything will go better but doing nothing at all to facilitate such an outcome. Exit implies that the cooperative structure as we knew it does not exist any more; it is either converted into an IOF, merged with another cooperative, or dissolved. Spawning involves the formation of a new cooperative by a subgroup of members. Reinvention is the beginning of a new life cycle after the key organizational design attributes have been modified significantly (Cook, 2018). In the reinvention option, a new organization emerges and the process starts over from the point in time at which founding/reinventing members decide which organizational design attributes to adopt for the new venture. The scholarly literature and popular press articles are full of cases of agricultural cooperatives that have faced, or are currently facing, similar challenges, where increasing MOCs end to increasing relative operational costs, which lead to tinkering and, eventually, reinvention (for example, Hansmann, 1996; Fulton and Hueth, 2009; Bijman et al, 2012; Bijman and Iliopoulos, 2014). In the following section we present one European and one US case of agricultural cooperatives that have successfully addressed increasing MOCs.

HOW AGRICULTURAL COOPERATIVES ADDRESS ORGANIZATIONAL COSTS IN EUROPE AND THE US Solutions to Organizational Costs in Agricultural Cooperatives Solutions to organizational costs incurred by agricultural cooperatives address MCCs, FOCs, or MOCs. The formation of a cooperative is by itself a major means of addressing high MCCs facing a group of farmers in the absence of effective collective action (Sexton and Iskow, 1988). Solutions to FOCs include: ● Adoption of bottom-up, holistic approaches that install and/or boost trust and bridging social capital between and among all key cooperative stakeholder groups and, thus, minimize the costs of communication and reaching agreement on key formation decisions (for example, Scharmer, 2009). ● Self-selection of members so as to avoid frictions during the selection and implementation of key strategies and operational policies (for example, Grashuis and Cook, 2021). ● Lobbying to support the establishment of an institutional and legal framework that is conducive to minimizing FOCs (for example, Bijman et al., 2012). ● Establishment of trustful and supportive relationships with other actors of the netchain in order to minimize transaction costs associated with partnerships, joint ventures, and strategic alliances (for example, Nilsson et al., 2012; Valentinov and Iliopoulos, 2021). MOCs are more complex to address and require a combination of cooperative genius, expertise, and supportive mental models. Based on, and extending, Cook and Iliopoulos’ (2016) typology of solutions to MOCs incurred by agricultural cooperatives, we propose the types of solutions set out in Figure 3.2. Under tinkering, four generic solutions are included: user alignment, member retention, supply–demand balancing, and transparency. “User alignment” solutions align residual income and control rights so as to encourage each member-patron to contribute to the cooper-

Organizational costs in agricultural cooperatives  63

Source: Author.

Figure 3.2

Solutions to maintenance organizational costs in agricultural cooperatives

ative in proportion to the benefits s/he receives. Example solution instruments for implementing user alignment solutions include base capital plans, marketing order systems, marketing contracts signed with members, proportional voting schemes, the requirement for significant upfront equity capital contribution by members, and issuance of appreciable and transferable delivery rights. “Member retention” solutions are policies implemented in order to increase member loyalty to the cooperative. Example solution instruments for implementing member retention solutions include introduction of member relations programs, binding grower agreements, marketing agency in common exclusivity, promotion of the cooperative’s image, training schools for members, significantly increasing the costs to members of exiting the cooperative, and placing emphasis on the cooperative’s evolution and history. “Supply–demand balancing” solutions enable the cooperative to gain control over its major input and or output supply channels. Example solution instruments for implementing supply–demand balancing solutions include attainment of large size, adoption of a closed/ defined membership policy, creation of spatial monopoly/monopsony, mandatory marketing agreements with members, and establishment of a delivery rights system. Under supply– demand balancing solutions, we also include innovative capital acquisition techniques targeting members and/or non-member investors. Such solutions are implemented through a number of instruments, including, but not limited to, the formation of subsidiaries, joint ventures, or holding companies; the issuance of preferred stock; formalization of transferable and appreciable delivery rights; establishment of hedging services for members; issuance

64  Handbook of research on cooperatives and mutuals of externally tradable subordinate bonds; and acceptance of external corporate investors in cooperative-owned subsidiaries. “Transparency” solutions are designed to allow member-patrons to choose their preferred level of risk and measure cooperative performance, and/or enable them to monitor management more efficiently. Example solution instruments for implementing transparency solutions include adoption of separate capital, risk, and governance pools that foster the commonality of interest within each pool; signing of management contracts with local cooperative members in federated multipurpose cooperatives; issuance of multiple types of stock; establishment of transferable and appreciable delivery rights, placing focus on a single commodity within a region; issuance of externally tradable subordinate bonds; and acceptance of external corporate investors. When tinkering no longer works, cooperative leaders have three other options: the ambiguous solution of “status quo,” the two fundamental solutions of spawning and reinvention, and finally exit, which is usually implemented by bankruptcy, conversion to IOF, or liquidation. Cases of agricultural cooperatives in Europe and the US that have implemented one or more of the aforementioned solutions abound. In Table 3.1 we have selected some of these cases based on the authors’ experience and a review of the English-language academic literature. In order to illustrate potential similarities and differences in the ways in which agricultural cooperatives in Europe and the US address organizational costs, we present one example organization from each continent, respectively. Solutions to Organizational Costs in European Agricultural Cooperatives: The Case of the Pindos Poultry Cooperative5 Background In the late 1950s, seven farmers in the poorest region of Europe at that time, in northwestern Greece, saw an opportunity to increase their income by raising chickens on the side of their other farming activities. However, they soon realized that distribution networks were problematic and buyers exercised considerable monopsony power over them. Each of these farmers experienced, therefore, very high market contracting costs. In order to address these MCCs, in 1958 they came together, collaborated, and founded the Pindos Poultry Cooperative (PPC) as a traditional agricultural cooperative (Chaddad and Cook, 2004). FOCs were addressed by seed money provided by members themselves and some help from the International Council of Churches. More than 60 years later, PPC is a very successful poultry business cooperatively owned by 572 farmers and employing 1,200 persons. This success is manifested, among other ways, in: (i) being the number one poultry company in Greece, with a market share of nearly 40 percent; (ii) constant profitability, with profits increasing throughout its history with the exception of 2006, due to the avian flu outbreak; (iii) investing constantly in improving its capacity to lead the poultry industry in Greece; (iv) a €27 million investment plan for the period 2020–4 resulting in a new €9.5 million processing plant as early as July 2021; (v) state-of-the art facilities; (vi) providing its members with numerous economic and non-pecuniary benefits; and (vii) providing significant benefits to the local community. So, how did they achieve all of these? As we will see: with one major reinvention, numerous tinkering actions, cooperative genius and, of course, a lot of hard and smart work.

Valio

Nordmilch eG

Nordmilch AAG (PLC) Germany

3

4

5

Germany

Finland

Hungary

Morakert

2

Country

Belgium

REO Veilling

Cooperative

Problem

Dairy

Dairy

Growth through mergers

Control

Portfolio

as a federated co-op)

Internal free riding

Horizon

service cooperative

Dairy (LLC acting

Internal free riding

Internal free riding

Purchasing and

vegetables (auction)

Fruits and

Sector

2. Member retention

1. User alignment

1. Reinvention

1. User Alignment

1. User alignment

2. Member retention

1. S-D balancing

Generic Solution

Source

interest for up to 6 years)

on a voluntary basis (fixed

members and employees

(Genussscheine) for

participation rights

1&2a. Issuance of profit

24.9% of shares.

allowed but only up to

adopted; outside investors

agerial governance model

entity from the co-op; man-

founded as a separate legal

1a. Nordmilch AG (PLC) was

member.

patronage by each co-op

to Valio, so as to reflect

Müller (2012)

Hanisch &

Müller (2012)

Hanisch &

(2012) paid on shareholders’ loans

Pyykkönen adjust dividends and interest

Ollila &

(2012)

Ton & Szabó

(2012)

Ton & Szabó

to all member-co-ops and

1a. Valio pays the same price

1b. High upfront equity capital

limited liability company)

acquisition techniques (e.g.,

1a. Innovative equity capital

member’s farm)

produce directly from each

members (e.g., collection of

2a. Additional services to

1a. Binding member contracts

Solution Mechanism

Example solutions to maintenance organizational costs adopted by agricultural cooperatives

1

#

Table 3.1

Organizational costs in agricultural cooperatives  65

Cooperative

BayWa

CRV

Friesland-Campina

Land O’Lakes

9

10

11

(Federated)

Conserve Italia

of two dairy co-ops)

eG (result of a merger

Humana Milchunion

8

7

6

#

Country

USA

Netherlands

The

Netherlands

The

Germany

Italy

Germany

Sector

Dairy

Dairy

Cattle breeding

Farm supplies

vegetables

Fruits and

Dairy

Problem

Generic Solution

Solution Mechanism

Source

1. User alignment 2. Member retention

contribution

1. S-D balancing

Disproportional capital

Free-Rider

issued

2a. Multiple classes of shares

1a. Base capital plan

agreements/contracts

1a. Mutually binding member

(2016)

Iliopoulos

Cook &

(2016)

Iliopoulos

Cook &

(2016) tions expert

Iliopoulos hired a skillful communica-

1. Member retention

scattered in two countries

Heterogeneity—too

Cook &

(2012)

Filippi & Kühl

(2012)

Iliopoulos

Bono &

Müller (2012)

Hanisch &

relations department and

investors

1a. Acceptance of external

issued

3b. Multiple types of stock

allowed

3a. Non-member investors

tially based on investment

2a. Enabled control rights par-

15 co-ops

1a. Single sales organization for

as a joint sales agency

2a. Joint Venture (Nord-Contor)

Milchkontor

resulted in Deutches

Humana Milchunion

1d. Merger of Nordmilch and

(LLC)

Milchindustrie GmbH

1c. Formation of Humana

governance model

1b. Adoption of the managerial

investor-share cooperative

1a. From a traditional to an

many members (26,524)

1. Transparency

3. Transparency

2. User alignment

1. S-D balancing

balancing

2. Member retention & S-D

1. Reinvention

1a. Established a strong member

Financing growth

market position (growth)

Achieving a dominant

Growth through mergers

66  Handbook of research on cooperatives and mutuals

Organic Valley-CROPP USA

GROWMARK

Dairy Farmers of

16

17

18

19

Farmland

15

(2016)

education

cooperative

/ Ronghua Growing

● low level of members’

vegetables/grain

technical skills and

● lack of capital

Contribution

Disproportional Capital

management

Human capital

Fruits and

Dairy

USA

China

Farm inputs

primarily dairy

Cross pool subsidization

Lack of transparency

pork Multiple pool—

Iliopoulos

acquisition

Grain, fertilizer,

with 3. Member retention

2. S-D balancing

members and non-members

to members

training (with role-playing)

3. Provide regular experiential

2. Market a “core” product

(2011)

(2016) Garnevska et al. contracts

1. 1. S-D balancing

Binding

Iliopoulos

2a. Control homogeneity

Cook &

(2016) 1a. Base Capital plan

Iliopoulos system

Cook &

(2016)

Iliopoulos

Cook &

functioning for federated

1a. Centralized human resource

strict member constraints

Closed membership policies with

2. Member Retention

1. User Alignment

1. User Alignment

All four generic solutions

Cook &

(2016)

Bankruptcy

Multipurpose

Never adapted

Iliopoulos

Cook &

(2016)

Iliopoulos

Cook &

(2016)

Iliopoulos

rights

1a. Organized as closed member-

enforcement

2a&3a. Well-defined, strict

discounts

1a. Transparent premiums and

agreement

Source Cook &

variability Over extension of capital

1. User alignment

3. Member retention

2. User alignment

1. Transparency

Solution Mechanism 1a&2a. Adaptable marketing

ship with tradable delivery

Capital constraint

Variability of Quality

2. Member retention

Reliability

Generic Solution 1. S-D balancing

Problem Volatility

Supply and demand

Sugar

Sector

USA

USA

USA

Nut

Citrus

Growing Cooperative

Melon Vegetable

Dongwan Lvdadi

America (DFA)

American Crystal

14

USA

Blue Diamond

Country

USA

13

Cooperative

Florida’s Natural

#

12

Organizational costs in agricultural cooperatives  67

23

22

21

Country

Sector

Problem

Generic Solution

3) Horizon/free-rider/ portfolio

Rice Growers Assoc.,

Agricore United, Amer.

by government

Galicia

Dairy Cooperatives in

Fishery (generic)

Spain

Dairy

High transaction costs

Member retention

alignment

contracts, design equity

FCStone

S-D balancing, User

structure, sign production

Producers Inc.,

Southern Bluefin tuna

introduce a federated voting

Pro-Fac, United

Source

(2000)

Pintassilgo

Heath (2009)

Fulton and

Forgács (2006)

services to members

(2016)

Investment by the co-op to provide Pereira et al.

benefits according to contribution)

member receives a share of the

period, fair sharing rule (each

Transferable membership, waiting

hands of current patrons

maintain control in the

management policies that

rights and responsibilities,

SK Wheat Pool,

3. members assume ownership

practices

Amer. Bison Co-op,

Management monitoring

and responsibilities/

2. Alter membership rights

processing

or on bulk handling and

activities near the farm level

value activities/Focus

becomes available 1. Convert to IOF for added

shared around as soon as it

members: new info is

information provider for

3. Co-op assumed the role of

2. Joined input purchasing

Walnut Growers, N.

balancing

user alignment, S-D

Solution Mechanism 1. 50% of co-op shares bought

Lilydale, Diamond

Native Beef Co-op,

Free riding

2) Agency problem

Foods,

Fish

transparency 3. member retention,

problem?)

Co., West Liberty

US

Reinvention

member equity (Horizon

Dakota Growers Pasta 2. Member retention,

1. Conversion to IOF/

Tri Valley Growers,

1) Lack of capital/access

US/Canada

retention

3. Transparency/member

low level of social capital

Association

2. S-D balancing

2) High transaction costs,

Marketing Co-op

1) High debt-to equity ratio 1. Liquidation

2) Purchasing &

1) Meat

Agricultural

Hungary

Hadju Gadzak

Cooperative

Beke Cooperative/

#

20

68  Handbook of research on cooperatives and mutuals

#

25

24

Cooperative

Country

Sector

Solution Mechanism

rights, joint venture with IOF Vertical integration, divestment geographic expansion

environment innovation, relationship management

portfolio diversification, closed membership access, production quota, supply commitment price discovery enhancement, inventory management, equity management, variable pricing structure

Cooperative

Valio

ZESPRI

Pacific Coast

Producers/

Atkins Ranch

Euralis

Organic Valley

Blue Diamond

Florida’s Natural

Growers Cooperative

Rocky Mountain Sugar

Cooperative

Harvest Land

Association

Cotton Cooperative

Anecoop

Glanbia

MFA Oil

United Potato Growers

Organic Valley

Country Natural Beef/

brand development, process

United Agricultural

Producers

External pressures

Adaptation to external

Louisiana Sugar Cane

ownership at 8% with no voting

rights, associated membership (no

Closed Membership/delivery

Cooperative (LCAs)

reinvention?

increased demand

Generic Solution S-D balance/user alignment/

Problem Safeguard property rights/

Mountain States Lamb All

Fruit/Meat vote)/delivery rights and investor

World

US

cooperative/

Midwest Elderberry

Next Big Thing/

Source

(2018b)

Grashuis

(2018a)

Grashuis

Organizational costs in agricultural cooperatives  69

Cooperative

Viver

Vall de Almonacia

Viver & Vall de

30

31

32

Almonacia

Altura

cooperative

Unnamed wine

29

28

Unnamed case

27

cooperative

Survey

Cooperative

States Lamb

Milcobel, Mountain

Tereos, Sodiaal,

Fonterra

Producers Association,

Michigan Milk

26

#

Spain

Spain

Spain

Spain

France

Italy

Spain

Country

Olive oil

Olive oil

Olive oil

Olive oil

Wine

vegetables

Fruits and

all

Sector

Ortiz-Miranda

Ortiz-Miranda

(2012)

& promoted; mutual monitoring from Ortiz-Miranda Transparency

members

Moragues-Faus transactions; shared identity

S-D balancing Member retention

(2012)

& produce

Moragues-Faus

(2012) delivery of almost all members’

Bylaws make mandatory the

Small size; trust-based

User alignment

environment

Free-rider

S-D balancing

Ortiz-Miranda

Adaptation to external

&

Moragues-Faus

(2012)

& avoid frictions Separate product pools

Moragues-Faus Withholding information from

Orozco (2014)

different contractual provisions

non-organic producer-members to

Fares and

Differentiated payment system/

members

olive oil

User alignment

Reverse transparency (!)

User alignment

member-patrons’ quality of S-D balancing

High variance in

Transparency (!)

behavior

selection/opportunistic

Moral hazard/ adverse

preference heterogeneity

(2020)

investment in knowledge transfer

Member retention

and educational activities for

Pellegrini et al.

Conflict resolution strategies,

User alignment

environment; member

Adaptation to external

(2021)

environment

Piñeiro et al.

Source

Adaptation to external

Joined cropland management

Solution Mechanism

abandonment

Generic Solution

Horizon problem/land

Problem

70  Handbook of research on cooperatives and mutuals

Organizational costs in agricultural cooperatives  71 Addressing organizational costs in PPC Up to the late 1970s PPC was a semi-professional locally focused business managed by the board of directors, primarily by the chairman of the board. The cooperative’s processing plant had problems adhering to professional and quality standards: members were not seriously committed to their cooperative, while competitors were always several steps ahead. In 1979 the authorities shut down PPC’s processing plant for violating environmental law. That negative development would have forced many companies to exit the industry and sell their assets to whoever was interested; not PPC, though. PPC leaders used the closing of their plant as an opportunity to rethink their vision, objectives, and strategies. The cooperative’s leaders undertook extensive discussions with all members and, in a dramatic General Assembly, decided to transform the cooperative into a fully professional business that would become the leader in the national poultry industry. The successful implementation of the “reinvention” solution to MOCs, however, necessitated the adoption of a completely new organizational design that would address various types of MOCs. Such MOCs included risk bearing-related costs manifested as constraints to risk capital acquisition and efficient decision making (that is, external and internal free-rider, horizon, portfolio, costly decisions and processes, and costs associated with conflict resolution). The reinvention of PPC resulted in the transformation of the cooperative from a traditional to a member-investor cooperative with vertical investments. Returns to members are distributed in proportion to shareholdings, in addition to patronage. This is done through periodic appreciation of cooperative shares so that they better depict the true value of cooperative assets. In terms of the governance model, PPC has adopted the extended traditional model of cooperative governance. Over the years, through tinkering actions, the cooperative has enriched the extended traditional governance model with a number of organizational design innovations, which we present later in this section. In 1981 PPC hired a professional CEO, who is still in that position today, and who has been instrumental in designing and implementing numerous tinkering actions since. Such tinkering solutions to MOCs include: ● Adoption of a quasi-new generation cooperative ownership structure with the following features: ● Significant upfront investment requirement: Each member-patron joining PPC contributes capital in five ways, by: (1) buying a “participation right” at €5,000; (2) purchasing a membership share whose price is adjusted regularly by the BoD (current price is €15,150); (3) buying delivery rights that correspond to 100 percent of the broilers raised at her/his farm. Each delivery right corresponds to one square meter of broiler house with a current value of €63/m2. The price of the delivery right is also adjusted regularly to depict its market value. Delivery rights are tradable under the approval of the board; (4) providing additional risk capital to make an investment that has been approved by the General Assembly; (5) covering at the end of the year any losses that have been incurred by the cooperative. Any outstanding profits are not distributed to members, they are held in special reserves to fund planned investments; (6) defined membership policy. New shares and delivery rights are issued only where an expansion of capacity is planned. When this is the case, the children of current members have priority over other interested farmers. Before permitting admission,

72  Handbook of research on cooperatives and mutuals

●

● ● ●

●

●

●

●

however, the board assesses all new applicants on the basis of their past experience, size of broiler house (capacity of 10,000–20,000 broilers is mandatory), reliability and trustworthiness; and (7) issuing partially redeemable, transferable, tradable, and appreciable residual income rights as described above and below in the equity redemption plan. Implementation of an equity redemption plan as follows: retiring member-patrons receive the nominal values of their cooperative share plus an amount that represents their cumulative contribution to the cooperative’s risk capital. The total amount received depends on the number of years of membership and the number of delivery rights (at their current price). In case the retiring member is not succeeded by a child, this amount is almost doubled. Members exiting for any reason other than retirement are allowed to sell their share and delivery rights at a freely negotiable price but approval of the new member is conditional upon board approval. Creation of spatial monopsony to balance supply and demand. Institution of an Executive Committee, whose chairperson, two vice chairs, and two members are also members of the board of directors. They meet once a week in order to make decisions that cannot wait until the regular board meeting. In order to improve efficient decision making, PPC has also created seven topic committees, in which members and employees participate. These bodies coordinate the cooperative’s operations and monitor management (for example, supervision of timely deliveries, member relations, and so on). An important byproduct of this policy is that committee members become accustomed to participating in decision making and thus become prepared to serve as board members in the future. To address monitoring-related free-rider issues, the cooperative has implemented a system of incentives and graduated sanctions. Members participate in a number of supervisory committees that monitor the various aspects of PPC’s operations. Board members who do not participate in board meetings for more than three months or miss five consecutive board meetings are forced out of the board. Up to now, there has been no need to enforce such sanctions. Emphasis is placed on PPC’s history and increasing the switching costs for members (for example, by requiring a significant upfront equity contribution that can be redeemed only under certain conditions and at a later point in time) to retain members and increase their commitment to the cooperative. Member retention is improved by creating a member relations department and improving communication with members; every week at least one board member meets with some members in a village café to discuss developments and listen to their concerns, which are then transmitted back to the board, executive committee, topic committees, and personnel for design-relevant actions. Effective communication with members is also achieved through daily contacts with PPC employees, who visit farms to deliver inputs or advise members on operational and accounting issues. Minimizing the need for sanctions on members and board members is achieved through the promotion of member interaction and active participation in the governance of PPC, both of which facilitate focus on common values, and the creation of trust and commitment to the cooperative. Members perceive this “common feeling of belonging” to a successful group that supports them in times of hardship as one of the strongest motives to be part of, and contribute to, this cooperative endeavor.

Organizational costs in agricultural cooperatives  73 What is most impressive, however, is how the process of cooperative genius enabled PPC to avoid the extremely negative consequences of severe governmental interference in cooperatives’ affairs in the 1980s. Starting with the introduction of a new cooperative law in 1982, political parties had a major say in the organization and operations of agricultural cooperatives in Greece. For example, members interested in serving on the board of directors could be nominated only if a recognized political party was supporting their nomination. In this way, most agricultural cooperatives entered a spiral of inefficient decisions and influence activities that resulted in many bankruptcies and/or failure to serve member-patrons. PPC is an exemplary exception to that rule. According to several member-patrons who served on the board in the 1980s, in PPC the prevailing mental model was that when a board member participated in board meetings s/he forgot her/his political party affiliation and did everything possible to improve the results for PPC. Diffused among members, this mentality has paid back over the years and has been the cornerstone of PPC’s diachronic success.

SOLUTIONS TO ORGANIZATIONAL COSTS IN US AGRICULTURAL COOPERATIVES: THE CASE OF ORGANIC VALLEY Undertaking organization cost studies utilizing a dynamic “founding organization cost”–“maintaining organization cost” approach requires in-depth knowledge of the history of a given entity. The poultry case in Greece and the following Organic Valley case in the US allow the researcher to follow the evolution of changes in costs incurred, from “birth” to “present.” We were afforded access to the founder’s recollections and data combined into stories and narratives of the complex and costly process of creating self-governed organizations. The Organic Valley case shares the story of a group of three distinct types of farmers: old-timers (farmers whose ancestors settled on the land and continued to do so for generations), the Amish, and newcomers, called “back-to-the-land,” who dreamed of establishing an organic way of life. These three subsets of agriculturalists settled in the “driftless” area of Southwest Wisconsin, a hilly area with ravines and creeks the glaciers bypassed 10,000 years earlier. This geological phenomenon resulted in small arable areas suitable for small farm vegetable and fruit entities, tobacco plots, and livestock enterprises. When the agricultural depression of the 1980s devastated the opportunities to extract a living, many of the “old-timers” left leaving an innovative and feisty group to survive. They knew they would have to work together and produce output that would generate higher-valued returns. Many of them adapted the organic approach to crop and animal production. Starting in 1988, seven multi-crop/livestock farmers who had struggled through the previous eight years of depressed commodity prices gathered in a local basement to discuss their future. Each of the seven had converted to the organic method of production—a costly three-year process of adapting to a non-synthetic approach to controlling insects and weeds and non-use of synthetic plant food. Originally, they organized into numerous pools (groups producing similar outputs). The initial challenge was finding stable markets with a minimum of variation in price paid. Within months of confronting this challenge, they realized that organic dairy production proffered the greatest opportunity for year-round revenue flow. The next major obstacle facing the group was that they could not ship their organic milk or organic dairy products—primarily cheese

74  Handbook of research on cooperatives and mutuals and butter—because Wisconsin had not had not yet developed certification standards for dairy products. However, certification standards did exist for their fruit and vegetable outputs. The lack of organic certification of dairy output introduced this initial group to “founding organizational costs.” They would now have to develop organic standards for feed stocks, herd health practices, group milk hauling protocols, and fluid milk production. Consequently, these administrative procedures had to be submitted to a lengthy process at the national level. Additionally, milk jointly shipped had to be certified. This led to their first major partnership (later Organic Valley would become well known as negotiators of win–win partnerships). The first partnership was with NFO, a bargaining cooperative which provided administrative, regulatory, market analysis, and financing assistance. In addition to the founding organizational costs of creating organic standards and the procedures and processes to convince buyers and regulators to trust the validity of stated quality and attributes, there was a need to ameliorate potential frictions between the founders and new members. As noted, the original members consisted of three types: (1) the old-timers, who had been established in the area for several generations and produced vegetables, fruit, and tobacco on small plots. They also maintained a few dairy and beef cows, and a number had been able to grow the size of their farms, particularly in dairy; (2) the Amish, who had arrived several generations later, were experienced in organic methods, and practiced multi-crop and livestock small farm approaches to agriculture; and (3) the newcomers—“back-to-the-land” progressive thinkers with idealistic ideas about organic farming but usually inexperienced in the methods of organic farming. However, most had considerable experience in business and complementary technical skills, and agreed with the founders’ objectives: stable price and sustainable profit. The investment in melding these diverse cultures, religions, skills, backgrounds, and preferences consumed many hours and education meetings. When the 25-year history of the group was written, the collective and individual success verified the effort of collaboration. Much is attributed to the fact that the founding group concentrated on developing a set of organizational design elements that were unique and challenging. These basic principles follow. Once “organic” was perceived and received by consumers and government officials, the challenges of designing an organizational form that would bring the founders together with the heterogeneous three types of farmers into a commercially viable group became the next FOC. During the many meetings of the first year a consensus evolved regarding the following elements of their organizational structure: (1) all output would be organic; (2) the new entity would be owned and governed by organic farmers; (3) the new entity would not be a traditional cooperative; (4) the entity must generate a stable pay price; and (5) the organization must generate an income that would allow for a family farm to survive. These are among many FOCs encountered by the founders of Organic Valley. Another FOC blends with the first MOC: the need for equity and debt capital. Equity capital acquisition in cooperatives is viewed as a constraint because of free-rider, horizon, and portfolio problems created by vaguely defined property rights of the cooperative structure (Hansmann 1996; Cook and Iliopoulos, 2000). Organic Valley formed as a quasi-new generation cooperative (see Franken and Grashuis, this volume) and attempted to ameliorate many of the structural issues of traditional cooperatives. The founders gave much thought to the cost of maintaining their organizational structure once they were formed. Consequently, they adapted elements of defined membership and strict proportionality of capital contribution and product supplied, which was named “capital base requirement.” This amount is set by the

Organizational costs in agricultural cooperatives  75 dairy pool governance body. The capital base requirement is equal to 5.5 percent of annual gross income from milk marketing (this case discusses the dairy pool structure, which amounts to approximately 80–90 percent of Organic Valley gross revenue). Members can only transfer their delivery rights to family members, thus limiting incentives for member share maximization and facilitating member expansion and addition of new members. In addition to the member mandatory capital acquisition program, Organic Valley acquires growth capital from members and non-members through its social investor program. This capital is in the form of preferred stock and, depending on date of issue, has varying dividend rates. Originally the social investors were local communities and businesses but later their customers and consumers became major non-voting social investors. Currently, most of the preferred stockholders are consumers of Organic Valley products. The scarcity of equity capital in patron-owned firms such as cooperatives becomes a friction point because the profits (surplus) are distributed in proportion to patronage, not investment. Acquiring equity capital becomes a tension-riddled function incurring high maintenance organizational costs because the patron interested in growing incurs three years of very low-performing assets to convert production to organic standards. Consequently, the patron requires earnings of the cooperative to be distributed to assist in the patron’s organic production growth farm strategy. Developing communication and assistance policies and programs becomes a significant MOC. Another solution to the Organic Valley capital shortage was their ability to form partnerships. Their first major partnership was with the NFO (a national trade association with similar strategic and philosophical visions for US agriculture). The partnership included cash flow and administrative assistance in exchange for an Organic Valley guarantee of organic cheese. This partnership provided benefits to the dairy pool relative to the other pools. The NFO provided financing, national distribution, a conventional market for surplus production, and political and regulatory networks. Over time the partnership approach contributed to minimizing operating and capital expenditures and expansion of their distribution and mass-marketing expertise and networks. Within 12 years Organic Valley had almost 50 partnerships. One of the more interesting partnership strategies was with local processing plants that would process the organic milk in sterilized processing plants before conventional milk was processed each morning. Consequently, a no-brick-and-mortar strategy evolved. The capital saved by not building physical assets was invested in brand name marketing and innovation. One of the innovations was the adaptation of UHT milk (ultra-high temperature pasteurized), extending the shelf life of their organic milk from 21 to 70 days. Another MOC occurs in the process of distribution of profits. The pay price is predetermined at the beginning of the year. If Organic Valley generates net revenue beyond the amount distributed by this policy, the excess is allocated to unallocated reserves and dividends to preferred stockholders, employees, and the egg, meat, soybean, and produce pools. During the first 12 years membership grew from 34 members to approximately 500 members. Maintaining patron input and matching supply with growing demand while maintaining a “stable-price sustainable-livelihood” philosophy, strategy, and structure became a serious functional and organizational challenge. The Organic Valley cooperative organizational model focused on maintenance of high and stable prices, which results in a very different operating approach from conventional dairy firms’ and traditional cooperatives strategies’ pay procedures. Organic Valley sets a target pay price for an entire year in January (set by the board of directors with the guidance of producer pool advisors). The target price

76  Handbook of research on cooperatives and mutuals ranges from 15 to 50 percent higher than conventional market pay prices. One of the basic principles/practices of Organic Valley is to adhere to the target price, having never sold output at below target price. If Organic Valley cannot use the entire organic output from its members for organic sales, it sells the surplus milk into the conventional market for a lower price. The member receives a blended price but a considerable premium to the conventional market price. In 2009 supply of organic milk exceeded demand, so the leadership developed a policy of each member withholding their organic supply by 7 percent. The membership complied and target price goals were achieved. The challenge of balancing producer supply with commercial demand is a complex economic and member relations task. Organic Valley is particularly vulnerable to this phenomenon (most marketing cooperatives face this dilemma because of the biological production function creating significant variation in producer supply) because of high milk production in a pasture-based supply source during the low-demand months of summer. Organic Valley continues to employ and execute the policies that are mentioned in this organizational cost case. Through 2021, it has met its target price every year, including the last reported year of 2019, where it paid $30.25 per hundred pounds compared to an average of $18.00 for conventional milk, although it did not make a profit in 2017, 2018, or 2019. In these years the conventional milk group also suffered below cost of production levels. In June 2021 Organic Valley reported sales of $1.2 billion dollars and a significant increase in net operating income. This case, through a small set of examples, demonstrates the difference between founding organizational costs and maintenance organizational costs—a difference seldom recognized in case analysis or academic studies. More detailed studies clarifying and analyzing the differences between these two types of organizational costs would help cooperative developers and scholars when informing collective entrepreneurs.

COMPARING SOLUTIONS TO COOPERATIVE ORGANIZATIONAL COSTS IN EUROPE AND THE US By comparing solutions to organizational costs adopted by agricultural cooperatives in Europe and the US, useful lessons can be gleaned. The most important maintenance organizational costs incurred by agricultural cooperatives in both Europe and the US share the same root causes and are intended to address the same basic cooperative needs. These include the need to: (1) implement the “golden rule of proportionality,” according to which potential intra-cooperative frictions are minimized when usage of the cooperative and thus benefits derived are kept in proportion to capital contribution and control of the organization; (2) attract and retain members highly committed to the cooperative; (3) balance member supply and market demand; and (4) implement transparency rules to enable effective management monitoring and efficient risk management decisions. However, underlying causes take the form of one or more of the vaguely defined property rights constraints presented above. European and US agricultural cooperatives adopt the same generic solutions to organizational costs. While the terms and specific solution instruments implemented in the two continents may differ, the underlying solution mechanisms are based on the same economic principles. Whether a tinkering or a fundamental solution is chosen depends on how deeply cooperative leaders need to go in order to address the underlying root cause of each organ-

Organizational costs in agricultural cooperatives  77 izational cost. As highlighted by the analysis of the two organizational cost cases and the comparison of solutions in other agricultural cooperatives (see Table 3.1), tinkering solutions tend to address the symptoms of the problem, while reinvention solutions go under the iceberg surface seeking to address the root cause. The latter solutions have been associated with boundary redrawing as a means of avoiding intra-cooperative frictions (Iliopoulos and Valentinov, 2022). The institutional environment determines the range of solutions available to cooperatives. For example, less restrictive legal frameworks allow cooperative leaders to design more efficient solutions to organizational costs. Yet, legal frameworks reflect the dominant mental models in a country or state, and changing non-generative mental models should be the first priority of policy makers. When an agricultural cooperative is founded, usually members do not spend quality time on discussing and agreeing on the basic organizational principles and practices for their cooperative (that is, its organizational design). Yet, the quantity and quality of time invested in this endeavor could probably be used as a predictor of future low or high organizational costs. This is an unexplored knowledge area where more research is welcome. The Upper Midwest of the US became internationally known in the 1990s for the so-called cooperative fever that resulted in the start-up of numerous new generation cooperatives. However, organizational innovations usually do not emerge in a vacuum; many of the solutions to maintenance organizational costs adopted by new generation cooperatives have been introduced before, in one or another form, both in the US and in Europe. Given that cooperatives carry long organizational memories, their leaders will always have a stock of solutions to explore whenever they are faced with a (supposedly) new type of organizational cost. The dominant mental model among members is very important; whether and which solutions to organizational costs will be implemented depend on how members perceive and think about these issues. As shown in the European case study, a membership that places the cooperative organization above all other concerns was able to bypass governmental attempts to interfere in the internal affairs of the cooperative. Similarly, in Organic Valley, the underlying mental model facilitated independent collective action and helped the diverse group of initial members to address FOCs and MOCs. In addition to the provision of strong incentives to members for, for example, capitalizing their cooperative, an effective communication program accompanied by well-designed member retention policies is equally important in the US and in Europe. Among other achievements, this facilitates member agreement on a common intent and strategy to pursue it. Member preference heterogeneity surfaces as a major source of intra-cooperative MOCs; solutions to address it are implemented on both sides of the Atlantic. However, the exact mechanism and direction of causality between member preference heterogeneity, vaguely defined property right constraints, and MOCs is not yet understood in depth. Further research is needed to shed new light on this issues. While solutions to organizational costs modifying the traditional ownership model of agricultural cooperatives are adopted in both Europe and the US, significant changes in the governance model are observed only in (northwestern) Europe. Why this happens cannot be inferred from the extant academic literature. This is another avenue for fruitful future research. While solutions to cooperative MOCs have attracted scholarly interest in recent years, research on solutions to FOCs remains less systematic; this is yet another knowledge gap that future research should address.

78  Handbook of research on cooperatives and mutuals

CONCLUDING REMARKS The current chapter summarizes extant research on organizational costs incurred by agricultural cooperatives in Europe and the US, and proffers a new, temporal approach to studying these costs. Irrespective of the reasons why such costs have become more prevalent in recent decades, organizational costs represent a real threat to cooperative longevity. When founding members come together to create their cooperative, they are aware, only or primarily, of their individual market contracting costs and the founding organizational costs involved in starting their joint enterprise. Later on, as the cooperative evolves along its lifecycle, members and their leaders start to realize that there are significant maintenance organizational costs to be addressed if the cooperative is to survive rivalry. Designing solutions to organizational costs then becomes a necessity. The institutional environment largely dictates which of these solutions are feasible. However, organizational efficiency and effectiveness are the ultimate judges of the success of a solution. Significant member preference heterogeneity seems to magnify potential frictions among members and between members and management. Addressing such diverging member preferences is constrained by the ability of a cooperative to ameliorate the vaguely defined property right constraints facing traditional cooperatives in the form of free-rider, horizon, portfolio, control, and high collective decision-making costs problems. The need to provide clear and efficient incentives to all major stakeholder groups in order to capitalize their cooperative and help to make it sustainable in the long run provides a strong rationale for addressing organizational costs. The same generic solutions are implemented by agricultural cooperatives in Europe and the US. However, while in both cases similar solution instruments that modify the ownership structure of the organizations have been used, changes in the traditional governance model of agricultural cooperatives have so far been implemented only in northwestern Europe. Probably as a consequence of this, the latter process is not yet well understood by scholars. Future research addressing this and related knowledge gaps will help cooperative leaders to improve the longevity of their organizations in the long run. An important area for further inquiry is the contribution of prevailing mental models to the recognition of organizational costs and the co-design of effective solutions. While very little research is available on this issue, it nevertheless emphasizes the need for a more holistic, interdisciplinary approach to research on cooperative enterprises and organizational costs.

NOTES 1. 2. 3.

The authors wish to thank an anonymous reviewer for helpful comments and suggestions. Probably with the exception of bargaining associations. The need to optimize formation organizational costs may arise again, at a later phase, in the case that cooperative leaders decide to reinvent their organization or exit the cooperative form (Cook, 2018). 4. The traditional ownership model is characterized by ownership rights restricted to members-patrons; residual income rights are nontransferable, nonappreciable, and redeemable; and benefits are distributed to members on an equal basis or in proportion to patronage (Cook and Iliopoulos, 1998; Chaddad and Cook, 2004). 5. The information on the Pindos Poultry Cooperative presented in this chapter is based on Iliopoulos and Theodorakopoulou (2014), and research conducted by the first author in October–November 2021.

Organizational costs in agricultural cooperatives  79

REFERENCES Ajates, R. (2020). “Agricultural Cooperatives Remaining Competitive in a Globalized Food System: At What Cost to Members, the Cooperative Movement and Food Sustainability?” Organization, 27(2): 337–55. Apparao, D., Garnevska, E., and N. Shadbolt (2019). “Examining Commitment, Heterogeneity and Social Capital Within the Membership Base of Agricultural Co-operatives—A Conceptual Framework.” Journal of Co-operative Organization and Management, 7(1), 42–50, DOI: https://​doi​ .org/​10​.1016/​j​.jcom​.2019​.03​.003. Barzel, Y. (1989). Economic Analysis of Property Rights. Cambridge, UK: Cambridge University Press. Benos, T., Kalogeras, N., Wetzels, M., de Ruyter, K., and J.M.E. Pennings (2018). “Harnessing a ‘Currency Matrix’ for Performance Measurement in Cooperatives: A Multi-Phased Study.” Sustainability, 10, 4536; DOI:​10​.3390/​su10124536. Bijman, J., and C. Iliopoulos. (2014). “Farmers’ Cooperatives in the EU: Policies, Strategies, and Organization.” Annals of Public and Cooperative Economics, 85(4): 497–508; DOI: https://​doi​.org/​ 10​.1068/​a42168. Bijman, J., Iliopoulos, C., Poppe, K.J., Gijselinckx, C., Hagedorn, K., Hanisch, M., and G. van der Sangen (2012). Support for Farmers’ Co-operatives. Final Report. Wageningen, The Netherlands: Wageningen UR. Bono, P., and C. Iliopoulos (2012). Internationalisation of Second-Tier Cooperatives: The Case of Conserve Italia, Italy. Support for Farmers’ Cooperatives. Case Study Report. Wageningen: Wageningen UR. Bradburd, R.M., and A.M. Over Mead, Jr. (1982). “Organizational Costs, ‘Sticky Equilibria,’ and Critical Levels of Concentration.” The Review of Economics and Statistics, 64(1): 50–8. Chaddad, F.R. (2012). “Advancing the Theory of the Cooperative Organization: The Cooperative as a True Hybrid.” Annals of Public and Cooperative Economics, 83(4): 445–61; 10.1111/j.1467-8292.2 012.00472.x. Chaddad, F.R., and M.L. Cook (2004). “Understanding New Cooperative Models: An Ownership-Control Rights Typology.” Review of Agricultural Economics, 26(3): 348–60; DOI: 10.111/j.1467-9353.2004.00184.x Chaddad, F.R., and C. Iliopoulos (2013). “Control Rights, Governance and the Costs of Ownership in Agricultural Cooperatives.” Agribusiness: An International Journal, 29(1): 3–22; DOI: http://​dx​.doi​ .org/​10​.1002/​1gr​.21328. Coase, R.H. (1937).  “The Nature of the Firm.” Economica, 4(16): 386–405. DOI: 10.1111/ j.1468-0335.1937.tb00002.x. Commons, R.J. (1934). Institutional Economics. Madison, WI: University of Wisconsin Press. Cook, M.L. (1993). “Cooperatives and Group Action.” In D. Padberg (ed.), Food and Agricultural Marketing Issues for the 21st Century, pp.154–69. College Station, TX: Texas A&M University. Cook, M.L. (1994). “The Role of Management Behavior in Agricultural Cooperatives.” Journal of Agricultural Cooperation, 9: 42–60. Cook, M.L. (1995). “The Future of U.S. Agricultural Cooperatives: A Neo-Institutional Approach.” American Journal of Agricultural Economics, 77(5): 1153–9. Cook, M. (2018). “A Life Cycle Explanation of Cooperative Longevity.” Sustainability, 10(5), 1586, DOI: https://​doi​.org/​10​.3390/​su10051586. Cook, M.L., and C. Iliopoulos (1998). “Solutions to Property Rights Constraints in Producer-Owned and Controlled Organizations: Prerequisite for Agri-Chain Leadership?” In G.W. Ziggers, J.H. Trienekens, and P.J.P. Zuurbier (eds), Proceedings of the Third International Conference on Chain Management in Agri Business and Food Industry, pp.541–53. Wageningen, the Netherlands: Wageningen Agricultural University. Cook, M.L., and C. Iliopoulos (2000). “Ill-defined Property Rights in Collective Action: The Case of US Agricultural Cooperatives.” In C. Ménard (ed.), Institutions, Contracts, and Organizations: Perspectives from New Institutional Economics, pp.335–48. London: Edward Elgar Publishing. Cook, M.L., and C. Iliopoulos (2016). “Generic Solutions to Coordination and Organizational Costs: Informing Cooperative Longevity.” Journal on Chain and Network Science, 16(1): 19–27; DOI: 10.3920/JCNS2016.x001.

80  Handbook of research on cooperatives and mutuals Cook, M.L., and B. Plunkett (2006). “Collective Entrepreneurship: An Emerging Phenomenon in Producer-Owned Organizations.” Journal of Agricultural and Applied Economics, 38(2): 421–8; DOI:  https://​doi​.org/​10​.1017/​S1074070800022458. Cook, M.L., Chaddard, F.R., and C. Iliopoulos (2004). “Advances in Cooperative Theory since 1990: A Review of Agricultural Economics Literature.” In G.W.J Hendrikse (ed.), Restructuring Agricultural Cooperatives, pp.65–90. The Netherlands: Haveka. Fares, M’Hand, and L. Orozco (2014). “Tournament Mechanism in Wine-Grape Contracts: Evidence from a French Wine Cooperative.” Journal of Wine Economics, 9(3): 320–45; DOI:​10​.1017/​jwe​.2014​ .29. Filippi, M., and R. Kühl (2012). Agrial (FR), BayWa (DE) and Internationalisation. Support for Farmers’ Cooperatives. Case Study Report. Wageningen: Wageningen UR. Forgács, C. (2006). “Leadership and the Importance of Social Capital in the Transition of Cooperatives: A Case Study of Two Cooperatives.” Studies in Agricultural Economics, 105: 23–38. Fulton, M.E., and B. Hueth (2009). “Cooperative Conversions, Failures, and Restructurings: An Overview.” Journal of Cooperatives, 23: i–xi. Garnevska, E., Liub, G., and N.M. Shadbolt (2011). “Factors for Successful Development of Farmer cooperatives in Northwest China.” International Food and Agribusiness Management Review, 14(4): 69–84; DOI: 10.22004/ag.econ.117603. Grashuis, J. (2018a). “Joint Ownership by Farmers and Investors in the Agri-Food Industry: An Exploratory Study of the Limited Cooperative Association.” Agricultural and Food Economics, 6(1): 6–14; DOI: https://​doi​.org/​10​.1186/​s40100​-018​-0118​-0. Grashuis, J. (2018b). “An Exploratory Study of Cooperative Survival: Strategic Adaptation to External Developments.” Sustainability, 10(3): 652; DOI: 10.3390/su10030652. Grashuis, J., and M.L. Cook (2021). “Members of Cooperatives: More Heterogeneous, Less Satisfied?” International Food and Agribusiness Management Review, 24(5): 813–25. Hanisch, M., and M. Müller (2012). Ownership and Control Rights Transformations: The Evolution of the Deutches Milchkontor GmbH. Support for Farmers’ Cooperatives. Case Study Report. Wageningen: Wageningen UR. Hansmann, H. (1996). The Ownership of Enterprise. Cambridge, MA: The Belknap Press of Harvard University Press. Hendrikse, G., and L. Feng (2013). “Interfirm Cooperatives.” In A. Grandori (ed.), Handbook of Economic Organization, pp.501–21. Cheltenham, UK: Edward Elgar Publishing. Hirschman, A.O. (1970). Exit, Voice, and Loyalty. Cambridge, MA: Harvard University Press. Hogeland, J.A. (2004). “How Culture Drives Economic Behavior in Cooperatives.” Journal of Rural Cooperation, 21(1): 19–36. Hogeland, J.A. (2006). “The Economic Culture of U.S. Agricultural Cooperatives.” Culture & Agriculture, 28(2): 67–79. Iliopoulos, C. (2003). “Vertical Integration, Contracts, and the Theory of the Cooperative Organization.” Invited Paper, EURESCO CONFERENCE: Vertical Markets and Cooperative Hierarchies: The Role of Cooperatives in the International Agri-Food Industry, Bad Herrenalb, Germany, June 12–16, 2003. Available at: www​.researchgate​.net/​publication/​263203592​_Vertical​_Integration​_Contracts​_and​_the​ _Theory​_of​_the​_Cooperative​_Organization. Iliopoulos, C., and G.W.J. Hendrikse (2009). “Influence Costs in Agribusiness Cooperatives: Evidence from Case Studies.” International Studies of Management and Organization, 39(4): 60–80; DOI: http://​dx​.doi​.org/​10​.2753/​IMO0020​-8825390404. Iliopoulos, C., and I. Theodorakopoulou (2014). “Measuring and Communicating the True Value of Membership: The Case of the Pindos Poultry Co-operative.” In T. Mazzarol, S. Reboud, and E. Mamouni Limnios (eds), Sustainable Co-operative Enterprise: Case Studies of Organisational Resilience in the Co-operative Business Model, pp.223–39. Cheltenham: Edward Elgar Publishing. Iliopoulos, C., and V. Valentinov (2017). “Member Preference Heterogeneity and System-Lifeworld Dichotomy in Cooperatives: An Exploratory Case Study.” Journal of Organizational Change Management, 30(7): 1063–80; https://​doi​.org/​10​.1108/​JOCM​-12​-2016​-0262. Iliopoulos, C., and V. Valentinov (2018). “Member Heterogeneity in Agricultural Cooperatives: A Systems-Theoretic Perspective.” Sustainability, 10, 1271; http://​doi​.org/​10​.3390/​su10041271.

Organizational costs in agricultural cooperatives  81 Iliopoulos, C., and V. Valentinov (2022). “Cooperative Governance Under Increasing Member Diversity: Towards a New Theoretical Framework.” Scandinavian Journal of Management, 38(1): 101192; https://​doi​.org/​10​.1016/​j​.scaman​.2021​.101192. Jones, G., and C.W.L. Hill (1988). “Transaction Cost Analysis of Strategy-Structure Choice.” Strategic Management Journal, 9: 159–72. King, R.P. (2012). “The Science of Design.” American Journal of Agricultural Economics, 94(2): 275–84; DOI: http://​dx​.doi​.org/​10​.1093/​ajae/​aar128. Lichbach, M.I. (1996). The Cooperator’s Dilemma. Ann Arbor, MI: The University of Michigan Press. Madhok, A. (1996). “Crossroads—The Organization of Economic Activity: Transaction Costs, Firm Capabilities, and the Nature of Governance.” Organization Science, 7(5): 577–90. DOI: https://​doi​ .org/​10​.1287/​orsc​.7​.5​.577. Masten, S.E., Meehan Jr, J.W., and E.A. Snyder (1991). “The Costs of Organization.” Journal of Law, Economics, and Organization, 7(1): 1–25. Ménard, C. (2004). “The Economics of Hybrid Organizations.” Journal of Institutional and Theoretical Economics, 160: 345–76. Ménard, C. (2018). “Organization and Governance in the Agri-food Sector: How Can We Capture Their Variety?” Agribusiness: An International Journal, 34: 141–60. Ménard, C. (2021). “Hybrids: Where Are We?” Journal of Institutional Economics,  1–16. DOI:​10​.1017/​ S1744137421000230. Mierzwa, D. (2021). “Organizational Culture of Cooperative Enterprises in Poland: An Empirical Study.” European Research Studies Journal, XXIV(1): 241–61. Milgrom, P., and J. Roberts (1987). “Informational Asymmetries, Strategic Behavior, and Industrial Organization.” The American Economic Review, 77(2): 184–93. Milgrom, P., and J. Roberts (1992). Economics, Organization, and Management. Upper Saddle River, NJ: Prentice-Hall. Moragues-Faus, A.M., and D. Ortiz-Miranda (2012). “Governing Cooperative Quality Schemes: Lessons from Olive Oil Initiatives in Valencia (Spain).” Outlook on Agriculture, 41(1): 27–33; DOI: 10.5367/0o.2012.0072. Nilsson, J. (2001). “Organisational Principles for Co-operative Firms.” Scandinavian Journal of Management, 17(3): 329–56. DOI: 10.1016/S0956-5221(01)00010-0. Nilsson, J., and I.W. Lind (2015). “Institutional Changes in the Swedish Meat Industry.” British Food Journal, 117(10): 2501–14, DOI: https://​doi​.org/​10​.1108/​bfj​-11​-2014​-0378. Nilsson, J., Svendsen, G.L.H., and G.T. Svendsen (2012). “Are Large and Complex Agricultural Cooperatives Losing Their Social Capital?” Agribusiness: An International Journal, 28(2): 187–204; DOI: 10.1002/agr.21285. Ollila, P., and P. Pyykkönen (2012). Cooperative Dairy Processor Valio—Structural Development to Its Present Stage. Support for Farmers’ Cooperatives. Case Study Report. Wageningen: Wageningen UR. Olson, M. (1965). The Logic of Collective Action. Cambridge, MA: Harvard University Press. Ortiz-Miranda, D., Moreno-Perez, O.M., and A.M. Moragues-Faus (2010). “Innovative Strategies of Agricultural Cooperatives in the Framework of the New Rural Development Paradigms: The Case of the Region of Valencia (Spain).” Environment and Planning A: Economy and Space, 42(3): 661–77; DOI: https://​doi​.org/​10​.1068/​a42168. Ostrom, E. (1990). Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge, UK: Cambridge University Press. Pellegrini, G., Annosi, M.C., Contò, F., and M. Fiore (2020). “What Are the Conflicting Tensions in an Italian Cooperative and How Do Members Manage Them? Business Goals’, Integrated Management, and Reduction of Waste within a Fruit and Vegetables Supply Chain.” Sustainability, 12, 3050; DOI:​ 10​.3390/​su12073050. Pennerstorfer, D., and C.R. Weiss (2013). “Product Quality in the Agri-food Chain: Do Cooperatives Offer High-quality Wine?” European Review of Agricultural Economics, 40(1): 143–62; DOI: https://​ doi​.org/​10​.1093/​erae/​jbs008. Pereira, A., Carballo‐Penela, A., González‐ López, M.I., and X. Vence (2016). “A Case Study of Servicing in the Farming Livestock Sector: Organisational Change and Potential Environmental Improvement.” Journal of Cleaner Production, 124: 84–93; DOI: 10.1016/j.clepro.2016.02.127.

82  Handbook of research on cooperatives and mutuals Peterson, H.C., and B.L. Anderson (1996). “Cooperative Strategy: Theory and Practice.” Agribusiness: An International Journal, 12(4): 371–83. Piñeiro, V., Martinez-Gomez V., Meliá-Martí E., and J-M. Garcia-Alvarez-Coque (2021). “Drivers of Joint Cropland Management Strategies in Agri-Food Cooperatives.” Journal of Rural Studies, 84: 162–73; DOI: https://​doi​.org/​10​.1016/​j​.jrurstud​.2021​.04​.003. Pintassilgo, P., and Duarte-Costa, C. (2000). “The New-Member Problem in the Cooperative Management of High Sea Fisheries.” Marine Resource Economics, 15(4): 361–78; https://​doi​.org/​10​.1086/​mre​.15​ .4​.42629331. Porter, P.K., and G.W. Scully (1987). “Economic Efficiency in Cooperatives.” Journal of Law and Economics, 30 (October): 489–512. Reynolds, B.J., Gray, T.W., and C.A. Kraenzle (1997). Voting and Representation Systems in Agricultural Cooperatives. RBS Research Report 156, Washington, DC: USDA, Rural Business-Cooperative Service. Scharmer, C.O. (2009). Theory U: Leading from the Future as It Emerges. San Francisco, CA: Berrett-Koehler Publishers. Sexton, R., and J. Iskow (1988). Factors Critical to the Success or Failure of Emerging Agricultural Cooperatives. Giannini Foundation Information Series No. 88-3, Oakland, CA: University of California-Davis. Soboh, R.A.M.E., Oude Lansink, A., Giesen, G., and G. van Dijk (2009). “Performance Measurement of the Agricultural Marketing Cooperatives: The Gap between Theory and Practice.” Applied Economics Perspective and Policy, 31(3): 446–69; DOI: https://​doi​.org/​10​.1111/​j​.1467​-9353​.2009​.01448​.x. Staatz, J.M. (1987). “The Structural Characteristics of Farmer Cooperatives and Their Behavioral Consequences.” In J.S. Royer (ed.), Cooperative Theory: New Approaches, pp.33–60, ACS Service Report 18. Washington, DC: USDA. Ton, G., and G.G. Szabó (2012). Organisational Mechanisms to Solve Collective Action Challenges in Vegetables Marketing. Support for Farmers’ Cooperatives. Case Study Report. Wageningen: Wageningen UR. Valentinov. V. (2007). “Why are Cooperatives Important in Agriculture? An Organizational Economics Perspective.” Journal of Institutional Economics, 3(1): 55–69. DOI: https://​doi​.org/​10​.1017/​ S1744137406000555. Valentinov, V., and C. Iliopoulos (2021). “Social Capital in Cooperatives: An Evolutionary Luhmannian Perspective.” Journal of Evolutionary Economics; https://​doi​.org/​10​.1007/​s00191​-021​-00744​-5. Veblen, Thorstein (1904). The Theory of the Business Enterprise. New Brunswick, NJ: Transaction Books. Vitaliano, P. (1983). “Cooperative Enterprise: An Alternative Conceptual Basis for Analyzing a Complex Institution.” American Journal of Agricultural Economics, 65(5): 1078–83. Wadsworth, J.J. (2001). Strategic Planning in Farmer Cooperatives, RBS Research Report 184. Washington, DC: USDA. Ward, J.L. (ed.) (2005). Unconventional Wisdom: Counterintuitive Insights for Family Business Success. Chichester, UK: John Wiley & Sons. Williamson, O.E. (1971). “The Vertical Integration of Production: Market Failure Considerations.” American Economic Review, 61(May): 112–23. Williamson, O.E. (1975). Markets and Hierarchies: Analysis and Antitrust Implications. New York, NY: Free Press. Williamson, O.E. (1985). The Economic Institutions of Capitalism. New York, NY: Free Press. Williamson, O.E. (1996). The Mechanisms of Governance. New York, NY: Oxford University Press. Williamson, O.E. (2000). “The New Institutional Economics: Taking Stock, Looking Ahead.” Journal of Economic Literature, XXXVIII(September): 595–613.

4. New generation cooperatives: what we know and need to learn Jason Franken and Jasper Grashuis1

INTRODUCTION Following the 1980s US farm crisis and during a period of growing agricultural industrialization (that is, value-added processing, branding, and globalization), a novel adaptation to the traditional cooperative (TC) spread across the upper Midwest (Harris, Stefanson, & Fulton, 1996). With defined, appreciable, and transferable membership rights and large upfront capital requirements as its main characteristics, the adaptation, first appearing in the 1970s, became known as the new generation cooperative (NGC). Academics devoted much attention to NGCs in the late 1990s and early 2000s (for example, Cook & Iliopoulos, 1999; Harris et al., 1996; Holland & King, 2004; Holmes, Walzer, & Merrett, 2001). However, academic interest then waned and even disappeared (Tonsager, 2013) until Grashuis and Cook (2018) reexamined the status of the NGCs formed during the 1990s. Grahuis and Cook (2018) found that many NGCs exited via liquidations, dissolutions, and conversions to other business structures because of apparent equity and liquidity constraints.2 Grashuis and Cook (2018) took a retrospective approach but did not examine the current relevance of NGCs. In this chapter, we compare the ownership characteristics of TCs and NGCs and discuss motives for adaptations. As described below, ownership of TCs is open but not transferable, and member equity is redeemable but not appreciable. Such characteristics lead to problems, which jeopardize the balance between individual and common objectives and may facilitate decline and even exit if left unaddressed (Cook, 2018). In response, the ownership of NGCs is limited to a relatively small and homogenous group of producers who make relatively large capital investments and supply commitments to engage in vertical integration to process and add value to farm commodities such as grain and meat. We illustrate the ownership characteristics of currently active NGCs with a descriptive study of bylaws, articles of incorporation, and other legal documents. Last, we sketch a future research agenda to further our knowledge of NGCs.

OWNERSHIP CHARACTERISTICS OF TRADITIONAL AND NEW GENERATION COOPERATIVES Several problems experienced to varying degrees by cooperatives and other business forms are symptoms of ownership structure and related property rights (Cook, 1995). Essentially, property rights entail legal ownership and are composed of control rights and residual claims—that is, the amount left after all promised payments to fixed claim holders (for example, employees or debtors). In what follows, use of academic jargon is limited to improve accessibility. To 83

84  Handbook of research on cooperatives and mutuals Table 4.1

Economic motivations and ownership characteristics of traditional and new generation cooperatives

Economic motivations

Traditional cooperative

New generation cooperative

Defensive

Offensive

1. Margin reduction

1. Scale economies

2. Bargaining power

2. Firm-level profit increase

3. Risk reduction 4. Farm-level price increase Philosophies

Three Coop Principlesa

1. Democratic controlb

2. Service at cost, benefit proportional

2. Service at cost, benefit proportional

to use Ownership characteristics

New Generation Ideas

1. Democratic controlb

to use

3. Limited return on equity

3. Appreciable return on equity

1. Open membership

1. Defined membership

2. Nonappreciable equity

2. Appreciable equity

3. Nontransferable ownership

3. Transferable ownership

Notes: The United States Department of Agriculture (“Understanding Cooperatives: Cooperative Business Principles,” 2011) lists four traditional business principles of cooperatives, two of which we combine as service at cost in proportion to use. The USDA revised to three cooperative principles—user-owner, user-control, and user-benefits—to allow non-traditional cooperatives while excluding other firms by emphasizing the user orientation (Reynolds, 2014). b In accordance with state laws in the US, cooperatives traditionally have one vote per member, but in states that allow it some NGCs set voting rights in proportion to delivery shares (Coltrain, Barton, & Boland, 2000). Similarly, NGCs in parts of Europe may have proportional voting rights (Kalogeras et al. 2013). Source: Authors. a

appreciate the importance of clear property rights, consider the following: if no one clearly owns an asset, then there is less incentive to guard its value; if property rights are not appreciable and secure, then the inability to realize a return and fear of loss may cause underinvestment (Milgrom & Roberts, 1992).3 Ownership Structure of Traditional Cooperatives As detailed in Table 4.1, historical motivations behind the formation of TCs are often defensive as groups of relatively small producers seek access to input and output markets and fair prices from relatively large buyers and sellers (Valentinov, 2007). This defensive nature, combined with cooperative principles rooted in the philosophy of the Rochdale Society in mid-1800s England, typically compels an open membership policy with nonappreciable and nontransferable member equity. While some TCs have quality and/or quantity restrictions, open membership implies limited control over the quantity and quality of supply. As a result, TCs are inherently unable to optimally match supply and demand, manage risk, achieve scale efficiency, or pursue product quality differentiation (Cook & Iliopoulos, 1998). Typically, membership in TCs is obtained at a relatively low fee (for example, $100). In addition, members must invest some amount of equity. Member equity is nonappreciable and returned to members based on a revolvement plan. Because of its redeemable nature, member equity is somewhat like a source of debt on the balance sheet, albeit with the cooperative’s board of directors able to choose to redeem the equity. Meanwhile, ownership is also nontransferable, as a secondary ownership market is

New generation cooperatives: what we know and need to learn  85 Table 4.2

Susceptibility of traditional and new generation cooperatives to property rights problems

Property rights problem

Traditional cooperative

New generation cooperative

Free-rider problem

Minor

Minimal

Horizon problem

Minor

Minimal

Portfolio problem

Major

Minimal

Control problem

Major

Minor

Influence cost problem

Minor

Minor

Notes: Range: none (0), minimal (3), minor (7), major (10); sum to 50 = demise. Cook (1995) applies these ratings to various cooperative types, with namesakes rooted in either Nourse’s philosophy of the cooperative as a competitive yardstick or Sapiro’s approach to extracting rents well beyond the farm level: Nourse I local multipurpose cooperatives; Nourse II regional multipurpose cooperatives; Sapiro I bargaining cooperatives or associations; Sapiro II marketing cooperatives; and Sapiro III NGCs. Sapiro II are the traditional marketing cooperatives compared with Sapiro III NGCs in this table. Source: Authors.

nonexistent. TCs often have equity on the balance sheet belonging to (former) members who are no longer patrons. Property Rights Problems The ownership characteristics of TCs invite susceptibility to several inefficiencies (Porter & Scully, 1987; Vitaliano, 1983). Building on these criticisms, Cook (1995) identifies five problems from a property right perspective: (1) free-rider problem; (2) horizon problem; (3) portfolio problem; (4) control problem; and (5) influence cost problem. The first three form an equity problem and the latter two a control problem. Each problem is detailed in turn below (Table 4.2). The free-rider problem arises when property rights are insecure or unassigned. TCs may have an external free-rider problem if non-members can capture benefits (for example, price improvements) from efforts by members. TCs may also have an internal free-rider problem if newer members can capture benefits from past efforts (for example, capital investments in brands or facilities) by older members. For example, Diamond Walnut Growers suffered an internal free-rider problem (Hardesty, 2009). The cooperative wanted to make large investments in brands and new products to support a consumer-oriented strategy. However, the members showed a limited willingness to do so as future members would be able to reap part of their benefits. This capital constraint in part motivated the conversion of Diamond Walnut Growers into an IOF in 2005. Horizon and portfolio problems arise with increasing member heterogeneity. The former reflects a lack of member consensus on the use of joint assets based on differences in time horizons (for example, nearness to retirement). The latter reflects a mismatch between individual interests, risk preferences, and joint activities. Both problems stem from a lack of transferability, liquidity, and appreciation of members’ equity in the cooperative. For example, Hariyoga and Sexton (2009) detailed how Tri-Valley Growers went bankrupt because of a severe portfolio problem. In this case, peach and other fruit growers who supplied the cooperative shared in losses generated by members who grew tomatoes. The control problem is associated with a divergence of interests among members, board directors, and managers, and the influence costs problem arises when self-interested individu-

86  Handbook of research on cooperatives and mutuals als seek to influence the distribution of costs and benefits (Cook, 1995). These problems create governance issues in TCs related to the monitoring of management to ensure it acts on behalf of the owners. Saskatchewan Wheat Pool is an example of a cooperative that converted to an IOF because of a control problem (Fulton & Larson, 2009). The pool’s board of directors, composed of producer-members, lacked the experience and expertise to effectively monitor its management, which enacted aggressive growth strategies that resulted in an unsustainable increase in debt and an inefficient portfolio of diversified enterprises. Ownership Structure of New Generation Cooperatives Due to a desire to pursue a more offensive or aggressive (that is, rent-seeking) approach via collective value-added processing businesses, which entail greater startup costs than simply marketing farm commodities, it became necessary for producers to overcome the capital constraint inherent to the ownership structure of TCs (Tables 4.1 and 4.2). The emergence of the NGC as an alternative to the TC is an institutional response to the aforementioned property rights problems by adjusting the ownership structure (Cook & Iliopoulos, 1998). The NGC has the combined characteristics of various ownership structures, including the TC, the IOF, and the limited liability company (LLC). Table 4.3 lists adaptations that NGCs have employed in response to the property rights problems faced by TCs. While not all NGCs utilize all of these adaptations, some of the adaptations are also incorporated into the redesign of traditional cooperatives (Chaddad & Cook, 2004; Cook & Iliopoulos, 1998). For instance, a base capital plan reduces internal free-rider inefficiencies by maintaining member investment in proportion to use. Note that transferable and appreciable delivery rights theoretically address all property rights problems except the influence costs problem. Hence, the most important and distinctive characteristic of NGCs is the sale/issuance of delivery right shares that are: (1) binding; (2) transferable; (3) appreciable; and (4) restricted (Cook & Iliopoulos, 1999). NGCs issue a limited or specific number of delivery rights tied to shares, determined by the processing plant’s capacity. Each delivery right’s initial price is determined by the projected cost of the processing plant and other property and equipment. NGCs thus have a minimum and upfront capital requirement to address the capital constraint of TCs. Each delivery right constitutes a contractual obligation on the owner’s part to supply a specified production unit (for example, one bushel of corn; one turkey). The delivery obligation is a response to the external free-rider problem of TCs, by requiring members to deliver in order to directly benefit from the cooperative. Moreover, if a new member were to join by purchasing an existing delivery right share, the purchase price should theoretically appreciate from the issuance price, thereby alleviating the internal free-rider problem. The horizon problem of TCs is (at least partly) alleviated by the ability of delivery right holders to sell ownership thereof to other producers. If the projected stream of returns for a prospective cooperative investment extends beyond a member’s horizon (for example, retirement), then that value potentially could be capitalized in the share price and recovered through its sale. Transferability of shares may also enable members to adjust risk exposure, and thus decrease portfolio problems. All such arguments are subject to the liquidity of a market for shares limited to producers of that commodity. Other factors, including single commodity, homogeneity of economic interest, and degree of involvement by producers, also contribute to the successful startup and operation of

New generation cooperatives: what we know and need to learn  87 Table 4.3

NGC responses to property rights problems

Problem

Solutions/Responses

1. Free-rider problem

– Base capital plan – Defined membership & volume – Upfront equity – Marketing agreements – Transferable & appreciable delivery rights

2. Horizon problem

– Base capital plan – Transferable & appreciable delivery rights – Preferred stock

3. Portfolio problem

– Single commodity – Hedging – Transferable & appreciable delivery rights

4. Control problem

– Single commodity – Transferable & appreciable delivery rights – Board committees – Singleness of purpose – Frequent structural/operational communication

5. Influence cost problem

– Single commodity – Local region – Singleness of purpose – Commonality of interest

Source: Authors.

NGCs. The singleness of purpose of NGCs (that is, processing a particular commodity into a value-added product), for instance, conveys fewer control problems than in TCs, which are more often multi-commodity or multipurpose, and hence have greater potential for divergent interests among heterogeneous membership (Tables 4.1 and 4.2). Moreover, relative to IOFs, NGCs generally have fewer agency problems (that is, control and influence cost problems), since their board of directors is composed of producer-members with incentives to monitor management, whereas IOFs often have board members appointed by the CEO. If better monitoring leads to appreciation of the business, NGC members with appreciable shares may have greater incentives to monitor management than members of TCs, and hence, NGC members owning a greater number of shares may seek seats on the board of directors.

EVIDENCE FROM ACTIVE NEW GENERATION COOPERATIVES The following subsections supply examples from excerpts of official documentation of NGCs to inform upon their characteristics. Following Grashuis and Cook (2018), business names listed in the most recent directory of NGCs (Merrett et al., 2007) were searched in online business directories of secretaries of state to determine the current status as active or inactive.4 The search returned a list of 44 active NGCs, not including any NGCs started since 2007 (see Table 4.4). An online search for official documentation concerning grower or member agreements, delivery agreements, bylaws, and articles of incorporation yields the below information on NGCs’ purpose, membership access, supply quantity, and stock transferability.

88  Handbook of research on cooperatives and mutuals Table 4.4

Active New Generation Cooperatives

Name

Location

Product

AgraMarke

St. Joseph, MO

Specialty grain

Allied Producers Cooperative

Sioux City, IA

Pork

American Crystal Sugar

Moorhead, MN

Sugar Ethanol

Big River Resources

West Burlington, IA

Bushmills Ethanol

Atwater, MN

Ethanol

Calcot

Bakersfield, CA

Cotton

California Dairies

Visalia, CA

Milk

Central Equity Milk

Springfield, MO

Milk

Chippewa Valley Agrafuels

Benson, MN

Ethanol

Cloverdale Growers Alliance

Cloverdale, ND

Hog

Dakota Lamb Growers

Northwood, ND

Lamb

Dakota Pride Cooperative

Jamestown, ND

Grain Seafood

Delta Pride Catfish

Isola, MS

Farmers Cooperative of Hanska

Hanksa, MN

Grain

Foremost Farms

Baraboo, WI

Milk

Glacial Lakes Corn Processors

Watertown, SD

Ethanol

Gold Eagle Cooperative

Goldfield, IA

Ethanol

Golden Growers

Fargo, ND

corn syrup

Heartland Corn Products

Winthrop, MN

Ethanol Turkey

Iowa Turkey Growers

West Liberty, IA

Island Grown Farmers Cooperative

Lopez, WA

Beef

Michigan Sugar Company

Bay City, MI

Sugar

Michigan Turkey Producers Cooperative

Grand Rapids, MI

Turkey

Midwest Organic Farmers Cooperative

Piper City, IL

Grain

Minn-Dak Farmers

Wahpeton, ND

Sugar

Minnesota Emu

Nevis, MN

Emu

Minnesota Soybean Processors

Brewster, MN

Soybean

Minnesota Valley Alfalfa

Willmar, MN

Alfalfa Bison

North American Bison

New Rockford, ND

North Dakota Elk Growers

Medora, ND

Elk

Northern Vineyards

Stillwater, MN

Wine

Ocean Spray

Lakeville-Middleboro, MA

Cranberries

Organic Valley

Lacrosse, WI

Milk

Pacific Northwest Vegetable Company (NORPAC)

Brooks, OR

Vegetables

Plains Cotton Cooperative Association

Lubbock, TX

Cotton

Quad County Corn Processors

Galva, IA

Ethanol

Quality Beef Producers

Blenker, WI

Livestock

Siouxland Energy and Livestock

Sioux Center, IA

Ethanol

Smith Island Crabmeat Cooperative

Tylerton, MD

Seafood

Southeast Milk

Belleview, FL

Milk

Southern Minnesota Beet Sugar

Renville, MN

Sugar

Southwest Iowa Egg

Massena, IA

Egg

Sun Valley Potatoes

Paul, ID

Potatoes

United Mills

Renville, MN

livestock feed

United Sugars

Bloomington, MN

Sugar

Western Sugar Cooperative

Denver, CO

Sugar

Wisconsin Cranberry Cooperative

Wisconsin Rapids, WI

Cranberries

Source: Authors.

New generation cooperatives: what we know and need to learn  89 An Untraditionally Offensive/Aggressive Purpose As emphasized earlier, TCs serve a defensive purpose by facilitating market access for their members’ farm commodities. Some cooperatives (that is, bargaining associations) only bargain and do not take physical ownership of member output. In contrast, NGCs engage in vertical integration by assuming control of the processing stage of the value chain. NGCs first take delivery of commodity from their members and then process the commodity into some type of value-added product such as pasta or ethanol. NGCs thus serve a more offensive purpose, which is often stated explicitly in the articles of organization. For example, Allied Producers Cooperative (Premium Pork)’s purpose is described as: “[T]o process swine delivered by its members and others into pork products and to market pork products on behalf of its patron members.” Even if the purpose of the entity is shrouded in legal terminology, price and payment descriptions may offer clarity. For example, in the case of Minnesota Soybean Processors, there are two components to the price received by their members. First, the “[c]ompany shall pay Patron within ten (10) days of each delivery on a priced or spot contract for soybeans. Company shall determine the purchase price based upon available market information to establish a per bushel price which will include price fluctuations as a result of a changing market.” Second, [a]t the end of each processing year, and at such other times as determined by the Board, Company shall determine the net income from all of its operations and may make such allocations and payments to Patron as determined by the Board in accordance with the Company’s Bylaws, after approval by the Company’s lender(s), which will further compensate Patron for value added to Patron’s soybeans during processing, and still allow Company to retain its financial integrity.

Membership Access Membership in TCs is open, meaning anybody can become a member irrespective of farm characteristics such as location or product quantity (Chaddad and Cook, 2004). In contrast to TCs, NGCs have a defined membership policy. For example, as stated by the dairy processing cooperative Central Equity Milk in its articles of incorporation: “New members may be admitted from time to time and the general rule by which property rights of such members may be determined and fixed shall be in accordance with the general rules for determination of property rights of other members.” Delta Pride Catfish, a processor of farm-raised catfish in Mississippi, similarly has its door half-open: “The common stock of the corporation shall be issued from time to time, in such amounts as the board of directors may determine.” Sometimes the definition of a (prospective) member is quite loose. For example, Golden Growers, an ethanol producer owned by corn producers, indicates in its articles of incorporation that its membership “shall be limited to Persons who are residents of the United States and (i) have entered into a Member Agreement with the Cooperative, (ii) have acquired at least 4,000 Units, and (iii) have been accepted and approved by the Board of Directors.” The most common ownership restriction concerns product quantity. The intention is to exclude relatively small producers who may free-ride on larger producers. For example, according to the articles of incorporation of Glacial Lakes Corn Processors, an ethanol producer in South Dakota: “Each member of this cooperative must hold a minimum of Two

90  Handbook of research on cooperatives and mutuals Thousand Five Hundred (2,500) shares of common stock by the date established by the Board of Directors as the date on and after which holding such number of shares of common stock becomes a requirement of membership.” As is standard, one share of common stock is equated with one unit of production (for example, one bushel of corn). As such, the threshold for becoming a member of Glacial Lakes Energy is 2,500 bushels of corn. As another example, Dakota Lamb Growers Cooperative requires a minimum of 50 lambs to be delivered to an associate packer, as defined below in its member agreement: [I]f I enter into agreement with a DLGC-Approved Packer(s) (eg., Superior Farms), I agree to purchase a minimum of 50 shares of Equity Stock of Dakota Lamb Growers Cooperative (the “Cooperative”) from a current member of Dakota Lamb Growers at a price to be determined between the buyer and seller. If I intend to enter into an agreement with a DLGC Value Added Provider, I agree to purchase a number of Equity Shares equal to the number of lambs delivered to the Value Added Provider in one calendar year, until I own a minimum of 50 DLGC Equity Shares.

Some restrictions relate to geography, which addresses inefficiencies in terms of delivery and governance. For example, Michigan Turkey Producers has the following in its articles of incorporation: “Common stock may be held only by producers of turkeys (individuals, partnerships, limited liability companies, corporations or cooperatives) who are located in the territory served by the corporation.” Of course, “territory served” is an ambiguous and likely flexible term. American Crystal Sugar, located in the Red River Valley of Minnesota and North Dakota, initially has a similar passage in its articles of incorporation: “Any person, firm, partnership, or corporation who is a bona fide sugarbeet farm operator in the territory in which this corporation is engaged in business and who agrees to purchase securities of this corporation and to abide by its Articles of Incorporation and Bylaws, may, upon approval of the board of directors, become a common shareholder of this corporation.” However, the constraint then becomes much more defined: “The sugarbeet field(s) of a Common Shareholder must be in a section of land that is within a 35-mile radius of the closest Company receiving station, as the stations existed on January 1, 1998. Any receiving stations added after January 1, 1998, will not be used in determining the 35-mile limit.” Stock Transferability Generally, it is impossible in TCs to transfer ownership from one individual to another. In NGCs, ownership in the form of delivery rights or membership units may be transferred to eligible individuals at the discretion of the board of directors. As noted by Agra-Market Quality Grains: “The units are transferable only with the approval of the Board of Directors, and then only to persons or entities eligible to hold the units. No purported transfer or assignment of any units to any person or entity not eligible to hold such units passes any privileges or rights on account of such units.” At times, the entity may reserve the opportunity to buy back stock. American Crystal Sugar declares its policy as follows: Whenever any shareholder desires to sell his common and preferred stock, he shall first offer it to this corporation for purchase by this corporation at the par value thereof. In the event such stock is not

New generation cooperatives: what we know and need to learn  91 purchased by this corporation after receipt of a written notice from the shareholder offering the said stock for sale, then the shareholder may sell said stock to any person, firm, partnership or corporation who will fall within the definition of “operator” as set forth in these bylaws.

Unlike public equity markets such as the New York Stock Exchange, there is not similar liquidity for the exchange of NGC shares, due to ownership constraints and associated delivery obligations attached to shares. In its Unit Transfer Policy, Golden Triangle Energy explains the process as follows: Buyer and seller are responsible for negotiating the terms and price of the sale. Because the Units are not listed on an exchange, where efficient price discovery between buyers and sellers acting on current, real-time information in volume transactions is generally achieved, it is incumbent upon you as the current owner of the Units to determine their fair market value before you agree to transfer them to a buyer. Determination of fair value is the sole responsibility of buyer and seller.

Supply Quantity In TCs, there is no limit on the quantity supplied by members. Consequently, TCs may have too much inventory to sell in the marketplace. In NGCs, not only is there a minimum quantity but there is also an exact or targeted quantity to be supplied by members. The aggregate quantity is matched to the capacity of the processing plant. In the case of American Crystal Sugar Company, the quantity is matched to the contracted acreage of sugarbeets: “Shareholder agrees during the Initial Term and any Renewal Term hereof to prepare land, plant, replant, harvest and deliver, the number of acres of sugarbeets based upon the number of Preferred Shares of Company then owned by Shareholder.” More commonly, the quantity is matched to the number of owned shares. For example, in the case of Minnesota Soybean Processors: “Patron agrees to commit and deliver to the Company, at the Company’s designated facility(ies), one (1) or more bushels of soybeans during each processing year for each Class A Preferred Unit of the Company owned by Patron.” Golden Growers has the same policy: “Each year during the term hereof, Member agrees to sell and deliver to the Cooperative, and the Cooperative agrees to take delivery of one bushel of corn for each Unit of the Cooperative owned by such Member (the ‘Annual Corn Commitment’).” NGCs have safeguards in place in case member output is too low or too high. For example, Golden Growers is rather explicit concerning delivery obligations: “If Member is unable to deliver the committed number of bushels of corn from Member’s own production due to acts of God, other crop failure or similar cause, that circumstance shall not excuse delay or non-delivery.” NGCs typically do not accept more supply than contracted. American Crystal Sugar Company stipulates: “Company shall not be obligated to purchase sugarbeets, and Shareholder agrees to destroy prior to August 15, or such other date specified by the Company and communicated to Shareholder, sugarbeets from all acres planted in excess of that contracted pursuant to this Agreement.” In fact, some NGCs consider the possibility of adjusting the aggregate quantity downward in case of changes in market conditions. For example, in the case of Golden Growers: If the total number of bushels of corn contracted for sale and delivery to the Cooperative by all members exceeds the aggregate number of bushels that the Cooperative determines that it needs, the

92  Handbook of research on cooperatives and mutuals Cooperative will have the right to reduce the Annual Corn Commitment on a pro-rata basis, so that the total number of bushels contracted to the Cooperative by all members will fulfill the Cooperative’s anticipated needs.

EMPIRICAL STUDIES As outlined in the prior section, TCs face several challenges that NGCs, which require patrons to purchase transferable and appreciable shares that convey usage (delivery) rights/obligations, should arguably be less vulnerable to. However, there is little empirical assessment of this contention (Table 4.5). For instance, given limited empirical evidence of the horizon problem in cooperatives, some scholars suggest it is less severe than previously thought (Fahlbeck, 2007; Fulton & Giannakas, 2012; Olesen, 2007). Only two studies empirically address any property rights problems, both of which focus on investment constraints. Iliopoulos (1998) finds that closed membership and marketing agreements, and to a lesser extent transferable and appreciable shares/delivery rights of NGCs, increase member investment, as measured by the ratios of total member equity to the number of members and total member equity to total cooperative assets. However, the finding could simply reflect the high capital requirements of NGC processing activities spread across smaller closed memberships. Franken and Cook (2019) assess horizon and portfolio investment constraints more directly by surveying members about their preferences for cooperative investment, but the study is limited to only three cooperatives, one of which has NGC features. The consequences of success, performance, and survival are addressed by three empirical studies, with conclusions that NGCs do not appear to exhibit better performance than TCs (Kalogeras, Pennings, Benos, & Doumpos, 2013), and in fact remain susceptible to challenges common to most business forms, including capital constraints (Carlberg, Ward, & Holcomb, 2006; Grashuis & Cook, 2018). Further, Gurung and Unterschultz (2007) find that traditional marketing cooperatives are more likely to pay spot market cash prices, and thus are more responsive to commodity market competition, whereas NGCs are more likely to use pooled pricing and appear indifferent to short-run changes in competition. The results likely reflect differences in the defensive and offensive natures of TCs and NGCs and the latter’s use of contracts in securing supply for processing. Four empirical studies investigate factors influencing producers’ (willingness to make) investments in NGCs (Chambers, 2007; Cobia, 1990; Puaha & Tilley, 2003; Turko, 2008) and generally suggest that larger, wealthier producers and those willing to take risks are more likely to invest. In contrast, TCs are often assumed to assist risk-averse producers in shedding or managing risk. Through the lens of collective entrepreneurship, Chambers (2007) adds further insight, as entrepreneurs are known to be risk-takers. Two empirical studies consider interesting issues about the pricing and liquidity of NGCs’ delivery rights/stock. One finds that NGC share prices are inelastic with respect to supply and demand factors (Kalogeras, Van Dijk, & Baourakis, 2007). The other finds members had significantly negative expectations about NGC future earnings growth, which may reflect horizon problems (Akono, Nganje, Kaitibie, & Gustafson, 2005).

New generation cooperatives: what we know and need to learn  93 Table 4.5 Study

Summary of NGC empirical studies table Topic/Method

Highlighted results/Key findings

Studies on any of 5VDPR by cooperative type Franken &

Assess investment

Evidence of the classic horizon problem in a member-investor cooperative and a novel

Cook (2019)

constraints

return of capital or wait-to-receive horizon problem for a NGC with members near

using surveys of

retirement significantly more likely to support investments that likely appreciate the value

cooperative members of their tradable shares. in US and New Zealand Iliopoulos

Assess investment

Member investment in the cooperative, as measured by ratios of total member equity to

(1998)

constraints using

the number of members and total member equity to total cooperative assets, is statistically

surveys of CEOs/

significantly higher at the 5% level for cooperatives with defined membership and

management of US

marketing agreements and at the 10% level for those with transferable/appreciable shares/

cooperatives

delivery rights.

Studies on performance and survival by cooperative type Carlberg et al.

Surveys of 50 US

Statistically greater importance on a local champion, steering committee, low operating

(2006)

NGC managers

costs, and member base capital for NGC success. Rankings vary by commodity. The

about success factors importance of product quality for livestock and organic NGCs reflects challenges with member heterogeneity, whereas IOFs could secure adequate quality from another supplier. The importance of financing costs of member capital implies the persistence of investment constraints in NGCs. Kalogeras et

Compare financial

The authors conclude that “there is no clear-cut evidence that the cooperatives with

al. (2013)

performance of 14

innovative ownership structures perform better than the cooperatives with more traditional

Dutch coops

structures” (p.90).

Grashuis &

Survival of 88 of

65 exited, with many through bankruptcy or liquidation due to challenges common to most

Cook (2018)

the original NGCs

business organizations and other failures or conversions reflecting inherent equity and

formed in U.S.

liquidity constraints limiting their ability to drive complex, capital-intensive, value-added

mostly in 1990s

ventures.

Studies on prices offered by cooperative type Gurung &

Survey responses

Traditional marketing cooperatives often pay spot market cash price, thus being more

Unterschultz

from 84 US and

responsive to competition, whereas NGCs are more likely to use pooled pricing.

(2007)

Canadian coops

Studies on producer investment in NGCs Cobia (1990)

Survey responses of

Investors are slightly younger (thus, less farming experience) and have more education.

191 investors and

Investors farm significantly more land and have twice the net worth of non-investors,

127 non-investors

perhaps reflecting the capital requirements for membership in NGCs. Investors view the

in NGCs in North

NGC as a greater risk with a higher expected rate of return than non-investors.

Dakota. Puaha &

Survey responses

Investment is significantly lower among risk-averse farmers and those further from the

Tilley (2003)

of 323 (298 non-)

proposed site, but is higher among those familiar with the cooperative and who value

investors in a NGC

social benefits (for example, local job creation), and full-time farmers.

in Oklahoma Turko (2008)

Survey responses

Significantly positive effects of producers’ self-assessed knowledge about NGCs, farm

of 717 Manitoba

size, education level on willingness to invest, while age has a negative effect. Self-assessed

producers subscribed knowledge also significantly increases willingness-to-commit and potential monetary to a newspaper

investment, which is negatively affected by contract production and risk-aversion.

94  Handbook of research on cooperatives and mutuals Study

Topic/Method

Highlighted results/Key findings

Chambers

Survey responses

Transaction costs (i.e., physical asset specificity) explain most of investment, but ex-post

(2007)

from 207 investors

information asymmetry related to agency and collective decision-making costs (i.e.,

and non-investors in

ability to have “fair say” and exit) improves predictive power of models. Risk perception

two NGCs

increases investment as means to share risk via collective entrepreneurship.

Studies on NGC stock, delivery rights Liquidity significantly affects the LLC earnings price ratio. Authors note NGCs stocks

Akono et al.

Stock transactions

(2005)

for US NGCs, LLCs, typically have low trading volume. Investors have significantly negative expectations and NGCs that

about NGC future earnings growth, which authors suggest may reflect horizon problems,

became LLCs

but find no significant expectation effect on LLC realized returns.

Kalogeras et

Supply/demand

The quantity of delivery rights demanded is explained by the members’ strategy at the

al. (2007)

(price) of

farm level (i.e., past investments in the farm consistent with intent to continue farming)

delivery rights for

and differences in farm income (i.e., large vs. small producers) and the price for shares is

a Dutch NGC using

explained by the members’ return on equity. Prices of shares appear to be highly inelastic

interviews with 54

with respect to the supply and demand factors considered.

members.

Source: Authors.

Case Studies Several case studies on cooperatives are from the early 2000s, with little if any similar work since (Table 4.6). Early examples are teaching cases, primarily intended for classroom instruction, published in the Review of Agricultural Economics. Later, a book of research cases on cooperative conversions, failures, and restructurings in the US and Canada included several studies of NGCs (Fulton & Hueth, 2009). Common themes are capital constraints and an (over) reliance on debt financing. One case notes the changing of state law to allow outside (nonproducer) investors in an attempt to circumvent such constraints (Boland, Bosse, & Brester, 2007). This modification has occurred elsewhere since. Future research agenda Despite substantial academic interest in NGCs in the 1990s and 2000s, recent empirical analysis of NGCs is sparse, and there remain a great number of open questions to be addressed. Four empirical studies investigate factors influencing producers’ (willingness to make) investments in NGCs. Two others consider interesting issues about NGCs’ delivery rights and stock pricing and liquidity. There is a remarkable lack of work directly evaluating the ability of NGCs to overcome the property rights problems, given that these problems are the predominant theoretical justification for their formation. Moreover, in the reviewed case studies, capital constraints still appear problematic in NGCs, despite notions that the more secure property rights would alleviate equity issues. Three studies address the consequences of success, performance, and survival. The conclusions are that NGCs do not appear to exhibit better performance than TCs and remain susceptible to challenges common to most business forms, including capital constraints. Hence, it appears that further work is needed to verify these findings and, if substantiated, then inform or reconcile why this unexpected result is observed. Below, we raise several questions and discuss how future research may be conducted.

New generation cooperatives: what we know and need to learn  95 Table 4.6

Summary of NGC case studies

Article

Case

Cooperative

Type

Business Type/

Issues/Themes

Restructure

Rev. of Ag. Econ. Cases Falk (2002)

Teaching Ranchers’ Choice

NGC

Cooperative Brester & Boland (2004)

Reliance on debt, plant fire, capital constraints

Teaching Rocky Mountain Sugar NGC Growers’ Cooperative

Reliance on debt and heterogeneity in members’ preferences for risky investments (i.e., portfolio constraints) are noted.

Boland et al. (2007)

Teaching Mountain States Lamb

NGC

Cooperative

Given equity drive constraints, Wyoming law changed so non-sheep producers could invest as outside equity holders (for example, Class B stock) as long as producers (for example, Class A stockholders) maintained majority of voting rights.

Coop. Conversions Cases Henehan & Schmit (2009)

Research Pro-Fac Cooperative

NGC elements

(fruit & vegetable

(p.55) but

processing)

proportional

Reliance on debt, capital constraints

voting, restructure to IOF Hariyoga & Sexton (2009)

Research Tri-Valley Growers (fruit & vegetable

traditional coop to

Reliance on debt, capital constraints

NGC to IOF

(particularly, portfolio)

NGC to IOF

Reliance on debt, capital constraints

NGC

Agency problems, capital constraints

processing) Boland & McKee (2009)

Research Dakota Growers Pasta Company

McKee & Boland (2009)

Research North American Bison

Kenkel & Holcomb (2009)

Research American Native Beef

(horizon, portfolio)

Cooperative Cooperative

NGC to NGC/LLC Capital constraints in initial equity blend/combination

drives, portfolio problems reflecting large and small producers and venture capital investors

Source: Authors.

Do NGCs Experience Fewer Property Rights Problems? Perhaps a reason for the lack of empirical work concerning NGCs and the five property rights problems is that it seems to necessitate extensive survey work to obtain the perspectives of cooperative members, and perhaps board members, on investment and control issues. For instance, Cook and Burress’ (2013) large-scale survey of chairs of boards of directors provides their perspectives on governance and control issues related to interrelationships between cooperative members, board of directors, and management. However, the research offers little evidence of differences by cooperative type, as only 3 percent of respondents are NGCs. Franken and Cook’s (2019) approach to investigating horizon and portfolio investment constraints, entailing surveys of members of three cooperatives, could be more conclusive if more than one traditional cooperative and one NGC were involved. Other approaches using financial data

96  Handbook of research on cooperatives and mutuals to assess the presence of investment constraints among cooperatives vis-à-vis IOFs could be extended to assess differences among cooperative types (Chaddad, Cook, & Heckelei, 2005). Still, it seems likely that addressing these questions will entail years of repeated survey work. As the cooperative form takes on more variations, it may be more instructive to account for the particular characteristics of each cooperative (for example, transferable delivery rights, base capital plans, and so on) rather than whether it precisely fits the NGC model. Are NGCs More Successful than Other Cooperatives? As scholars often measure the success of businesses in terms of financial performance and survival (Grashuis & Cook, 2018; Kalogeras et al., 2013), addressing this question may not require as much survey work. Such approaches could be extended to numerous organizational forms to increase the sample size. Still, financial metrics may not fully encompass overall cooperative performance, and survey measures of perceived performance may complement financial analyses (Franken & Cook, 2015). Observing the survival rates of cooperatives is more straightforward, but discerning the cause of exit without additional data may be problematic. Scholars will need to be resourceful to assess whether exits reflect property rights problems, to which various types of cooperatives are relatively more or less vulnerable, or other challenges common to most business forms. Moreover, does exit reflect a business failure or strategic move to take advantage of another opportunity, for instance, as an LLC? Are NGCs More Likely to Exit than TCs? While TCs, in theory, have more inherent equity constraints, NGCs may experience a higher exit rate. While Grashuis and Cook (2018) determined that NGCs exit for common reasons such as low demand and poor management, a frequent observation is the tendency of members to prioritize farm-gate profits as opposed to firm-level profits. As a result, members of NGCs may have more short-term objectives. By comparison, TCs may have a longer life span because of their defensive nature. Empirically, producing an answer to the above question necessitates some form of survival analysis, which is increasingly often applied to determine the motivations behind mergers and acquisitions and liquidations and dissolutions of cooperatives (for example, Grashuis & Franken, 2020). What Are the Advantages and Disadvantages of Incorporating Producer-owned Value-added Ventures as NGCs or LLCs? According to directories of producer organizations with closed or defined membership, most are organized as LLCs and not cooperatives. There are several possible explanations. To obtain immunity from antitrust litigation, collectives of farm producers in the US must be organized as cooperatives with an open membership policy. Most states in the US do not have separate incorporation statutes for TCs and NGCs. Therefore, NGCs may not qualify for antitrust immunity with a closed membership policy. Also, the LLC structure is by far the most common business structure adopted in the US, as it features the limited liability of corporations yet avoids double taxation at business and individual levels. In all likelihood, survey research of producer-owned business organizations with value-added activities structured as cooperatives or LLCs is necessary to uncover the various advantages and disadvantages. The

New generation cooperatives: what we know and need to learn  97 answers may motivate practitioners and policymakers to (re)consider the appeal of the cooperative model, both practically and legally, or to modify existing legal constraints.

NOTES 1.

The authors wish to thank an anonymous reviewer and the editors of this book for helpful comments and suggestions. 2. Here, equity refers to equity capital, with debt capital being another potential source of financing, and liquidity refers to how quickly and easily an asset can be converted to cash. 3. For more details on property rights, see Cook (1995). 4. Merrett et al. (2007) used the term “closed membership producer cooperatives,” which are organized either as cooperatives or limited liability companies. In our analysis we do not differentiate between cooperatives and limited liability companies. An entity is included as long as the membership is composed of a defined (that is, closed) group of farm producers.

REFERENCES Akono, J.H., Nganje, W.E., Kaitibie, S. & Gustafson, C.R. (2005). Investors’ expectations of new generation cooperatives’ equity. Agribusiness & Applied Economics Report 23633, North Dakota State University, Department of Agribusiness and Applied Economics. Boland, M.A., Bosse, A., and Brester, G.W. (2007). The Mountain States Lamb Cooperative: Can vertical integration keep lamb producers from being fleeced? Applied Economic Perspectives and Policy, 29(1), 157–69. Boland, M.A., & McKee, G.J. (2009). The restructuring of Dakota Growers Pasta Company. Journal of Cooperatives, 23, 141–51. Brester, G.W., & Boland, M.A. (2004). The Rocky Mountain Sugar Growers’ Cooperative: “Sweet” or “sugar‐coated” visions of the future? Applied Economic Perspectives and Policy, 26(2), 287–302. Carlberg, J.G., Ward, C.E., & Holcomb, R.B. (2006). Success factors for new generation cooperatives. International Food and Agribusiness Management Review, 9, 33–52. Chaddad, F.R., & Cook, M.L. (2004). Understanding new cooperative models: an ownership–control rights typology. Applied Economic Perspectives and Policy, 26(3), 348–60. Chaddad, F.R., Cook, M.L., & Heckelei, T. (2005). Testing for the presence of financial constraints in US agricultural cooperatives: an investment behaviour approach. Journal of Agricultural Economics, 56(3), 385–97. Chambers, M. (2007). Informing the theory of collective entrepreneurship: Investment choice. Published Doctorate Dissertation. University of Missouri-Columbia. (PhD), University of Missouri, Columbia, MO. Cobia, D.W. (1990). New Generation Cooperatives: External Environment and Investor Characteristics. Cooperatives: Their Importance in the Future Food and Agricultural System—FAMC 1990 Conference 265911, Food and Agricultural Marketing Consortium. Coltrain, D., Barton, D.G., & Boland, M. (2000). Differences between new generation cooperatives and traditional cooperatives (D.o.A.E. Arthur Capper Cooperative Center, Trans.). Manhatten, Kansas: Kansas State University. Cook, M.L. (1995). The future of US agricultural cooperatives: a neo-institutional approach. American Journal of Agricultural Economics, 77(5), 1153–9. Cook, M.L. (2018). A life cycle explanation of cooperative longevity. Sustainability, 10(5), 1586. Cook, M.L., & Burress, M.J. (2013). The impact of CEO tenure on cooperative governance. Managerial and Decision Economics, 34(3–5), 218–29. Cook, M.L., & Iliopoulos, C. (1998). Solutions to property rights constraints in producer-owned and controlled organizations: prerequisite for agri-chain leadership? Paper presented at the Proceedings of

98  Handbook of research on cooperatives and mutuals the Third international Conference on Chain Management in Agribusiness and the Food Industry held in Ede, the Netherlands, 28–29 May 1998. Cook, M.L., & Iliopoulos, C. (1999). Beginning to inform the theory of the cooperative firm: emergence of the new generation cooperative. The Finnish Journal of Business Economics, 1999(4): 525–35. Fahlbeck, E. (2007). The horizon problem in agricultural cooperatives–only in theory? In K. Karantininis & J. Nilsson (eds), Vertical Markets and Cooperative Hierarchies (pp.255–74). Dordrecht, The Netherlands: Springer. Falk, C.L. (2002). The ranchers’ choice cooperative: what happened? Applied Economic Perspectives and Policy, 24(2), 512–27. Franken, J., & Cook, M. (2019). Horizon and portfolio investment constraints in agricultural cooperatives. In J. Windsperge, G. Cliquet, G. Hendrikse, & M. Sreckovic (eds), Design and Management of Interfirm Networks (pp.179–95). Heidelberg, Germany: Springer. Franken, J.R., & Cook, M.L. (2015). Informing measurement of cooperative performance. In J. Windsperger, G. Cliquet, T. Ehrmann, & G. Hendrikse (eds), Interfirm Networks (pp.209–26). Heidelberg, Germany: Springer. Fulton, M., & Giannakas, K. (2012). The value of a norm: open membership and the horizon problem in cooperatives. Journal of Rural Cooperation, 40(2), 145–61. Fulton, M.E., & Hueth, B. (2009). Cooperative conversions, failures and restructurings: an overview. Journal of Cooperatives, 23, i–xi. Fulton, M.E., & Larson, K.A. (2009). The restructuring of the Saskatchewan wheat pool: overconfidence and agency. Journal of Cooperatives, 23, 1–19. Grashuis, J., & Cook, M. (2018). An examination of new generation cooperatives in the upper Midwest: successes, failures, and limitations. Annals of Public and Cooperative Economics, 89(4), 623­–44. Grashuis, J., & Franken, J. (2020). Exit strategies of farmer co-operatives in the United States: a competing risks analysis. Journal of Co-operative Organization and Management, 8(2), 100–19. Gurung, R.K., & Unterschultz, J.R. (2007). Evaluation of factors affecting the choice of pricing and payment practices by traditional marketing and new generation cooperatives. Journal of Cooperatives, 20, 18–32. Hardesty, S.D. (2009). The conversion of Diamond Walnut Growers. Journal of Cooperatives, 23, 40–52. Hariyoga, H., & Sexton, R.J. (2009). The rise and fall of Tri-Valley Growers Cooperative. Journal of Cooperatives, 23, 87–100. Harris, A., Stefanson, B., & Fulton, M.E. (1996). New generation cooperatives and cooperative theory. Journal of Cooperatives, 11, 15–28. Henehan, B.M., & Schmit, T.M. (2009). Serving member interests in changing markets: a case study of Pro-Fac cooperative. Journal of Cooperatives, 23, 53–70. Holland, S.J., & King, R.P. (2004). Trading mechanisms for new-generation cooperative stock: the architecture of organizational formation and demise. American Journal of Agricultural Economics, 86(5), 1262–8. Holmes, M., Walzer, N., & Merrett, C. (2001). New Generation Cooperatives: Case Studies. Macomb, IL: Illinois Institute for Rural Affairs, Western Illinois University. Iliopoulos, C. (1998). A study of the property rights constraints in US agricultural cooperatives: Theory and evidence. (PhD Dissertation). University of Missouri-Columbia, Columbia, MO. Kalogeras, N., Pennings, J.M., Benos, T., & Doumpos, M. (2013). Which cooperative ownership model performs better? A financial‐decision aid approach. Agribusiness, 29(1), 80–95. Kalogeras, N., Van Dijk, G., & Baourakis, G. (2007). The market exchange of delivery rights within new generation cooperatives: some empirical observations. Paper presented at the International Conference on Economics and Management of Networks (3rd): EMNet 2007 (Franchising, Cooperatives, Strategic Alliances, Joint Ventures and Venture Capital Relations), Rotterdam, The Netherlands. Kenkel, P.L., & Holcomb, R.B. (2009). American Native Beef Cooperative. Journal of Cooperatives, 23, 166–82. McKee, G.J., & Boland, M.A. (2009). North American Bison Cooperative and North Dakota Natural Beef LLC: Governance of a contractual alliance. Journal of Cooperatives, 23, 152–65.

New generation cooperatives: what we know and need to learn  99 Merrett, C., Holmes, M., Eggert, J., & Garrett, B. (2007). Directory of Closed Membership Producer Cooperatives: New Generation Cooperatives and Limited Liability Companies in the United States and Canada. Macomb, IL: Illinois Institute for Rural Affairs, Western Illinois University. Milgrom, P.R., & Roberts, J. (1992). Economics, Organization and Management. Englewood Cliffs, NJ: Prentice-Hall. Olesen, H.B. (2007). The horizon problem reconsidered. In K. Karantininis & J. Nilsson (eds), Vertical Markets and Cooperative Hierarchies (pp.245–53). Dordrecht, The Netherlands: Springer. Porter, P.K., & Scully, G.W. (1987). Economic efficiency in cooperatives. Journal of Law and Economics, 30, 489–512. Puaha, H., & Tilley, D.S. (2003). Investment decisions in new generation cooperatives: A case study of value added products (VAP) cooperative in Alva, Oklahoma. Paper presented at the Southern Agricultural Economics Association Annual Meeting, Mobile, AL. Reynolds, B.J. (2014). Comparing Cooperative Principles of the U.S. Department of Agriculture and the International Cooperative Alliance (R. Development, Trans.) Rural Business-Cooperative Service: United States Department of Agriculture. Tonsager, D. (2013). Commentary: the co-op way. Rural Cooperatives, May/June, 2, 41. Turko, T.J. (2008). Manitoba Producers’ Willingness-to-Invest in New Generation Cooperatives (MS). University of Manitoba, Manitoba, Canada. USDA. (2011). Understanding cooperatives: cooperative business principles. Rural Development— Cooperative Programs: United States Department of Agriculture, August 1994, Slightly Revised April 2011. Valentinov, V. (2007). Why are cooperatives important in agriculture? An organizational economics perspective. Journal of Institutional Economics, 3(1), 55–69. Vitaliano, P. (1983). Cooperative enterprise: an alternative conceptual basis for analyzing a complex institution. American Journal of Agricultural Economics, 65(5), 1078–83.

5. Cooperative business structures: access to capital via equity and credit Christopher J. Kopka

“That capital should be of their own providing and bear a fixed rate of interest.”—Rochdale Practices, 1860

INTRODUCTION The purpose of this chapter is to consider how cooperatives access capital by reviewing the history of cooperatives and their principles. The chapter is primarily rooted in the experience of United States-based cooperatives. The chapter will offer high-level context about capital, including the distinctions between equity and credit, as well as a discussion of law, including legal structure, policy, and business practice. Philosophically, cooperatives wish to place people’s interests over the interests of economic capital. In theory, cooperatives align the interests of producers, consumers, or workers for market participation, governance via formalized membership for those member-consumer/ producers, and investment via gathering at-risk capital from those same people. Ideally, capital has an important, albeit limited, role within cooperatives—where capital is expected to result in a modest return. In the United States, this philosophy is embedded in antitrust law for agricultural or horticultural producers through the Capper–Volstead Act. No matter how structured legally, all businesses need economic capital—money—to start, operate, and grow. Across the broad spectrum of choices of business entity structure, we can similarly see a wide range of ways in which: 1. “start-up” capital comes into the business at initiation; 2. once started, additional funds in the form of working capital are deployed for business operations as a going concern; 3. monies, once available, can be distributed outside the business to different parties; and 4. in the event of a substantial business transaction (such as dissolution, acquisition, or merger), capital is exchanged or distributed. Intended sources and uses of capital have a bearing on the selection of legal structure for a business. When assessing whether to incorporate as a cooperative, we can anticipate a tension between: 1. the desire to align the socio-economic interests among relatively similar economic actors in shared ownership, and 2. the need to amass deployable capital to grow the underlying business formed by and for those economic actors.

100

Cooperative business structures: access to capital via equity and credit  101 In practice, there may be gaps—sometimes significant ones—among the ideological aspirations of cooperators, their market aspirations as a group of member-consumers/producers/ workers, and the reality of their available capital for direct investment as business owners formed to realize those aspirations. As a result, the law, policy, and practice around cooperative business structures are evolving to consider and attempt to address access to (i) equity-based at-risk capital and (ii) other forms of capital, particularly debt-based instruments. While this chapter primarily focuses on historical examples of structure and capital flows from the Rochdale Pioneers in the United Kingdom and the experience of cooperatives incorporated in the United States, many of the questions apply strategically in other global contexts.

OVERVIEW OF BUSINESS FINANCE AND CAPITAL We can think of economic capital in elementary terms when considering its role in the formation, financing, and growth of businesses: Capital represents economic value, usually in the form of money, that can be deployed for the express goal of generating increased economic value for the owner of that capital. While capital might be deployed in many ways, practically speaking, an owner of capital will usually deploy it in the form of equity or debt. With equity, capital is deployed via investment into a legally structured business entity in exchange for an ownership interest. The ownership interest is typically associated with an express expectation of generating a risk-adjusted return for the equity-holder. Having exchanged capital for equity, our capital owner now becomes an owner in the business. A fairly typical example would be investing a specified amount of money for a specified number of equity shares, often called “stock.” Equity typically also includes a governance right. Debt, meanwhile, represents capital deployed via a contract to a business entity in exchange for a set of obligations and stipulated payments, usually with interest. The business is now an obligor to our capital owner, who is now a lender to the business. The lender of capital typically assumes that the capital is later returned following an agreed-upon condition or event, usually a period of time. Because of the contractual expectation of capital return, lenders to a business typically take on less risk than equity investors in the same business entity. A fairly typical example of debt would be a bank or credit union loaning a specified amount of money for a specified number of months or years, subject to certain contractual restrictions and conditions in the loan agreement. Unlike equity, debt typically does not include a governance right. It may, however, include quasi-governance rights, such as access to books and records or rights of access and observation of board proceedings. The long-standing historical debates over the theoretical meanings and optimal definitions of capital, equity, and debt are outside the scope of this chapter.

COOPERATIVE PHILOSOPHICAL ORIENTATIONS TOWARD CAPITAL Cooperatives are sometimes mistakenly assumed to be anti-capitalist. That notion may prevail among some cooperative thought leaders. For example, consider the highly influential historic writings of George Holyoake, as quoted by Fairbairn (1994, p.20): “Capital is used in

102  Handbook of research on cooperatives and mutuals co-operation and honestly paid for, but the capitalist is excluded […] The capitalist sells his commodity to the co-operator.” The reality, however, is much more complicated, for virtually all cooperatives are businesses. As businesses, cooperatives are structured and orient their operations to compete in the broader economy. As indicated through the writings of the International Cooperative Alliance (ICA) (2015, p.33), it is theoretically possible to form a cooperative for purely social or cultural activities. As a practical matter, however, the formation of cooperatives not expecting economic participation in market activities is quite rare. For instance, in the United States, economic surveys completed by the University of Wisconsin’s Center for Cooperatives reveal that arts and crafts cooperatives are an exceedingly small portion of the overall cooperative sector. That said, even these quite niche cooperatives generate a cognizable economic impact. The long-mythologized Rochdale Pioneers wrote first of raising capital for their start-up in their Statutes of 1844: “The objects and plans of this Society are to form arrangements for the pecuniary benefit, and improvement of the social and domestic condition of its members, by raising a sufficient amount of capital in shares of one pound each, to bring into operation the following plans and arrangements” (quoted in Fairbairn, 1994, p.5). By 1860, Rochdale had formalized this practice with this statement: “That capital should be of their own providing and bear a fixed rate of interest” (quoted in Fairbairn, 1994, p.20). In this regard, cooperatives are very capitalistic as they can—and do—gather and then deploy economic capital to compete in markets every day, in virtually every country in the world. Yet they are also very much anti-speculative in their orientation toward that capital. The ICA is a highly influential community of practice, formed initially in 1895 and still globally active today. Philosophically, the ICA has a distinct view on the role of capital in cooperatives. For cooperatives this has been articulated internationally via the third principle of cooperation, Member Economic Participation. The third principle states in relevant part, drawing significantly from the “law the first” of Rochdale, “Members contribute equitably to, and democratically control, the capital of their cooperative.” Within the specific context of Member Economic Participation, the ICA community of practice assumes that “the key economic concept enshrined in [Member Economic Participation] is that in a co-operative capital is the servant, not the master of the enterprise. the whole structure of co-operative enterprise is designed around the concept of capital being in service of people and labour, not labour and people being in servitude to capital” (ICA, 2015, p.30). Paul Lambert, an influential writer on cooperation from the mid-twentieth century, understood this to mean that “under no circumstances will profits be distributed in proportion to capital invested” (Fairbairn, 1994, p.30, discussing Lambert). Further, as discussed by, among others, Vitaliano (1985, pp.139–42), the user-ownership principle (as a theoretical economic aspiration) posits that the people who use a business entity should own and finance that business entity together. Implicit, then, is the preference that outside economic capital from non-users will not be used to fund the business entity. Again, this is consistent with the historical first law of the Rochdale Pioneers. Why is there such a strong emphasis that cooperative capital should be contributed by members, workers, or producer-owners? The answer likely can be found in this statement from the ICA (2015, p.29), drawing from the history and practice of the Rochdale Pioneers: “Co-operatives exist to meet the needs of people, not primarily to generate a speculative return on capital invested in them.” And so, by 1937, the working assumption—and principle—for global cooperation was a “[r]estriction to a fixed rate of the interest upon capital,” no more

Cooperative business structures: access to capital via equity and credit  103 and no less (Fairbairn, 1994, p.25, quoting Hall and Watkins, 1937). Indeed, the expectation of a fixed rate of interest upon capital—all capital—persisted until late in the twentieth century throughout the international cooperative community of practice. Functionally, this means that there should essentially be no excess expectation of economic value being created based “solely” upon holding some type of equity capital in a cooperative. As Fairbairn (1994, p.34) has similarly observed and stated slightly differently, “Being an owner of a co-operative, by itself, brings no special return.” The Ideal Financing of a Pure Cooperative Taken together, in their “purest” theoretical and philosophical construction, cooperatives consistent with the ICA principles and values, as well as historic Rochdale practices, assume all financing of the business could be from capital amassed solely from the members who own the business entity together. The capital would generate a relatively modest return, if any. While this may appear economically irrational to people unfamiliar with cooperative businesses, it mainly draws from the assumption that the primary economic benefit stems from the use of the cooperative enterprise—not from the deployment of capital into that business enterprise for speculative purposes. If all interests are, indeed, well aligned within a cooperative enterprise, then—theoretically—capital need not generate a significant at-risk return for equity capital (Dunn 1988, p.89; Lambert, 1963). This orientation, coincidentally, has worked—and continues to work—for more than 150 years of cooperation at Rochdale. This ideal also stems from the assumption that there are potentially significant risks posed by non-aligned, outside capital. Again, consider the perspective of the International Cooperative Alliance: “A co-operative that relies heavily on external sources for the capital needed to fund its business operations creates a risk of breaching the 4th Principle of autonomy and independence through the financial and compliance covenants imposed by commercial lenders or venture capital investors” (ICA, 2015, p.34). Ideal, Practice, and Evolution As others have already long observed in cooperative businesses, what is desirable as a matter of philosophy, theory, or ideology is not always feasible when confronted by market realities (see for example USDA, 1989, p.4). In practice, within the broader marketplace of cooperative going concerns, however, ideologically “pure” financing of a cooperative is not always the case. This fact should not surprise us. As Poitras (2016, prologue) observes with regard to the broad history of capital, business structures, and markets, “[t]hrough the centuries, the organization of commercial activities has changed considerably, impacting the choice between debt and equity capital in the financing of commercial assets.” As cooperative businesses represent one (among many) forms of commercial assets and enterprises, the choices between debt and equity capital in the financing of cooperatives have changed—albeit perhaps less considerably than is the case with other forms of legal structure for commercial enterprises. Hence, over time, we see that the law, policy, and practice in the structuring of cooperative business entities—as with other types of business structures - has evolved to reflect that cooperatives’ business operations may be financed, in whole or in part, via debt or equity from both users and non-users of the cooperative.

104  Handbook of research on cooperatives and mutuals The impetus to review cooperative principles in light of these realities came following the findings of Sven-Åke Böök about the uses of capital globally in cooperative businesses in a report entitled “Cooperative Values in a Changing World: Report to the ICA Congress,” presented in Tokyo, Japan, in October of 1992. Within the report, Böök chronicled that, among other things, capitalization of cooperatives—and the structures around capitalization—was changing, and recommended that the ICA’s principles of cooperatives be revisited to anticipate those changes. In particular, the legal structures that allow for the financing of a cooperative by “outside,” non-member-owner capital has led to a business term of art in North America calling those cooperatives “hybrids” or “multi-stakeholder” cooperatives. Importantly, economists using the term “hybrid” concerning transaction costs may mean something quite distinct from when lawyers or practitioners use the term “hybrid” to mean cooperatives that include funding from a broader “multi-stakeholder” group. Two influential papers (Chaddad & Cook, 2004, pp.348–60; Cook & Chaddad, 2004, pp.1249–53) have considered the evolution of cooperatives from an economic perspective. This evolution of cooperatives, whether viewed through an economics lens concerning contracts and governance or through a structural lens in terms of stakeholders, capital, and governance, is not without critique from keen observers of the history of cooperation. For example, Fairbairn (1994, p.25) admonishes the evolution: “The tendency of co-operatives to drift toward the capitalist mainstream is a reason, then, to review and reaffirm co-operative principles every generation or two.” Hence, for most cooperative practitioners, the historical orientation toward capital of the Rochdale Pioneers and other early cooperatives remains, as of today, a primary reference point (see, for example, Fairbairn, 1994, pp.8–9). As explored, for instance, by Ménard (2018) and Sauvée (2013), there are trade-offs and considerations for hybrid economic and business structures that are outside the scope of this chapter. As also explored, for instance, by Münkner (2004), there are a range of considerations in multi-stakeholder cooperative entities, including but not limited to the incorporation of capital, that are similarly outside the scope of this chapter.

INITIAL CAPITALIZATION OF COOPERATIVES As with the Rochdale Pioneers, every cooperative formed for business purposes must have the capital to start its business operations. A practice observed in many cooperatives is some form of “member share,” set at a given amount of money and required at or soon after the member applies for membership in the cooperative. In the case of the Rochdale Pioneers, the membership share was initially set at one British pound per member. Based upon the inflation-adjusted currency converter of the National Archives of the United Kingdom, a single British pound in 1850 would be worth approximately £80.19 in 2017 (about $110). It would have been the equivalent of five days’ wages of a skilled tradesperson of the era. While seemingly small, this was not an insubstantial sum at the time for the original pioneering members from the lower economic classes of mid-nineteenth-century Britain. Cooperatives will usually consider the initial member’s capital contribution for that member share as its par value. Although this might still seem small, even after accounting for inflation and currency adjustments, consider that similar sums are often raised today when starting

Cooperative business structures: access to capital via equity and credit  105 consumer cooperatives. For example, in 2022, US$80 is the initial capital contribution for new members to join the Wedge Community Cooperative in Minnesota, which is the largest retail food cooperative in the United States by several measures. There is no “typical” amount set for the par value of cooperative shares. As Lund (2013, p.11) notes, “[t]he par value of the member stock varies greatly from co-op to co-op and industry to industry and can range from $10 to tens of thousands of dollars.” Rochdale historically, and the Wedge today, illustrate that quite modest amounts of initial capital can be drawn from new members to (i) create a cooperative going concern while (ii) extending the ownership economy much more deeply than is typical with other forms of incorporated businesses, where minimum investment may be in the millions of dollars for participation. Typically member shares will remain at par and not increase in value over time, even if the cooperative is economically successful and the value of the business grows (Andrews, 2015, p.14). That said, Andrews notes (2015, p.16) that only a relatively small number of cooperatives globally have experimented—internally, among the membership, or externally, within defined markets—with publicly tradable shares that reflect fluctuations in value. Although presumably even those cooperatives may still utilize an “at par” membership share.

“PURE” COOPERATIVES, AGRICULTURE, AND THE RISE OF DEBT-BASED CAPITAL Aaron Sapiro, a California agricultural law attorney who was also an early twentieth-century thought leader on North American cooperation, hypothesized that farm marketing cooperatives could be capitalized solely based upon debt-based capital. From Sapiro’s (1923, p.88 of reprint) vantage point, the key advantage of debt-based capital was this: “It is purely cooperative. There is no speculation.” The notion of agriculturally oriented lending long pre-dates Sapiro’s hypothesis, with the earliest cooperative forms of farm lending pre-dating the formation of the United States. Moreover, the institutionalization of federal farm credit dates to 1916 in the United States via the federal Farm Loan Act. Over time, the credit institutions formed under the act would evolve into the Farm Credit System. It was not until 1933, ten years after Sapiro’s influential article, that the US Congress passed the Farm Credit Act. Under this act, agricultural lending became intimately tied to a network of cooperative banking institutions with the specific goal of growing farms and farmers’ cooperatives via lending. The Farm Credit System, based exclusively on debt-based capital, was (and remains) remarkably successful—so much so that, as of 1968, the Farm Credit Association (FCA) reports that the system had repaid all pre-existing capital to the United States government, rendering the cooperative banking institutions of the system wholly owned by US farmers and their agricultural cooperatives. Although some of the economic shocks of the twentieth century prompted significant restructuring to the Farm Credit System, in 2022, taken as a whole, the FCA’s financial indictors report notes that the system has more than US$300 billion in outstanding loans and more than US$400 billion in total assets. While there are several examples in the United States of agricultural cooperatives raising and deploying non-farmer, non-member capital, by and large Sapiro’s hypothesis almost 100 years ago that anti-speculative, debt-based capital could drive the growth of US agricultural cooperatives has largely been realized. As a business practice, most US farmers will have

106  Handbook of research on cooperatives and mutuals a close relationship with their banker or credit union loan officer. In contrast, relatively few US farmers have any need to engage with the vast array of intermediaries, such as broker-dealers, who specialize in raising equity-based, investor-oriented capital. We can see that US agricultural cooperative businesses are not functionally anti-capitalist; they gather significant amounts of capital, usually in the form of debt. Yet their historical evolution and present-day business practices demonstrate they have remained mainly anti-speculative in their relation to capital. Debt-based Capital Outside the Farm Credit System The relative strength of agricultural cooperative lending also indirectly sparked the creation of additional US-based banking institutions focused on the start-up, development, and growth of non-farm cooperatives. In 1978, the US Congress chartered what would become known as National Cooperative Bank (NCB). NCB’s focus areas are well outside US agriculture, with a primary emphasis on cooperatives across several distinct sectors (for example, retail food, goods and services, healthcare, housing, childcare, education, energy, and manufacturing) and a secondary emphasis on business models that are not strictly speaking cooperatives (charter schools, employee stock ownership plans). Notwithstanding the broad spectrum of sectors served, NCB to date has achieved about 1 percent of the total scale achieved by the Farm Credit System. We can see that Sapiro’s dream of deploying debt-based, anti-speculative capital, now a reality for farmers, remains a distant, less accessible form of capitalization and finance for other forms of cooperation in the United States. That said, cooperatives throughout the world have demonstrated ingenuity—with or without dedicated lending institutions—by leveraging both public markets and private placements to issue debt-based capital. However, it may come in many forms. In a relatively recent global survey of cooperatives and their approaches to capitalization, two-thirds of the 300 largest cooperative and mutual businesses were attracting external capital via some form of debt-based capital instrument. Typically these instruments were reviewed and rated by a credit rating agency (Andrews, 2015, p.9). These may commonly take the form of bonds, short-term commercial paper, or preferred stock, for example (Andrews, 2015, pp.12–14).

CAPITALIZING BUSINESS OPERATIONS VIA INTERNAL CAPITAL Like any other business, cooperatives often reflect their earnings’ success in the broader marketplace. When business operations are economically successful, one way for a cooperative to access capital is through holding some portion of those earnings within the cooperative rather than distributing that economic value to the current member-owners (whether or not those earnings are directly attributable to a member-owner’s use of the cooperative). It is not uncommon for cooperative boards to look closely at earnings generated from the purchase and sales of goods or services to non-users and consider those earnings for purposes of creating unallocated equity capital (see, for example, Dunn, 1988, p.90 for a discussion of this fairly standard practice).

Cooperative business structures: access to capital via equity and credit  107 While the mechanics and accountancy for retaining earnings can be—and often is—quite complex for many cooperatives, at its core the typical approach is to have unallocated equity capital added to the cooperative’s balance sheet. Unallocated means that the equity position is not designated for particular members. Instead, it is held by the cooperative and, hence, is, in essence, indirectly controlled by all members. Additionally, a cooperative’s board and its management team may also generate internal capital by determining what portion of earnings are (or could be) apportioned to each member-owner. Typically, this is based upon the amount of business conducted with the cooperative that led to those earnings (usually called patronage) yet decided not to distribute all of those earnings. This similarly creates a form of equity on the cooperative’s balance sheet, though it is allocated to each member’s specific equity account. Kenkel (2020) has observed: “The advantage of retained patronage from the member’s perspective is that it is created from the profit stream, and members do not have to make a cash investment.” On the other hand, “[t]he disadvantage of retained patronage from the cooperative’s standpoint is that it is dependent upon the profitability of the cooperative.” The same disadvantage holds concerning unallocated equity. While internal capitalization can be adequate for a cooperative as a means of sourcing capital, it is only possible when the cooperative is generating net operating income, which is a measure of profit. Moreover, retained patronage may not be particularly advantageous for the members. While variations can and do exist, particularly in the context of alternative forms of cooperatives, as noted by Shakow (2004, p.542), “[c]ooperative retains have equity elements, but they appear to offer no benefit beyond receipt of their face amount when they are redeemed.” One typical objective is to have internal capital that can be used directly to fund future research, development, or business operations of the cooperative from the success of past operations, resulting in prior earnings. Another typical objective is to position the cooperative to reflect a strong or well-capitalized balance sheet, which provides negotiating leverage for the cooperative should it seek outside equity or debt capital from third parties (see for example Kenkel, 2020). Recall that a primary concern for Rochdale in 1844 was, in essence, raising start-up capital. Ten years later, as a going concern, Rochdale needed to revisit, think through, and then articulate its position on, in effect, working capital. Fairbairn (1994, p.9) relays this quite helpfully: The 1844 statutes had mentioned paying interest on capital and paying out the remainder of the surplus on the basis of patronage; but this was clearly incomplete since it said nothing about developing reserves. The revised statutes of 23 October 1854 made clear that surpluses were applied first to covering costs of management, paying interest on borrowed capital and limited interest on share capital, paying depreciation, building up reserves, investing in business development, and paying for educational programs — and only after all of this was the remainder to be distributed in patronage refunds.

Capitalizing Business Operations via Additional Member-owner Contributed Capital It is not uncommon for businesses to raise new capital from prior investors. Sometimes the legal entity itself is structured to make this compulsory, often called a “capital call,” which can be the case with investment funds formed explicitly for venturing. Other times, and as is more typical for cooperatives, raising new capital from the current member-owners as the primary or sole investors is not compulsory, though culturally it may be strongly encouraged.

108  Handbook of research on cooperatives and mutuals The earliest theory and practice for cooperatives, modeling the practice of the Rochdale Pioneers, was to treat initial capital and subsequent capital in essentially the same way. This suggests that the capital of member-owners would not be expected to generate a significant return once invested in the cooperative. Over time, however, cooperative theory, policy, and practice have recognized that members may have a difference in view on the expectations of returns for the initial membership shares, low or no returns, and their future, additional investments, higher or potentially market-rate returns. This is reflected, for instance, in the reformulation by the ICA of the internationally accepted cooperative principles in 1995 and further explored in the “Guidance Notes to the Co-operative Principles” (ICA, 2015, p.30). As noted earlier, a few global cooperatives have introduced innovative share structures that allow for some fluctuation in value, as well as some degree of trading, whether internally among members or externally via specified markets (Andrews, 2015, p.16). A more common approach among cooperatives, however, is to structure multiple share classes available to the membership, where investment is voluntary and where the shares will typically bear a “fixed rate of interest,” albeit perhaps at a rate of interest closer to market rates, making the shares more financially attractive (Andrews, 2015, p.16).

CAPITALIZING BUSINESS OPERATIONS VIA NON-MEMBER EQUITY CAPITAL For scaled business enterprises, a reasonably standard path is to start as a privately held business and then, over time and following sufficient economic growth, to become, in Western financial parlance, “publicly traded.” Practically this means that the purchase and sale of the equity capital, represented as shares (often simply called stock), can be traded and exchanged among willing buyers and willing sellers, whether or not they have other economic dealings with the business enterprise. The trading of equity is sometimes called creating a secondary market for those equity shares. Cooperatives, in contrast, are a historically unique form of the privately held firm in that they require membership as a prerequisite to equity-based ownership, which, as we have seen, draws directly from the experience of the Rochdale Pioneers. “The lack of ability to ‘float stock’ constrains the equity base of cooperatives and prevents the emergence of a secondary market for cooperative equity certificates” (USDA, 1989, p.iv). This has several observable consequences for both the cooperative, at the firm’s level, and the membership, in their capacity as investor-owners. For the cooperative, capital markets are effectively inaccessible, closing off a source of equity capital readily accessible to virtually all other for-profit firms. And there may be a dampening effect on the cooperative receiving further investment from current or future members. Importantly, as the USDA (1989, p.16) has noted, “[M]embers of the cooperative may have an incentive to underinvest in the cooperative, particularly with respect to long-term investments.” Presumably, this means that the cost of capital (or at least equity-based capital) may be higher for cooperatives than for other profit-seeking firms. This, in turn, may reveal why scaled cooperatives have a preference for debt-based capital rather than equity-based capital.

Cooperative business structures: access to capital via equity and credit  109 For the member-owners, their equity capital is less liquid. It may tend toward higher concentration and lower diversification of assets, in the case of producer- or worker-cooperatives, whose entrepreneurial livelihoods are closely aligned to the cooperative’s marketplace activities (USDA, 1989, p.16). It could also tend toward less consideration, and therefore lower concentration of assets, toward cooperative businesses, in the case of consumer cooperatives and cooperative-friendly investors who, ultimately, consider other, more liquid types of equities. For investors in the secondary equity markets, mainly publicly traded “stock markets,” cooperatives are simply not in the evoked set of investments to be considered. While research on the comparative economic performance between cooperatives and investor-owned firms is relatively sparse (Harris and Fulton, 1984, p.1), the available research strongly suggests that cooperatives tend to perform as well as investor-owned firms in their respective sectors. Capital constraints, however, remain a challenge for cooperative finance, resulting in an increasing investigation of possibilities for attracting capital. Consider, for example, this observation about Canadian cooperatives from Harris and Fulton nearly 40 years ago (1984, pp.129–33): “Co-operative proposals for financial restructuring highlight the need for additional capital and raise questions about co-operatives’ capacity to generate competitive rates of return that will attract outside investors.” Or this consideration in the context of US agricultural cooperatives from Dunn (1988, p.91) four years later: “Increasingly, public issuance of common stock with attached voting rights has been explored as a method by which cooperatives can tap public capital markets.” At least as of this writing, the exploration of publicly traded cooperative equity shares has been theoretical, and there is limited trading of US or Canadian-based cooperative equity shares. Nevertheless, attracting non-member equity capital directly to cooperatives is possible, even absent secondary markets (Münkner 2004). Over the past few decades, several world regions have experimented with modifying the enabling laws for incorporating cooperatives to include non-member equity. One of the most precise statutory articulations has been under the laws of Minnesota in the United States. With more than 1,000 incorporated, active cooperatives filed with its Secretary of State as of January 2022, Minnesota is home to the most significant number of incorporated “traditional” cooperatives in the United States and likely in comparison to most other regions of the world. It is not surprising, then, that Minnesota has emerged as a leader in considering alternative business forms of cooperation. Minnesota created a new cooperative statute in 2003 called 308B, which allowed an alternative form of cooperative inclusive of investor, non-member-owner equity capital. Whether cooperatives formed under legal structures such as 308B will grow and whether non-member capital will be gathered sufficiently to warrant secondary markets remains to be seen. Until then, non-member equity capital for cooperatives will likely remain a relatively limited source of capital, presumably gathered from and among cooperatively oriented enthusiasts.

SUBSTANTIAL BUSINESS TRANSACTIONS: RESTRUCTURINGS In contrast, there are several intriguing examples of cooperative restructuring via holding company models that seek to retain a high degree of cooperative ownership and governance, on the one hand, while on the other hand holding company models create investor-oriented at-risk equity capital access.

110  Handbook of research on cooperatives and mutuals Globally, perhaps the best-known example is the “Irish Model,” which “is a type of minority interest investment distinguished by the subsidiary being publicly traded and the original co-operative parent being transformed into a nonoperating holding company” (Andrews, 2015, p.19). The result is, in effect, a cooperative restructured with what Chaddad and Cook (2004, pp.355–8) have called a form of “capital seeking entity.” Similarly, in the United States the National Grape Cooperative owns Welch Foods, a wholly owned subsidiary.

SUGGESTIONS FOR FUTURE RESEARCH Cooperatives and access to capital and credit, while fascinating academically, also pose several practical, tactical challenges to cooperative businesses. Hence, in developing suggestions for future research, several leading practitioners and thought leaders were interviewed to help identify potential new research priorities. Special thanks go in particular to Paul Bradley, Anne Breckenridge, Michael Boland, Elias Crim, Matthew Elliott, Erin Gerrits, Kristi Schweiss, Dave Swanson, Felipe Witchger, and Tim Wolters for their insights, observations, and suggestions. Consideration of the Evolution of Cooperative Philosophy Several practitioners and other co-authors of this textbook reflected relatively few analyses on the evolution of cooperative philosophy concerning the role of capital. This chapter itself offers only relatively brief consideration. Hence the chapter’s subject, in and of itself, is a potentially beneficial area for further research.

STRESS-TESTING ASSUMPTIONS AND NEGATIVE INFERENCES ABOUT OUTSIDE CAPITAL The cooperative practitioner community often assumes that outside investor equity capital is inherently harmful. However, it is not necessarily the case that this is true. There are two critical distinctions between user-investors and non-user-investors. First, within a community of user-investors, their time horizon for return on and of capital is likely to be reasonably similar functionally, whereas the time horizons for non-user-investors can all be quite varied though may, by luck or design, align with those of the user-investors. Second, user-investors are likely to share a high degree of sector experience, which informs their approach to the cooperative’s underlying strategy and business operations. In contrast, non-user-investors are likely to have a broad spectrum of sector-experience knowledge, though relatively few are likely to have as much sector experience as longer-tenured user-investors. Rather than simply assuming that the historic restraints on equity capital to mitigate those differences are de facto optimal, legal practitioners in particular ponder first whether research could be undertaken to determine whether these differences are material or adverse. Theoretically, an evidence base could reveal that these differences are positive for cooperatives. Innovative approaches to cooperative governance could be explored to leverage the distinctions of time horizon, and sector experience is advantageous.

Cooperative business structures: access to capital via equity and credit  111 Incentivizing Member Investment in Cooperatives As we have seen from the history and current cooperatives’ practice, there is a strong preference for member-originated capital. That said, we also see that the bias against at-risk, fully speculative capital means one unambiguous form of incentivizing member capital—namely, maximizing profit or yield—is inhibited in most cooperatives’ capital structures. Different and additional forms of incentives that seem less speculative yet still create specific economic advantages could be tested and, presumably in some cases, validated for stimulating additional investment from member-owners in their cooperatives. Introduction and Growth of New Intermediaries As we have seen in the context of US agriculture, a robust network of intermediaries stemming from farm credit has been developed to extend debt-based capital to agricultural cooperatives and their farmer-owners. In contrast, a robust network of intermediaries has yet to emerge for access to equity-based capital for forms of cooperatives in other sectors of the economy. Moreover, the network of intermediaries servicing cooperatives outside of agriculture, while existing, is essentially anemic. What types of intermediaries are necessary to create, fund, and scale more cooperatives in more sectors of the economy? In turn, what aspects of debt and equity capital regulation in the United States would need to be revisited or reconsidered? Also, are there lessons to be learned from the relative success or failure of similar intermediary networks in other parts of the world? Cooperation among Cooperatives The idea of cooperation among and between various cooperatives is internationally acknowledged as a critical principle among cooperative practitioners. That said, because the history of cooperative philosophy and principles presumed that capital would originate from each cooperative’s members uniquely, a robust consideration of cooperation among cooperatives via debt and equity capital agreements has never been fully articulated in theory. Even still, capital arrangements among and between cooperatives happen quite frequently, albeit episodically, in practice. Should larger, scaled cooperatives, such as insurance mutuals, with relatively strong balance sheets be engaged for lending or investment into smaller cooperatives, including those focused on emerging sectors using cooperative business models? Relative Success (or Failure) of Hybrid Cooperative Structures There is much discussion about hybrid and multi-stakeholder cooperative structures in academic literature and practitioner conversations, though to date these structures are legally incorporated relatively rarely. For instance, in the state of Minnesota, home to the greatest number of incorporated cooperatives of any one state in the United States, the Minnesota Secretary of State’s publicly available information on filings shows 94 hybrid cooperatives have been incorporated between 2011 and 2020. While this represents 46 percent of all cooperatives incorporated in Minnesota from 2011 to 2020, the number pales compared to the more than 400,000 corporations and limited liability companies formed in Minnesota since 2011 and reflected in the Secretary of State’s filings. Research would be beneficial regarding

112  Handbook of research on cooperatives and mutuals whether (i) alternative structures are material to the cooperative economy specifically or the overall economy more generally and (ii) if so, whether or not the types of concerns raised concerning alternative forms of cooperatives have or have not been realized. Cooperatives in Relation to New and Emerging Structures As noted above, throughout the history of commercial activity, structural choices concerning capital perpetually change and evolve. Just as cooperative structures have iterated over time, so too have new forms of governance emerged. With the advent of blockchain technology and the broad expansion of digital engagement platforms, one particularly intriguing area of evolution is the introduction of decentralized autonomous organizations, often referred to as DAOs (Chohan & Chohan, 2017). Could cooperatives leverage DAOs, and vice versa, for aspects of the organization, strategy, structure, and, of course, capital? Could DAOs become the digital face of cooperatives? In contrast, could cooperative structures be deployed as the analog commercial expressions of the typically virtual, digital manifestations of DAOs to address the legal limitations (SEC, 2017) DAOs face with regard to securities regulators?

CONCLUSION Anti-speculation informs the philosophical, theoretical, and principles-based orientation toward equity-based capital within the cooperative community, as does a strong preference for member-originated equity-based capital. This orientation and preference derive mainly from the history and experience of the Rochdale Pioneers in the United Kingdom. At the same time, however, cooperatives, like other businesses, require capital to start up, grow, and reach a minimum viable scale. Having removed speculation as a critical incentive for gathering capital, the history and current practice for cooperative development in the United States (and other countries) reveals a strong bias and preference for debt-based forms of capital, particularly in the experience of United States agricultural cooperatives. Still, practical challenges for cooperatives as going concerns remain, revealing a tension between philosophy and practice. As cooperatives have evolved in the context of the broader marketplace, “hybrid” forms of legal structures have emerged to allow for varying degrees of equity-based capital. As can be seen from the broad spectrum of practitioner recommendations for further research in this chapter, the international community of practice for cooperatives can and should anticipate robust dialogue, debate, and evaluation for many years to come.

REFERENCES Andrews, A.M. (2015). Survey of Cooperative Capital, Filene Research institute found at: www​ .researchgate​.net/​figure/​fig1​_274384036. Böök, S-A. (1992). Cooperative Values in a Changing World: Report to the ICA Congress, presented in Tokyo, Japan. Chaddad, F. and Cook, M.L. (2004). Understanding New Cooperative Models: An Ownership-Control Rights Typology, Rev. Agric. Econ., 26(3): 348–60. Chohan, U.W. and Chohan, U.W. (2017). The Decentralized Autonomous Organization and Governance Issues found at https://​ssrn​.com/​abstract​=​3082055 or http://​dx​.doi​.org/​10​.2139/​ssrn​.3082055.

Cooperative business structures: access to capital via equity and credit  113 Cook, M.L. and Chaddad, F.R. (2004). Redesigning Cooperative Boundaries: The Emergence of New Models, Am. J. Agr. Econ., 86(5): 1249–53. Dunn, J. (1988). Basic Cooperative Principles and Their Relationship to Selected Practices, Journal of Agricultural Cooperation, 3(83): 83–93. Fairbairn, B. (1994). The Meaning of Rochdale The Rochdale Pioneers and the Co-operative Principles. Center for the Study of Co-operatives, University of Saskatchewan. Farm Credit Administration (FCA) history found at www​.fca​.gov/​about/​history​-of​-fca and financial indicators found at www​.fca​.gov/​bank​-oversight/​major​-financial​-indicators. Hall, F. and Watkins, W.P. (1937). Rochdale Rules and Methods, Co-operation: A Survey of the History, Principles, and Organisation of the Co-operative Movement in Great Britain and Ireland. Manchester: Co-operative Union. Harris, A. and Fulton, M. (1984). Comparative Financial Performance Analysis of Canadian Co-operatives, Investor-Owned Firms, and Industry Norms. Center for the Study of Co-operatives, University of Saskatchewan. International Cooperative Alliance (ICA) (2015). Guidance Notes to the Co-operative Principles. .ica​ .coop/​ en/​ cooperatives/​ cooperative​ Cooperatives identity, values & principles, found at www​ -identity. Kenkel, P. (2020). Understanding Cooperative Equity, Oklahoma State University Extension, Id: AGEC-1087 found at: https://​extension​.okstate​.edu/​fact​-sheets/​understanding​-cooperative​-equity​ .html Lambert, P. (1963). Studies in the Social Philosophy of Co-operation. Trans. Létargez, J. Manchester: Co-operative Union (originally published as La doctrine coopérative, Brussels and Paris, 1959). Lund, M. (2013). Cooperative Equity and Ownership: An Introduction, University of Wisconsin Center for Cooperatives, found at https://​resources​.uwcc​.wisc​.edu/​Finance/​Cooperative​%20Equity​%20and​ %20Ownership​.pdf Ménard, C. (2018) Organization and Governance in the Agrifood Sector: How Can We Capture Their Variety? Agribusiness, 34: 142–60. Minnesota Secretary of State New Business Filings Summary found at www​.sos​.state​.mn​.us/​business​ -liens/​business​-liens​-data/​new​-business​-filings​-summary​-in​-the​-past​-10​-years/​ Münkner, H.H. (2004). Multi-stakeholder co-operatives and their legal framework, pp.49–82, in Trends and Challenges for Co-operatives and Social Enterprises in Developed and Transition Countries (Borzaga and Spear, editors) Edizioni31. National Cooperative Bank of the United States (NCB) Synopsis of History found at www​.ncb​.coop/​ about​-us/​community​-impact. NCB Discussion of Its Community Focus and Impact found at www​.ncb​.coop/​about​-us/​community​ -impact. Poitras, G. (2016). Equity Capital From Ancient Partnerships to Modern Exchange Traded Funds, 1st edition. Abingdon: Routledge. Sapiro, A. (1923). True Farmer Cooperation: The California Plan of Cooperative Marketing. How it Differs from the Rochdale Plan. ‘Locality’ vs. ‘Commodity.’ Organization and Financing. World’s Work, 84–96 (Reprint, Journal of Agricultural Cooperation (1993)). Sauvée, L. (2013). Hybrid Governance: Sketching Discrete Alternatives, Journal on Chain and Network Science: 13. Shakow, D. (2004). From Rochdale Principles to LLCs: The Ongoing Evolution of Cooperative Structure, Tax Notes found at www​.researchgate​.net/​publication/​228151792​_From​_Rochdale​_Principles​_to​ _LLCs​_The​_Ongoing​_Evolution​_of​_the​_Cooperative​_Structure United Kingdom National Archives currency converter found at www​.nationalarchives​.gov​.uk/​currency​ -converter. United States Department of Agriculture (USDA) (1989). Farmer Cooperative Theory: Recent Developments, Agricultural Cooperative Services, ACS Research Report Number 84. United States Securities and Exchange Commission (SEC) Investigative Report (2017) found at www​ .sec​.gov/​news/​press​-release/​2017​-131. University of Wisconsin Center for Cooperatives, Research on the Economic Impact of Cooperatives, found at https://​reic​.uwcc​.wisc​.edu/​arts/​.

114  Handbook of research on cooperatives and mutuals Vitaliano, P. (1985). Cooperative Principles and Concepts: An Overview. Washington DC: American Institute of Cooperation. Wedge Community Cooperative membership eligibility found at https://​tccp​.coop.

PART III GOVERNANCE

6. Social capital and governance of agricultural cooperatives Jerker Nilsson1

INTRODUCTION This chapter aims to provide an overview of the role that social capital plays in the governance of cooperative membership organizations, with a focus on agricultural cooperatives in Western economies. Based on an account of the challenges for cooperative governance, the chapter presents various governing bodies and takes the following points in turn. Different forms of social capital are instrumental to the many social relationships within a cooperative membership. This also concerns relationships to the leaderships within the membership organization and the cooperative business firm. The amount of social capital within the membership is related to the cooperatives’ business environment. The chapter concludes that there is a need for more knowledge about issues concerning the governance of cooperative membership organizations. The internal governance of cooperatives is specific because individuals who conduct business with the cooperative firm (the patrons) are in charge of the governance. For the business relations to be beneficial for the patrons, they must govern it, and thus they must own it (Dunn, 1988). Because there may be a large number of patrons, the cooperative is owned and governed collectively; that is, the patrons are members of a cooperative membership organization. This organization owns and runs a cooperative business firm, with which the patrons conduct business. The membership organization is most often a society, which is a social construction. This dual character makes the governance of cooperatives unique. An investor-owned firm’s shareholders have not invested for the purpose of conducting business with it (Hansmann, 1996).

FORMS OF COOPERATIVE GOVERNANCE The Structure of Cooperative Governance The governance of the cooperative membership organization can be depicted as the upper triangle shown in Figure 6.1. The governance of investor-owned firms could be illustrated in a similar way, but their ownership organization is typically flat. Cooperative membership organizations with many patrons need a hierarchical structure, though the pyramid is upside-down. The lower triangle of Figure 6.1 shows the governance of the cooperative business firms. This is basically the same as that of an imagined investor-owned “twin,” though the membership organization’s boards of directors sometimes require the leadership of the business firm to satisfy members’ social demands. Both investor-owned firms and cooperative business firms have a chief executive officer (CEO) (or a general manager) on top of a hierarchically struc116

Social capital and governance of agricultural cooperatives  117

Source: Author.

Figure 6.1

The governance structure of a cooperative membership organization and a cooperative business firm, respectively

tured business firm. In both cases, the CEO is appointed by and is subordinated to a board of directors. The hierarchical pattern of investor-owned firms exists also in cooperative business firms. As compared to business firms’ hierarchies, cooperative membership organizations have a hierarchy with the members as principals and the board of directors as their agent. Among the members and the board of directors there may be one or several echelons of elected representatives, who are important for channeling information between the board and the membership, even though all the decision rights rest in the hands of the board. The fact that there are elected representatives at intermediary levels implies that there are both horizontal and vertical networks and agency relationships. Because the membership organization consists exclusively of patrons, its nature is different from that of the owners of an investor-owned firm: In a cooperative membership organization, there are social relationships and partly social goals, which means that the social capital theory has explanatory power for the internal governance of cooperatives. Social conditions and relationships must be considered also in investor-owned firms, but their social concerns are subordinated to the financial goal. The right side of Figure 6.1 indicates that cooperatives have a few other organizational units, the aim of which is to support the governance structure. They are to help members control the board of directors and the management, to find suitable candidates to be elected representatives, and to function as an information channel between the members and the leadership (Morfi et al., 2018). A cooperative membership organization can be regarded as horizontal integration of the farmer-members, though the strength of integration may vary depending on the contracting conditions between the cooperative and the members. It is, however, more relevant to think about cooperatives in terms of vertical integration between the firm and the membership. The membership organization is meaningless without the business firm, and vice versa. However, the relationship between the individual members and the cooperative may at the most be partially vertical integration. First, because the membership is voluntary, members enter and

118  Handbook of research on cooperatives and mutuals exit continuously. Second, the members are normally free to conduct business with other firms; that is, delivery obligations and buying obligations are not found in all cooperative constitutions, statutes and bylaws. Third, the members generally only have “ownership” of the shares of the membership organization, while ownership of the cooperative business firm is collective. Finally, the control of the business firm is collective as it is in the hands of the board of directors. These factors have profound consequences for governance. Rationales for Cooperative Membership Although there may be reasons other than profit, farmers belong to a cooperative membership organization primarily because they expect profitable business exchanges on their own part. Cooperative business firms exist because members want to conduct business with it (Karantininis & Zago, 2001; Morfi et al., 2015). In that respect, cooperatives differ from non-profit organizations, though there may also be similarities (Valentinov & Iliopoulos, 2012). The leadership of cooperatives must satisfy farmers’ short-term interests (otherwise, farmers exit from the cooperative). At the same time, cooperatives must care about their long-term interests, thereby securing that the cooperative business firm remains strong. The balance between short-term and long-term perspectives is a challenge for the internal governance of cooperatives. It has been suggested that several economic benefits emanate from cooperatives (Schrader, 1989; Van Dijk, 1997). One often-used rationale is that cooperatives may reduce members’ transaction costs (Staatz, 1984; Sexton, 1986; Ollila, 1989; Hendrikse & Feng, 2013). Because farmers have substantial investments in assets, which have little value outside their present deployment, farmers are typically subject to opportunism by independent business partners. Another reason for farmers’ vulnerability is uncertainty. Farmers have difficulty in assessing the qualities of the transacted products and have limited knowledge about market prices. Thus, powerful independent business partners may exploit farmers, as they have a weak market position (Staatz, 1984; Bonus, 1986; Williamson, 1985). Because of weak spatial competition, farmers often have limited possibilities in choosing between different trading partners. Imbalanced power relations leave farmers facing lock-in and hold-up situations. One caveat, however, is that investor-owned firms behave honestly if they have such transaction-specific investments that make the partners mutually dependent upon each other (Ollila, 1989; Nilsson & Lind, 2015). If there are large firms in both primary agriculture and agro-food industries, “hit-and-run” behavior by investor-owned firms is less likely. As farmers expand their operations and gain a stronger market position, investor-owned firms have less reason to maltreat them. Some researchers claim that as farmers get very large agricultural operations, cooperatives are no longer able to reduce their transaction costs very much (Porter & Scully, 1987; Holmström, 1999). A condition for a cooperative to thrive is that members think they get good enough prices, services, and other conditions. If cooperatives are not perceived to be the best way of reducing farmers’ transaction costs, the farmers will patronize competing firms, not care about governing their cooperative, and not invest in it. The members act individually when selling agricultural products and buying farm inputs, while their ownership and governance of the membership organization is collective. Collective decision-making presupposes social interaction within the membership, exchanges of information, and interrelationships among the members and between the members and the elected representatives.

Social capital and governance of agricultural cooperatives  119 Protection of Members’ Rights The interrelationships within a cooperative membership organization are associated with costs in a manner similar to the way in which farmers have transaction costs in their exchanges with their business partners (Staatz, 1984). Because members and elected representatives at all echelons in the organizational hierarchy have different knowledge, skills, and social networks, some of them have possibilities to obtain private benefits rather than caring for the collective best. Furthermore, the relationships are characterized by uncertainties, because the individuals do not know the intentions, capabilities, and social conditions of other individuals, and it is impossible to forecast the outcomes of the cooperatives’ investment decisions. Because of the risk for opportunistic behavior on the part of the board of directors, other elected representatives, and fellow members, there is a need for regulations. Part of the interdependency within the cooperative membership organization is regulated by national legislations about cooperatives, as well as cooperative bylaws. These rules are often based upon a set of cooperative principles, which may concern voting rights, member treatment, and capital remuneration; that is, rules that presuppose collective action. The best known principles are those suggested by the International Cooperative Alliance, which in turn are influenced by the principles formulated in the 1840s by the Rochdale cooperative pioneers (Barton, 1989). These principles prescribe rules for handling conflicts between collective ownership and governance as opposed to members’ individual interests. Thus, they reduce agency problems and stimulate trust (Nilsson, 1996). Nevertheless, the rules may not completely prevent somebody from seeking personal benefits. There is a tradeoff between the members’ perceived benefits from doing business with their cooperative and their perceived costs for monitoring the cooperative. If farmers do not care about monitoring their cooperative because this involves excessively high costs, the cooperative will not work in the interests of the farmers, who will then become even less involved in the governance. This leads to vicious circles. This process is more likely when the cooperative business firm is so large and has such complex operations that the members are not capable of governing it, and when the membership is so large and heterogeneous that members have weak incentive to control. Previous research has indicated a relationship between members’ willingness to govern a cooperative and the performance thereof (Barraud-Didier et al., 2012). For example, Fulton and Giannakas (2007, p.93) write: “… as membership commitment wanes, so does the financial and organizational health of the organization and with it its ability to provide goods and services to the members.” Except for social capital theory, issues concerning cooperative internal governance may be elucidated by agency theory, which is compatible with the transaction cost theory, because both are based on the theoretical presumption of opportunism, that is, self-interest-seeking with guile. Some humans may sometimes seek advantages for themselves, even to the extent that they are not honest with others, and it is not possible to foresee who will be fraudulent and when. Due to information asymmetry, agents may be in a position to deceive the principals (Jensen & Meckling, 1976). CEOs are in a special position to act opportunistically as they execute decisions made by the boards, and a board may have difficulty in monitoring the CEO. There may also be opportunistic behavior in other relationships within the membership organization. Social capital theory concerns how such agency problems may be solved through trust in interpersonal relations.

120  Handbook of research on cooperatives and mutuals Social capital theory, on the other hand, concerns trustful relations between individuals and groups of individuals. The notion of opportunism may, however, be relevant, namely when a trusted partner is caught acting fraudulently and, due to hidden information, this behavior is not revealed on time. Principles behind Cooperative Governance The topic of cooperative governance has seen considerable attention from researchers, though fewer studies concern internal governance issues (Hanisch & Rommel, 2012; Hakelius, 2018; Morfi et al., 2018, 2021). Most researchers are interested in the agency problems that exist in the relationships between a cooperative’s board of directors and its CEO (Hendrikse & Bijman 2002; Hendrikse 2005; Chaddad & Iliopoulos 2013; Bijman et al., 2013; 2014). The problem of incomplete contracting is argued to be greater in cooperatives than in investor-owned firms. One reason is that the objective of cooperatives is to deliver member benefits, while investor-owned firms aim to provide a one-dimensional, easily measured return on investment to their owners. The vagueness of cooperative objectives makes it difficult to design incentive schemes that prevent CEOs from expropriating rents, especially because of information asymmetry. The CEO knows more about the cooperative’s businesses than the board of directors or the members. In the relationships within a cooperative membership organization, that is, between the members and the board of directors, social capital theory provides a promising toolbox. The governance in cooperative membership organizations has evolved over time. Historically, a small number of farmers who lived in the same village or a limited geographical area typically established cooperatives. The founders, often well-educated farmers with large operations and a good reputation, observed that their community faced difficulties on the markets. The task of establishing a jointly owned firm was a risky one because everybody would thereby be dependent on each other. If one or a few of the members were shirking, the entire membership would suffer. Therefore, trust was needed within the membership, that is, the level of social capital had to be high. The members were also willing to accept a high degree of social control. The early members had to finance the newly established cooperative but they were normally not willing to invest a larger amount than was necessary. For this reason, members, especially in the old days, accepted personal liability for the cooperatives’ debts. This is why cooperatives have often had low leverage. The cooperative was established to adjust a malfunctioning market mechanism, which is to say that, through their cooperative, the members could reduce the risk-taking in their farming enterprises. Hence, they were not willing to accept large risks within the cooperative enterprise, and so the financial investments were small. The members needed all the capital they could get for investments in their own farming operations. The newly established cooperatives typically had an internal governance structure of direct democracy. The entire membership congregated in an annual general assembly, where a board of directors was elected. The business operations were conducted by the chairperson or by a person who was elected for this task, often one trusted member or a farmer’s son. The same simple governance structure still exists in many locally operating cooperatives, which have small and homogeneous memberships, and business operations that are simple and member-related (Feng et al., 2016). At the general assembly meetings, the members decide about the cooperative’s strategies, and the members discuss the cooperative’s business issues

Social capital and governance of agricultural cooperatives  121 throughout the year when they meet. Thus, in the infancy of the cooperative movement, the members had low monitoring costs. Personal acquaintances mean trust, and the members will have similar notions about their cooperative’s mission. However, as the cooperatives expanded, it became necessary to have a professional leader. The employment of a manager entailed increasing but still relatively low monitoring costs. Communication was simple through personal contacts. The interdependence between members as well as between members and leadership fostered social capital. As years and decades have passed, intensified competition and a quest for low processing costs through large-scale operations have given rise to many mergers. Thus, cooperative memberships have grown to thousands or tens of thousands. If all members within a large membership were to negotiate until they have reached a common agreement, the governance costs would be exorbitant (Olson, 1965). One way to reduce these collective decision-making costs is by delegating authority to committees, that is, splitting the group into different chapters of an organization such as a cooperative membership organization (Hansmann, 1996). “Collective decision-making costs arise with the adoption of costly processes to address patron interest heterogeneity and/or inefficient decisions that fail to maximize the aggregate welfare of the owners as a group” (Cook & Iliopoulos, 2016, p.21). To the extent that there are diverging interests between different groups of members, these problems may be solved with the help of a membership organization with much information exchange horizontally and vertically (Hakelius & Nilsson, 2020). The conflicts within a heterogeneous membership may paralyze member control. The solution is that the decisionmaking rights are delegated to a board of directors. This limits individual members’ chance to free ride. Long-term investments have to be made by the leadership even though these investments may be at odds with the interests of some members.

SOCIAL CAPITAL IN COOPERATIVE GOVERNANCE The Concept of Social Capital Social capital includes “the information, trust, and norms of reciprocity inherent in one’s social networks” (Woolcock, 1998, p.153). The existence of social capital means that an individual has access to resources of other individuals (Bourdieu, 1986). A cooperative member benefits from the cooperative’s and other members’ resources. Social capital consists of the existence of relationships between people who are willing to support each other, which means that those who enjoy social capital cannot use this capital on their own. This distinguishes social capital from financial, physical and human capital. “Just as a screwdriver (physical capital) or a college education (human capital) can increase productivity (both individual and collective), so too can social contacts affect the productivity of individuals and groups” (Putnam, 2000, p.19). Social capital exists at individual, group and society levels; that is, it may be a resource for people in various social contexts (Bourdieu, 1986; Coleman, 1988) as well as a characteristic of communities (Putnam, 2000). The existence of social capital smooths information exchange and reduces information asymmetry, thus facilitating transactions. It stimulates investments in physical and human capital, because it lowers people’s transaction costs and raises involvement thanks to a lower risk of deceitful behavior (Coleman, 1988; Putnam, 1995). When

122  Handbook of research on cooperatives and mutuals people trust each other, they find it easier to interact (Kuhnen, 2009). Social capital facilitates coordination, stimulates partnerships, and reduces opportunism (Putnam, 1995). Social capital theory has been used in many studies of the relationships within cooperative membership organizations and related issues. Thus, a variety of social capital indicators exist, often related to networks, norms, and trust (Putnam, 1995). In studies of social capital in agricultural cooperatives, researchers have focused on the relationships of members with each other, with the leadership, and with various dimensions of the cooperative membership organizations. The indicators may be members’ involvement, trust, satisfaction, and loyalty (Feng et al., 2016; Yu & Nilsson, 2018). A study about the importance of social capital for members’ participation in governance comprised the three dimensions of external, relational, and cognitive social capital (Liang et al., 2015). External social capital refers to a cooperative’s connections to financial institutions, trading partners and other organizations. Relational social capital concerns members’ trust in each other and in the leadership. Cognitive social capital indicates the members’ mental state in relation to their cooperative. This indicates that social capital may be a latent variable as well as an overt variable, such as members’ participation in general assembly meetings or other activities (Liang et al., 2015), so social capital can show not only what people are doing but also their mental state. Thus, social capital can be related to socio-psychological variables, including not only satisfaction but also knowledge and perceptions, commitment, embeddedness, and loyalty, which many researchers have used when studying cooperative members (Österberg & Nilsson, 2009; Barraud-Didier et al., 2012; Arcas-Lario et al., 2014; Morfi et al., 2018). The social capital theory may contribute to a dynamic perspective insofar as communication may change individuals’ positions. People learn, gain new perspectives, consider other people’s interests, and gain new interests. Of particular interest is the communication between rank-and-file members and board members, as the two parties adapt to each other (Morfi et al., 2021). Members and elected representatives form their opinions about a cooperative’s activities through decision-making processes similar to those presented in the behavioral science literature. The process includes elements such as problem identification, problem analysis, information gathering, considerations, determining decision criteria, decisions, and evaluation. In behavioral theory, a distinction is made between high- and low-involvement decisions, where the former concerns the individual going through every step of the process from problem recognition to post-decision evaluation, while the latter concerns casual or impulsive decisions, which do not require in-depth cognitive efforts (Blackwell et al., 2006). It could even be the case that the members, in their self-identification, put much weight on their cooperative membership (Borgen, 2001; Foreman & Whetten, 2002). Many farmers’ decisions about cooperative membership may be high-involvement decisions, as a farmer’s economy is often dependent upon what the cooperative achieves. This means that communication about cooperative issues is crucial in all the phases of the decision-making process, for both rank-and-file members and elected representatives. Types of Social Capital Aside from cognitive and relational social capital, researchers also refer to structural social capital, which is objectively and externally observable relationships (Deng et al., 2021). “[S]tructural social capital facilitates information sharing, and collective action and decision

Social capital and governance of agricultural cooperatives  123 making through established roles, social networks and other social structures supplemented by rules, procedures and precedents. And cognitive social capital refers to shared norms, values, trust, attitudes, and beliefs” (Grootaert & Bastelaer, 2001, p.19). The two concepts are linked. For a cooperative to have cognitive social capital in its membership there must be well-functioning structural social capital, and structural social capital presupposes that the members have cognitive social capital, which allows a member democratic organization to be built and function well. Structural social capital is a framework for cognitive social capital. People influence each other, in particular as concerns important issues. Social influences are bound to occur in close relationships, that is, when there is bonding social capital (Putnam, 2000). Bonding social capital means that people consider themselves to have a similar social identity. It leads to multiple and close bonds with individuals. It is often based on emotions, such as between family members, committed couples, long-term business partners, and members of ideologically strong groups. Respect and reciprocity characterize the relationships. Bonding social capital is more likely to occur in small organizations and within smaller groups in a larger organization. Bridging social capital, on the other hand, connects individuals with different experiences, values, and backgrounds. Many cooperative members communicate with each other and so do board members. Bridging social capital is seen, for example, at farmers’ meetings and on social media. Although farmers may not be acquainted, they exchange ideas about issues associated with values or their agricultural practices and business strategies (Chiffoleau, 2009). Meetings among members strengthen cohesion and create a sense of community. Although such networking affects members’ willingness to participate in cooperatives, these formal networks are not as effective as socially tight networks (Fitzgerald & Curtis, 2012). Some researchers identify a third category, linking social capital (Robison et al., 2002), which pertains to connections with people in power, such as the members’ relations with the board of directors. Thus, it has a component of vertical relations, while the other types of social capital concern mainly horizontal relations within the membership organization. Social capital can be found in all organizations and all business functions. Companies need to enjoy trust in their business environment. Social capital is essential inside a firm but also in its relations with authorities, business partners, financial institutions, and society at large (Yu & Nilsson, 2018). Investors must have confidence in the companies in which they consider investing. Customers must trust that they will receive the products they have ordered. An organization’s reputation and image constitute social capital. The social capital within a group depends on whether participants share “common values and understanding that allows different participants to work together for collective results and common goals” (Huppé & Creech, 2012, p.6). Such values are similar to the concepts of “cooperative values,” which occur in both theoretical and empirical studies (Craig, 1993; Hakelius, 1996; Nilsson, 1996). It has been argued that these values are the basis of the so-called cooperative principles, which often form the origin for cooperative legislation and cooperatives’ statutes. However, the cooperative principles alone cannot guarantee social capital in memberships or lower the governance and control costs. An organizational structure is required that promotes communication among members and their participation in decision-making.

124  Handbook of research on cooperatives and mutuals Abuse of Social Capital The existence of social capital is often seen as something positive since collaboration and coordination are facilitated. It has thus been argued that poverty can be alleviated thanks to social capital among a group of poor people. However, such a positive view ignores how social capital is used. For example, it is social capital that holds together criminal gangs and fanatical religious groups (Rohman, 2014). More generally, it can be questionable to have confidence in a partner, even if you have a lot of information about the partner. One cannot know but must only hope that the partner is worthy of trust. Therefore, trust is associated with risk-taking, as the partner may abuse the trust or for some external reason not be able to keep promises. Vulnerability is the price of trust. A sudden loss of trust can involve financial, social, and emotional costs (Barbalet, 2009). In the event of temporary breaches of trust, an alternative may be to “forgive” others and continue to cooperate, similar to the large “trust loans” that exist among close friends, parents and children, or spouses. The alternative—to break the relationship or punish the partner—can be expensive for the partner who feels cheated. The individual who abuses social capital by cheating or free-riding can be punished by losing social capital within a wider circle. This can be subject to both social and formal sanctions. However, it is not certain that the fraud will be revealed, and the fraudsters can neglect the punishment if they have strong social networks in general. Fraud can thus violate social norms, national laws, and cooperative statutes (Coleman, 1988). In a cooperative context, lack of social capital can create problems. A cooperative can be threatened if weak social capital characterizes a large part of the membership, which means that members do not control the leadership. There may be different reasons for members showing passivity in controlling the leadership (Nilsson & Svendsen, 2011). One possibility is that the members are satisfied with the cooperative’s performance and trust the cooperative, at least until a period of poorer performance arrives. Another reason may be that members want to be free riders, hoping that some other members will take care of the control. If the members do not control the leadership, there may be strong social capital within a small group of individuals, who thus run the business in their own interest. This group may consist of management or directors. A mentality can be developed within the leadership so that the cooperative is poorly managed or even characterized by corruption (Fulton & Hueth, 2009; Lamprinakis & Fulton, 2011; Nilsson & Lind, 2015; Fulton & Giannakas, 2020). There may be alliances between board members or CEOs. Due to the information asymmetry, leaders may be able to hide critical information and thus mislead members. As the contracts between the membership and the management are not clear, the power relationship is skewed. As cooperatives expand, often through mergers, the memberships become increasingly heterogeneous in many respects—as concerns members’ age, production orientation, delivery volumes, location, and so on. Thus, there is a risk of diverging opinions and poor communication (Kalogeras et al., 2009; Elliott et al., 2018; Höhler & Kühl, 2018; Iliopoulos & Valentinov, 2018; Grashuis & Cook, 2021). The bridging social capital within the membership at large is likely to suffer. The increasing heterogeneity of the membership and the weaker social capital are likely to result in concentration of power in the hands of the leadership. The social capital within a large membership may, however, be extensive if the board of directors succeeds in stating an overriding strategy that benefits almost all members (Hakelius & Nilsson, 2020).

Social capital and governance of agricultural cooperatives  125

THE LIMITATIONS OF SOCIAL CAPITAL Agency Problems There is a risk of fraud within an organization in which the ownership is separated from the governance. A self-interested employed leader has better knowledge about the organization and can therefore appropriate rents to which the owners are entitled (Sharma, 1997). Such agency problems appear irrespective of the organization’s ownership structure, when an agent acts on behalf of somebody else, the principal. However, the extent of agency problems varies between organizations with different ownerships and between cooperatives with different attributes. Agency problems exist when there is a lack of social capital, and agency problems make internal governance problematic. In the hypothetical case of complete social capital within an organization, there would be no agency problems, which corresponds to the stewardship model for cooperative governance (Cornforth, 2004). The members take part in a cooperative’s governance and everyone can be trusted. However, in reality, one may expect that at least some participants will sometimes exhibit opportunistic behavior, that is, self-interest seeking with guile. Because it is not possible to foresee who will act deceitfully, when, in which respect, and to what extent, even potential agency problems must be taken into account. Agency problems tend to be more serious in cooperatives than in investor-owned firms, because the former category is more complex than the latter. While an investor-owned firm has a fairly clear objective—return on equity—a cooperative’s objective is to provide member benefits. The fact that a cooperative’s objective can be operationalized in varying ways contributes to imbalances between the members, the board of directors, and the professional management. Likewise, the relationships between the various other units within a membership organization may be unclear. In line with the incomplete contracting theory, there may be uncertainties about who has specific responsibilities. Even the contract between the members and the cooperative leaves the members much freedom of action (Hendrikse & Veerman, 2001). In investor-owned firms, the market for equity capital has the function of disciplining managers, but the equity capital in cooperatives is most often not subject to any market forces. Investor-owned firms often implement interest-aligning salary schemes and stock options for managers who succeed in providing good financial results. Cooperatives most often pay a fixed salary, because the financial results of the cooperative business depends on the prices and patronage refunds that are paid to the members. The owners of an organization—cooperative or investor-owned—use various measures to manage agency problems, which is to say that they will have monitoring costs in the form of auditing, information systems, incentive schemes, and so on. However, they cannot fully eliminate the agency problems, because that would require exorbitantly high monitoring costs. Rather, they have to find a tradeoff between agency costs and monitoring costs. Thus, in comparison to investor-owned firms, cooperatives will have higher agency costs or higher monitoring costs, or both. Cooperative members’ monitoring costs should, however, be counterweighed by the cooperatives providing member benefits. In a cooperative context, agency problems are reduced with the help of rules and regulations in the form of legislation and statutes, which reduce the members’ and the elected representatives’ possibility to be fraudulent. The rules stipulate specific organizational structures and

126  Handbook of research on cooperatives and mutuals control mechanisms, for example concerning how a board of directors should be elected, as well as requirements about auditing. Such institutional structures have the effect that people will act more trustworthily and potential deceit is revealed and remedied. The rules aim, not least, at limiting members’ propensity to be free riders. Even though the farmer-members are obliged to follow their cooperative’s statutes, they have much freedom of action, for example by trading with investor-owned firms rather than their cooperatives. When farmers conduct business with investor-owned firms they do not have any monitoring costs for these firms, but owners of these firms carry the monitoring costs. The farmers who conduct business with investor-owned firms may, however, face agency costs in the sense that these firms may not fully adhere to the terms that are stated in the trading contracts, and the farmers’ have monitoring costs in surveilling that the investor-owned firms follow the contracts. Horizontal and Vertical Integration The amount of agency problems and social capital in cooperative membership organizations varies depending on the cooperatives’ attributes, in particular whether a cooperative has a small or a large membership. The borderline between small and large cooperative memberships is diffuse, because it is multifaceted. Within small memberships, there is a high chance that the agency problems are handled thanks to much social capital, because members are acquainted with each other (Feng et al., 2016). The relationships are mainly characterized by bridging social capital, while bonding social capital is likely in groups of members and among the elected representatives. The flat structure of small membership organizations means that there is social control. Contributing to the social capital is that small memberships have less heterogeneity as concerns the members’ views about the mission of the cooperatives and their strategies. Personal relationships make it easier for the members to monitor the leaderships. The geographical proximity between members tends to increase the amount of trust and collaboration. Likewise, small cooperatives are likely to have simple operations, which means that the members feel more involved and are more able to monitor the operations (Nilsson et al., 2012). The internal governance of cooperatives varies as the amount of social capital within the memberships is related to the cooperatives’ size and age (Deng et al., 2021). Some small cooperatives follow a niche strategy that allows them to remain small over an extended period of time (Hakelius et al., 2013; Feng et al., 2016) but in other cases intensified competition induces cooperatives to expand both horizontally and vertically (Cook, 1995). The horizontal expansion mainly takes place through mergers, which lead to larger and more heterogeneous memberships (Van der Krogt et al., 2007). By being large, a cooperative achieves lower average processing costs, a better use of its financial resources, and more market power. Horizontal and vertical expansion often go hand in hand. While horizontal expansion means that the cooperative’s membership organizations grow, vertical expansion concerns the cooperative business firms. Through forward (downstream) vertical integration, cooperatives extend their business operations into value-added activities, thereby hoping to reach lucrative markets. Backward (upstream) vertical integration means that the cooperative expands into farm input business operations. In a large membership, not all members have social relations with one another. Anonymity implies that the amount of social capital is limited. Members are therefore more prone to free-riding when it comes to governing the cooperative as well as financing it and trading

Social capital and governance of agricultural cooperatives  127 with it. In order to establish more social capital, large membership organizations are split into smaller units (districts if geographically defined), which is to say that there are several layers of governmental bodies, which are hierarchically structured. Within the smaller units, there are better chances for social capital, but on the other hand there is a long distance—socially, psychologically, and geographically—between the members and the board of directors. This distance must be bridged through a democratic membership system, otherwise members feel that their voice is not heard, and they become less involved. If the members have less trust in one another and in the leadership, there is a higher risk that they will exit from the cooperative (Hirschman, 1978). When such a process starts, there may be a self-enforcing mechanism, because the farmers who exit first are the most attractive ones for the investor-owned firms, and without these, the cooperative will perform more and more poorly for the remaining members (Nilsson & Lind, 2015). A vicious circle comes into operation. Heterogeneity When a membership organization consists of two or more hierarchically divided echelons, communication and coordination become more difficult. Even the board of directors may find it hard to identify members’ interests (Kalogeras et al., 2009; Cechin et al., 2013). The larger a membership organization is, the more heterogeneous it will probably be. This also applies most often to federative cooperatives, that is, those where the membership consists of smaller cooperatives because, in these, it is difficult to find a well-functioning organizational structure. Within the small member cooperatives, there may be much social capital, but these small cooperatives are mostly dependent on the federative organization, in which they have less influence. Similarly, large cooperative business firms have a complex structure, often with subsidiaries, some of which perhaps have operations that are only indirectly related to the members’ agricultural products. Due to the size and complexity of the operations, the members and perhaps even the directors will have difficulty understanding the operations (Nilsson & Svendsen, 2011). The information asymmetry increases and the management gains more power (Hind, 1999). Cooperative failures have been claimed to be related to poor member control, sometimes connected to the leadership exhibiting hubris, wanting to expand too fast and too much (Fulton & Hueth, 2009; Fulton & Larson, 2009). If the management succeeds, the organization will become even more complex. This will challenge the cultural traits of cooperatives (Hogeland, 2006; 2015). In large cooperatives, the management might be influenced by the dominant logic of conducting business (Bager, 1994; Lang, 2006). The members’ perception of the difference between cooperatives and investor-owned firms is erased as the cooperative evolves from being a means for farmers to ensure their independence to becoming an organization with objectives of its own. In such a case, members may find themselves locked into market-dominating cooperatives in a similar way as in investor-owned firms (Ollila et al., 2014). The difference between cooperatives and investor-owned firms in the minds of the farmers shrinks when cooperatives adapt to upstream and downstream markets in the same fashion as investor-owned firms. Being primarily interested in the first stages of the processing of agricultural products, the members care less about the further processing. Members cannot be expected to be interested in collecting information about all the operations of their cooperative. To govern the complex business operations, some cooperatives have to rely on external directors, which might affect

128  Handbook of research on cooperatives and mutuals member control (Kalogeras et al., 2009; Österberg & Nilsson, 2009; Barraud-Didier et al., 2012). Given members’ limited commitment to cooperatives’ upstream and downstream operations, many members are neither capable of nor interested in involving themselves in the governance of their cooperatives (Gaurwitsch & Nilsson, 2010). It is often claimed that the amount of social capital is limited in heterogeneous memberships (Nilsson, 2001; Grashuis & Cook, 2021). The concept of membership heterogeneity is, however, multifaceted (Elliott et al., 2018; Höhler & Kühl, 2018). Heterogeneity as concerns members’ socioeconomic or otherwise factual characteristics may in itself be irrelevant for their social relationships. What is relevant is rather the members’ conceptions of their cooperative’s attributes, mission and strategies, and these variables are not necessarily connected to its members’ factual attributes. Groups of members who are committed to their cooperative will more likely be characterized by social capital (Kalogeras et al., 2009; Iliopoulos & Valentinov, 2018; Apparao et al., 2019). Individual versus Collective Interests Cooperatives with large and heterogeneous memberships and with extensive and complex business operations are likely to face specific agency problems, which in a cooperative context are sometimes labeled VDPR problems (vaguely defined property rights; Cook, 1995). Such problems hamper the members’ willingness and capacity to take part in the governance of cooperatives. One agency problem is termed the follow-up problem (or a control problem), which means that a member is not able and not willing to exert control of the cooperative. A subcategory of this is the motivational problem, which states that a member does not have an incentive to care about the cooperative. Another subcategory is the institutional problem, which means that individuals do not have any incentive to organize a protest movement or conduct any other collective action (Olson, 1965). Third, the information problem implies that individual members have limited possibilities to get information about their cooperatives, especially as the cooperative leadership dominates the information channels. Lastly, the monitoring problem means that members may find it too costly to inform others about their opinions. The common denominator is that the individual member wants to free ride, hoping that somebody else will take action (Nilsson & Svendsen, 2011). The decision-maker problem (or the influence costs problem) means that the leadership has difficulty in knowing the members’ opinions just as the members have difficulty in forwarding their views. Poorly involved members of a large and heterogeneous membership will provide blurred signals to the board of directors. The collective nature of cooperative ownership and control aggravates the agency problems (Hendrikse & Feng, 2013). Poor social capital implies that the individual farmer does not want to be involved in the governance. However, only individuals can undertake the governance tasks, and if the members do not do that somebody else will, most likely the management. Each one understands that a cooperative must be financed and governed but they act as if somebody else will take these responsibilities. The clash between individual and collective interests gives rise to further agency problems. The free-rider problem (or the common-property problem) evolves as the individual member has an interest in reaping personal advantages on behalf of the entire membership. The heterogeneity within a cooperative membership implies, second, a portfolio problem. Not

Social capital and governance of agricultural cooperatives  129 all members benefit equally from all the investments made by the board. Third, the horizon problem appears because members enter and exit the cooperatives continuously, which means that they have different time horizons. Thus, some of the cooperative investments’ payoff time differs from the members’ planned time horizon. Only in the hypothetical case in which all members had exactly the same interests would the portfolio problem and the horizon problem disappear. A cooperative’s chances for survival and success improve thanks to various regulations in laws and statures. The fact that today a large number of cooperatives exist and are strong indicates that cooperatives have generally succeeded in having good regulations. Cooperatives are able to adapt their governance structures as they expand their memberships and business operations. There are ways to keep sufficient social capital within the memberships. Cooperatives have a large number of institutional measures for stimulating social capital within their memberships and reducing the negative consequences of shrinking social capital.

THE “GLUE” OF SOCIAL CAPITAL Social capital “is the ‘gluey stuff’ that binds individuals to groups, groups to organizations, citizens to societies” (Labonte, 1999, p.430). There are two ways to view the role of social capital in relation to cooperatives. The first concerns the role of social capital in the interaction within cooperative memberships and the members’ social and economic environment. Second, social capital affects the performance of cooperative business firms. Cooperatives may generate social capital that is extended to their social environment, and the existence of social capital in the socioeconomic milieu can affect cooperative development. Cooperatives can create social capital, which spreads within the community (Majee & Hoyt, 2010). Similarly, the growth of cooperatives can contribute with economies of scale and income, especially to small farmers and communities. Alternatively, the existence of social capital “ambience” helps in the creation of cooperatives (Jones & Kalmi, 2009). In the absence of social capital, there are poor conditions for the development of cooperatives. Naturally, there is a feedback loop where cooperatives generate social capital, which in turn accumulates in the community, fostering further generation of cooperatives. Social capital affects the performance of cooperative business firms. Social capital has been put forward as the “missing link” that can bind together the members’ interests and the entrepreneurial capabilities of cooperative leadership towards a successful trajectory (Ruben & Hepas, 2012). Specifically, both bridging and bonding social capital are found to play a crucial role in the analysis of farmer cooperatives. Ruben and Hepas (2012) interpret bridging social capital to link cooperative members to others outside the organization. They find that intra-cooperative bonding social capital affects the performance of cooperatives positively. High bridging social capital (links with external groups), on the other hand, was found to decrease the intensity of internal bonding social capital, leading to heterogeneity and weakening the adaptability and performance of the cooperative. The relationship between social capital and governance may be strong. Cooperatives with low bonding social capital exhibit low member participation and engagement in meetings and decision-making, leading eventually to poor business performance. Internal social networks that facilitate joint

130  Handbook of research on cooperatives and mutuals decision-making and access to information for collective action are vital to maintaining delivery commitments with the membership (Reynolds, 1997).

CONCLUSIONS Much research indicates that social capital is essential to the governance of agricultural cooperatives, comprising the interaction between members and various categories of members, between members and elected representatives, between elected representatives in different governmental bodies, and between the board of directors and the professional management. However, there is a need for more knowledge, especially because more and more cooperatives have not only very large and complex business activities but also increasingly sizeable and heterogeneous memberships, which may threaten the social capital in the membership organizations. The question arises as to how different governance models can be combined with the cooperative identity. Insofar as social capital is limited, there is a risk of agency problems in the relations between the members and the various governmental bodies, including the board of directors. There is a need for more empirical studies, preferably about the behavioral and social processes in the context of cooperative decision-making. Such studies could shed light on potential agency problems. Considering the great diversity among cooperatives, part of the research could be conducted as case studies of a few cooperatives, whereby the researchers specify the conditions under which the cooperatives and the members are operating. Questions could include: ● Do elected representatives promote their interests at the detriment of the members? ● Does much social capital in the relations between the elected representatives and certain groups of members mean that favor is given? ● Does social capital in the relationship between the elected representatives and the professional management lead to management domination? ● Do the elected representatives promote the interests of the present members, thereby threatening the future of the cooperative and the future members? ● Is it possible that much social capital within a specific category of members will lead to collusion to get certain interests promoted? ● How do elected representatives make sure they get correct information about the opinions of the members and various member categories? ● How are members informed about the performance of the elected representatives and what can they do in the event of dissatisfaction?

REFERENCES Apparao, D., Garnevska, E., & Shadbolt, N. (2019). Examining commitment, heterogeneity and social capital within the membership base of agricultural co-operatives: a conceptual framework. Journal of Co-operative Organization and Management, 7(1), 42–50. Arcas-Lario, N., Martín-Ugedo, J.F., & Mínuguez-Vera, A. (2014). Farmers’ satisfaction with fresh fruit and vegetable marketing Spanish cooperatives: an explanation from agency theory. International Food and Agribusiness Management Review, 17(1), 127–46. Bager, T. (1994). Isomorphic processes and the transformation of cooperatives. Annals of Public and Cooperative Economics, 65(1): 35–57.

Social capital and governance of agricultural cooperatives  131 Barbalet, J. (2009). A characterization of trust, and its consequences. Theory and Society, 38(4), 367–82. Barbaud-Didier, V., Henninger, M.-C., & El Akremi, A. (2012). The relationship between members’ trust and participation in the governance of cooperatives: the role of organizational commitment. International Food and Agribusiness Management Review, 15(1), 1–24. Barton, D. (1989). Principles. In D. Cobia (ed.), Cooperatives in Agriculture (pp.21–34). Englewood Cliffs, NJ: Prentice-Hall. Bijman, J., Hanisch, M., & Van der Sangen, G., (2014). Shifting control? The changes of internal governance in agricultural co-operatives in the EU. Annals of Public and Cooperative Economics, 85(4), 641–61. Bijman, J., Hendrikse, G.W.J., & Van Oijen, A. (2013). Accommodating two worlds in one organization. Managerial and Decision Economics, 34, 204–17. Blackwell, R.D., Miniard, P.W., & Engel, J.F. (2006). Consumer Behavior. Mason, Ohio: Thomson Business and Economics. Bonus, H. (1986). The cooperative association as a business enterprise: a study in the economics of transaction. Journal of Institutional and Theoretical Economics, 142, 310–39. Borgen, S. O. (2001). Identification as a trust‐generating mechanism in cooperatives. Annals of Public and Cooperative Economics, 72(2), 209–28. Bourdieu, P. (1986). The forms of capital. In J.G. Richardson (ed.), Handbook of Theory and Research for the Sociology of Education (pp.241–58). New York, NY: Greenwood Press. Cechin, A., Bijman, J., Pascucci, S., Zylberszaijn, D., & Omta O., (2013). Drivers of pro-active member participation in agricultural cooperatives: evidence from Brazil. Annals of Public and Cooperative Economics, 84(4), 443–68. Chaddad, F.R., & Iliopoulos, C. (2013). Control rights, governance, and the costs of ownership in agribusiness cooperatives. Agribusiness, 29(1), 3–22. Chiffoleau, Y. (2009). From politics to co-operation: the dynamics of embeddedness in alternative food supply chains. Sociologia Ruralis, 49, 218–35. Coleman, J.S. (1988). Social capital in the creation of human capital. American Journal of Sociology, 94, pp.S95–S120. Cook, M.L. (1995). The future of U.S. agricultural cooperatives: a neo-institutional approach. American Journal of Agricultural Economics, 77, 1153–9. Cook, M.L., & Iliopoulos, C. (2016). Generic solutions to coordination and organizational costs: informing cooperative longevity. Journal on Chain and Network Science, 16(1), 19–27. Cornforth, C. (2004). The governance of cooperatives and mutual associations: a paradox perspective. Annals of Public and Cooperative Economics, 75(1), 11–32. Craig, J.G. (1993), The Nature of Co-operation. Montréal: Black Rose Books. Deng, W., Hendrikse, G.W.J., & Liang, Q. (2021). Internal social capital and the life cycle of agricultural cooperatives. Journal of Evolutionary Economics, 31(1), 301–23. Dunn, J.R. (1988). Basic cooperative principles and their relationship to selected practices. Journal of Agricultural Cooperatives, 3, 83–93. Elliott, M., Elliott, L., & Sluis, E.V.D. (2018). A predictive analytics understanding of cooperative membership heterogeneity and sustainability. Sustainability, 10(6), 2048. Feng, L., Friis, A., & Nilsson, J. (2016). Social capital among members in grain marketing cooperatives of different sizes. Agribusiness, 32(1), 113–26. Fitzgerald, J., & Curtis, K.A. (2012). Partisan discord in the family and political engagement: a comparative behavioral analysis. Journal of Politics, 74, 129–41. Foreman, P., & Whetten, D.A. (2002). Members’ identification with multiple-identity organizations. Organization Science, 13(6), 618–35. Fulton, M., & Giannakas, K. (2007). Agency and leadership in cooperatives: Endogenizing organizational commitment. In K. Karantininis & J. Nilsson (eds), Vertical Markets and Cooperative Hierarchies (pp.93–113). Dordrecht: Springer. Fulton, M., & Giannakas, K. (2020). Corruption in agricultural processing firms: a comparison of cooperatives and investor‐owned firms. Canadian Journal of Agricultural Economics, 68(4), 445–60. Fulton, M., & Hueth, B. (2009). Cooperative conversions, failures and restructurings: an overview. Journal of Cooperatives, 23, i–xi.

132  Handbook of research on cooperatives and mutuals Fulton, M., & Larson, K. (2009). Overconfidence and hubris: the demise of agricultural cooperatives in western Canada. Journal of Rural Cooperation, 37(2), 166–200. Gaurwitsch, S., & Nilsson, J. (2010). Members’ readership of annual reports: a cross-national comparison of supply co-operatives. Journal of Co-operative Studies, 43(1), 5–13. Grashuis, J., & Cook, M.L. (2021). Members of cooperatives: more heterogeneous, less satisfied? International Food and Agribusiness Management Review, 24(5), 813–25. Grootaert, C., & Van Bastelaer, T. (2001). Understanding and Measuring Social Capital: A Multidisciplinary Tool for Practitioners. Washington, DC: The World Bank. Hakelius, K. (1996). Cooperative Values: Farmers’ Cooperatives in the Minds of the Farmers [Doctoral dissertation, Swedish University of Agricultural Sciences]. Hakelius, K. (2018). Understanding the board of Swedish farmer cooperatives: cases focusing on board composition and interaction patterns. Journal of Co-operative Organization and Management, 6(2), 45–52. Hakelius, K., & Nilsson, J. (2020). The logic behind the internal governance of Sweden’s largest agricultural cooperatives. Sustainability, 12(21), 9073. Hakelius, K., Karantininis, K., & Feng, L. (2013). The resilience of the cooperative form: cooperative beehiving. In T. Ehrmann, J. Windsperger, G. Cliquet, & G. Hendrikse (eds), Network Governance: Alliances, Cooperatives and Franchise Chains (pp.127–48). Berlin/Heidelberg: Physica Verlag. Hanisch, M., & Rommel, J.M., (2012). Support for Farmers’ Cooperatives; EU Synthesis and Comparative Analysis Report: Internal Governance. Wageningen, the Netherlands: Wageningen UR. Hansmann, H. (1996). The Ownership of Enterprise. Cambridge, MA: The Belknap Press. Hendrikse, G.W.J., & Bijman, J., (2002). Ownership structure in agrifood chains: the marketing cooperative. American Journal of Agricultural Economics, 84(1), 104–19. Hendrikse, G.W.J. (2005). Contingent control rights in agricultural cooperatives. In T. Theurl and A.C. Meyer (eds), Strategies for Cooperatives (pp.385–94). Maastricht: Shaker Verlag. Hendrikse, G.W.J., & Feng, L. (2013). Interfirm cooperatives. In A. Grandori (ed.), Handbook of Economic Organization: Integrating Economic and Organizational Theory (pp.501–21). Cheltenham, UK: Edward Elgar. Hendrikse, G.W.J., & Veerman, C.P. (2001). Marketing co‐operatives: an incomplete contracting perspective. Journal of Agricultural Economics, 52(1), 53–64. Hind, A.M. (1999). Cooperative life cycle and goals. Journal of Agricultural Economics, 50(3), 536–48. Hirschman, A.O. (1978). Exit, voice, and the state. World Politics, 31(1), 90–107. Hogeland, J.A. (2006). The economic culture of U.S. agricultural cooperatives. Culture and Agriculture, 28(2), 67–79. Hogeland, J.A. (2015). Managing uncertainty and expectations: the strategic response of U.S. agricultural cooperatives to agricultural industrialization. Journal of Cooperative Organization and Management, 3(2): 60–71. Höhler, J., & Kühl, R. (2018). Dimensions of member heterogeneity in cooperatives and their impact on organization: a literature review. Annals of Public and Cooperative Economics, 89(4), 697–712. Holmström, B. (1999). The future of cooperatives: a corporate perspective. Finnish Journal of Business Economics, 48(4), 404–17. Huppé, G.A., & Creech, H. (2012). Developing Social Capital in Networked Governance Initiatives: A Lock-step Approach. Manitoba, Canada: The International Institute for Sustainable Development. Iliopoulos, C., & Valentinov, V. (2018). Member heterogeneity in agricultural cooperatives: a systems-theoretic perspective. Sustainability, 10(4), 1271. Jensen, M.C., & Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305–60. Jones, D.C., & Kalmi, P. (2009). Trust, inequality and the size of the co-operative sector: cross-country evidence. Annals of Public and Cooperative Economics, 80, 165–95. Kalogeras, N., Pennings, J.M., Van Der Lans, I.A., Garcia, P., & Van Dijk, G. (2009). Understanding heterogeneous preferences of cooperative members. Agribusiness, 25(1), 90–111. Karantininis, K., & Zago, A. (2001). Endogenous membership in mixed duopsonies. American Journal of Agricultural Economics, 83(5), 1266–72. Kuhnen, C.M. (2009). Business networks, corporate governance, and contracting in the mutual fund industry. Journal of Finance, 64, 2185–2220.

Social capital and governance of agricultural cooperatives  133 La Due Lake, R., & Huckfeldt, R. (1998). Social capital, social networks, and political participation. Political Psychology, 19, 567–84. Labonte, R. (1999). Social capital and community development: practitioner emptor. Australian and New Zealand Journal of Public Health, 23(4), 430–3. Lamprinakis, L., & Fulton, M.E. (2011). Does acquisition of a cooperative generate profits for the buyer? The Dairyworld case. Agricultural Economics, 42 (Supplement), 89–100. Lang, K.A. (2006). Cognition, agency theory and organizational failure: a Saskatchewan Wheat Pool case study. [MSc thesis, University of Saskatchewan]. Liang, Q., Huang, Z., Lu, H.Y., & Wang, X.X. (2015). Social capital, member participation, and cooperative performance: evidence from China’s Zhejiang. International Food and Agribusiness Management Review, 18(1), 49–78. Majee, W., & Hoyt, A. (2010). Are worker-owned cooperatives the brewing pots for social capital? Community Development, 41, 417–30. Morfi, C., Nilsson, J., & Österberg, H. (2018). Why farmers involve themselves in co-operative district councils. Annals of Public and Cooperative Economics, 89(4), 581–98. Morfi, C., Nilsson, J., Hakelius, K., & Karantininis, K. (2021). Social networks and member participation in cooperative governance. Agribusiness, 37(2), 264–85. Morfi, C., Ollila, P., Nilsson, J., Feng, L., & Karantininis, K. (2015). Motivation behind members’ loyalty to agricultural cooperatives. In J. Windsperger, G. Cliquet, T. Ehrmann, & G. Hendrikse (eds), Interfirm Networks: Franchising, Cooperatives and Strategic Alliances (pp.173–90). Heidelberg: Springer International Publishing AG. Nilsson, J. (1996). The nature of cooperative values and principles: transaction cost theoretical explanations. Annals of Public and Cooperative Economics, 67(4), 633–53. Nilsson, J. (2001). Organisational principles for cooperative firms. Scandinavian Journal of Management, 17(3), 329–56. Nilsson, J., & Lind, L.W. (2015). Institutional changes in the Swedish meat industry. British Food Journal, 117(10), 2501–14. Nilsson, J., & Svendsen, G.T. (2011). Free riding or trust? Why members (do not) monitor their co-operatives. Journal of Rural Cooperation, 39(2), 131–50. Nilsson, J., Svendsen, G.L.H., & Svendsen, G.T. (2012). Are large and complex agricultural cooperatives losing their social capital? Agribusiness, 28(2), 187–204. Ollila, P. (1989). Coordination of supply and demand in the dairy marketing system – with special emphasis on the potential role of farmer cooperatives as coordinating institutions. Journal of Agricultural Science in Finland, 61, 137–321. Ollila, P., Nilsson, J., & Hess, S. (2014). Farmers’ reactions to the internationalisation of cooperatives. Agricultural and Food Science, 23, 291–306. Olson, M. (1965). The Logic of Collective Action. Cambridge, MA: Harvard University Press. Österberg, P. & Nilsson, J. (2009). Members’ perception of their participation in the governance of cooperatives: the key to trust and commitment in agricultural cooperatives. Agribusiness, 25 (2), 181–97. Porter, P.K., & Scully, G.W. (1987). Economic efficiency in cooperatives. The Journal of Law and Economics, 30, 489–512. Putnam, R.D. (1995). Bowling alone: America’s declining social capital. Journal of Democracy, 6, 65–78. Putnam, R.D. (2000). Bowling Alone: The Revival of American Community. New York: Simon & Schuster. Reynolds, B. (1997). Decision-making in Cooperatives with Diverse Member Interests, RBS Research Report 155, United States Department of Agriculture, Rural Business-Cooperative Service. Robison, L., Siles, M. & Schmid, A.A. (2002). Social Capital and Poverty Reduction: Toward a Mature Paradigm. Agricultural Economics Report No 614, East Lansing, MI: Michigan State University. Rohman, A. (2014). The Positive and Negative Social Capital. SSRN: http://​dx​.doi​.org/​10​.2139/​ssrn​ .2304640. Ruben, R., & Heras, J. (2012). Social capital, governance and performance of Ethiopian coffee cooperatives. Annals of Public and Cooperative Economics, 83(4), 463–84. Schrader, L. (1989). Economic justification. In D. Cobia (ed.), Cooperatives in Agriculture (pp.121–36). Englewood Cliffs, NJ: Prentice-Hall.

134  Handbook of research on cooperatives and mutuals Sexton, R. (1986). The formation of cooperatives: a game-theoretic approach with implications for cooperative finance, decision making, and stability. American Journal of Agricultural Economics, 68, 423–33. Sharma, A. (1997). Professional as agent: knowledge asymmetry in agency exchange. The Academy of Management Review, 22(3), 758–98. Staatz, J. (1984). A theoretical perspective on the behavior of farmers’ cooperatives. [PhD Dissertation.] East Lansing, MI: Michigan State University. Valentinov, V., & Iliopoulos, C. (2012). Economic theories of nonprofits and agricultural cooperatives compared: new perspectives for nonprofit scholars. Nonprofit and Voluntary Sector Quarterly, 42(1), 109–26. Van der Krogt, D., Nilsson, J., & Høst, V. (2007). The impact of cooperatives’ risk aversion and equity capital constraints on their inter-firm consolidation and collaboration strategies – with an empirical study of the European dairy industry. Agribusiness, 23(4), 452–72. Van Dijk, G. (1997) Implementing the sixth reason for co-operation: new generation co-operatives in the agribusiness. In J. Nilsson and G. van Dijk (eds), Strategies and Structures in the Agro-food Industries (pp.94–110). Assen: van Gorcum. Williamson, O. (1985). The Economic Institutions of Capitalism. New York, NY: The Free Press. Woolcock, M. (1998). Social capital and economic development: towards a theoretical synthesis and policy framework. Theory and Society, 27, 151–208. Yu, L., & Nilsson, J. (2018). Social capital and the financing performance of farmer cooperatives in Fujian Province, China. Agribusiness, 34, 847–64.

7. Leadership in agricultural cooperatives John L. Park, Diane B. Friend, Matthew T. Manley and Barry L. Boyd1

INTRODUCTION The scope of business activity controlled by agricultural cooperatives is significant. The National Council of Farmer Cooperatives (2021) reports that across the United States, 1.9 million farmers are members of 1,779 agricultural cooperatives. Collectively, these businesses represent $100.1 billion in assets, $7.8 billion in net income, and more than 300,000 jobs. To put this in perspective, an assumed average board size of seven directors suggests that these 1.9 million members place the care of their collective assets, income, and jobs in the hands of roughly 12,000 directors. Thus, less than 1 percent of cooperative members hold power to oversee the use of the cooperative’s assets and protect the value of its investments. Cooperative directors certainly bear a considerable responsibility, yet many directors struggle to develop leadership qualities to enhance their success. Cooperative directors play an important role that is often described by fiduciary duties (primarily, the duties of care, loyalty, and obedience). These duties suggest that it is the director’s responsibility to abide by prescribed standards of behavior that will protect the cooperative (as much as possible) from various threats, whether they are economic, legal, or due to human frailty and poor decisions. Thus, directors are expected to nurture the financial well-being of the cooperative and conduct its business with a mindset that places the needs of the cooperative first. However, some qualities of cooperation lead to unique challenges that may benefit from leadership training.

THE CHALLENGE OF COOPERATIVE OWNERSHIP The user-owner nature of cooperation creates a powerful counter-expectation and desire to place members’ needs above all else. This pressure stems from the dual role of members as both customers and owners. As customers, directors often feel responsible for providing immediate benefits to the members. They might perceive member benefit as the sole rationale for the cooperative’s existence. However, to be successful, cooperative board members must balance the short-run benefit from shared profits with the long-run benefit of the cooperative’s performance and existence. To further illustrate the situation, we might describe the cooperative as having a core of proven business principles (for example, Rochdale Principles, sound business principles), protected by a layer of policy, enveloped by cultural practices and member perceptions that give the business a unique and meaningful place in the market (Figure 7.1). The layers around the core define a necessary division of roles between management and the board of directors, recognizing that there may be a degree of shared responsibility for some specific duties. The 135

136  Handbook of research on cooperatives and mutuals

Figure 7.1

Key cooperative layers

board operates outside the management activities yet oversees its performance, determines its purpose, and sets policies to ensure its continued existence. Management then operates within those bounds to properly use the cooperative’s assets as they execute the board’s will and, by extension, the members’. To demonstrate the need for improved cooperative leadership, consider the example of a cooperative cotton gin in a drought-stricken region. Severe drought could lead to a lost cotton crop, and members suffer. However, no crop would also imply no revenue for the gin. In this situation, the board may be tempted to give in to the misconception that the cooperative exists to benefit members in bad times (a cultural perception) and therefore choose to redeem back stock despite heavy losses at the cooperative (a policy decision), putting some cash in the hands of members. In this case, the board has failed to prevent member perceptions from affecting sound business principles, resulting in the liquidation of cooperative assets without any means of replenishing the lost equity. Solutions to such challenges are not simply a matter of director education. It is not enough to know the workings of the cooperative model or successful business principles. These challenges require directors to be self-aware, to communicate with other directors, and to inspire collaboration. As discussed in subsequent sections, those skills and traits can be viewed through the context of leadership. The challenge of effective board operation is ultimately a director leadership challenge. We cannot address the challenges of board effectiveness without encouraging individual director excellence. We cannot create a following of member loyalty and trust without board effectiveness. Leadership is not a choice. Rather, it simply exists or does not exist. Indeed, the quality of leadership can be the difference between success and failure.

Leadership in agricultural cooperatives  137

LEADERSHIP VERSUS MANAGEMENT Leadership is a complex, multidimensional phenomenon (DePree, 1989). It has been defined as a behavior, a style, a skill, a process, a responsibility, an experience, a function of management, a position of authority, and influencing relationship, a characteristic, and an ability (Northouse, 2016). According to Kellerman (2012), there are more than 1,500 definitions of leadership. There are various views on the relationship between leadership and management. Prentice (1961) defined leadership as “the accomplishment of a goal through the direction of human assistants.” According to Northouse (2016), leadership is a process in which an individual influences followers to achieve a common goal. Miller (2008) defined leadership in the context of non-profit boards as “board actions that have served to move organizations forward so that they can successfully meet challenges.” That wording provides a good working definition for discussing leadership in agricultural cooperatives. The relationship of leadership to management is also a subject of intense debate. Leadership has been described as a subset of management. Mintzberg (1973) proposed that leadership was one of the nine management roles. Other scholars, including Bass (1985), argue that while leadership and management overlap, the two activities are not synonymous. A few scholars, such as Yukl (1989), argue that leadership and management are extreme opposites. They contend that a good leader cannot be a good manager, and a good manager cannot be a good leader. A widely cited article on the difference in management and leadership (Ratcliffe, 2013) concluded that the mission of both leaders and managers is to control and influence other people. Managers were described as exercising influence through formal authority, while leaders use vision, inspiration, and motivation to align followers. In our discussion of leadership in this chapter, we make no effort to separate leadership traits, actions, and behavior from those of management. We also do not attempt to separate the concepts of board leadership from the related concepts of teamwork, board alignment, and effective board decision-making. Instead, we concentrate on the value of leadership theory as a vehicle to improve the effectiveness of boards of directors.

RELEVANT LEADERSHIP THEORIES Our discussion begins by drawing upon concepts, models, and theories that support the idea that leadership is best defined as a multidimensional act of beliefs and behaviors. To discuss the research of leadership in cooperatives, we first discuss four theories of leadership that have particular application to cooperatives: the Behavioral Leadership Approach, Situational Leadership Theory, Relational Leadership Theory, and the Emotional Competency Framework. These theories are formulated to explain, predict, and understand phenomena that synthesize a multidimensional leadership model appropriate for the modern cooperative. Behavioral Leadership Approach The Behavioral Leadership Approach explains what leaders do and how they act. The behavioral approach comprises two general kinds of behavior: task behavior and relationship behavior. According to Northouse (2016), task behaviors facilitate goal accomplishments, whereas relationship behaviors help group members interact. The behavioral approach defines leadership

138  Handbook of research on cooperatives and mutuals by the way leaders act. This approach attempts to determine what good leaders need to do to identify necessary actions and behaviors to be effective leaders. Early behavioral research examined whether leaders should focus on the tasks or the social relations among team members (Likert, 1961). Park et al. (2019) find a strong correlation between social relations and interaction necessary in cooperative leadership. There is considerable agreement among leadership scholars that effective leaders possess multiple skills, suggesting that the behavioral approach is complex. According to Levi (2017), if the behaviors of good leaders cannot be separated from the situation, then leadership theories should combine factors. Situational Leadership Theory For cooperatives, Situational Leadership Theory, widely recognized as one of the most applicable approaches, focuses on leadership at the board level. Developed by Hersey and Blanchard (1993), situational leadership theory links a leader’s behavior to the characteristics of the team (Levi 2017). This theory relies on the premise that different situations demand different leadership abilities and skills. The value of this theory is that it goes beyond looking at a leader’s behavior and prescribes how a leader should behave and adapt. Situational leadership theory is a developmental theory that assumes that an important goal is to develop the whole team’s effectiveness through the influence each director brings to the team (Levi, 2017). The governing board of an organization (a compilation of several leaders that form a team) performs leadership tasks by serving the organization. Collectively, the board of directors governs complex situations by synthesizing information, executing oversight authority, and communicating a strategic vision. By assigning the term “teamwork” to this body of leaders, we can say they are using their influence to affect the quality of their decisions and strategy (Vecchio et al., 2006). Relational Leadership Theory While the concept of relation-oriented behavior has been around since the earliest formal studies of leadership (Stogdill & Coons, 1957), the term “relational leadership” has become better understood in the last decade. Uhl-Bien (2006) suggests that there are two perspectives that define the theory: an entity perspective, which emphasizes the individual’s attributes as they engage with others, and a relational perspective, which views leadership as a process of social construction. The two perspectives can be complimentary (Uhl-Bien, 2006). When arranged in a framework, we conclude, both perspectives provide the broadest possible interpretation for a multidimensional approach to cooperative leadership. Emotional Competence Framework To explain a leader’s specific beliefs, virtues, and character, we look to the Emotional Competence Framework. This framework includes two key dimensions of personal and social competence. According to Goleman (1998), using an emotional intelligence yardstick to measure how well we handle ourselves and each other is increasingly important to lead people. The great divide in competencies resides between the heart and the mind, or more technically between cognition and emotion (Goleman, 1998). By combining thoughts and feelings, cooperative leaders can learn the practical skills of self-awareness, motivation, self-regulation,

Leadership in agricultural cooperatives  139 empathy, and adeptness for relationships. These skills translate into on-the-job capabilities that show optimum and deeper leadership understanding and performance levels. To further solidify a multidimensional approach to leadership study, we must review current literature to connect these theoretical approaches to empirical studies. A review of what has been researched, what findings are asserted, and what conclusions are made helps guide our understanding in building the foundation for a multidimensional framework.

LITERATURE ON LEADERSHIP The bulk of research on leadership in business journals coalesces around the question: “what constitutes a good board?” (Van den Berge & Levrau, 2004). Further, numerous researchers ask: “what competencies are needed to be an effective board member, how are these competencies assessed, and what framework can be applied to improve these competencies?” (Baysinger & Butler, 1985; Casio, 2004; Coulson-Thomas, 1994, 2009; Crossen et al., 2017; Hannah et al., 2011; Kiel & Nicholson, 2003; Pugliese et al., 2015; Seijts et al., 2019; Sturm et al., 2017; Van den Berge & Levrau, 2004). Yet, there is a lack of research specific to cooperative leadership that asks these same questions. Considering the numerous business failures in recent years, many academics have focused on research that addresses character, virtue, ethics, and morality. One such article focused on the character of a leader, describing how “entangling character and competence—that is binding them together through a series of events across time—produces the leaders we seek” (Sturm et al., 2017, p.349). The focus is on virtuous character, which is primarily concerned with leaders’ decisions and the quality of their judgment. On the other hand, leader competencies represent knowledge and skills, such as empathy, influence, and the ability to connect with others, that are necessary to lead (Dragoni et al., 2009; McCall, Lombardo, & Morrison, 1998). The question arises: can competencies be learned, or are they inherent in the beliefs and behavior of the leader? Sturm, Vera, and Crossan (2017) suggest that competence is closer to the ability to perform, whether natural talent or a learned skill, while character arises from a habitual behavior anchored in virtues. Hannah and Avolio (2011) suggest that “a leader’s character is defined not only by what the leader thinks but also by his or her motivation to act” (p.292). Thus, character drives how a leader will use competencies to govern and what strategic track to take. For example, a moral character might drive a leader with a strong competency of empathy and cooperation to make strategic decisions that are viewed as fair and equitable. Within the literature, we find various conceptual approaches focused on individual leaders’ relations to self, others, and their organizations. The prevailing literature in this area uses cross-sectional analyses that suggest multidimensional elements of leadership should be considered (Crossan et al., 2008). Crossan et al. (2017) define a leader’s character as an amalgam of virtues (for example, honesty and integrity) expressed as behavioral manifestations that can be measured through competencies (that is, individual, team, and organizational performance). Further, Crossan et al. state there is an “imperative to elevate the study of character alongside competencies in board governance research” (p.247). They present research-based evidence that supports the idea that leadership involves multiple skills with varying dimensions, including character, self-awareness, good teamwork, communication, problem-solving, and strategic thinking.

140  Handbook of research on cooperatives and mutuals Competency is the ability to perform effectively. It is a scale that is used to measure proficiency. Coulson-Thomas (2009) identifies competencies of board governance and specifies how to measure effective competencies by identifying, categorizing, and prioritizing what is required for board success. Competence and board effectiveness complement the qualities of the individual director, which improve dynamics in the boardroom and strengthen organization performance (Coulson-Thomas, 1994). According to Coulson-Thomas (2009), “beyond a core set of competencies, additional requirements can depend very much upon the situation, circumstances, context” (p.28). Thus, competencies are fixed and fluid simultaneously, supporting the premise that leadership is multidimensional. A subset of leadership research has focused on leadership issues relating to boards of directors. Several disciplines, including economics, business management, and leadership, all face similar challenges in explaining what ingredients are needed in the recipe for a successful board. The optimal criteria of board performance, how tasks are performed, what leadership qualities exist, where skills and abilities come from, and who should be selected are the more salient elements of board leadership research (Coulson-Thomas, 2009; Machold & Farquhar, 2013; Pugliese et al., 2015; Seijts et al., 2019).

A SYNTHESIZED HOLISTIC LEADERSHIP MODEL As a means of synthesizing this diverse body of theories and approaches to leadership, we suggest a conceptual framework of multidimensional leadership competencies. While attempting to synthesize previous theories, we admit that leadership remains an elusive phenomenon of unexplained nuances and character, where interaction becomes an art of influencing others. We believe this framework will advance future research on leadership in agricultural cooperatives. Influence Is Key Influence, as the core of our multidimensional leadership theory, has been highlighted in previous research. Northouse (2016, p.6) asserts: “Without influence, leadership does not exist.” An abundance of skill and ability does not guarantee that a leader will be effective. It is common to find good leaders, yet rarely do we see exceptional leaders who harness the skill of “influence” to move people or change circumstances. For leaders to be effective and successful, they must understand how to use influence to affect change. Without influence over oneself and others, a leader cannot develop their full leadership potential. We suggest that a more effective measure of leadership excellence in organizations should consider influence. Some commonly accepted definitions of influence include 1. The capacity to affect the character, development, or behavior of someone or something, or the effect itself. 2. To affect or change someone or something indirectly but in an important way. You can think of your capacity to influence the world as the best version of you. Your capacity for influence will empower you to develop the talents of others. Building this capacity leads to improved working environments, where coworkers have improved relationships and greater

Leadership in agricultural cooperatives  141 happiness in their jobs. Through properly applied influence, companies and leaders earn the loyalty of those they work with. Each of us has an innate desire to influence our environment and the people around us. We have feelings of self-fulfillment and validation when we influence others. Influence can extend in three levels: yourself, the direct relationships you have with other individuals, and the indirect relationships you have in the world. As we progress through these levels, we exhibit greater leadership excellence to our families, other people, groups, teams, organizations, communities, and, generally speaking, the world around us. The MIM Framework Although the Multidimensional Influence Model (hereafter MIM) was the result of research on the directors of agricultural cooperatives, we believe it is an enlightening framework to help all organizations, including agricultural cooperatives, to address their organizational challenges. We think it is a generalizable framework to handle all the challenges people face as they seek to engage in the world around them. The framework of the MIM is represented in Figure 7.2. It starts with recognizing that your ability to influence the world around you takes place in three domains. Beginning with self-mastery, your influence extends then to direct, one-to-one relationships within small groups, and finally to indirect relationships with people you may not know personally in your community at large. As we developed the MIM, we chose more generalizable forms of words to describe the relevant domains (self, group, and community). However, as we use the MIM for cooperative director training (its original intent), we can easily replace these words with a more familiar application (director, board, and cooperative). Within these three domains, our capacity for influence is founded partly on intrinsic beliefs and partly on our chosen behaviors. By considering influence as having two foundational components (beliefs and behaviors) and three relevant domains (self, group, and community), we have identified six competencies of influential leaders: consciousness, conduct, connected-

Figure 7.2

The multidimensional influence model, with application to cooperatives

142  Handbook of research on cooperatives and mutuals Table 7.1 Domain

Levels of influence in the MIM Foundation

Competency

Belief

Consciousness

Definition

Level 1 Self

The quality or state of being self-aware, managing one’s emotions, and feeling self-assured.

Self

Behavior

Conduct

A mode or standard of personal behavior based on moral principles. The act, manner, or process of carrying on.

Level 2 Group

Belief

Connectedness

A feeling of belonging to or affinity with a particular person or group.

Group

Behavior

Interaction

The manner of communicating and reacting to others (both verbally and non-verbally).

Level 3 Community

Belief

Representation

The fact of one person standing for another to have the rights and obligations of the person or group represented.

Community

Behavior

Cooperation

The act of individuals working together to achieve a defined and common purpose.

ness, interaction, representation, and cooperation. Finally, we recognize that more outstanding leadership is experienced as it is shared, meaning there is a progression of levels. This model has been grounded through many hours of interviews with cooperative directors and managers by Friend (2020). For convenience, we refer to each domain of influence and its respective foundational components and competencies as levels. Thus, when we refer to Level 1 Influence, we describe the combined effects of conscious conduct. Similarly, Level 2 Influence describes connected interaction, and Level 3 Influence describes represented cooperation. A summary of the MIM is found in Table 7.1 with definitions of each competency. A brief overview of each level of influence follows. Level 1 Influence Level 1 Influence can be described as the influence you have over yourself. It is defined as conscious conduct. Your desire to have an important impact on the world begins within yourself. Your ability to influence the world relies on your own awareness of your emotions, strengths, and limitations. Your feelings of self-assurance strengthen it. Your standards for behavior and the manner or processes you choose to carry on from day to day are critical considerations for the value your influence may have in the end. Level 2 Influence Level 2 Influence can be described as the influence you have on an important group to which you belong, or more generally the people with whom you directly interact. It is defined as connected interaction. Your ability to extend your influence to others in these small group settings is dependent on the connections and feelings of affinity you develop with the group or with particular people. It is impacted both positively and negatively by the ways in which you choose to communicate with others, including the non-verbal cues you may use (such as a well-timed eye-roll).

Leadership in agricultural cooperatives  143 Level 3 Influence Level 3 Influence can be described as the influence you have over the larger organizations to which you belong, including the community in which you live or the cooperative to which you belong. It is defined as represented cooperation. Whether you call it citizenship or membership, it represents the influence you exert on multiple people, including people you do not interact with directly and even those you may never meet. To successfully influence your community, you must consider the rights and obligations of all. You must find ways to work together and identify common bonds and goals. Plato said: “If you want to go fast, go alone. If you want to go far, go together.” Influence, as it is described here, will produce remarkable results. Our definition of influence requires service to others. This type of influence will empower the development of others and improve working relationships. It will bring greater joy to work and build loyalty in your cooperative. Sometimes our natural weaknesses in the competencies result in the expression of a counterfeit influence that relies upon coercion, intimidation, and exclusion. Unlike influence, counterfeit influence will erode loyalty in the organization. When individuals lack one of the six competencies, they tend to fill the void with less desirable outcomes. For example, a leader who is not self-aware of emotions (Level 1) may yell at employees to deal with their anger. The board member who is not connected to other board members (Level 2) may withhold comments in meetings only to share gossip at a coffee shop. Board members who do not represent certain members (Level 3) may enact policies that discriminate and destroy loyalty.

APPLICATION OF LEADERSHIP THEORY TO AGRICULTURAL COOPERATIVES Agricultural cooperatives possess a distinctive business structure yet stand shoulder to shoulder with other organizations in how they are led. Leadership flows from the board of directors to the management they hire. The idea that farmers and ranchers lead the largest businesses in the world is arguably a perplexing subject that causes leadership experts and scholars to frequently ponder whether cooperative members join the board of directors equipped with leadership expertise to govern effectively. They wonder: do cooperative board members possess the skills and abilities needed to meet the board and organizational challenges? While much of what has been discussed has general applicability to business leadership, agricultural cooperatives face some unique challenges due to their structure. The hallmark of the cooperative structure is user-ownership, user-control, and user-benefit, which presents some challenges for directors and managers. Consider the following: 1. Members of the cooperative are all farmers who patronize the cooperative as customers. 2. Members are all managers of farm operations. 3. Members participate in supply chain activities that are not the same but adjacent to the cooperative. 4. Directors are elected from among the members. The resulting situation is a board of directors with multiple perspectives. Park et al. (2019) elaborate further on the ramifications. As a result of the situation, directors may become inappropriately involved in managerial decisions. Additionally, they may not fully understand

144  Handbook of research on cooperatives and mutuals the relevant business model given the cooperative’s position in the supply chain. They may not fully comprehend important competitive considerations. Proper training of directors, then, must go beyond sharing of knowledge to also include the establishment of a proper mindset. When boards lose sight of their roles and responsibilities as leaders, the cooperative suffers, and ultimately the members/owners are left void of leadership. In 2000, critical structural changes began to occur among agricultural cooperatives in the US and Canada (Fulton & Hueth, 2009). Many were forced to file for bankruptcy or convert cooperatives to investor-owned firms to remain financially solvent. Fulton and Hueth (2009) suggested in their case study of several cooperative conversions and restructurings that most failures were due to poor leadership. This seminal literature helps to articulate the critical role and importance of sound leadership. The conceptual framework developed by Fulton and Hueth (2009) draws from the “economics of cooperative literature and includes property rights issues, life cycle theories, agency problems, market power, free-rider issues, and horizon problems” (p.2). The study focused on external and internal issues, leaving a void in the discussion regarding leaders’ actions, behaviors, or conduct. Were the directors also competent leaders who could navigate the struggles and challenges they faced? If not, what are the needed leadership competencies that would have helped them succeed? Our observation is that boards composed of directors who lack a more enlightened mindset tend to exhibit problems with groupthink (a situation where group consensus overrides individual thought and rationale). Further, the board can result in principal-agent problems, post-decision rationalization, the halo effect, and other forms of cognitive bias. Many leadership theories attempt to address such situations. For example, Park and Siebert (2010, p.75) studied the “secretive and authoritarian manner” in which the general manager and board president ran the Pedernales Electric Cooperative in Texas. The board did not protect the cooperative values and eventually caused the members to lodge a legal battle over their membership rights.

IMPLICATIONS OF THE MIM TO BOARDS OF AGRICULTURAL COOPERATIVES The MIM and other leadership models both reinforce traditional board education approaches and provide a new lens for additional insight. Most traditional education programs for cooperative boards of directors include information on the board member’s roles and responsibilities; an overview of the cooperative financial model; an overview of the cooperative’s competitive situation; effective board meeting operation and decision-making; strategic planning; balance sheet management; profit distribution; and equity management (specific educational agendas are available at various state cooperative councils and university cooperative centers). MIM provides additional insight into these subjects by allowing individual directors to build internal cognitive depth that will enhance their ability to take traditional knowledge and apply it in a more purposeful, thoughtful, and deliberate way. By bridging the traditional cooperative education programs with MIM, we are able to increase a leader’s ability to effectively produce desired outcomes. The MIM also becomes the means for director assessment and customization of training.

Leadership in agricultural cooperatives  145 While a MIM-based board education program is not dissimilar to traditional approaches, it may present additional advantages. First, the concept of leadership development may be more palatable to cooperative board members when presented as the concept of building director competencies. That could encourage greater participation. Second, the MIM could be a fresh approach for directors who have completed traditional director training programs but wish to expand their ability to use their skills and knowledge more effectively. Finally, while many existing advanced director education programs focus on finance and strategic planning, the MIM approach suggests a need for more in-depth education on self-awareness, and interpersonal and communication skills. It joins personal development programs that focus on personality (for example, Strength Finders, Meyers-Briggs Type Indicator), and behavioral (for example, DISC, Predictive Index) assessment. The MIM provides a framework for assessment that includes a multidimensional approach incorporating personality, behavior, and character.

OPPORTUNITIES FOR ADDITIONAL RESEARCH Significant progress has been made in understanding cooperative financial performance because it can be tested using cross-sectional time-series data from a sample of cooperatives. While empirical research on leadership models is inherently more challenging, there is a critical need for qualitative research in the boardroom that correlates the relationship of leadership behaviors to financial performance. Related to that research would be investigation of boardroom dynamics of individual director competencies. Such research could answer how individual competencies are reflected in board actions (or inactions) that influence different performance outcomes. Further, the research could shed light on collective board competency deficiencies that lead to problems such as groupthink, indecision, and failure to represent members. As cooperatives expand in scale and sophistication and incorporate the next generation of leaders, there will be increased pressure to develop research-based leadership training.

NOTE 1.

The authors wish to thank Dr. Phil Kenkel for helpful comments and suggestions.

REFERENCES Bass, B.M. (1985). Leadership and Performance Beyond Expectations. New York: The Free Press. Baysinger, B., & Butler, H. (1985). Corporate governance and the Board of Directors: performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1(1), 101–24. Cascio, W. (2004). Board governance: a social systems perspective. Academy of Management, 18. doi: 10.5465/ame.2004.12689560. Coulson-Thomas, C. (1994). Developing directors: building an effective boardroom team. Journal of European Industrial Training, 18(6), 29–52. Coulson-Thomas, C. (2009). Competencies of an effective director. Industrial and Commercial Training, 41(1), 27–35. Crossan, M., Byrne, A., Seijts, G., Reno, M., Monzani, L., & Gandz, J. (2017). Toward a framework of leader character in organizations. Journal of Management Studies, 54(7). doi: 10.1111/journs.12254.

146  Handbook of research on cooperatives and mutuals Crossan, M., Vera, D., & Nanjad, L. (2008). Transcendent leadership: strategic leadership in dynamic environments. Leadership Quarterly, 19, 569–81. DePree, M. (1989). Leadership Is an Art. New York: Dell Publishing. Dragoni, L., Tesluk, P.E., Russell, J.E., & Oh, I. S. (2009). Understanding managerial development: Integrating developmental assignments, learning orientation, and access to developmental opportunities in predicting managerial competencies. Academy of Management Journal, 52(4), 731–43. Friend, D., (2020). Texas agricultural cooperatives: a study in governing competencies. Dissertation, Texas A&M University, College Station, Texas. Fulton, M., & Hueth, B. (2009). Cooperatives, conversions, failures and restructurings: an overview. Journal of Cooperatives, 23, 1–11. Goleman, D. (1998). Working with Emotional Intelligence. New York: Bantam Books. Hannah, S., & Avolio, B. (2011). Leadership character, ethos, and virtue: individual and collective considerations. Leadership Quarterly, 11, 989–94. Hannah, S.T., Avolio, B.J., & Walumbwa, F.O. (2011). Relationships between authentic leadership, moral courage, and ethical and pro-social behaviors. Business Ethics Quarterly, 21(4), 555–78. Hersey, P., & Blanchard, K. (1993). Management of Organizational Behavior: Utilizing Human Resources. Englewood Cliffs, NJ: Prentice Hall. Kellerman, B. (2012). The End of Leadership. New York: Harper Collins. Kiel, G., & Nicholson, G. (2003). Board composition and corporate performance: how the Australian experience informs contrasting theories of corporate governance. Corporate Governance, 11(3), 189–202. Levi, D. (2017). Group Dynamics for Teams. Thousand Oaks, CA: Sage. Likert, R. (1961). New Patterns in Management. New York: Harper. Machold, S., & Farquhar, S. (2013). Board task evolution: a longitudinal field study in the UK. Corporate Governance: An International Review, 21(2), 147–64. McCall, W., Lombardi, M., & Morrison, A. (1998). The Lessons of Experience: How Successful Executives Develop on the Job. New York: Free Press. Mintzberg, H. (1973). The Nature of Managerial Work. New York: Harper & Row. Miller, B.S. (2008). Developing leadership on boards of directors. Journal for Non-Profit Management, 12(1), 2–12. National Council of Farmer Cooperatives. (2021) “About National Council of Farmer Cooperatives.” http://​ncfc​.org/​about​-ncfc/​ accessed December 2021. Northouse, P. (2016). Leadership: Theory and Practice. Thousand Oaks, CA: Sage Publishing. Park, J.L., Friend, D., McKee, G., & Manley, M.T. (2019). A framework for training and assessment of the 21st century cooperative. Western Economics Forum, 17(2), 5–15. Park, J.L., & Siebert, J. (2010). Rebuilding cooperative leadership: the case of Pedernales electric cooperative. Journal of Cooperatives, 24, 63–79. Prentice, W.C.H. (1961). Understanding leadership. Harvard Business Review, reprint 2004, 82(1), 102–9. Pugliese, A., Nicholson, G., & Bezemer, P. (2015). An observational analysis of the impact of board dynamics and directors’ participation on perceived board effectiveness. British Journal of Management, 26(1), 1–25. Ratcliffe, R. (2013). What’s the difference between leadership and management? The Guardian, 29. Roberts, J., McNulty, T., & Stiles, P. (2005). Beyond agency conceptions of the work of the non executive director: creating accountability in the boardroom. British Journal of Management, 16, 5–26. Seijts, G., Byrne, A., Crossan, M., & Gandz, J. (2019). Leader character in board governance. Journal of Management and Governance, 23(1), 227–58. Stogdill, R.M. (1974). Handbook of Leadership: A Survey of Theory and Research. New York: Free Press. Sturm, R.E., Vera, D., & Crossan, M. (2017). The entanglement of leader character and leader competence and its impact on performance. The Leadership Quarterly, 28(3), 349–66. Uhl-Bien, M. (2006). Relational leadership theory: exploring the social processes of leadership and organizing. Leadership Quarterly, 17(6), 654–76. Van den Berge, L.A. & Levrau, A. (2004). Evaluating boards of directors: what constitutes a good corporate board? Corporate Governance, 12(4), 461–77.

Leadership in agricultural cooperatives  147 Vecchio, R., Bullis, R., & Brazil, D. (2006). The utility of situational leadership theory: a replication in a military setting. Small Group Leadership, 37, 407–24. Yukl, G., 1989. Managerial leadership: a review of theory and research. Journal of Management, 15(2), 251–90.

8. Measuring cooperative performance using organizational effectiveness and member participation Sanjib Bhuyan and Kostas Karantininis1

INTRODUCTION The raison d’être of any cooperative is to serve its members, who form and patronize the cooperative expecting it to “meet their common economic, social and cultural needs and aspirations” (ICA, 2015). Cooperative objectives are often multidimensional and must be clearly defined, measured, and communicated to the cooperative membership. Members will engage and commit to their cooperative if they are “rewarded” by its performance. Higher member participation contributes to further cooperative performance. Cooperative performance can be conceptualized as a spiral where higher performance inspires member participation, contributing to cooperative performance. Poor performance discourages member participation, which further inhibits performance, leading to a downward spiral and eventual demise. Effective cooperatives are riding an upward spiral, where satisfied members are committed to better performance. This chapter proposes that organizational performance is the “currency,” à la Benos et al. (2018), with which members can be “rewarded” and consequently inspired to participate in the cooperative. Further, we develop a conceptual model of the links and feedback between organizational effectiveness and member participation. There is no cooperative without member participation (Gray & Kraenzle, 1998). Similarly, member commitment to their cooperative is an essential factor determining their participation (Barbaud-Didier et al., 2012). However, most of the existing literature on measuring cooperative performance focuses on economic and financial measures—specifically, the criteria found under either the System Resource approach or the Goal Attainment approach of measuring organizational effectiveness in a cooperative. There are a relatively limited number of studies that consider member satisfaction. Even less measure member happiness, morale, and trust as measures of cooperative performance. However, there are cooperative performance studies that use member satisfaction, morale, or trust as factors that influence a cooperative’s economic or financial performance (Sayers et al., 1996; Hansen et al., 2002; Nilsson et al., 2009; Hernández-Espallardo et al., 2013; Arcas-Lario et al., 2014). Fulton and Adamowicz (1993) have shown that (among other factors discussed in their paper) the survival of any cooperative ultimately depends on the commitment of its members. Bhuyan (2007) concluded that one of the keys to the success of member-owned organizations, such as cooperatives, is the active participation of its members, without which such organizations are very likely to fail. Therefore, effective managers and directors try to understand their members’ characteristics and values, members’ goals and needs, and member satisfaction to improve member participation (Bhuyan & Leistritz, 2001). 148

Measuring cooperative performance  149 Like any other business organization, the “performance” of a cooperative business coincides with efficiency: specifically, technical efficiency (the ability to generate maximum output from a given set of inputs), allocative efficiency (choosing the best input combination for a given output), or the combination of the two referred to as economic efficiency (Porter & Skully, 1987; Sexton & Iskow, 1993; Soboh et al., 2018; Skevas & Grashuis, 2020; Franken & Cook, 2015). Other common business indicators used for performance are sales growth, profitability, cost, and similar; there are also financial indicators, such as Return on Investment (ROI), Return on Equity (ROE), Debt/Asset ratios, or earnings before interest, taxes, depreciation, and amortization (EBITDA), and similar (Porter & Scully, 1987; Arcas et al., 2011; Benos et al., 2018). However, the performance of a cooperative concerning its members is usually captured with measures that refer to members’ income, product prices, and similar (Grashuis & Se, 2019). Researchers in economics and finance have used economic and financial numerical metrics to measure the performance of cooperatives (USDA, 2006, 2007; Arcas et al., 2011). With these economic or financial measures, we measure whether the firm in question has or was able to reach certain economic or financial benchmarks set by the financial sector or the industry. Similarly, measures of members’ performance capture the economic and financial performance of the members’ business or the market where the cooperative operates. However, the measures do not represent how the organization worked internally and externally to “perform.” Instead, the measures look just at the results and not the processes to achieve those results. Thus, the economic and financial measures of performance are limited and ignore the non-economic or non-financial aspects of the business organization, such as employee commitment or member participation in a member-owned business, which are equally important for the organization’s success. Expanding the concept of performance measurements of business organizations beyond economic and financial performance measures brings us to the concept of organizational effectiveness, defined as “the efficiency with which an association can meet its objectives” (Pedraza, 2014, p.1). Organizational effectiveness is an efficiency measure at its core because it involves achieving the best outcome with minimum resources. Cooperative efficiency is a well-researched concept, and there exist various extensive reviews (Porter & Scully, 1987; Sexton & Iskow, 1993; Soboh et al., 2018; Grashuis & Ye, 2019; Skevas & Grashuis, 2020). Research also seeks to extend cooperative performance beyond financial indicators (Franken & Cook, 2015). However, a comprehensive concept of cooperative performance is still missing. This chapter looks beyond traditional economic and financial indices to measure cooperative performance using a broader perspective: organizational effectiveness. The novelty of organizational effectiveness lies in expanding the “outcome” to include economic or financial indicators as well as a comprehensive set of cooperative objectives, including member satisfaction. Although organizational effectiveness is arguably a very ambitious measure, it has been used in the business literature, while its use in cooperative organizations is still lacking. As we discuss in detail in the next section, the measurement of organizational effectiveness takes a holistic approach to evaluate an organization’s performance. The chapter’s main objective is to present the concept of organizational effectiveness and its application to cooperative organizations. Second, we present a selective review of the cooperative and non-cooperative literature that focuses on connecting member participation to the organizational effectiveness of cooperatives. However, no claim is made that the review

150  Handbook of research on cooperatives and mutuals and discussions are exhaustive, and thus we leave readers the opportunity to further explore organizational effectiveness in cooperatives. Along the way we also discuss member commitment and motivation for participation, key elements in any cooperative and membership organization.

IMPORTANCE OF ORGANIZATIONAL EFFECTIVENESS IN COOPERATIVES In organizational behavior literature, the conceptualization and measurement of organizational effectiveness dates back to the 1960s (Yuchtman & Seashore, 1967; Kanter & Brinkerhoff, 1981; Matthews, 2011). At its core, organizational effectiveness examines how efficiently an organization achieves its goals. As we explain below, these goals are not just economic and financial goals, such as profit or ROI (return on investment), but also non-economic goals, such as satisfaction and trust among organization members. Organizational effectiveness goes beyond the traditional enterprise performance measures, such as financial or economic performance. It provides a holistic look at an organization’s performance by considering its economic, financial, and non-economic goals. Organizational effectiveness is essentially a continuous or ongoing process in every organization to be more effective in what it does. A multitude of criteria could measure organizational effectiveness, and therefore there is no consensus in the literature on a single definition or how to measure it. An organization may consider itself effective when it achieves its desired goals (for example, profitability, employee satisfaction, high graduation rates, higher production rate, and so on) with minimal waste of resources (for example, time, money, human resources, and so on). Thus, the meaning of organizational effectiveness may vary from organization to organization. Nonetheless, there has been a general consensus among researchers in the organizational behavior domain that there are five main approaches or frameworks to view or measure organizational effectiveness (Schermerhorn et al., 2004): 1. the System Resource Approach, which defines organizational effectiveness as the ability of an organization to acquire the necessary resources to ensure its viability (for example, ability of a farmer cooperative to raise equity from members to establish and operate their cooperative); 2. the Goal Attainment Approach, which measures organizational effectiveness as the degree to which an organization has achieved its goals, which are typically economic or financial (for example, garnering higher prices for members’ products or lowering cost of members’ farm operations; increasing market share, profit, or ROI, and so on); 3. the Strategic Constituency Approach, which focuses on assessing how well an organization is able to satisfy all of its strategic constituencies in its value chain (for example, a food processing cooperative needs to be able to satisfy the needs of its consumers and vendors while also satisfying its members’ needs); 4. the Internal Process Approach, which measures organizational effectiveness in terms of an organization’s ability to offer a harmonious and efficient internal environment (for example, building trust among members, improving shared governance between employees and management, improving employee morale, and so on); and

Measuring cooperative performance  151 5. the Competing Values Approach, which integrates all the above approaches of measuring organizational effectiveness (OE) and measures the changes of those effectiveness criteria over time (for example, measuring profitability, member participation, or member satisfaction over time). Table 8.1 summarizes these five principal approaches of measuring organizational effectiveness.2 Table 8.1

Principal approaches to measure organizational effectiveness

Approaches/framework

Effectiveness defined

System Resource

Ability to gather scarce resources from environment

Effectiveness Criteria Resource acquisition

Goal Attainment

Goal achievement

Productivity, efficiency

Strategic Constituency

Satisfaction of all constituencies, both internally and

Constituents’ satisfaction

externally Internal Process

Harmonious workplace environment

Happiness, morale, trust

Competing Values

Integration of all the above definitions of effectiveness

Incorporation of all the above criteria

Source: Summarized from Schermerhorn, et al., 2004.

System Resource Approach All organizations—large or small, for-profit or nonprofit—need resources to operate and succeed. For farmer cooperatives, this could be the equity needed to establish a cooperative, the capital needed to operate or expand the cooperative, or the cooperative’s ability to source the agricultural raw materials (for example, grain, cattle, milk) it needs to function. The resource needs for different organizations will be different, and organizations must be able to garner the necessary resources in a timely and cost-effective manner to continue to operate. The System Resource framework of measuring organizational effectiveness thus proposes that for an organization to be successful, it must be effective at exploiting its environment to acquire necessary resources (Yuchtman & Seashore 1967; Russo & Fouts, 1997; Daft, 2010; Matthews, 2011). Cooperatives and other membership organizations need members to form and continue operating because members are also investors. Cooperatives, both agricultural and non-agricultural, in the United States rely on members, grants from foundations and government, and loans to raise the capital they need to form and to operate (Bhuyan, 2018; Pokharel et al., 2019; Royer & McKee, 2020). Unlike investor-owned firms (IOFs), the main goal of cooperatives is not making a profit. Hence, cooperative organizations face major hurdles in attracting investments (Biswas 2015) and attracting experienced managers who may expect profit sharing or similar rewards, common in IOFs. Nonetheless, there are examples where cooperatives are thriving as leaders in their markets (for example, Ocean Spray (cranberries) in the US, Arla Foods (dairy) in Denmark and Sweden, Danish Crown (meat) in Denmark, Fonterra (dairy) in New Zealand). These cooperative organizations have been very effective by acquiring resources from their environment and deploying them efficiently.

152  Handbook of research on cooperatives and mutuals Goal Attainment Approach The Goal Attainment approach considers an organization to be effective if it can achieve its goals, or based on how well it achieves its goals (Price 1968). Literature using this approach typically focuses on how well the organization has achieved its financial or similar goals (for example, profitability). Liket and Mass (2013) argue that financial metrics, such as profitability, are not appropriate for nonprofit organizations (NPO) as they are generally not profit-oriented. Although the authors do not discuss cooperatives explicitly, their argument could be applied to measure the organizational effectiveness of cooperatives. For example, in addition to increasing profits (or return to members), cooperatives may have other goals such as increasing membership, increasing member participation, improving member education, providing more low-cost or free services to their members, and so on. Although it may appear tautological, a careful application of this approach may prove useful. Using this approach, one must evaluate two questions: How clear is the specification of the goals? How well are they communicated and comprehended by their members? Also, the Goal Attainment framework is often difficult to consider in organizations with numerous concurrent goals that may conflict with each other (Eydi, 2015). However, there is evidence that cooperatives can reconcile divergent members’ preferences (Iliopoulos & Valentinov, 2017) and goals (Franken & Cook, 2015). Strategic Constituencies Approach The Strategic Constituencies framework focuses on examining the satisfaction of an organization’s stakeholders or constituencies, both external and internal. These constituencies may include their employees, customers, business entities in the organization’s supply chain, government, and so on. Each constituency of an organization will have its own goals and strategies, and therefore, satisfying an organization’s various constituencies is a challenging task for the organization. The organizational effectiveness of an organization thus depends on how well the organization can satisfy its diverse constituent groups to ensure the survival and success of the organization. This approach grew out of work by Connolly et al. (1980). Organizational effectiveness under this framework refers to the minimal satisfaction of all the strategic constituencies of the organization (Schermerhorn et al., 2004); higher levels of constituents’ satisfaction, thus, will translate into higher organizational efficiency of the organization. Cooperative organizations also have multiple constituencies with often competing goals (for example, an agricultural producer cooperative’s members will be happy to receive higher prices for their products). Still, the cooperative must sell that product at a competitive price to downstream buyers, for example. Bhuyan (2018) found cooperatives in the northeastern United States whose members were satisfied with their ability to provide input in their cooperative management were satisfied overall with their cooperatives, implying that they were organizationally effective. Although existing empirical studies do not use member satisfaction as a metric of cooperative performance (that is, to measure organizational effectiveness), some cooperative performance studies do consider member satisfaction as a factor determining cooperative performance (Sayers et al., 1996; Hansen et al., 2002; Nilsson et al., 2009; Hernández-Espallardo et al., 2013; Arcas-Lario et al., 2014). Unlike in IOFs, member participation is core to cooperatives’ existence, and members need to be satisfied if they are

Measuring cooperative performance  153 to participate. Therefore, it is important to consider satisfaction in the overall organizational effectiveness. Internal Process Approach The Internal Process framework emphasizes how well an organization can offer a harmonious and efficient internal environment (Chelladurai, 1987). This approach considers people involved in the organization (such as members, employees, management) as an integral part of the organization. It places a higher value on everyone creating a harmonious work environment to work together toward success. Such a work environment is also expected to create high morale among the people in the organization. The relationships between the people in the organization must be based on trust and honesty to create a harmonious work environment. According to Andrews (2010), a high trust environment creates positive intra-organizational relationships, that is, social capital, in an organization, reducing organizational bureaucracy, reducing employee turnover, increasing organizational commitment, and leading to better organizational performance. Andrews’ arguments are equally applicable to member-owned organizations such as cooperatives.3 Trust among members of a cooperative or between members and the cooperative board is essential for cooperative survival and success (Hansen et al., 2002; Barraud-Didlier et al., 2012). If members do not trust each other or members do not trust their leadership, then management inefficiencies are created within the organization, which can adversely impact the profitability of the cooperative (Bhuyan, 2007). Although employee (non-member) relations and employee satisfaction do not get much attention in cooperative literature, employees are an integral part of any organization, including cooperatives. Thus, an effort to create a harmonious work environment in the organization should include employees (Basterretxea et al., 2019; Ollé-Espluga & Bartoll, 2019). Cooperative leadership must pay attention to all the people in the organization, including employees who are not members of the cooperative organization. Competing Values Approach As mentioned earlier, there is no single, unified, or even unanimous measure of organizational effectiveness. Not surprisingly, the Competing Value Approach attempts to integrate competing views or approaches on examining organizational effectiveness. According to Balduck and Buelens (2008), this framework was originally proposed by Quinn and Rohrbaurgh (1983) to address disagreements and competing viewpoints about what constitutes organizational effectiveness and how to measure it. According to this approach, organizations can measure organizational effectiveness in different ways. Further, the process of measuring is not static, that is, measurements change with the changing need of the organization. Rojas (2000) compares various approaches to measure organizational effectiveness and concludes that the Competing Value Approach is the most comprehensive approach used across various sectors and countries globally. As mentioned earlier, the bulk of the existing literature on assessing cooperative performance focuses on cooperatives’ financial performance. At the same time, only a limited number of researchers have looked beyond the commonly used financial or economic measures to examine cooperative performance or, more broadly speaking, the organizational

154  Handbook of research on cooperatives and mutuals effectiveness of cooperatives (for example, Bhuyan, 2007; Haruni and Mahmood, 2012; Zivkovic et al., 2015). While Zivkovic et al. examined how the relationship between managers and the cooperative board of directors affects cooperatives’ performance, Haruni and Mahmood explored how group cohesiveness related to cooperative performance, and Bhuyan analyzed how members’ attitude toward their cooperative impacted their participation in their cooperative. Present-day cooperatives face many challenges to succeed, such as governance issues, finance, marketing issues, communication issues, strategic planning issues, and regulatory issues, among others (Gray et al. 2001; Bhuyan, 2018). In cooperative literature, one can identify several conflicts of interest in cooperatives: 1. the conflict of size—as cooperatives grow and gain market position, they will extract surplus from the other side of the market, for example, from consumers or sellers of inputs (Helmberger & Hoos, 1962; Sexton & Iskow, 1993); 2. conflict of scope—a lack of clarity as to whose interests cooperatives serve (Schroeder, 1992; Hoang et al., 2021). As cooperatives grow in size and often in scope, governance and member participation become more complex, and agency problems arise; 3. agency problems—among heterogeneous members and between members and cooperative leadership (Porter & Scully, 1987; Hakelius et al., 2013; Feng et al., 2016; Fernando et al., 2021; Deng et al., 2021); 4. the horizon issue, due to the differences in the horizon for members and the horizon for cooperatives; members are hence reluctant to leave retained earnings within the cooperative or make further long-term investments (Giannakas et al., 2016); 5. the lack of transferability for cooperative equity, or portfolio issues (Caves & Petersen, 1986; Petruchenya, 2018); 6. free-riding, a common phenomenon in cooperative organizations as in most collective actions (Olson, 1965; Cook, 1995). Many challenges are unique to cooperatives, making it harder to fathom why performance is measured from only an economic or financial perspective. In that context, the five organizational effectiveness frameworks provide a more holistic approach to measuring cooperative performance.

COMMITMENT AND PARTICIPATION Members can express their commitment by participating in their cooperatives in various ways: through patronage, governance, and (or) by promoting their cooperative and acting as a recruiter of new members (Gray & Kraenzle, 1998). There exist cooperative members who may fail in any of these three manifestations of commitment. Still, not all members can fail in all the three types of participation, because the cooperative will cease to exist if they do. There is a hierarchy in commitment level associated with the three types of participation mentioned above. First, it is not uncommon that some members may not patronize their cooperative consistently, either by quitting the cooperative altogether or by participating infrequently. Patronage, of course, depends very much on the cooperative constitution and bylaws and the enforceability of contracts (for example, how well supply agreements can be enforced by the cooperative). Besides strictly business reasons, such as price and profit, there can be

Measuring cooperative performance  155 other reasons behind inconsistent cooperative behavior that are often related to trust and ideology (Morfi et al., 2014). Participation in governance takes a higher level of commitment since it involves time, effort, and responsibility. Age, trust, and experience are key factors in member commitment (Österberg et al., 2000). In their study examining the relationship between cooperative members’ trust and their participation in cooperative governance, Barraud-Didlier et al. (2012) found a positive and statistically significant link between trust and commitment, confirming what others have found in non-cooperative organizations (Kramer, 2009; Morgan & Hunt, 1994; Grashuis & Cook, 2021). Finally, the behavior of actively praising their own cooperative and energetically recruiting other members takes a different type of commitment. Defining commitment in terms of patronage, Fulton (1999) states that member commitment is their preference to “patronize a cooperative even when the cooperative’s price or service is not as good as that provided by an IOF” (p.423). Others have expressed a similar view on the meaning of member commitment (Jussila et al., 2012). Such definition of commitment may seem strange in the context of cooperative members given our typical understanding of the behavior of an economic agent (a cooperative member) to maximize his/her utility through profit maximization or cost minimization because such an agent would not continue to patronize a cooperative “even when the cooperative’s price or service is not as good as that provided by the IOF” (Fulton 1999). However, commitment may differ for cooperative members, for two reasons. First, cooperative members optimize over the long run. Therefore, they are willing to accept some temporary losses if the overall expected benefit is positive. Second, cooperative members may have economic and non-economic objectives, including social objectives. Both may explain why members may continue to patronize their cooperatives, at least in the short run, despite not benefiting economically (Akerlof & Kranton, 2011; Jusila et al., 2012; Jones et al., 2016). Members may express their commitment by participating in their cooperative’s governance, including being elected as a representative to the cooperative’s board or regularly voting as a member on all cooperative governance matters.4 While there may be ulterior motives (for example, higher prestige for board members in the community) that have no relation to the functions of the cooperatives, Siebert and Park (2010) argue that members’ participation in their cooperatives’ governance is motivated by their interest in the long-term survival (success) of the cooperative. It is understood that such long-term survival is beneficial (economically or otherwise) for these members who participate in cooperative governance. Barraud-Didlier et al. (2012) posit that a member’s participation in the governance of their cooperative is similar to an organizational citizenship behavior where individuals are so concerned by what goes within that organization that they run for elected positions in that organization to change it from within. Barraud-Didlier et al. argue that such participatory behavior by members is better for the organization’s performance (Podaskoff et al., 2009). In the context of cooperatives alone, citing past studies, Barraud-Didlier et al. (2012) remind us that such membership behavior contributes toward cooperative success. Members, particularly those in the cooperative’s boards and committees, are instrumental in promoting the cooperative both in general and specifically as a tool to recruit new members. However, there is a serious shortage of literature focusing on this aspect of member participation. In their paper on the evaluation of the Co-operative Group of the UK (a consumer cooperative), Birchall and Simmons (2004) discuss how, among other efforts to fend off potential takeover bids, the cooperative board devised “innovative strategies for recruiting new members and integrating membership with other aspects of the business such as public

156  Handbook of research on cooperatives and mutuals relations and staff training” (p.492). Bob Canell, a member of Suma Wholefoods (UK), a worker-owned cooperative and wholesale food distributor, mentions that recruitment and induction of new members at Suma takes nine months from initial job offer to acceptance as a new member by existing members (that is, other Suma workers) by ballot (ICA, 2015). One could surmise that the nine months between the initial job offer and the ballot for membership of the new hire allows other workers, who are already members, to evaluate the new hire as a potential member-owner, and their commitment to the cooperative organization. In their study on the impact of trust on member retention and satisfaction and cooperative performance, Hansen et al. (2002) found that trust among members and management was key in the performance outcome of the two agricultural marketing cooperatives they studied. Examining the role of members in livestock (pig) production cooperatives in Germany, Theuvsen and Franz (2007) found that these cooperatives are most successful (in economic or financial terms) when they meet members’ needs (that is, members are satisfied). Haruni and Mahmood (2012) studied the importance of group cohesiveness among members of several agricultural and non-agricultural cooperatives in Malaysia. They show that better cooperative performance (in economic or financial terms) was directly associated with a higher degree of membership cohesiveness. Sisay et al. (2017) found seed producer cooperatives (SPC) in Ethiopia that focused on their customers and their vendors’ (supplies) satisfaction, and that had a more market-oriented management team, performed better than other SPCs. Thus, the existing literature identifies that organizational measurement metrics, such as member participation and member satisfaction, are necessary for the continued success of cooperatives. This strand of literature also shows that trust among members, trust between members and the cooperative board, and higher perception about their cooperatives and boards are important factors contributing to a cooperative’s success in economic and financial terms.

IMPORTANCE OF MOTIVATION AND COMMITMENT IN MEMBER PARTICIPATION Psychologists have long studied the motivation of persons or groups. It is beyond the authors’ expertise and the scope of this chapter to delve into the literature on motivation.5 Motivation is viewed as a “time-linked set of recursive and reciprocal affective, behavioral, and cognitive processes and actions that are organized around an individual’s goals” (Kanfer & Chen, 2016, p.7). There exist various aspects of motivation, but we are interested in the “why” aspect here because it focuses on the person (individual) and their needs, motives, wants, and likes—all of which provide personal reasons for individual action (Kanfer & Chen, 2016). In cooperatives, the literature shows that members may be motivated by both economic and non-economic reasons (Birchall & Simmons, 2004). Whether we categorize the incentives behind member motivation as economic or non-economic or individual or collective, incentives must exist to motivate individuals to participate in a cooperative. Incentives address the classic question: What’s in it for me? Motivation, thus, means a willingness to do something by an individual or a group of individuals, provided there is an incentive, which could be either economic, non-economic, or both. There exists a general agreement in the organizational behavior literature that when workers are owners, the motivation of individuals is enhanced (Bayo-Moriones et al., 2002). In the context of member-owned organizations like cooperatives, we can argue that a cooperative

Measuring cooperative performance  157 member’s personal (that is, individual) motivation should be enhanced because he/she is also the user-owner. Nonetheless, a cooperative member’s motivation is influenced by how well the cooperative serves his/her needs. Cooperatives being member-owned and member-controlled organizations, members must participate in running the organization. However, one of the key issues that cooperatives struggle with is how to increase member participation. In this context, Birchall and Simmons (2004) investigate member motivation for participation from both an individualistic perspective (what’s in it for me?) and a group perspective (how does my participation help the group and the organization?), and the findings are noteworthy. For example, from an “individualistic incentives” standpoint, member participation was inversely proportional to cost; that is, the higher the monetary or economic cost of participation in terms of time and money, the lower the participation. This was perhaps not surprising assuming members were economically rational. The authors, however, found that most of the members who preferred “individualistic incentives” would still participate in the cooperative regardless of their individual incentives because they had higher “collectivistic incentives” (that is, mostly non-economic reasons, such as shared values and goals or a sense of community). For cooperative members, thus, personal incentives were important, but they were secondary to their group’s incentive or the collective incentives of their cooperative (Birchall & Simmons, 2004). We can infer two things from such findings: one, member motivations are important for their participation and two, management strategies should be geared toward strengthening and improving the collective incentives. However, the cooperative leadership must still need to pay attention to individual members’ incentives, which are typically economic or financial. Many studies have shown that member commitment is a unique feature of a member’s relationship with their cooperative and determines members’ participatory behavior (Podsakoff et al., 2009; Byrne et al., 2012). Adding to such arguments regarding the importance of member commitment in member-owned organizations, such as cooperatives, Jussila et al. (2012) describe member commitment as a key variable that “captures the extent to which [a] member is likely to choose to maintain his/her membership (patronage) in the co-operative” (p.9). Anderson and Henehan (2005) concluded that member commitment is likely significant for members to actively support their cooperative with patronage, capital, and management. In a historical context, Fulton (1999) shows that member commitment in cooperatives is initially driven by an ideology, which later fades away. In a stylized model, Fulton (1999) shows how ideology may enhance a member’s commitment to a cooperative compared to an IOF and then presents evidence on how ideology fades away and cooperative leadership needs to provide members with further incentives. Several studies in less developed countries have recently investigated member commitment in farmer cooperatives. Msaddak et al. (2021) found the role of trust in enhancing cooperation among members using game simulations in Tunisia. Similarly, Donkor and Heijkerlik (2021), studying 215 rice farmers in Zambia, find that actively committed members acquire more economic benefits from the cooperative than passive members. Commitment is found to be influenced by education. In a study of Ethiopian cooperatives, Awoke (2021) investigates the impact of commitment on cooperatives with different scopes and finds higher commitment of specialized members than multipurpose cooperatives. It is found that organizational factors, such as rewarding active participation, assuring the voice of members is heard, communication approach, and education and training for members, affect commitment (Awoke, 2012).

158  Handbook of research on cooperatives and mutuals Member participation is a key strategic ingredient for member-owned organizations to achieve the so-called cooperative advantage with which we are all familiar (Birchall & Simmons, 2004). Although there is existing cooperative literature on trust and member participation, including management characteristics, on the economic or financial performance of cooperatives (Hansen et al., 2002; Soboh et al., 2018; Grashuis & Ye, 2019), the range and the amount of literature on member motivation, commitment, and participation on cooperative performance (economic or otherwise) is limited. Among those who have explored the relationship between member participation and cooperative performance, it is found that member commitment through their participatory behavior in terms of patronage, providing debt capital, or participating in cooperative governance is essential for the cooperative’s success. Existing research across the globe establishes clearly that member commitment is key to member participation in cooperative organizations. As discussed earlier, the notion of a “successful” cooperative is typically translated as economic or financial success. It is usually measured by commonly accepted criteria and related metrics, such as profitability and other financial measurements. However, as our discussion in this chapter shows, there are alternative approaches to measuring cooperative performance or organizational effectiveness. One of those approaches is the Strategic Constituencies Approach, which focuses on satisfying an organization’s constituencies. One of the key constituencies of any cooperative is its members and employees (internal constituencies). This chapter discusses how members are key to a cooperative’s success. Existing literature examining the relationship between commitment and organizational effectiveness focuses on the link between employee commitment and firm performance as well as how those in management may improve employee commitment (Swanson & Arnold, 1996; Katzenbach, 2000; Yukl, 2008; Andrews, 2010). However, none of these studies focus on cooperatives and their employees (or members). Thus, there is an opportunity for cooperative researchers to investigate this area of research focusing on cooperative employees and managers and their commitment to the organizational effectiveness of their cooperatives. One of the shortcomings of the existing studies is that they did not examine the link between members’ experience (both positive and negative) and how that impacts member satisfaction, member motivation, commitment, and participation, which ultimately impacts a cooperative’s organizational performance. In other words, as Benos et al. (2018) suggested, one needs to devise a “currency” in the exchange between the cooperative and its members, where such a “currency” is what a rational member is rewarded for contributing to the cooperative by patronage and overall participation. We propose that such currency (or “fiat”) is organizational effectiveness. The cooperative rewards its members with organizational effectiveness, and members in turn devote themselves to participation in the cooperative functions. In turn, member participation is an input that affects organizational effectiveness. To close the discussion, we present a heuristic model of the reciprocal relationship between member participation and organizational effectiveness of cooperatives. In Figure 8.1, we illustrate the interconnectedness of the various constructs that contribute to or are responsible for the organizational effectiveness of cooperatives. We have learned so far that when individuals participate in a member-owned organization, whether as lay members or as elected members to area committees or the board, they are motivated to participate (regardless of the type of incentives). Here we posit that members’ commitment to participate in their cooperative is based on their expectations about reaching the goals they set when they decide(d) to participate. Such goals could be personal (individual)

Measuring cooperative performance  159

Source: Authors.

Figure 8.1

A heuristic model of member participation and organizational effectiveness in cooperatives

goals or group (collective) goals. The degree of conversion of one’s motivation to commit (that is, commitment to participate in their cooperative) may, however, depend on the outcome that members have already experienced, either directly or indirectly.6 For example, those members who have earned a higher income or saved on the cost of their farm operations from their cooperative patronage, or gained access to new markets for their farm output through their cooperative, are more likely to be motivated to stay engaged and committed to their cooperatives compared to those members who did not have a positive outcome from their participation in the cooperative. Thus, we propose the hypothesis that those members who had a positive experience from their cooperative participation are likely to be satisfied with their cooperative and, in turn, to be more motivated to participate further in their cooperative, leading to better organizational effectiveness. The positive reinforcement leads to the upper spiral in Figure 8.1. On the other hand, those who did not have positive experiences are more likely to be dissatisfied with their cooperative and less motivated to participate further in it. If the cooperative

160  Handbook of research on cooperatives and mutuals is ineffective, members are dissatisfied, are de-motivated, and do not participate, leading to lower performance. Thus, the cooperative enters the lower spiral in Figure 8.1. The same logic also applies to potential cooperative members; for example, potential cooperative members who have direct or indirect knowledge of the negative experience of existing cooperative members may decide not to become members of that cooperative until they become aware of existing members having more positive experience. We have discussed how member motivation and commitment are crucial in the organizational effectiveness of cooperatives. We closed this section with a heuristic model of the interlinkages of the various constructs discussed in this chapter. We also proposed some preliminary hypotheses on the non-economic interconnectedness and constructs related to the organizational effectiveness of cooperatives. Such hypotheses may be tested as part of future research so that the lessons learned from such research could better manage all member-owned organizations, including cooperatives. These reciprocal relationships are difficult to formulate and test, and require sophisticated and in-depth data. Our framework is the first approach to disentangle these relationships. More work is required to enrich this conceptual model, formulate testable hypotheses, collect appropriate data, and test the hypotheses using appropriate methodology. For example, a structural equations model (SEM) could be an appropriate method for testing the proposed framework and evaluate its validity in various organizational settings, including in member-owned organizations such as cooperatives. SEM allows for measurement of unobserved variables such as organizational effectiveness, using observed measures such as ROI, satisfaction, and so on. Further SEM allows for the unobserved variable to be included in models with feedback loops and changes to the unobserved variables over time.

CONCLUSIONS In this chapter we have broadened the concept of cooperative performance by looking beyond the commonly used economic or financial performance measures. We also examined how cooperative performance influences member participation and how it affects it further. We provided a heuristic conceptual model to illustrate this reciprocal relationship between cooperative performance and member commitment. We suggest that cooperative performance could be measured and explained in both economic and non-economic methods; that members are motivated by both personal and group incentives; that motivation and commitment drive participation; that member participation is a key element determining organizational effectiveness of cooperatives; and that members’ experience and satisfaction with their cooperatives are likely to influence their decision to participate in cooperatives. The managerial implications are clear: managers should focus on creating positive member experiences (economic and non-economic), leading to member retention/recruitment and increased member participation, leading to a more effective and successful cooperative organization. As is evident from our discussion of the various organizational behavioral approaches to measuring organizational effectiveness, we conclude that they are all relevant to assessing cooperative performance or organizational effectiveness. We suggest no conflicts in using organizational efficiency concepts and approaches in measuring cooperative performance or success (or failure). To our knowledge, this is the first effort to connect various constructs

Measuring cooperative performance  161 related to measuring cooperative performance in an organized way. Assessing cooperatives’ organizational effectiveness or performance using a multi-pronged approach, rather than just an economic and financial approach, is expected to enhance our understanding of the cooperative model and help improve its longevity. We incorporated a wide array of literature from both social sciences and humanities on measuring organizational effectiveness and various facets of cooperatives. We proposed a conceptual model that connects the dots in explaining cooperative performance from a member participation perspective. The proposed model is geography and typology neutral, and thus can be applied anywhere in the world where there are member-owned organizations that are organized using the democratic principles of cooperatives. There are ample research opportunities for cooperative researchers to assess cooperative performance using the organizational effectiveness framework.7

NOTES 1. 2.

3. 4.

5. 6. 7.

The authors wish to thank Matthew Elliot and two anonymous reviewers for helpful comments and suggestions. Readers may also be interested in Liket & Mass (2013), who provide an excellent overview of the organizational effectiveness literature that focuses on non-profit organizations (NPO). While they propose cooperation with other organizations as a criterion for determining organizational effectiveness in NPOs, they do not mention cooperatives in their discussions. For a discussion on cooperative governance and the role of social capital, see Nilson, this book. As in an election for civic body governance, existing representatives to the cooperative board are more likely to get reelected. Morfi et al. (2014) explain why existing members have a better chance of being reelected: for example, these board members went through the election process before and thus are known to the members of the cooperative; these board members know how the cooperative governance works; they may have more respect among fellow members for social, political, and economic reasons. See Kanfer and Chen (2016) for a meta-analysis of the literature on motivation in organizational behavior. Additionally, focusing specifically on members of cooperatives and mutual businesses, Birchall and Simmons (2004) elegantly presented what motivates their members to participate. Jesse and Rogers (2006) reported that in a major agricultural cooperative in the US, management mistakes led to financial loss for members and resulted in member dissatisfaction; however, they did not explore member motivation and participation in that cooperative. For example, one could focus on cooperative employees and managers and their commitment to the organizational effectiveness or performance of their cooperatives.

REFERENCES Akerlof, G., & Kranton, R.E. (2011). Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being. Princeton University Press. Anderson, B.L. & Henehan, B.M. (2005). What gives agricultural co-operatives a bad name? International Journal of Co-operative Management, 2(2): 9–15. Andrews, R. (2010). Organizational social capital, structure and performance. Human Relations, 63(5): 583–608. Arcas, N., García, D., & Guzmán, I. (2011). Effect of size on performance of Spanish agricultural cooperatives. Outlook on Agriculture, 40(3): 201–6.

162  Handbook of research on cooperatives and mutuals Arcas-Lario, N., Martin-Ugedo, J.F., & Minguez-Vera, A. (2014). Farmers’ satisfaction with fresh fruit and vegetable marketing Spanish cooperatives: an explanation from agency theory. International Food and Agribusiness Management Review, 17(1): 127–46. Awoke, H.M. (2021). Member commitment in agricultural cooperatives: Evidence from Ethiopia. Cogent Business & Management, 8(1): 1968730; DOI: 10.1080/23311975.2021.1968730. Balduck, A.L., & Buelens. A. (2008). A Two-Level Competing Values Approach to Measure Nonprofit Organizational Effectiveness. Working paper (D/2008/7012/19), Ghent University, Belgium, April 2008. Barbaud-Didier, V., Henninger, M.-C., & El Akremi, A. (2012). The relationship between members’ trust and participation in the governance of cooperatives: the role of organizational commitment. International Food and Agribusiness Management Review, 15(1): 1–24. Basterretxea, I., Heras-Saizarbitoria, I., & Lertxundi, A. (2019). Can employee ownership and human resource management policies clash in worker cooperatives? Lessons from a defunct cooperative. Human Resource Management, 58(6): 585–601. Bayo-Moriones, J.A., Galilea-Salvatierra, P.J., & de Cerio, J.M. (2002). Participation, cooperatives and performance: an analysis of Spanish manufacturing firms, unpublished manuscript, January. Benos, T., Kalogeras, N., Wetzels, M., De Ruyter, K., & Pennings, J.M. (2018). Harnessing a ‘currency matrix’ for performance measurement in cooperatives: a multi-phased study. Sustainability, 10(12): 4536. Bhuyan, S. (2018). Assessing organizational effectiveness of member-owned enterprises in the northeast United States. Management Today, 8(2): 159–68. Bhuyan, S. (2007). The ‘people’ factor in cooperatives: the effect of attitudes on member participation and commitment. Canadian Journal of Agricultural Economics, 55: 275–98. Bhuyan, S., & Leistritz, F.L. (2001). An examination of characteristics and determinants of success of cooperatives in the non-agricultural sectors. Journal of Cooperation, 16: 46–62. Birchall, J., & Simmons, R. (2004). The involvement of members in the governance of large-scale co-operative and mutual businesses: a formative evaluation of the co-operative group. Review of Social Economy, 62(4): 487–515. Biswas, S.N. (2015). Organizational behaviour research in rural producer’ cooperatives: a neglected domain. International Journal of Rural Management, 11(1): 40–59. Byrne, N., McCarthy, O., Ward, M., & McMurtry, J.J. (2012). Credit union restructuring: don’t forget the member! International Journal of Co-operative Management, 6: 31–9. Caves, R.E., & Petersen, B.C. (1986). Cooperatives’ shares in farm industries: organizational and policy factors. Agribusiness, 2(1): 1–19. Chelladurai, P. (1987). Multidimensionality and multiple perspectives of organizational effectiveness. Journal of Sport Management, 1: 37–47. Connolly, T., Conlon, E.J., & Deutsch, S.J. (1980). Organizational effectiveness: a multiple-constituency approach. Academy of Management Review, 5: 211–17. Cook, M.L. (1995). The future of U.S. agricultural cooperatives: a neo-institutional approach. American Journal of Agricultural Economics, 77(5): 1153–9. Daft, R.L. (2010). Organization Theory and Design. South West Cengage Learning. Deng, W., Hendrikse, G.W.J., & Liang, Q. (2021). Internal social capital and the life cycle of agricultural cooperatives. Journal of Evolutionary Economics, 31(1): 301–23. Donkor, E., & Hejkrlik, J. (2021). Does commitment to cooperatives affect the economic benefits of smallholder farmers? Evidence from rice cooperatives in the Western province of Zambia. Agrekon, 1–16. Eydi, H. (2015). Organizational effectiveness models: review and apply in non-profit sporting organizations. American Journal of Economics, Finance and Management, 1(5), 460–67. Feng, L., Friis, A., & Nilsson, J. (2016). Social capital among members in grain marketing cooperatives of different sizes. Agribusiness, 32(1), 113–26. Fernando, S., Garnevska, E., Ramilan, T., & Shadbolt, N. (2021). Organisational attributes of cooperatives and farmer companies. Journal of Co-operative Organization and Management, 9(1), 100–132. Franken, J.R., & Cook, M.L. (2015). Informing measurement of cooperative performance. In J. Windsperger, G. Cliquet, T. Ehrmann, & G. Hendrikse (eds), Interfirm Networks: Franchising, Cooperatives and Strategic Alliances (pp.209–26). Springer.

Measuring cooperative performance  163 Fulton, J.R., & Adamowicz, W.L. (1993). Factors that influence the commitment of members to their cooperative organization. Journal of Cooperation, 8: 39–53. Fulton, M.E. (1999). Cooperatives and member commitment. The Finnish Journal of Business Economics, 4: 418–37. Giannakas, K., Fulton, M., & Sesmero, J. (2016). Horizon and free-rider problems in cooperative organizations. Journal of Agricultural and Resource Economics, 41(3): 372–92. Grashuis, J., & Cook, M.L. (2021). Members of cooperatives: more heterogeneous, less satisfied? International Food and Agribusiness Management Review, 24(5): 813–25. Grashuis, J., & Ye, S.U. (2019). A review of the empirical literature on farmer cooperatives: performance, ownership and governance, finance, and member attitude. Annals of Public and Cooperative Economics, 90(1): 77–102. Gray, T., Heffernan, W., & Hendrickson, M. (2001). Agricultural cooperatives and dilemmas of survival. Journal of Rural Cooperation, 29(2): 167–98. Gray, T.W., & Kraenzle, C.A. (1998). Member Participation in Agricultural Cooperatives: A Regression and Scale Analysis. Rural Business-Cooperative Service. Research Report 165. Hakelius, K., Karantininis, K., & Feng, L. (2013). The resilience of the cooperative form: cooperative beehiving (pp.127–48). In T. Ehrmann, J. Windsperger, G. Cliquet, & G. Hendrikse (eds), Network Governance: Alliances, Cooperatives and Franchise Chains (pp.127–48). Berlin/Heidelberg: Physica Verlag. Hansen, M.H., Morrow Jr, J.L. & Batista, J.C. (2002). The impact of trust on cooperative membership retention, performance, and satisfaction: an exploratory study. Int. Food & Agribusiness Management Review, 5: 41–59. Hernández-Espallardo, M., Arcas-Lario, N., & Marcos-Matás, G. (2013). Farmers’ satisfaction and intention to continue membership in agricultural marketing co-operatives: neoclassical versus transaction cost considerations. European Review of Agricultural Economics, 40(2), 239–60. Haruni, M.Z.M.B. & Mahmood, R.B. (2012). The relationship between group cohesiveness and performance: an empirical study of cooperatives movement in Malaysia. International Journal of Cooperative Studies, 1(1): 15–20. Helmberger, P., & Hoos, S. (1962). Cooperative enterprise and organization theory. Journal of Farm Economics, 44(2): 275–90. Hoang, V.-N., Nguyen, T.T., Wilson, C., Ho, T.Q., & Khanal, U. (2021). Scale and scope economies in small household rice farming in Vietnam. Journal of Integrative Agriculture, 20(12): 3339–51. Iliopoulos, C., & Valentinov, V. (2017). Member preference heterogeneity and system-lifeworld dichotomy in cooperatives: an exploratory case study. Journal of Organizational Change Management, 30(7): 1063–80. International Co-operative Alliance (ICA) (2015). Co-operative Governance Fit to Build Resilience in the Face of Complexity. ICA report. Brussels, Belgium. Jesse, E.V., & R.T. Rogers (2006). The Cranberry Industry and Ocean Spray Cooperative: Lessons in Cooperative Governance. Monograph Series, #19, Food System Research Group, Department of Agricultural & Applied Economics, University of Wisconsin-Madison. Jussila, I., Goel, S., & Tuominen, P. (2012). Governance of co-operative organizations: a social exchange perspective. Business and Management Research, 1(2): 14–25. Jones, D., Jussila, I., & Kalmi, P. (2016). The determinants of membership in cooperative banks: common bond versus private gain. Annals of Public and Cooperative Economics, 87(3): 411–32. Kanfer, R. & Chen, G. (2016). Motivation in organizational behavior: history, advances and prospects. Organizational Behavior and Human Decision Processes, 136: 6–19. Kanter, R.M., & Brinkerhoff, D. (1981). Organizational performance: recent developments in measurement. Annual Review of Sociology, 7(1): 321–49. Katzenbach, J.R. (2000). Peak Performance: Aligning the Hearts and Minds of Your Employees. Harvard Business School Press. Kramer, R.M. (2009). Organizational Trust. Oxford University Press. Liket, K.C. & Maas, K. (2013). Nonprofit organizational effectiveness: analysis of best practices. Nonprofit and Voluntary Sector Quarterly, 1–29, DOI: 10.1177/0899764013510064. Maria, S., Darma, D.C., & Nurfadillah, M. (2019). The factors that affect performance and cooperative success. Archives of Business Research, 7(12): 219–32.

164  Handbook of research on cooperatives and mutuals Matthews, J.R. (2011). Assessing organizational effectiveness: the role of performance measures. The Library Quarterly, 81(1), 83–110. Morfi, C., Ollila, P., Nilsson, J., Feng, L., Karantininis, K., & Surry, Y. (2014). The switching behaviour of Finnish co-operative members in relation to their commitment and loyalty. Paper prepared for presentation at the EAAE 2014 Congress ‘Agri-Food and Rural Innovations for Healthier Societies’, 26–29 August, Ljubljana, Slovenia. Morgan, R.M., & Hunt, S.D. (1994). The commitment-trust theory of relationship marketing. Journal of Marketing, 58: 20–38. Msaddak, M., Ben-Nasr, J., & Zaibet, L. (2021). Dynamics of trust and cooperation in the dairy value chain: a game simulation approach. Journal of International Food & Agribusiness Marketing, 33(4): 353–73. Nilsson, J., Kihlén, A., & Norell, L. (2009). Are traditional cooperatives an endangered species? About shrinking satisfaction, involvement and trust. International Food and Agribusiness Management Review, 12: 1–22. Novkovic, S. (2008). Defining the co-operative difference. The Journal of Socio-Economics, 37(6): 2168–77. Ollé-Espluga, L., & Bartoll, X. (2019). Health status and job satisfaction of worker co-operative members in the Basque Country in a time of economic uncertainty. ICA Review of International Cooperation, 105: 83–101. Olson, M. (1965). The Logic of Collective Action. Harvard University Press. Österberg, P., Nilsson, J., Hakelius, K., & Nilsson, J. (2000). Members’ perception of their participation in the governance of cooperatives: the key to trust and commitment in agricultural cooperatives. Agribusiness, 25(2): 181–97. Pedraza, J.M. (2014). What is organizational effectiveness. How an organization could achieve it? [Unpublished manuscript.] Petruchenya, A. (2018). Essays on Cooperatives: Emergence, Retained Earnings, and Market Shares (No. EPS-2018-447-ORG). Podsakoff, N.P., Whiting, S.W., Podsakoff, P.M., & Blume, B.D. (2009). Individual- and organizational-level consequences of organizational citizenship behaviors: a meta-analysis. Journal of Applied Psychology, 94(1): 122–40. Pokharel, K.P., Regmi, M., Featherstone, A.M., & Archer, D.W. (2019). Examining the financial performance of agricultural cooperatives in the USA. Agricultural Finance Review, 79(2): 271–82. Porter, P.K., & Scully, G.W. (1987). Economic efficiency in cooperatives. The Journal of Law and Economics, 30(2): 489–512. Price, J.L. (1968). The study of organizational effectiveness. Sociological Quarterly, 13: 3–15. Quinn, R.E. & Rohrbaugh, J. (1983). A spatial model of effectiveness criteria: towards a competing values approach to organizational analyses. Management Science, 29(3): 363–77. Rojas, R.R. (2000). A review of models for measuring organizational effectiveness among for profit and nonprofit managers. Nonprofit Management & Leadership, 11: 97–104. Royer, J., & McKee, G. (2020). Optimal capital structure in agricultural cooperatives and implications for equity retirement. Agricultural Finance Review, 81(2): 277–91. Russo, M.V., & Fouts, P.A. (1997). A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, 40(3): 534–59. Sayers, D.M., Kilmer, R.L., Lee, J.-Y., & Flambert, A.M. (1996). Satisfaction evaluation of milk handlers by southern US dairy farmers. Journal of Agricultural and Applied Economics, 28(2)L 313–21. Schermerhorn, J.R., Hunt, J.G., & Osborn, R.N. (2004). Core Concepts of Organizational Behavior. John Wiley. Schroeder, T.C. (1992). Economies of scale and scope for agricultural supply and marketing cooperatives. Review of Agricultural Economics, 14(1): 93–103. Sexton, R.J., & Iskow, J. (1993). The competitive role of cooperatives in market-oriented economies: a policy analysis. In Agricultural Cooperatives in Transition (pp.55–83). Routledge. Siebert, John W., & Park, John L. (2010). Maintaining a healthy equity structure: a policy change at producers cooperative association. International Food and Agribusiness Management Review, 13(3): 87–96.

Measuring cooperative performance  165 Sisay, D.T., Verhees, F.J.H.M, & van Trijp, J.C.M. (2017). Marketing activities as critical success factors: the case of seed producer cooperatives in Ethiopia. African Journal of Business Management, 11(19): 548–63. Skevas, T., & Grashuis, J. (2020). Technical efficiency and spatial spillovers: evidence from grain marketing cooperatives in the US Midwest. Agribusiness, 36(1), 111–26. Soboh, R.A.M.E., Lansink, A.O., Giesen, G., & van Dijk, G. (2018). A review of the empirical literature on farmer cooperatives: performance, ownership and governance, finance, and member attitude. Annals of Public and Cooperative Economics, 90(1): 77–102. Stander, C.R. (2021). Equity retirement and other determinants impact on return on equity in US local farm supply and grain marketing cooperatives. Retrieved from https://​krex​.k​-state​.edu/​dspace/​handle/​ 2097/​40986. Swanson, R.A., & Arnold, D.E. (1996). The purpose of human resource development to improve organizational performance. In R.W. Rowden (ed.), Workplace Learning: Departing the Five Critical Questions of Theory and Practice. Higher and Adult Education Series. San Francisco: Jossey-Bass. Theuvsen, L., & Franz, A. (2007). The role and success factors of livestock trading Cooperatives: lessons from German pork production. International Food and Agribusiness Management Review, 10(1): 2007. USDA (2006). Measuring Performance of Dairy Cooperatives, Rural Development, Rural Business and Cooperative Programs, Research Report 212, Washington, D.C., June. USDA (2007). Measuring the Performance of Agricultural Cooperatives, Rural Development, Rural Business and Cooperative Programs, Research Report 213, Washington, D.C., December. Yuchtman, R.F., & Seashore, S. (1967). A system resource approach to organizational effectiveness. American Sociological Review, 32, 891–903. Yukl, G. (2008). How leaders influence organizational effectiveness. The Leadership Quarterly, 19: 708–22. Zivkovic, S., Hudson, D., Johnson, P., & Park, J. (2015). Impact of the relationship between managers and board of directors on performance of agricultural cooperatives. Selected Paper prepared for presentation at the Southern Agricultural Economics Association (SAEA) Annual Meeting, Atlanta, Georgia, 31 January–3 February 2015.

9. A framework for understanding the role of producers in governance of supply chains Michael A. Boland, Noreen Byrne, Bridget Carroll, Olive McCarthy, Stephen Pitts, and William Secor

INTRODUCTION The chapters making up this Part explore applied cases of farmers’ use of marketing cooperatives in the EU member states, Latin America, and the US. Our objective is to describe producers’ historical and current role and their use of marketing cooperatives. To motivate the chapters, we briefly describe the concepts necessary to understand the framework of the applied examples. Each chapter focuses on different sectors. For instance, in Latin America, we focus on the use of small farmers producing cocoa, coffee, and other similar products for export. In the EU, we examine the dairy cooperatives of Ireland. In the US, we look at commercial farmers and their governance in various sectors that use the cooperative to integrate vertically. This chapter provides a brief overview of how early cooperative philosophers positioned the concept of a marketing cooperative to producers. The framework underlies our descriptive analysis of farmers using marketing cooperatives in different sectors and regions of the world. We follow a discussion of different types of marketing channels, supply chains, and value chains. Last, we define governance and its role in supply chains.

FORMATION OF MARKETING COOPERATIVES The chapters in this Part focus on Sapiro II Cooperatives or Marketing Cooperatives, whose objectives are bypassing investor-benefit firms, enhancing prices, and increasing the marketing margin for producers. The success of cooperatives over time is measured by their ability to overcome free-rider, horizon, portfolio, control, and influence problems. Cook (1995) argues that portfolio and control problems are significant for Sapiro II cooperatives. Portfolio problems occur when investment decisions are tied to patronage decisions which may be suboptimal when there is non-transferability and non-marketability of retained cooperative investment—particularly when members may have greater risk than they desire. Control problems are based on the principal (co-op board of directors) and agent (management) relationship, where boards may lack the information to direct the cooperative’s management adequately. Successful Sapiro II marketing cooperatives find ways to overcome these portfolio and control problems. Many of the 46 marketing cooperatives in Boland (2020) are in single agricultural commodities, where control and portfolio problems are expected to be less severe due to the single-commodity purpose of the cooperative.

166

A framework for understanding the role of producers in governance of supply chains  167

DISTINCTION OF MARKETING CHANNELS, SUPPLY CHAINS, AND VALUE CHAINS The food system contains multiple stages with various marketing channels. A marketing channel is shown in Figure 9.1. Stages that may lie between the producer and consumer include processing, wholesaling or distribution, and retailing. For example, consider a marketing channel for coffee. Consumers desire coffee in the form of beans that can be ground or in the form of ground coffee for direct use in coffee machines. In addition, consumers purchase liquid coffee at a restaurant or coffee house, or similar store format. A simplified set of stages in the marketing channel would include coffee production, grinding and roasting, wholesaling, and retailing to consumers. A roaster must work with multiple stages in the channel to mix various beans to create a specific kind of coffee. A marketing channel wholly governed only by cooperatives does not characterize most marketing channels, but exceptions exist. For example, Solidarite Paysanne la Promotion de Actions Café et Development Integras (SOPACDI) is a coffee cooperative in Democratic Republic of Congo (DRC) (equalexchange​ .coop/​our​-partners/​farmer​-partners/​sopacdi) where the cooperatives control a large portion of the marketing channel. In this example, SOPACDI sells some of its beans to Equal Exchange, a worker cooperative. Equal Exchange collects the beans and roasts them, and sells them to customers who include food cooperatives.

Figure 9.1

Example of distribution or marketing channels with various stages in agriculture

The discussion of marketing channels helps a reader understand the types of firms in a channel and the relative complexity of the channel. For example, in the DRC coffee example, the channel would consist of two stages. For example producers sell in a cooperative sell to Equal Exchange who then sell to retailers. However, some of the coffee beans in the DRC are also sold through a direct marketing channel where a producer sells to a consumer at a roadside stand. Thus, DRC coffee is sold through a variety of marketing channels each with different numbers of stages and supply chain, value chain, and governance attributes. A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from production to consumption. Unlike a marketing channel, which describes the number of stages in which a product might be sold, supply chain management seeks to achieve efficient methods of optimizing the marketing for the lowest

168  Handbook of research on cooperatives and mutuals

Figure 9.2

Example of a supply chain for agricultural products

cost (Figure 9.2). The supply chain involves a broad network of entities to deliver the product, which has been transformed in some fashion to a finished product suitable for the consumer. For example, our coffee example includes maintaining the coffee beans in climate-controlled packaging, storage at main constant or near constant temperature and away from moisture, and other factors that might affect the coffee beans’ quality. There are many supply chains within a single cooperative firm such as Equal Exchange. Consider their cocoa bean products, which include multiple product lines such as cocoa beans, chocolate bars, chocolate drink mixes, baking cocoa, and other products. The cocoa beans are sold through the trademark Fair Trade Certified, which is an example of a segregated chain since the certification is maintained throughout the chain. This process is complex and has multiple stages. For example, the beans are packaged, shipped, and stored in a distribution center warehouse and sold directly to a retail grocer or foodservice distributor that sells to consumers. Equal Exchange employs logistics services, inventory management, warehouse replenishment, demand forecasting, and raw material procurement in this process. Thus, a cocoa bean supply chain is defined as an integrated process through which several business entities cooperate to acquire raw materials (for example, cocoa beans) through product procurement, convert the raw materials into specified products (for example, chocolate), and manage the standards of quality (for example, Fair Trade Certified) to deliver the finished products to retailers. A value chain is a set of activities that a firm operating in a specific industry performs to produce a product or service (Porter 1980). A firm’s value chain is designed to add value to products for all firms by carrying out activities to meet the demand of a supply chain captain. A supply chain captain could be an individual retail grocer, food service, or restaurant chain where all added value is realized. The value for the product is obtained through various activities, including research and development (for example, consumer desire to purchase coffee or cocoa products that provide producers with a living wage), research on consumer trends (for example, flavored coffees or cocoa products), the creation of product and service innovations valued by consumers (for example, single-serve or ground coffee), and economic conditions underlying consumer income that affect product demand. Thus, supply chains are linked to demand and value addition by value chains (Figure 9.3). For example, the value chain for chocolate bars includes Equal Exchange’s process used to create the bar, including research on consumer demand for product attributes such as flavor as measured by the notes in the cocoa beans; packaging attributes such as portion size; or certain types of production systems such as those using organic or Fair Trade Certified ingredients. The value comes from the entire process, from originating raw products to processing them into value-added products.

A framework for understanding the role of producers in governance of supply chains  169

Figure 9.3

Representation of Porter’s (1980) value chain activities

GOVERNANCE Corporate governance is defined as “structures, processes, cultures, and systems that engender the successful operation of organizations” (Keasey and Wright 1993). Williamson (2005) notes that governance is a critical issue in minimizing transaction costs because it encompasses the elements of the Make or Buy Decision which leads to a firm’s decision to vertically integrate to make something or contract to buy something such as an input. Coase’s (1937) transactions costs theory helps understand why agricultural producers have invested in cooperatives as an attempt to add value to a crop throughout the marketing year by pooling the crop across its members and reducing the transaction costs associated with each member trying to add value on their own. In an organization such as an investor-benefit corporation, decision rights are allocated between those internal to the firm, such as shareholders, boards of directors, and senior managers, and those external to the firm, such as outside auditors, regulatory agencies, analysts, and other stakeholders. Organizations become more complex as they grow. Managers with increasing responsibility thus find tradeoffs between the authority to make decisions (decision rights) and the ability to complete the required tasks are similarly complex because they must monitor and direct many employees, who are themselves assigned sub-tasks and decision rights. Embedded in our discussion of governance of supply chains is understanding the vertical boundaries of a firm. The corporation is the center of many contracts and is always one party to signed contracts with buyers, suppliers, employees, lenders, and other entities. These contracts specify the decision rights of each party. The corporate charter, which includes the articles of incorporation and bylaws, defines the rights of shareholders. Gereffi, Humphrey, and Sturgeon (2005) define five types of global value chain governance: market, modular, relational, captive, and hierarchical (Figure 9.4). These types are listed in increasing order of complexity: the market type suggests arm’s-length transactions, whereas the hierarchical classification suggests formal vertical integration. Modular, relational, and

170  Handbook of research on cooperatives and mutuals

Source: Modified from Gereffi, Humphrey, and Sturgeon (2005, p.89).

Figure 9.4

Three global value chain governance types

captive types are increasingly vertically coordinated. Market-type governance was the norm in agriculture, with price and grade specifications being standard with cooperatives providing the volume of produce. For example, fruit might be purchased in boxes of a certain weight and size, and a variety of intermediaries such as brokers and wholesalers would be the buyers. As seen in US agriculture, today several pooling cooperatives in sectors characterized by perennial crops have vertically integrated some portion of their member production. More recently, supply chain captains have moved toward modular systems and away from market systems to meet consumer demand for a year-round supply of various fruits, new forms of packaging such as smaller containers of pre-cut fruits, and greater attention to quality, including extended shelf life. Meeting these demands requires a deeper relationship with suppliers. Furthermore, stakeholder concerns about sustainability issues such as the use of child labor, greenhouse gases, soil health, and similar issues have grown. Consequently, chain captains have turned to turnkey suppliers who can manage the more complex issues of supply chains (for example, using E-Verify for labor or tracing food through the supply chain to verify sustainability claims). Chain captains have greater coordination through contracts of a certain duration with regular audits and inspections and are placing greater emphasis on the efficiency in the entire supply chain.

A framework for understanding the role of producers in governance of supply chains  171

SUMMARY The three chapters that follow focus on supply chain management, which can be thought of as functions that manage the flow of product. Agricultural producers, through their ownership in cooperatives, allow the members to participate in these chains, which has implications for increased opportunities and risk. The role of governance is discussed for various supply chains. Consider our example of coffee beans using Equal Exchange. It is an example of a two-stage marketing channel and a relational value chain with a cooperative structure that lends itself to a hierarchy value chain without explicit ownership throughout the chain. Agricultural producers have governance rights throughout these supply chains. In what follows, the examples from the US include examples of relational and hierarchy value chains, while the Latin American examples include relational chains and the Irish examples include hierarchy chains.

REFERENCES Boland, M.A. 2018. “The Business Merit of Trade.” Federal Reserve Bank of Kansas City Economic Review, 103(Special Issue): 27–54. Boland, M.A. 2020. “A Measure of Duration in a Life Cycle Analysis of U.S. Agricultural Cooperatives.” Staff Paper, University of Minnesota. Boland, M.A., B. Cooper, and J.M. White. 2016. “Making Sustainability Tangible: Land O’Lakes and the Dairy Supply Chain.” American Journal of Agricultural Economics 98(2): 648–57. Coase, R. 1937. “The Nature of the Firm.” Economica 4(16): 386–405. Cook, M.L. 1995. “The Future of U.S. Agricultural Cooperatives: A Neo-Institutional Approach.” American Journal of Agricultural Economics 77(5): 600–8. Gereffi, G., J. Humphrey, and T. Sturgeon. 2005. “The Governance of Global Value Chains.” Review of International Political Economy 12(1):78–104. Goldberg, R.A. 2018. Food Citizenship: Food System Advocates in an Era of Distrust. Oxford: Oxford University Press. Keasey, K. and M. Wright. 1993. “Issues in Corporate Accountability and Governance: An Editorial.” Accounting and Business Research 23(91A): 291–303. Porter, M.E. 1980. Competitive Strategy. New York: The Free Press. Williamson, O.E. 2005. “The Economics of Governance.” The American Economic Review 95(2): 1–18.

10. The role of the farmer and their cooperative in supply chain governance: a Latin American small producer perspective Stephen Pitts1

THE LATIN AMERICAN CONTEXT Two recent reports by the Food and Agriculture Organization (FAO) describe the Latin American context (FAO, 2018; OECD & Food and Agriculture Organization of the United Nations, 2019) and the importance of the agricultural sector for both the economy of the region as a whole and its continued growth and development. The region includes 2 billion hectares of land across 34 countries with a tremendous variety of topography and biodiversity. Latin America is a leading exporter of agricultural products: soybeans, pork, maize, poultry, animal feed, sugar, coffee, and fruits and vegetables. Three major sectors make up the market: a capital and technology-intensive corporate sector; rural subsistence farmers who often suffer from lack of land or market access; and an intermediate sector with market access that remains vulnerable to climate and geopolitical shocks. According to the World Bank, 14 percent of the overall Latin American population is employed in the agricultural sector; this figure is even higher in some specific countries. The region experienced a general poverty reduction of 20 percent from 1990 to 2014, including a 13 percent decrease in rural areas; progress in poverty reduction has not been as robust since then, however. The FAO describes the challenge as developing more inclusive and sustainable agricultural growth against a backdrop of slower demand and lower international prices. The region’s agricultural sector continues to improve technically and structurally. Aided by a combination of government and private research and development, the region has grown 2 percent annually in total factor productivity over the 30 years from 1990 to 2020. This period coincides with the move to trade liberalization and multilateral and bilateral free trade agreements with countries including EU states and the United States. This growth varies by region, farm size, and degree of specialization. It includes technological improvements and production techniques and direct subsidies to farmers. During this period, agricultural production has shifted depending on the country. For example, increased soybean production has been observed in the south, and increased fruit and vegetable production in the north. Cattle ranching and poultry production have both grown as well. An analysis of land structure reveals two different sectors: land concentration in large, export-oriented, capital-intensive farms and land fragmentation in smallholder production, depending on the country. Additionally, there has been increased outside investment in agricultural land. In addition to production changes, consumption patterns are changing. Throughout the region, population growth is slowing, both because of declining fertility and due to continued outmigration to developed countries, including the United States. Despite this slowdown in population growth, domestic demand for meat, fruits, and vegetables relative to staples like 172

A Latin American small producer perspective  173 corn, rice, and beans increases as tastes change. The strength of trade linkages, especially to middle-income countries like China and India, has allowed producers with better market access to take advantage of similar demographic changes abroad.

THE IMPORTANCE OF SPECIALTY CROPS Because of its historical importance in the Fair Trade (FT) and cooperative movements, we examine coffee more closely here. Five Latin American countries (Brazil, Columbia, Honduras, Peru, Mexico) are in the top ten coffee exporters, and Brazil is the largest coffee-producing country globally. Two species of coffee are commonly grown: arabica and robusta. Arabica coffee is often grown at higher altitudes and under a shade canopy by small producers who harvest by hand. Robusta coffee is grown under the direct sun at sea level and harvested by machine. Because of consumer preferences, finished product coffee frequently blends these two types. For this reason, the markets for both types of coffee are closely linked. Despite some internal shuffling, these countries have maintained their position against coffee producers from Asia. Overall both the value and the quantity of exports have increased from 1990 onward. These increases, however, have not been enjoyed equally by all producers. In the increasingly complex coffee value chain, alliances between growers and roasters have allowed them to capture a larger portion of this value chain as coffee processing has become more concentrated. Moreover, producers have also suffered from price volatility and climate change challenges. A gap is emerging between countries that can successfully process domestic coffee and export a finished product and countries that continue to export green coffee. Thus, increased growth depends on strategies to navigate these challenges. Cooperatives as an organizational strategy can provide solutions to these challenges (Coffee Development Report, 2020). Aside from coffee, Latin American agriculture also provides many fruits and vegetables for the US market. Production and demand are projected to increase in response to consumer preference changes toward increased consumption of tropical fruits and avocadoes. These areas represent a potential opportunity for poverty alleviation in rural Latin America. Because of this increase, Latin American agricultural trade continues to increase. Since 2016, Mexico has been a net exporter of agricultural products to the United States and provides more products than Canada or the European Union. This stylized fact reflects a broader trend: Latin American agriculture outperforms the same sector in all other world regions. Asia, especially China, has grown as another important export market outside North America. Through the FAO reports continued project growth in the agricultural sector, this growth is not assured. First, it depends on favorable trade conditions, especially regional free trade agreements with premium demand markets such as the EU and the US. Second, governments must continue to invest in agricultural research, especially to combat climate change, pests, and other environmental factors. Third, poor local infrastructure in roads, ports, and other logistics hampers the ability of farmers to bring their products to market. Fourth, continued growth requires effective institutions such as contract enforcement that attract private investment, insurance, credit, and microfinance services to bolster the household economy of smallholder farmers. Fifth, growth needs a set of coherent policies developed with input from farmers. Of these challenges, environmental challenges stand out most. Though Latin America enjoys great natural resources—land, forest, and water—climate change, the growth of cities,

174  Handbook of research on cooperatives and mutuals and unsustainable agricultural practices affect these resources. Thus, the FAO reports recommend that Latin America pursue a path of sustainable agricultural growth that mitigates climate change. Cooperatives can form part of the sustainability strategy to promote growth.

FAIR TRADE MOVEMENT The FT movement is a well-known attempt to address some of the features of the Latin American reality, including poverty reduction and sustainability. Fair trade emerged as a voluntarily labeling movement in the 1980s between European and US consumers and Latin American producers. Unlike much of anonymous global commerce, it presupposes a relationship between rural agricultural producers and processors based in the developing world. Processing companies agree to pay a minimum price that guarantees fair wages to producers. These producers reinvest some of the profits into the community as part of a “social premium.” In recent years, FT has also evolved to include sustainability standards. This movement has gained substantial popularity for smallholder farmers in Latin America and worldwide. In 2018, 350,000 farmers and workers participated in FT projects in the region. The five crops were bananas, coffee, cane sugar, cocoa, and fresh fruit (FairTrade International, 2020). A recent literature review provides an overview of economics research on the FT movement (Dragusanu et al., 2014). Fair trade standards include six mechanisms: a price floor, an FT premium, stability and access to credit, working conditions, institutional structure, and environmental protection. Fair trade umbrella groups differ as to whether only smallholder producers or large producers can be FT-certified. This difference led to a 2012 split between Transfair USA and Fairtrade International. For our purposes, we focus on smallholder producers. In this context, we note that the institutional structure encourages farmers to organize as a cooperative to make decisions democratically and transparently. All of the parts of the value chain described in Chapter 9 of this volume must be certified for a product to be considered FT. On the consumer side, the FT label functions as a dimension of consumer taste that differentiates the product and warrants a higher price. Empirical research indicates that consumers trust the FT label and pay more. On the producer side, the evidence for a net benefit is mixed. Producers often receive a higher price for their commodity (Bacon, 2005; Weber, 2011). This result comes as no surprise given the price floor. Moreover, producers often have greater production and higher overall income, as in the case of a group in Oaxaca (Jaffee, 2008). Two problems prevent this gross benefit from translating into a net benefit for the producer: (1) producers must pay to certify their crop as FT, and (2) they can only recover this cost if they sell a threshold percentage of the crop under the FT label. In extreme cases, producers may “dump” on the market FT-certified coffee that they cannot sell at the FT price. Because of the lost certification cost, they effectively have sold it at a loss. The problems with FT extend from the producer level to the market level. At the market level, if there is an advantage to selling certified FT coffee over non-FT coffee in a country, producers are expected to switch to producing FT coffee. As the supply of FT coffee increases, the price decreases until FT and non-FT coffee prices equalize. In economic terms, market entry dissipates the rents (de Janvry et al., 2015). More recent literature addresses two different outcomes for farmers: overall economic stability and environmental practices. In terms of economic stability, Nicaragua coffee farmers

A Latin American small producer perspective  175 who participate in FT cooperatives report less livelihood vulnerability and increased cash flow (Bacon, 2005; Bacon et al., 2008). However, follow-up research with the same population reveals food insecurity, bouts of hunger during the growing season, and no reduction in migration rates (Bacon et al., 2014, 2017). The results in terms of environmental practices give more hope. Both the above Nicaraguan and Oaxacan farmers used a variety of farming practices much more often than comparable farmers not in cooperatives: compost instead of chemical fertilizers, for example, and terraces and barriers to reduce erosion. This brief survey of the effects of the FT movement on smallholder agricultural producers illustrates some progress in improving their livelihood and the challenges that remain. Fair trade only targets one element of the value chain: like the non-FT producer, the FT producer still grows raw materials at a small scale and sells them in an open market, albeit a slightly more favorable one. The FT and cooperative movements have a history of working together through FT cooperatives. Many FT producers are cooperative members. We argue that cooperative membership offers them the tools to address these remaining challenges of the FT.

HISTORY OF SMALLHOLDER AGRICULTURAL COOPERATIVES Before examining how cooperative membership addresses the present-day challenges of rural agricultural producers, we examine their evolution over the past hundred years in Latin America. The cooperative story is inseparable from the economic history of Latin America after World War II and of the people of this region—both the European migrants who settled in the countryside as well as their descendants who moved to cities. We focus on smallholder agricultural cooperatives related to economic development after World War II. Latin American Perspectives uses the image of a tightrope to describe a collection of case studies related to “Latin American Agricultural Cooperatives and Small-Farmer Participation in Global Markets” (Vásquez-León, 2010). The issue’s introduction begins with the context of rural­–urban migration and farmland abandonment. It proposes agricultural production cooperatives as a way for smallholders to negotiate better terms of trade and sustain participatory self-governance structures. In contrast with large corporations’ emphasis on continued growth and profits, the authors propose that production cooperatives allow for smallholder producers to pursue stable relationships with their land that are sustainable over the long term. They allow producers to integrate economic capital (assets and land), social capital (the strength of networks and negotiating in groups), and human capital (investment in member education). Present agricultural cooperatives trace their roots to the cooperative movement, which Europeans brought to Latin America in the early twentieth century. Initially, cooperatives thrived in immigrant communities as they sought to create economic structures apart from the countries in which they lived. After World War II the model expanded to rural areas, where the pooling of resources would improve production for smallholder farmers. Unfortunately, in the subsequent decades of the 1950s and 1960s, both democratic and socialist governments across the region appropriated cooperatives for their own ends, and several scandals tarnished the cooperative’s reputation. The 1970s allowed cooperatives to return to their original mission as grassroots communities that developed apart from the state with much influence from Catholic liberation theology. In the 1980s, as many Latin American countries adopted neoliberal economic policies, large state-sponsored production collapsed, and agricultural cooperatives emerged to fill in the gaps.

176  Handbook of research on cooperatives and mutuals These agricultural cooperatives have continued to walk the tightrope between the promises and the consequences of neoliberalism, where price controls, deregulation, and trade barriers are removed. Within this umbrella falls the solidarity economy—which values the quality of life as much as economic efficiency—as well as the FT movement described above. In contrast to other movements critical of neoliberalism, which encourage withdrawal from markets and destabilization of governments, agricultural cooperatives seek to reform the markets. Though at times a point of tension, this stance also provides a sense of dynamism and flexibility. The issue provides four case studies. Each shows the opportunities and challenges of organizations in transition: a Japanese–Brazilian pepper cooperative; a nut harvester operated by an indigenous Brazilian group; a Paraguayan organic sugar cooperative exporting FT; and a Paraguayan banana exporter that uses Mercosur. Each cooperative partners with corporations or governments and competes against other producers on the free market. Despite the challenges, Vasquez-Leon and her colleagues conclude that these cooperatives have brought “more democratic forms of participation and social equity” in contrast to the failure of both the state and the private sector to promote a “more equitable and rural society.” Veltmeyer offers an analysis of these two poles (Veltmeyer, 2018). On the one hand, cooperatives and other forms of solidarity economics offer a way to manage rural development within a capitalist system; on the other hand, they offer an alternative to that very same system. Both share the importance of “Buen Vivir,” loosely translated as “Good Life,” instead of GDP as a guiding quantity. Like Vasquez-Leon, Veltmeyer begins in the 1980s in response to neoliberalism in Latin America. Vasquez-Leon traced the departure of the poor from rural areas; Veltmeyer details their arrival in the cities, where many worked in the informal sector and earned no better a living than they did in the countryside. Amid this “lost decade” (1980–90) of international development, soup kitchens and social economy projects in slums emerged. Disorganized protests in the 1980s merged into more focused social movements in 1990, in what Veltmeyer calls “the golden age of resistance” that included indigenous groups. These movements funneled a progressivist turn in the late 1990s. In broad strokes, Veltmeyer situates two different models of cooperatives. One model operates within the second wave of international development, which bears the name “growth with equity,” “development from within,” or “the new developmentalism,” depending on the flavor. Within this framework, cooperatives fill a gap created by the state and private enterprise: a form of community development from the ground up instead of from the top down. He provides examples throughout Latin America of this type of cooperative. The second model operates apart from capitalist societies to create a new model. Veltmeyer provides the example of the Zapatista movement in Chiapas or the Bolivarian Revolution of Venezuela. The cooperatives we examine fall under the first model. They operate within the market as a means for rural landowners to carve out a space between large corporations and government agencies, pool their various forms of capital, and improve their economic livelihood.

HOW COOPERATIVES ACCOMPANY SMALLHOLDER FARMERS IN THE PRESENT CONTEXT A recent report from IFPRI highlights the challenges faced by smallholder farmers (Fan et al., 2013). One challenge stems from the lack of integration into markets, both for agricultural

A Latin American small producer perspective  177 inputs and for the sale of agricultural outputs. By themselves, smallholder farmers merely accept market prices, both for the food they consume to survive and for the crops they sell to purchase this food. The welfare effects of market price fluctuations depend on whether the household is a net buyer or seller of the good in question. For example, if the price of corn goes up, the improved price benefits a household that grows corn for its consumption and sells it on the market. However, the same price increase hurts a household that must purchase corn because it cannot produce enough to meet its needs. In addition to global market factors, the uncertainty in the production process has increased as of late because of the impact of climate change—isolated extreme events as well as systemic variation in temperature and rainfall. Moreover, imperfect integration into markets also affects intermediate inputs in the production process, such as fertilizer, credit, and capital. The relative isolation of the rural areas in which smallholder farmers often live makes acquiring these inputs challenging, if they are present at all. Agricultural cooperatives help these smallholder farmers establish a new relationship with the market in the decommodification that has affected coffee and other value chains since the early 2000s (Fitter & Kaplinksy, 2001). Historically, coffee has been traded as a commodity. The commodity category includes any product whose market contains low barriers to entry, intense competition, and declining terms of trade (Borrella et al., 2015). Moreover, since the breakdown of the International Coffee Agreement in the early 1990s, the price has fluctuated in the world commodity market, with a general downward trend. However, treating coffee as a commodity fails to recognize the diversity both among and within varieties of coffee. The Coffee Taster’s Flavor Wheel distinguishes a similar variety of notes in coffee to those in wine (Coffee Taster’s Flavor Wheel, n.d.). At the same time, specialization in final product markets has increased. Consumers are willing to pay a higher price for higher quality coffee from a specific location than for coffee consumed at home and sold in a grocery store. For coffee consumed in a coffee shop, the increased price includes non-tangible elements such as the atmosphere or amenities. Fair Trade and direct trade, which build a direct relationship between the purchaser and the seller, add specialization. Suppose producers can take advantage of this specialization. In that case, growers can exit a large, perfectly competitive market where they sell an undifferentiated commodity and enter a smaller market, which offers them a higher and more stable price and an incentive to improve their production quality. Producers require accompaniment to transition from one type of market arrangement to another. Borrella et al. (2015) describe the new “connective businesses” category that offers this accompaniment. Fifteen years after Fitter & Kaplinsky above, they confirm the same trends of lower, more volatile prices due to market factors and climate change. All three businesses that they profile fall under the category of direct trade. By changing the governance of the supply chain, coffee producers can improve their connection with consumers. These changes require high costs: roasters are often not used to direct relationships with producers, and producers cannot negotiate with roasters. “Connective businesses” improve both the aggregate amount of value and its distribution for both parties. They operate as exporters or importers as the situation allows; moreover, they support producers and guarantee the reliability and quality of coffee deliveries. Their support of producers does not stop at incorporating them into the market, for the benefits of markets often do not extend to those at the bottom of the pyramid. Instead, they work with them to create shared value. The business literature distinguishes between two types of constraints

178  Handbook of research on cooperatives and mutuals faced by those at the bottom of the pyramid: those that limit value capture (transactional constraints) and those that restrict value creation (productivity constraints) (London et al., 2010). The notion of a “connective business” fleshes out these constraints. It denotes three types of transaction cost constraints: market access constraints, market power constraints, and market security constraints. A coffee cooperative provides market access by transporting perishable coffee cherries to the roasting center and providing coffee producers with information about consumer preferences. It increases market power by allowing producers to negotiate with roasters up the value chain and obtain better terms. Furthermore, it enhances market security by providing producers a guaranteed purchase price on their crops through the growing season, improving the stability of their household economy. In addition, a connective business can relieve productivity constraints by providing agricultural inputs, pre-market credit, and training, all of which improve the yield of the coffee harvest. The following section provides a case study of a group of faith-based connective businesses in Latin America, focusing on a coffee cooperative in Chiapas, Mexico, that provides a concrete example of how this model works in practice.

THE COMPARTE NETWORK The Society of Jesus is an international Catholic religious congregation known mainly for its education and social work worldwide. In 2008 a group of social workers in 11 Latin American countries formed an organization called Comparte, “share” in Spanish (Liebsch, 2022; Rivera, 2020). The network members describe themselves as a “community of learning and action formed to construct alternative economic and production initiatives to the prevailing model of development together with producer organizations and other allies.” Rooted in a local community, each member organization strives to deepen relationships in the community as it addresses the structural causes of the poverty of the producers. As Figure 10.1 illustrates, Comparte member organizations accompany both rural producers of products such as coffee, chocolate, bananas, honey, corn, and milk and urban producers of textiles, shoes, and other artisanal products. Producers take control of the value chain for their products from the origin. In addition, some Comparte producer organizations also provide microcredit to their members to assist with emergency financial needs or allow them to expand their businesses. The individual producer organizations of Comparte operate in challenging local contexts with tremendous inequality and resource hoarding. One role of the network is to allow them to share best practices for mutual support and learn from each other. Another part is to connect them with the international network of higher education institutions sponsored by the Jesuits and in the larger Catholic context. Relationships between the academy and the field benefit both parties. On the one hand, higher education institutions provide technical expertise, financial support, and market access to the producer organizations; in turn, the producer organizations provide students and faculty with concrete experience with a model of alternative development and an opportunity to put their skills into practice for social justice.

A Latin American small producer perspective  179

Source: Comparte Marketing Communications Circular, 2021. Used with permission.

Figure 10.1

The Comparte network

Table 10.1

Comparte members

County (11)

Social Center (16+3)

Brazil

CEAS Brasil

Bolivia

ACLO Tarija

Bolivia

CIPCA

Colombia

SUYUSAMA

Colombia

IMCA

Colombia

CINEP/Programa por la Paz

Cuba

Centro Loyola Santiago

Ecuador

Viviendas Hogar de Cristo

El Salvador

Solidaridad CVX

Guatemala

SERJUS

Mexico

Misión de Bachajón—YA

Nicaragua

NITLAPAN

Paraguay

CEPAG

Peru

CCAIJO

Peru

CIPCA

Peru

SAIPE

Columbia / Peru / Brazil

Servicio Panamazónico

Latin America

Federación FyA—Formación para el trabajo

Spain (Basque Country)

ALBOAN

180  Handbook of research on cooperatives and mutuals

AN INTEGRATED VALUE CHAIN IN CHIAPAS Given the rural agricultural focus of this chapter, we focus on one COMPARTE member in particular: the producer organization Ts’umbalil Sitalá, its associated coffee roaster Bats’il Maya, and the network of coffee shops Capeltic, which for simplicity’s sake we will refer to by the umbrella group’s name, Yomol A’tel (YA). YA provides a concrete example of how a rural agricultural cooperative can accompany indigenous smallholder farmers in a deeper context than FT to negotiate a different relationship with the market economy. We rely on participatory action research by the director of Capeltic during two of the years (2017–18) in which he was the director-general (Irezabal Vilaclara, 2020). Irezabal uses “the construction of the price” to describe how YA vertically integrates a value chain from the coffee field to the coffee shop. In contrast to other models that focus only on the economic aspect, YA’s approach touches all aspects—economic, cultural, social, and environmental—with a focus on the complete value chain, which includes the coffee itself and the people who produce it. Thus, improving this value chain requires improving the lives of the people who work at all value chain steps. The first rung of the value chain is the producers themselves. In 2019, there were 361 producers and 10 workers in the producer cooperative Ts’umbalil Sitalá. The main objective of this rung is to improve the agricultural production of these families: providing their food security for their staple crops (corn, rice, and beans), teaching them environmentally sustainable production methods, and offering the ability to sell their cash crop coffee as a finished product and not just as raw material. As members of the same indigenous group as the coffee farmers themselves, the workers accompany the coffee farmers. The second rung of the value chain is the coffee roastery, Bats’il Maya. It stands at the intersection of the Tseltal way of life and the world coffee market. Its main purpose is to change how the producers interact with the market. On their own, the producers must accept the market price for green coffee. Instead of being price-takers of the volatile commodity price of green coffee, the roastery negotiates on their behalf with customers to obtain a set price for a finished product. To produce a finished product, the roastery built a production facility in the historic center of the indigenous region, even though its remote location increases logistics and transportation costs. The local people think of the production facility as a business and as a center of formation for a “School of Coffee” that serves the coffee producers and their children, many of whom work in the production center. The third rung of the value chain is the network of coffee shops, Capeltic. It employs 50 workers in Mexico City, Guadalajara, and Puebla, which operate five coffee shops within the respective Jesuit universities in those cities. These coffee shops strengthen the relationship between the coffee field and the academy. They also provide a total value of $40 USD for each cup of coffee instead of the $0.80 that a typical intermediary in the region would pay. In other words, the improved value chain increases (by 50 times) the final value of the producer’s product compared to the alternative. This increase holds at scale as well. In 2017, during Irezabal’s research, the YA umbrella group earned $1.8 million: the culmination of a decade with average annual production growth of 86 percent. Even more than the financial benefits of this model, however, Irezabal emphasizes the human benefits. YA provides formation opportunities for parties and all parts of the value chain. Producers are very familiar with the harsh realities of the coffee value chain and the transformative effect of organizations such as YA. The Coffee School that Bats’il Maya offers

A Latin American small producer perspective  181 replicates traditional learn-by-doing educational methods of the Tseltal culture and takes place not in the classroom but in the field, not with outside experts but with members of the same community. Irezabal highlights the same transformative possibilities at the other end of the chain: the 350,000 transactions in Capeltic coffee shops during the 2017 fiscal year provide 350,000 opportunities to invite consumers to a similar transformation. Every person in the value chain—the producer in Chiapas, a coffee shop employee in Guadalajara, an investor in Spain—has a different perspective on this chain and their participation in it increases their solidarity with one another. Instead of investing in a value chain, investors in YA are investing in the economic viability of a region in a way that reduces inequality and generates jobs in one of the poorest regions in Mexico. Participation in YA helps to develop human capital both within the cooperative and throughout the indigenous community. Within the cooperative, Irezabal describes how a structure of an annual general assembly, monthly executive committee meetings, and regional assemblies for each of the ten regions of the cooperative has helped the organization successfully navigate important decisions during its decade of growth. In the indigenous language, “the word walks” through the community as they solicit feedback and then “the word is collected” when the various administrative groups collect the feedback. As Irezabal points out, this shared decision-making model helps the cooperative avoid the trap of relying on a single decision-maker and being unable to make decisions either when that person is away or when that person moves on. Instead, the shared experience of navigating the challenges of growing a local business has enriched the working relationships among the cooperative members themselves and made them more resilient to withstand future crises. Similarly, outside the cooperative, its presence in the community offers a different approach to other NGOs and organizations within the region that are primarily supported by the government and aim to improve macroeconomic indicators such as GDP per capita. The agendas for these organizations are often set at the state or federal levels, such as the conditional cash transfer and farm subsidy programs begun by the Mexican government under President Salinas in the 1990s. While these programs help local producers economically, perhaps in the same way as participation in the YA value chain, they do not provide the development of human capital and resilience that YA does. Irezabal defines the term “buen vivir” to describe the integrated way in which a household, and by extension an entire community, holistically makes a living—growing their own food, selling their coffee as a cash crop, participating in their community, and taking care of their surroundings. This broader context is crucial to successfully accompany these producers, not only as economic actors but also as human beings.

GOVERNANCE The governance of the integrated value chain operates via two committees (Alejandro Rodriguez, personal communication, February 16, 2022). At the origin of the value chain, the board of directors of the producer cooperative Tsumbal’il Sitalá consists of a representative from each of the 11 regions of the cooperative. These representatives are nominated by the annual assembly of that region. It oversees the work of the producers themselves: estimating their harvests, training in environmental practices, and undertaking other regional projects. It also resolves any disputes that occur among the producers. Most importantly, based on the local market and the estimated coffee harvest, it sets the annual price that the cooperative will

182  Handbook of research on cooperatives and mutuals pay its members for their green coffee. In summary, the board of directors looks inward toward the origin. In contrast, the Executive Committee of Yomol At’el consists of a representative from each of the projects that YA sponsors: the coffee roastery Bats´il Maya, the coffee shops Capeltic, the producer cooperative Tsumbal’il Sitalá, and the honey cooperative Chabtic. It provides a way for the full-time employees of these organizations—a mix of indigenous and non-indigenous—to look outward, up the value chain, toward the market for finished products. In many cases, the indigenous employees of YA organizations are the sons and daughters of members of the producer cooperatives. The Executive Committee manages the relationships among the subsequent steps of the value chain: the roastery and the Capeltic coffee shops. It also manages the relationships with the university partners and other NGOs that work with the Yomol At’el projects on research projects of common interest that allow for technology transfer between the academy and the field in the style of a Comparte project. This dual governance structure with complementary organisms that look inward and outward up and down the value chain buttresses Yomol At’el as a successful example of vertical integration from the field to the cup and beyond.

SUGGESTIONS FOR FUTURE RESEARCH This chapter concludes with some suggestions for three broad categories of research needs. First, we need more longitudinal data on communities of producers that include cooperative members and non-cooperative members. Most of the quantitative studies referenced above are based on cross-sectional data. In addition, frequently there is rich data on members but little data on non-members. Little is known about the entry and exit patterns of producers into cooperatives. It would be useful to understand if participation in governance leads to continued use of the cooperative or whether the cooperative is one choice among various brokers and other buyers. This longitudinal data could help answer these questions. In addition, we ought to collect data not only at the producer level but along the entire value chain to examine the impact of vertical integration, as in the case study of Yomol Atel. A recent development review points out this imbalance (de Janvry & Sadoulet, 2020). Development economists have researched the supply side far more than the demand side of agriculture for development. A second need is to examine these agricultural cooperatives as cooperatives. Qualitative research could determine which of the seven principles of the International Cooperative Alliance are most relevant and ascertain the extent to which members participate fully in the governance process through voting on issues that come before the membership. They could also paint a better picture of the equity needs of cooperatives and how they support their members throughout the marketing year. This research would provide insight into the present channels through which these cooperatives help their members participate more fully in the value chain of various commodities. In addition, it could highlight opportunities for future improvement. Finally, the focus has been on agricultural cooperatives and those with perennial crops such as coffee. However, other cooperatives exist in Latin America, including forestry cooperatives that are used in community development (Butler and Current, 2021a and 2021b). A useful study would be to compare and contrast agricultural cooperatives with forestry cooperatives to compare governance systems and overall contribution to family income.

A Latin American small producer perspective  183

CONCLUSION This chapter has surveyed the present state of rural agriculture in Latin America, in particular the challenges faced by smallholder farmers in the early part of the twenty-first century in the midst of structural changes to the agricultural sector. Using coffee as a representative example, it has told the story of how FT organizations, from the outside, and agricultural cooperatives, from the inside, have attempted to provide a response to these challenges. A case study of a coffee cooperative in Chiapas as one of a network of faith-based cooperatives throughout the region provides a sketch of a different approach that includes both broad-based community development of an entire coffee-producing region and an integrated value chain that stretches from the coffee field to the cup. Only this approach will provide the resilience necessary to address head-on both present and future market challenges.

NOTE 1. The author wishes to thank Michael Boland and two anonymous reviewers for helpful comments and suggestions.

REFERENCES Alejandro Rodriguez. (2022, February 16). Interview By Stephen Pitts [Telephone]. Bacon, C. (2005). Confronting the Coffee Crisis: Can Fair Trade, Organic, and Specialty Coffees Reduce Small-Scale Farmer Vulnerability in Northern Nicaragua? World Development, 33(3), 497–511. https://​doi​.org/​10​.1016/​j​.worlddev​.2004​.10​.002 Bacon, C.M., Méndez, V.E., Gómez, M.E.F., Stuart, D., & Flores, S.R.D. (2008). Are Sustainable Coffee Certifications Enough to Secure Farmer Livelihoods? The Millenium Development Goals and Nicaragua’s Fair Trade Cooperatives. Globalizations, 5(2), 259–74. https://​doi​.org/​10​.1080/​ 14747730802057688 Bacon, C.M., Sundstrom, W.A., Flores Gómez, M.E., Ernesto Méndez, V., Santos, R., Goldoftas, B., & Dougherty, I. (2014). Explaining the ‘Hungry Farmer Paradox’: Smallholders and Fair Trade Cooperatives Navigate Seasonality and Change in Nicaragua’s Corn and Coffee Markets. Global Environmental Change, 25, 133–49. https://​doi​.org/​10​.1016/​j​.gloenvcha​.2014​.02​.005 Bacon, C.M., Sundstrom, W.A., Stewart, I.T., & Beezer, D. (2017). Vulnerability to Cumulative Hazards: Coping with the Coffee Leaf Rust Outbreak, Drought, and Food Insecurity in Nicaragua. World Development, 93, 136–52. https://​doi​.org/​10​.1016/​j​.worlddev​.2016​.12​.025 Borrella, I., Mataix, C., & Carrasco-Gallego, R. (2015). Smallholder Farmers in the Speciality Coffee Industry: Opportunities, Constraints and the Businesses that Are Making it Possible. IDS Bulletin, 46(3), 29–44. https://​doi​.org/​10​.1111/​1759​-5436​.12142 Butler, Megan and Current, Dean. (2021a). Evolution of Community-Based Enterprise Governance Over Time: Lessons Learned from the Maya Biosphere Reserve. Small Scale Forestry, https://​doi​.org/​10​ .1007/​s11842​-021​-09486​-5 Butler, Megan and Current, Dean. (2021b). A Comparative Analysis of Community-Based Enterprise Governance in the Maya Biosphere Reserve. Society and Natural Resources, doi​.org/​10​.1080/​ 08941920​.2021​.1965272 Coffee Development Report. (2020). International Coffee Organization. www​.intern​ationalcof​feecouncil​ .com/​cdr2020 Coffee Taster’s Flavor Wheel. (n.d.). Specialty Coffee Association. Retrieved November 23, 2021, from https://​sca​.coffee/​research/​coffee​-tasters​-flavor​-wheel

184  Handbook of research on cooperatives and mutuals de Janvry, A., McIntosh, C., & Sadoulet, E. (2015). Fair Trade and Free Entry: Can a Disequilibrium Market Serve as a Development Tool? Review of Economics and Statistics, 97(3), 567–73. https://​doi​ .org/​10​.1162/​REST​_a​_00512 de Janvry, A., & Sadoulet, E. (2020). Using agriculture for development: Supply- and demand-side approaches. World Development, 133, 105003. https://​doi​.org/​10​.1016/​j​.worlddev​.2020​.105003 Dragusanu, R., Giovannucci, D., & Nunn, N. (2014). The Economics of Fair Trade. Journal of Economic Perspectives, 28(3), 217–36. https://​doi​.org/​10​.1257/​jep​.28​.3​.217 FairTrade International. (2020). Monitoring the Scope and Benefits of Fairtrade (11th ed.). www​.fairtrade​ .net/​library/​monitoring​-the​-scope​-and​-benefits​-of​-fairtrade​-summary​-monitoring​-report​-11th​-edition Fan, S., Brzeska, J., Keyzer, M., & Halsema, A. (2013). From Subsistence to Profit: Transforming doi​ .org/​ 10​ .2499/​ Smallholder Farms. International Food Policy Research Institute. https://​ 9780896295582 FAO. (2018). Panorama de la pobreza rural en América Latina y el Caribe 2018. www​.fao​.org/​3/​ CA2275ES/​ca2275es​.pdf Fitter, R., & Kaplinksy, R. (2001). Who Gains from Product Rents as the Coffee Market Becomes More Differentiated? A Value-chain Analysis. IDS Bulletin, 32(3), 69–82. https://​doi​.org/​10​.1111/​j​.1759​ -5436​.2001​.mp32003008​.x Irezabal Vilaclara, A. (2020). Gestión y apropiación de alternativas en la cadena de valor del café para la construcción del “buen vivir” en América Latina [Mondragon Unibersitatea]. http://​ ebiltegia​ .mondragon​.edu/​xmlui/​handle/​20​.500​.11984/​1960 Jaffee, D. (2008). Fair Trade for Indigenous Coffee Producers in Oaxaca, Mexico. In R. Ruben (ed.), The Impact of Fair Trade (pp.195–219). Wageningen Academic Publishers. https://​doi​.org/​10​.3920/​ 978​-90​-8686​-647​-2 Liebsch, MegAnne. (2022, February 8). How One Jesuit Network Supports 50,000 Farmers and Artisans across Latin America. Jesuits.org. www​.jesuits​.org/​stories/​this​-jesuit​-network​-supports​-50000​ -farmers​-and​-artisans​-in​-latin​-america/​ London, T., Anupindi, R., & Sheth, S. (2010). Creating Mutual Value: Lessons Learned from Ventures Serving Base of the Pyramid Producers. Journal of Business Research, 63(6), 582–94. https://​doi​.org/​ 10​.1016/​j​.jbusres​.2009​.04​.025 OECD, & Food and Agriculture Organization of the United Nations. (2019). Latin American Agriculture: Prospects and Challenges. In OECD-FAO Agricultural Outlook 2019–2028 (pp.70–124). www​.oecd​ -ilibrary​.org/​content/​component/​b2b742eb​-en Rivera, SJ, O.R. (2020, May). La respuesta de la Compañía de Jesús ante la desigualdad y la pobreza en América Latina. Ibero: Revista de La Universidad Iberoamericana, 67, 10–13. Vásquez-León, M. (2010). Introduction: Walking the Tightrope: Latin American Agricultural Cooperatives and Small-Farmer Participation in Global Markets. Latin American Perspectives, 37(6), 3–11. Veltmeyer, H. (2018). The Social Economy in Latin America as Alternative Development. Canadian Journal of Development Studies/Revue Canadienne d’études Du Développement, 39(1), 38–54. https://​doi​.org/​10​.1080/​02255189​.2017​.1294052 Weber, J.G. (2011). How Much More Do Growers Receive for Fair Trade-Organic Coffee? Food Policy, 36(5), 678–85. https://​doi​.org/​10​.1016/​j​.foodpol​.2011​.05​.007

11. The role of the farmer and their cooperative in supply chain governance: a US perspective Michael A. Boland and William Secor

OVERVIEW OF US AGRICULTURAL COOPERATIVES Cooperatives in the United States evolved along two lines in the early part of the twentieth century. As noted by Cook (1995), US producer cooperatives’ birth stories were influenced by Nourse and Sapiro. Nourse (1992) popularized the notion of the competitive yardstick in that cooperatives brought cost discipline to industry and allowed the industry to become more like the perfectly competitive ideal of neoclassical economics. Sapiro (1993) wrote that producers should commit to marketing 100 percent of their products through a cooperative. Sapiro cooperatives did not succeed as well in the US as they did in Australia and Canada, through various cooperative pools such as wheat and wool. This chapter focuses on the role of cooperatives whose members are agricultural and horticultural producers, which are referred to as producer cooperatives, and include marketing and purchasing functions. Farmer governance of the supply chain, in the writings of Nourse and Sapiro, was aligned with a Marketing Value Chain Governance system discussed in Chapter 9. These writings were not focused on adding value or capturing additional portions of the marketing margin. Control over volume and the ability to influence price were the primary considerations of the authors and the farmers they described. Cooperatives’ positions within the agricultural supply, marketing, and value chain are unique because a cooperative is fundamentally a form of vertical integration. Farmers are already members of the chain because of their production. Purchasing cooperatives acquire large amounts of farm inputs, pass along volume discounts, and have services which are needed by the farmer, while marketing cooperatives market volumes of agricultural and horticultural products and pass along volume premiums and any quality premiums. Some cooperatives, especially in food and feed grains and oilseeds, provide multipurpose products and services and are referred to as mixed cooperatives by the USDA (see pp.7 and 39 in United States Department of Agriculture—RD (2021)). Figure 11.1 shows the number of cooperatives and membership over time.

COOPERATION IS A FORM OF VERTICAL INTEGRATION As a result of this vertical integration, the governance decision for cooperatives within their respective supply, marketing, and value chains is inherently some form of vertical extension, or more broadly vertical coordination, within the chain. This is in contrast to alternative business models that may be an external entry decision or a vertical coordination decision depending on their connection to the chain. This vertical coordination perspective means that 185

186  Handbook of research on cooperatives and mutuals

Figure 11.1

Number of cooperatives and membership 1925–2019

Source: United States Department of Agriculture – RD (2021a, 2021b).

the relevant framework when analyzing governance decisions within these chains from the farmer and their cooperative perspective is the “make-or-buy” decision. Under the make-or-buy rubric, the decision to take on the responsibilities of another part of the chain (“make”) or to let others take on that responsibility and purchase their goods or services (“buy”) is evaluated based on the benefits and costs of each. With respect to the role of the farmer and their cooperative in supply, marketing, and value chain governance, the make-or-buy decision analyzes the most efficient coordination mechanism to use with respect to the farmer. In the farmer cooperative case, efficiency can be thought of as economic efficiency coupled with a governance structure that includes ownership by the farmer. Again, this is in contrast to alternative business models that would analyze this decision with respect to the owner of the firm: for example, an investor or sole proprietor. Moreover, the decisions in both cases impact the farmer as a member of the chain. However, only in the former case (a cooperative) does the farmer have control of that decision. Nourse’s Competitive Yardstick Concept In the literature, two viewpoints dominate as to how marketing cooperatives should interact in these chains: Nourse’s competitive yardstick and Sapiro’s marketing cooperatives. Nourse’s competitive yardstick perspective views cooperatives as a means for farmers to inject competition into a market that is not perfectly competitive (Nourse 1992). The cooperative should not exist permanently once perfect competition is attained, as he explains in the following way:

The role of the farmer: a US perspective  187 The farmer’s role in the economy is that of raising crops and producing livestock […] When such [complementary] services are furnished efficiently and economically (which means in a truly competitive manner), there is no occasion for the farmer to […] divert some of his capital and […] managerial time and effort to these tasks and away from his main enterprise of farm production. It is of the utmost importance, however, that farmers shall have both the legal institutions and the organizational “know-how” to step into these fields when and to the extent that service is inadequate or unduly high in cost […] when they [cooperatives] have in fact attained their real objective by demonstrating a superior method of processing or distribution or by breaking a monopolistic bottleneck […] they should then be content merely to maintain “stand-by” capacity or a “yardstick” operational position rather than to try to occupy the whole field or a dominating position within it. (Nourse 1992, p.106)

Sapiro’s Marketing or Cooperative Pooling Concept Sapiro’s marketing cooperative stands in contrast to Nourse’s competitive yardstick. The Sapiro marketing cooperative is evaluated by the economic gain it provides to its members, not the installation of competitive market dynamics (Sapiro, 1993). Sapiro heralds the success of these organizations by citing the market share they obtain (see Sapiro 1993, p.83). Additionally, a key component of a Sapiro marketing cooperative is the contracts created and the focus on commodities, not localities (Sapiro, 1993). In doing this, the departure from Nourse’s competitive yardstick reflects not just underlying motivations, but also fundamental practical organizational principles. Cook (1995) summarizes the evolution of US agricultural cooperatives along these lines, noting differences between marketing and bargaining cooperatives as appropriate. Cook’s (2018) updated life cycle model describes this further. In understanding these cooperatives in the light of this chapter’s focus, one must address the changing issues related to the various property right problems identified in “Stage Three” of the cooperative’s journey. These problems include the free-rider, horizon, portfolio, control, and influence costs problems. Various cooperative structures will mitigate each of these problems to varying degrees. Additionally, the cooperative structures chosen are dependent upon the commodity and the broader market structure.

FARMER GOVERNANCE Farmer governance along the supply chain involves making decisions that align the cooperative along Nourse’s or Sapiro’s lines while navigating the property rights issues identified in “Stage Three” of the cooperative’s journey. In this context, the horizon, portfolio, and control problems are particularly concerned. For example, consider corn producers vertically integrating downstream in an ethanol plant. The horizon problem creates a disincentive to invest in the ethanol plant due to conflicting timeframes for recouping the costs to build or buy the ethanol plant (Secor and Boland, 2017). The portfolio problem exists by potentially diversifying away from its original risk-return characteristics that some members may not prefer. Lastly, control problems may arise from adding a new business that farmers as board members find costly to monitor and manage, and outside investment cannot discipline. Accordingly, farmer supply chain governance decisions are made to mitigate these problems while also meeting the objectives of the underlying cooperative members. As Cook (1995) points out, Nourse and Sapiro’s cooperatives have tradeoffs in addressing these problems. Moreover, the commodity and market structure will add physical and practical limits

188  Handbook of research on cooperatives and mutuals to the chosen cooperative and governance structure. The remaining sections of this chapter provide examples of cooperatives and their decisions in supply, value, and marketing chains to manage these issues in a US context. The following section describes the data used to provide insights into cooperatives’ functions within the marketing, supply, and value chains they participate. The three subsequent sections summarize and explain the findings from the data within the context of marketing, supply, and value chains, respectively. Each section also provides examples of cooperative actions and decisions related to that chain concept. The chapter concludes with two sections on implications for current and future chain governance.

DATA We used data from 138 of the top 150 cooperatives in the United States based on sales volume according to the 2018 US Department of Agriculture statistics. This data was used by Boland (2020) in measuring different life cycle categories, which were split into marketing and purchasing, with 45 percent being marketing cooperatives and 55 percent being purchasing cooperatives. Value Chains Functions included are inbound logistics, production or processing, outbound logistics, marketing and sales, research and development, and services. Each cooperative’s activities were analyzed to see which of these functions was or was not done by the cooperative. Logistical functions were analyzed by looking at whether the cooperative participates or had participated in the regional Teamsters Union defined benefit program. We were able to identify 53 percent of the marketing and purchasing cooperatives as integrating the trucking function. We were not able to locate a method to identify non-trucking logistical functions but found seven cooperatives that owned locomotives. The production and processing function was identified as the production of a service by purchasing cooperatives and processing an agricultural product into food through marketing cooperatives. As was expected, 100 percent of the cooperatives were involved in this function. The marketing and sales function was defined as marketing products and services to buyers for marketing cooperatives or producers for purchasing cooperatives. All cooperatives were involved in this function as well. A number of marketing cooperatives have gone through change over time. In the late 1960s, the prune hullers unified their federated cooperative structure into the modern-day Sunsweet. Single-location dairy creameries have amalgamated into larger centralized cooperatives such as DFA, AMPI, CDI, Prairie Farms, and Land O’Lakes. More recently, Hazelnut Growers of Oregon merged into Wilco, a farm supply cooperative. All of these activities have been done to help farmers seek more of the marketing margin by developing value-added activities within their value chains and extending their governance beyond the farm gate. Research and development were identified as to whether the cooperative had a clearly defined functional area. Purchasing cooperatives were not considered to have activities in this area. Marketing cooperatives were identified as having research and development efforts in this function if they had clearly defined innovation centers or laboratories that worked with

The role of the farmer: a US perspective  189 buyers to identify new uses for their agricultural products, resulting in a movement outward in the demand curve. In analyzing this function, it soon became apparent that in the dairy industry, dairy marketing cooperatives were working collaboratively through dairy checkoff programs that funded research on topics that moved the demand curve outward. We found that 51 percent of the cooperatives had a clear research and development facility or collaborated through another entity. For example, Blue Diamond Growers and Sun-Maid Growers have created innovation centers to help provide solutions for buyers in the use of their products. Supply Chains Functions associated with agricultural supply chains include input suppliers, producers, first handlers, processors, distributors, and buyers. Note that there is no clear delineation between these entities and their function because some may also be part of a value chain. This is because a value chain is often built around an end-product (for example, breakfast cereal), while a supply chain is built around each input (for example, sugar, vitamins, or wheat for the breakfast cereal). A food processing firm is likely to have more supply chains and fewer value chains. Purchasing cooperatives were identified as input suppliers but 92 percent of them are first handlers of feed and food grains and oilseeds. Marketing cooperatives are involved in processing, and their level of involvement in distribution varies depending upon the commodity. All marketing cooperatives were found to sell directly to wholesalers who handled distribution activities, and 22 percent were found to own some form of distribution services. Some dairy cooperatives were involved with input supply by owning farm stores that sold feed or services such as insurance. Many purchasing cooperatives that began as single-location energy or feed cooperatives have developed into a full line of farm inputs. The most significant changes are noted for the mixed cooperatives, which have seen dramatic changes in the past two decades due to mergers and acquisitions that have increased their size and scale across geography and in some cases, business enterprises. Risch et al. (2014) note that these mixed cooperatives are undergoing significant changes brought upon by increases in crop yields, as noted in relation to corn by Beddow and Pardey (2015). Marketing Channels Every marketing cooperative was found to operate with two or more stages in a marketing channel, with wholesalers and retailers being most common. Purchasing cooperatives had no stages as they sold directly to producers. However, if one considers the sellers of products to these purchasing cooperatives, there are one (wholesaling) or two (wholesaling and manufacturing) stages. Of the marketing cooperatives, 88 percent had a retail store or outlet to sell directly to consumers. This form of direct marketing includes zero stages.

IMPLICATIONS FOR CHAIN GOVERNANCE NOW AND IN THE FUTURE Farmers have a unique role in chain governance as they are the underlying production level for the start of any food chain. When farmers, through cooperatives, enter the chain at a stage

190  Handbook of research on cooperatives and mutuals other than production, it is inherently a form of vertical integration. This is vertical integration and not coordination because the farmers are the owners of the cooperative and have control of the cooperative. This idea is consistent with and part of the rationale for single taxation of cooperative profits (see for example Sexton and Sexton 1986). As a result, the framework for analysis is a make-or-buy decision rather than a simple entry–exit decision. This implies that transaction costs and market power are major factors rather than potential profits and operational costs alone. Future research into chain governance and the US farmer should be performed within this framework. This is a segment of the research priority noted by Boland et al. (2021) and Boland (2019) on the future of the farm and its relationship to cooperatives. An additional area of research should further investigate farmer perceptions of cooperative value within the chain. Munch, Schmit, and Severson (2021) study this type of question using US dairy farmers. They find that dairy farmers would accept a lower milk price to sell through cooperatives, as opposed to independent processors. Note that some of this research will be related to and may overlap with the research on member participation and feelings of connectedness (see other Handbook chapters). The distinction lies in its focus on market relationships or transaction costs. For example, in Munch, Schmit, and Severson (2021), the value was tied to a willingness to accept lower output prices. This type of research also points to additional work on the implications on the chain of US farmer governance. Little work has investigated the impact of cooperative market share or chain dominance and chain outcomes. Future research may investigate whether chains dominated by cooperatives create lower consumer prices, more innovative products, or more equitably distributed profits along the chain. Furthermore, the use of cooperatives by limited-resource farmers in the US deserves further research. Many food cooperatives purchase food directly from many such farmers in a one-stage marketing channel. A growing need for volume might lead to a potential need for a cooperative to help alleviate supply constraints. Other research should investigate the extent to which chain governance by US farmers is affected by the areas needing further research (Boland et al. 2021). Namely: To what extent do changing farmer characteristics, sweeping data integration and collection efforts, and shifting regulations and regulatory environments affect US farmer governance of chains? The growing focus on environmental and social sustainability captures all three of these issues. As consumers become more focused on sustainability, a description of how US farmers and cooperatives are impacted and responding is needed. An example of this response is farmers’ participation in carbon markets and utilizing cover cropping or tillage following Land O’Lakes’ investment in this area and the creation of their Truterra business line. Chain governance questions relevant to this specific carbon market example might include to what extent cooperatives can facilitate farmers’ participation in these carbon markets, to what extent cooperatives can set the terms of these carbon markets, and how US farmers might value working cooperatively to market carbon credits. In addition to, or separate from, changes in farm practices, farmers may participate in information sharing programs that fit into the second issue: data collection. An example of this is dairy farmers who share sustainability information with chain participants (Boland, Cooper, and White 2018). In some cases, a cooperative is the steward of this information. Related chain governance questions include: what is the incentive to cooperatively market sustainability information; under what circumstances might it be better to market sustainability information as a cooperative vs incentivizing member practices to be more sustainable so that the

The role of the farmer: a US perspective  191 cooperative and its products are viewed as more sustainable; and how far in the chain should a cooperative control this information? Lastly, regulation around environmental issues appears to be changing. For example, in 2015 Ohio implemented new rules that affect fertilizer applications in the state (Hall 2015). One requirement is that those applying or supervising the application of fertilizer must be certified. An exception at the farmer level is if a cooperative or other custom applicator is doing the application. This suggests that regulations that are costly for individual farmers to comply with may be better managed through the cooperative. A similar argument has been made in the context of Section 199A tax deductions (Kenkel et al. 2019). Cooperatives are entities that affects individual farmers’ tax benefits. A related chain governance question is: How might cooperatives, from a governance context, be specially positioned to comply with new regulations vis-à-vis farmers or investor-owned firms?

SUMMARY AND CONCLUSIONS Agricultural producers continue to use their cooperatives in a way championed by Nourse. Many marketing cooperatives have market share, but not to the extent advocated by Sapiro, with the exception of certain industries such as cranberries or sugar beets. Many purchasing cooperatives have significant market share in geographic regions, and the 2000–20 period saw a tremendous degree of consolidation in this segment. These activities suggest that farmers continue to want some degree of control over the marketing margin or volume discounts and premiums, suggesting that governance is still critical and desirable for those chain captains who want to coordinate supply and value chains.

REFERENCES Beddow, J.M. and P.G. Pardey. 2015. “Moving Matters: The Effect of Location on Crop Production” The Journal of Economic History 75(1):219–49. Boland, M.A. 2019. “Governance in Agricultural Cooperatives.” Western Economic Forum 17(2):42–51. Boland, M.A. 2020. “A Measure of Duration in a Life Cycle Analysis of U.S. Agricultural Cooperatives.” Staff Paper P20-3. Department of Applied Economics, University of Minnesota. Boland, M., B. Cooper, and J.M. White. 2016. “Making Sustainability Tangible: Land O’Lakes and the Dairy Supply Chain.” American Journal of Agricultural Economics 98(2): 648–57. Boland, M. A., B. C. Briggeman, K. Jacobs, P. Kenkel, G. McKee, and J. L. Park. 2021. “Research Priorities for Agricultural Cooperatives and their Farmer-Members.” Applied Economic Perspectives and Policy 43(2):573–85. Cook, M. L. 1995. “The Future of U.S. Agricultural Cooperatives: A Neo-Institutional Approach.” American Journal of Agricultural Economics 77(5):1153–9. https://​doi​.org/​10​.2307/​1243338 Cook, M.L. 2018. “A Life Cycle Explanation of Cooperative Longevity.” Sustainability 10(5):1586. Available at https://​www​.mdpi​.com/​2071​-1050/​10/​5/​1586. Hall, P.K. 2015. Ohio's New Fertilizer and Manure Application Restrictions are in Effect. Farm Office, Ohio State University Extension. Available at https://​farmoffice​.osu​.edu/​blog/​mon​-07062015​-722pm/​ ohios​-new​-fertilizer​-and​-manure​-application​-restrictions​-are​-effect. Kenkel, P., G. McKee, M.A. Boland, and K. Jacobs. 2019. “The New Role of Agricultural Cooperatives in Pooling and Distributing Tax Deductions.” Western Economic Forum, 17(2):16–23. Munch, D. M., T. M. Schmit, and R. M. Severson. 2021. “Assessing the Value of Cooperative Membership: A Case of Dairy Marketing in the United States.” Journal of Co-operative Organization and Management 9(1). https://​doi​.org/​10​.1016/​j​.jcom​.2021​.100129

192  Handbook of research on cooperatives and mutuals Nourse, E. G. 1992. “The Place of the Cooperative in Our National Economy.” Journal of Cooperatives, 7:105–10. (Original work published in American Cooperation 1942 to 1945, American Institute of Cooperation, pp. 33–9). Risch, C., M.A. Boland, J. Crespi, and M. Leinweber. 2014. “Determinants of Occupational Safety in Agribusiness Workers.” Applied Economics Perspectives and Policy 36(3):46–55. Sapiro, A. 1993. “True Farmer Cooperation.” Journal of Cooperatives, 8:81-93. (Original work published in World’s Work, May 1923, pp. 84–96). Secor, W. and M.A. Boland. 2017. “Entry and Exit Patterns in Corn-ethanol Plants.” American Journal of Agricultural Economics 99(2):524–31. Sexton, R.J. and T.E. Sexton. 1986. Taxing Co-ops: Current Treatment is Fair, But Not For Reasons Given By Co-op Leaders. CHOICES 1(2):21–5. United States Department of Agriculture – RD. 2021. Agricultural Cooperative Statistics 2019, Service Report 83. Available at https://​www​.rd​.usda​.gov/​sites/​default/​files/​publications/​sr83​_agr​iculturalc​ ooperative​statistics​_2019​.pdf.

12. The role of the farmer and their cooperative in supply chain governance: an Irish perspective1 Bridget Carroll, Olive McCarthy, Noreen Byrne, Michael A. Boland and Michael Ward

In 2019 there were 21 dairy cooperatives in Ireland, with more than 61,000 members and €17 billion in sales (ICOS, 2020). Dairy cooperatives in Ireland are typically multi-purpose in nature, providing milk collection and processing, marketing, farm inputs and other services. Through its cooperatives, the Irish dairy industry has achieved a significant degree of vertical integration with its farmer-members, including the provision of a wide range of other supports (Food Vision 2030). The leading cooperatives include Glanbia, Kerry, Dairygold, Aurivo, Lakelands, the Carbery group of co-ops, Tipperary, Arrabawn and North Cork. When combined with the smaller cooperatives, these process most of the milk supply in Ireland (Ryan, 2013; Collins, 2020). The cooperative is therefore by far the dominant model in dairy processing. Two larger cooperatives with greater milk volumes, Glanbia and Kerry, have involved public limited company (plc) spinouts with minority shareholding by the cooperatives. The move to a plc structure in the 1980s and 1990s was designed primarily to raise finance for expansion and diversification using a value chain approach to understanding consumer demand for higher valued dairy products. In 2022, both cooperatives either engaged in or completed processes to once more ensure full ownership by the cooperatives of the dairy processing and agri-business activities. Smaller cooperatives avoided the plc route, in many cases forming alliances with private companies for the supply of ingredients such as milk powders and proteins and milk products such as cheese and butter instead. Governance remains close to the farmer shareholder, using a one-person-one-vote electoral system, with shareholding linked to usage and affordability. Typically, the governing structure consists of regional advisory elected farmer shareholder groups which in turn elect a small board of directors for the cooperative, with service often limited to two terms of three to four years and sometimes an upper age limit of 60 or 65. Like most cooperatives globally, the CEO or general manager wields considerable power in the cooperatives. Many multi-purpose dairy cooperatives have different classes of shares reflecting the different business relationships, such as milk supply and non-milk supply, that members have with the cooperative (Boland and Cook, 2013). This chapter examines supply chain governance in Irish dairy cooperatives. An increasing emphasis on scale and efficiencies and a drive to achieve global reach through value-added products have been evident. Capitalising on Ireland’s natural competitive advantages has also been a key feature of the national and international supply chain for dairy, ingredients and nutrition. A range of governance approaches have been adopted by cooperatives and have evolved over time. EU policy on milk supply has also been a key driving force in determining the role of the farmer and their cooperative in supply chain governance. The focus is now 193

194  Handbook of research on cooperatives and mutuals shifting to EU policy on climate change and other related issues such as land management, access to labour and youth involvement. Four cases of different kinds of cooperative organisation within the Irish dairy sector are presented in this chapter, with somewhat contrasting approaches to dairy supply chain governance in Ireland. These four cases serve to demonstrate how governance of dairy supply chains in Ireland has typically remained close to milk producers and serves a wide range of farm production needs. This closeness to farmers has been matched by an ability to reach global markets through federation and other strategies to achieve scale and sustainability. Ornua, which operates as a federated cooperative, markets Irish dairy produce internationally. The Glanbia Co-op has held a significant shareholding in Glanbia plc. Glanbia Co-op has focused its dairy-processing activities through Glanbia Ireland, a 60 per cent cooperatively owned joint venture with Glanbia plc. Proposals to bring Glanbia Ireland under the full ownership of Glanbia Co-op were agreed in early 2022 and the new co-operative entity has been named Tirlán. The plc has become a high-growth global business across nutrition, ingredients and dairy. Dairygold Cooperative Society Ltd is a fully farmer-owned multi-purpose cooperative that has committed to remaining as a cooperative. Finally, Carbery is owned by four independent dairy cooperatives, namely Barryroe, Bandon, Lisavaird and Drinagh. These cooperatives supply milk to Carbery, which is then responsible for processing and marketing. Carbery also owns other non-dairy businesses. All four entities are highly profitable and operate strong dairy consumer brands.

DAIRY COOPERATIVE SUPPLY CHAIN Given the advantages of climate and soil, a significant rural population and slow industrialisation, the Irish cooperative movement developed along the lines of strong agricultural cooperatives, focused primarily on the dairy sector. Sir Horace Plunkett visited the United States in 1890 and returned to Ireland with knowledge of the cooperative system (Kennelly, 2008). Dairying in Ireland is based on a low-cost, rain-fed, grass-based system with a high dependence on exports. Typically, milk is collected from members’ farms by cooperative-owned trucks and the milk is transported to the cooperatives’ processing plants, where it is weighed and quality tested. Once passed, the milk is stored for processing, often on-site, into a range of retail products for local and international consumer markets, for the food service sector or for development into food ingredients or other products, including pharmaceutical products. Over time, there has been a drive to rationalise the dairy-processing sector to achieve scale and efficiencies, develop market-oriented policies aimed at consumers, move away from primary processing and increase value-added exports, downstream manufacturing, new product and new market development. The main routes to market for dairy products are through individual cooperatives’ own marketing subsidiaries or joint ventures internationally, and through Ornua’s global marketing and distribution channels. Ornua markets approximately 60 per cent of all Irish dairy products to customers around the world. Irish milk-processing cooperatives have become integrated into global supply chains, developing food ingredients, flavourings, casein-based casings for the pharmaceutical industry, infant milk formula and sports nutrition products. Specialised nutrition companies such as Wyeth, Danone and Abbott have processing sites in Ireland which are supplied by the cooperatives. Relationships with multinational companies such as these have tended to be long-term as the

The role of the farmer: an Irish perspective  195 cooperatives widen and deepen their market channels. Very considerable investments have been made by the cooperatives to deliver food and food ingredients to a world standard in order to secure the future for their farmer-members. In terms of local retail brands of consumer products, once-lucrative contracts with large retailers have been upended in recent years as a result of the introduction of lower-priced supermarket own-brand dairy products. Various interdependencies, connected with the growth of the businesses, have developed in the sector on an all-island basis, as the island of Ireland encompasses 32 counties across two jurisdictions: the Republic of Ireland and the United Kingdom of Great Britain and Northern Ireland. These include manufacturing of specialist dairy products in Northern Ireland for cooperatives in the Republic of Ireland, purchase of milk in both jurisdictions and sale of agricultural products or grain from the Republic to Northern Ireland (Carroll, 2021). Plant capacity has been built around these resource flows. Lakeland Dairies and Glanbia, in particular, have a significant amount of their milk pools originating in Northern Ireland.

THE INFLUENCE OF EU AGRICULTURAL POLICY The backdrop to developments in Irish agricultural cooperatives over the past 30–40 years lies in the EU dairy quota system introduced in 1984 – which served to curb milk production and stabilise milk prices – and its subsequent removal in 2015. The removal of the quota system has served to improve the competitive position of EU dairy farmers. The quota system introduced a cap on milk production, thereby curtailing expansion opportunities at both farm and milk-processor level. Between 1984 and 2015 there was evident growth in average farm size, a decrease in dairy cow numbers, a trend towards farm consolidation and a reduction in the number of dairy producers (Donnellan, 2015). By 1986 some larger cooperative processors had begun to focus on overseas expansion and product diversification, which was financed through a capital restructuring and the formation of plcs (Jacobson and O’Leary, 1990). These plcs, namely Kerry and Glanbia, were established with majority cooperative ownership. Some cooperatives diversified into other industries such as pigs, agri-business, feed milling and consumer foods. The 2015 removal of the quota system enabled dairy farmers to increase milk production, which required significant investment in enhanced processing capacity. In anticipation of this change, many co-ops have been investing in new plant to support greatly increased member milk supply. For Glanbia and Kerry, the return on milk processing has generally been lower than that on the high value-added diversification activities over the past decade. In 2022 a return of dairy-processing activities to full cooperative ownership was seen, giving full control to farmers in a type of cooperative ‘remutualisation’, while the plc retains the other more profitable activities of the business. The cooperatives continue to have a shareholding stake in the plcs, but at significantly reduced levels. The evolution of the agricultural cooperative sector in Ireland has been greatly influenced by EU agricultural policy, as outlined above. However, more recently this policy has appeared to be at odds with EU climate change policy aiming to reach net zero greenhouse gas emissions (GHG) in the EU by 2050. Significantly increased milk production and the development of enhanced processing capacity pose significant environmental challenges. There have been high-profile objections to new milk-processing plants due to environmental impact concerns, including increased carbon footprint and damage to habitats. Furthermore,

196  Handbook of research on cooperatives and mutuals the impact of increased cow numbers on the environment through increased carbon emission levels has resulted in political and environmental controversy around the size of the so-called national herd. Additionally, as Ireland adopts EU climate change targets for 2030 and beyond, it also faces the threat of substantial EU fines for failing to meet targets. These conflicting EU policies leave dairy farmers in potentially vulnerable positions, and the target of climate change activism. However, there is scope and direction within the new CAP 2023–2027, particularly under the new agri-environmental and climate measure (AECM) which incorporates a results, landscape and cooperation-based approach to payments. This involves the option of a ‘general’ scheme or a ‘cooperation’ scheme, with an expected uptake of 30,000 farmers for the former and 20,000 for the latter. Cooperatives, as collaborative, landscape-based organisations with strong advisory divisions, would seem to be well placed to facilitate farmers in availing of these schemes (Byrne, Ryan-Doyle & McCarthy, 2022). What follows explores dairy supply chains and their governance in Ireland by focusing on four cooperative organisations.

FOUR COOPERATIVE ORGANISATIONS Ornua A state enterprise until 1973, Ornua, formerly the Irish Dairy Board, is a federated central dairy marketing organisation with eight cooperative members, seven of which are individual dairy/ multi-purpose or mixed cooperatives – Aurivo, Arrabawn, Dairygold, Glanbia (now Tirlán), Lakeland Dairies, North Cork Creameries and Tipperary. The remaining member, Carbery, is a federation of four dairy cooperatives. Ornua takes a commercial outlook in its aim to make a maximum return for primary producers. It is composed of Ornua Foods for international marketing and sales of its consumer brands and Ornua Ingredients for the procurement of dairy products and sale of dairy ingredients. It employs 2,400 people and group turnover in 2020 was €2.3 billion (Ornua, 2021). Ornua has developed a network of marketing and distribution companies in over one hundred countries. The Kerrygold brand, as distinct from brands produced by Kerry Co-op/ plc, was once a single brand of butter and now encompasses a range of products. It is considered one of the most identifiable Irish brands on European supermarket shelves and is the biggest butter brand in Germany and the second biggest butter brand in the US, making it one of Ireland’s key dairy assets (Ornua, 2021). Ornua’s cheese brands include Dubliner and Pilgrims Choice. While it still oversees marketing of a wide range of commodities, Ornua has progressed to processing and providing raw materials for the food industry, specialised food ingredients, customised milk and whey powders, milk proteins, proprietary recipes and branded products. In preparation for post-quota increases in milk supply, it made significant investment in research and development, sold its non-core dairy assets and moved into butter production and packing through collaboration with Dairygold and investment in a research and development Innovation Centre. Ornua was a ‘gold’ member for 2021 of the national sustainability programme ‘Origin Green’. In addition to reducing emissions and food waste, it has ensured that its member suppliers are approved under the Sustainable Dairy Assurance Scheme of Bord Bia (the national food board).

The role of the farmer: an Irish perspective  197 Ornua has been a very significant resource for the Irish dairy sector. It has enabled the sector to share the cost of co-ordinated development of export marketing and, as such, it plays a key role in collaboration in the sector. Ornua is useful for small and medium sized cooperatives which may find marketing products themselves more challenging, giving them negotiating power with customers they would not otherwise have (O’Mahony, 2014). Its members also benefit from and rely on its market analysis. Prior to its existence as a dairy board, Irish dairy was sold through London agents at significant cost and the sector had minimal market reporting and no brands (Irish Dairy Board, 1986). As a national cooperatively owned marketing cooperative, it is one of the few dairy board-type entities left in the world and arguably has been a factor in maintaining the high number of dairy cooperatives in Ireland relative to other countries (Carroll, 2021). While Ornua is held in very high esteem within the dairy cooperative sector, a recurring criticism of the organisation has been that its constituent members undermine it through rivalry and competition. In 2020 a new governance structure was formed, consisting of an Ornua Advisory Council and an Ornua Board. The Advisory Council is composed of appointees by cooperative members of Ornua (although these so-called non-conflicted members are not board members of the member-cooperatives); the two main national farming representative bodies, the national agricultural cooperative umbrella body and the chairperson of the Ornua Board, who is a non-executive director. The Board is made up of directors appointed by Ornua cooperative members, farming and industry appointees and a number of executive and non-executive directors. These changes took place following a number of ‘defections’ and larger member-cooperatives competing in some of the same markets as Ornua. Arguably, this new governance structure is a departure from the normal working of a second-level cooperative, which would see the direct involvement of user-beneficiaries. Glanbia Glanbia plc, in conjunction with Glanbia cooperative, recently renamed as Tirlán, has traditionally been the largest milk producer and dairy processor in Ireland, processing three billion litres of milk annually. It has three main business divisions. Glanbia Performance Nutrition comprises nine well-known brands across sports and lifestyle nutrition, including high-protein, whey-based and plant-based supplements and drinks, and weight loss products. Glanbia Nutritionals produces cheese and nutritional and functional nutrition products. It partners with food, beverage and supplement companies to deliver protein, plant-based, bioactive, premix, flavour, bakery, functionally optimised nutrients, edible film and aseptic processing solutions for a range of customers, from small start-up brands to multinational brands (Glanbia, 2021). US Cheese, a Glanbia brand, is the number one producer of American-style cheddar cheese, supplying natural cheese to brand owners and leading foodservice organisations globally (Glanbia, 2021). Finally, Tirlán Ireland focuses on dairy and grain production, animal nutrition and ingredient innovation. It has three core divisions: agri-business, supplying farm inputs, including animal feeds; consumer products, including well-known Irish brands in milk, cheese, butter, cream and soups; and ingredients, including highly specialised whey proteins and premium lactose, for use in lifestyle nutrition, infant nutrition and food products (Glanbia, 2021). It is the largest buyer of grain in Ireland and the largest miller and seller of animal feed. It was majority-owned by Glanbia Co-op until early 2022 and, following a recent restructuring, is now wholly cooperatively owned and led. Tirlán Ireland operates on a multi-purpose

198  Handbook of research on cooperatives and mutuals basis. It is the largest supplier of inputs to the Irish farming sector, with 52 dedicated retail outlets serving member farmers and the wider communities in which they live. Among its other activities, it offers a technical advisory service to farmers to promote farm efficiency, profitability and sustainability. It also produces grain-based feeds for animals, including world-class racehorses. The Glanbia plc board of directors and management have clearly followed a value chain approach to its businesses by using research and development on consumer attitudes to develop dairy value-added products. Doing so requires a great deal of capital. In 2020 Glanbia generated €3.8 billion in revenue, with profits after tax of €143.8 million. It has a stated commitment to sustainability in its supply chains, aiming to reduce manufacturing emissions by 30 per cent and supply chain emission intensity by 25 per cent by 2030, while achieving net zero carbon emissions no later than 2050 (Glanbia, 2021). Glanbia plc was formed in the late 1990s following the merger of Waterford cooperative, with a majority shareholding in Waterford plc, and Avonmore cooperative, with a majority shareholding in Avonmore plc. Prior to the merger, both co-ops had taken ‘the plc route’ to raise finance for expansion. In effect, these co-ops exchanged the bulk of their assets for a majority shareholding in a newly created investor-owned firm (Jacobson & O’Leary, 1999). The so-called plc structure was used to raise finance through the stock market. Glanbia Cooperative Society Ltd. took a majority 55.4 per cent shareholding in Glanbia plc, ensuring the farmer-members maintained control over the plc (Boland & Cook, 2013). However, over time, as with Kerry, the shareholding of the cooperative reduced as, among other activities, the plc issued shares to raise capital for global expansion (McCarthy & Ward, 2014). Much of this expansion took place in the high-growth, value-add business of nutrition, including innovations in high-protein consumer products. In 2021, the cooperative shareholding in the plc stood at 31.9 per cent (Glanbia, 2020). As of 2020, Glanbia plc was the biggest dairy company in Ireland, with sales of €1.9 billion in 2020 and profits after tax of €60 million. More than 95 per cent of its farmers’ dairy herd is grass-fed. It has 11 processing facilities, 52 agricultural stores and more than 2,100 employees. It is also the largest buyer and user of Irish grains, with more than 270,000 tonnes handled through the business annually. The cooperative has more than 11,000 farmer-members, represented by a board of 15. It operates a representative structure through 39 area committees and 11 regional committees to allow members to play a key role in the development of the cooperative. The cooperative board decided to reduce the number of cooperative directors on the plc board from seven to three between 2020 and 2023. This is to allow the plc board to introduce a more diverse set of skills while retaining cooperative representation as the largest plc shareholder (Glanbia, 2021). As discussed above in the context of Ornua’s governance structure, Tirlán Co-op has the right to appoint one director to the board of Ornua who is not directly involved in either cooperative or plc affairs, as an independent director who might have knowledge of global markets or auditing or some other expertise. The structuring and restructuring of the dairy-processing side of the business since the plc was established has resulted in the cooperative having full ownership and control of dairy processing once again. Part of the reduction of cooperative shareholding in the plc was the result of a type of ‘de-merger’ of the plc and the cooperative in 2017 resulting in the formation of a strategic joint venture, Glanbia Ireland. The cooperative took a 60 per cent stake in Glanbia Ireland, reducing its shareholding in the plc to fund the venture, with Glanbia plc holding the

The role of the farmer: an Irish perspective  199 remaining 40 per cent. Glanbia Ireland facilitated the much-needed investment in milk supply and processing capacity resulting from the lifting of EU milk quotas. To finance the move, the cooperative reduced its shareholding in the plc to 41.4 per cent. However, the new Glanbia Ireland arrangement, combining the ingredients, consumer foods and agri-business units, ensured that dairy processing would remain in the majority control of the farmer-members. On the establishment of Glanbia Ireland, members agreed that any dividends accruing to the cooperative from its stake in the venture would be kept within the cooperative for active milk supplier farmer-members and paid in cash or contributed as equity. In 2020, 4,500 milk supplier members received a payment per litre each month on all milk supplied as their share of the Glanbia Ireland profit (Glanbia, 2021). The decoupling of the dairy-processing arm of the business came to a conclusion in early 2022 with the agreement that Glanbia Co-op would pay €307 million to acquire Glanbia plc’s 40 per cent shareholding in Glanbia Ireland. This acquisition was to be financed through the launch of an equity-linked exchangeable bond of 5.3 per cent of the shares of Glanbia plc and funding the remainder through the sale of the equivalent of 2 per cent of shares in Glanbia plc. This effectively reduces the stake of the co-op in the plc while also ensuring that the co-op regains full control over milk processing, as well as other related farm businesses such as grain milling. The reduction in shareholding by the cooperative in the plc over time, together with the reduction in representation on the plc board, leads to a perception that the cooperative no longer needs a majority shareholding in the plc as it has regained majority control of milk processing. It also unburdens the plc of pressures from farmer suppliers and from the cooperative to maintain milk prices for suppliers within a largely investor/profit-driven plc model and allows the plc to focus on its global nutrition business in high-growth markets (McCarthy & Ward, 2014). While the transition back to full ownership of its processing facilities was completed by the cooperative in 2022, a potential spin-off of plc shares to the farmers, representing up to 50 per cent of the proceeds to the plc of the sale, is likely to have helped the deal pass by the farmers. The removal of the minimum annual profit retention policy of a profit after tax of 3.2 per cent of net revenues will also likely support an increase in milk price for member suppliers and the setting up of an investment fund by the cooperative will allow it to diversify independently into other farm business supports. The ‘de-merger’ in many ways recognises that milk processing is best carried out in close proximity to the farmer-producers, both geographically and in governance and decision-making terms. The process of realigning user/ownership rights is highlighted in stage five of Cook’s (2018) cooperative life cycle as a form of reinvention in cooperatives, in this case improving the control of the farmers. The reduction in the cooperative’s share of the high-value, high-growth elements of the company, however, may not be viewed favourably by all farmers, who may feel that the cooperative is losing out on investment in a business that it helped to build. While the agreed buy-back arrangement somewhat dilutes the cooperative ownership stake in the plc, it retains the bulk of its dividend returns into the future. It is also possible, however, that the plc prefers the opportunity to have a more diversified shareholder base.

200  Handbook of research on cooperatives and mutuals Dairygold Dairygold Cooperative Society Ltd was formed in 1990 following an amalgamation of Ballyclough cooperative (established in 1908) and Mitchelstown cooperative (established in 1919), both entities themselves the result of many amalgamations. It is Ireland’s largest fully farmer-owned cooperative. A multi-purpose cooperative, its main business areas are food ingredients, bulk cheese and butter; agri-business, including the milling and sale of animal feedstuffs; and retail. In 2020 it processed 1.43 billion litres of milk and had 7,000 members, of which 2,750 were milk suppliers, and more than 700 grain and other suppliers. It employed 1,200 people and had a turnover of €1.02 billion (Dairygold, 2021a). It has subsidiaries in Germany, China and the UK but its principal subsidiaries, joint ventures and alliances are still headquartered in Ireland and integrated into cooperative governance and control. Six regional electoral areas elect a 163-person regional committee. A 60-member general committee representing the six regions is elected from among members of the regional committee. The cooperative has a 12-person board comprising 10 elected members and 2 co-opted non-farmer-members. The regional committee meets 11 times a year and is attended by the board representative of the regional area along with the Member Relations Manager. Member participation takes place through the regional and general committee representative structure, the board members, and the Member Relations Manager. It also takes place at the retail stores, through the advisors, the drivers collecting milk and other staff members of the cooperative, as well as on organised demonstration farm-walks. An online portal, ‘Gateway’, is available for members’ use (Dairygold, 2021b). Dairygold is involved in the production and marketing of cheese for retail, food services and ingredients – for example, Jarlsberg cheese production in partnership with Norwegian dairy company TINE SA – and has begun producing a branded cheese for the US market. It sells cream to Ornua for the production of Kerrygold butter. Its business-to-business dairy ingredients, for customers both national and international, include full-cream milk powder, fat-filled milk powder, skimmed milk powder, rennet casein and demineralised whey powder for infant formula. For example, it supplies whey to Danone for infant formula. Its agri-business includes grain-intake and milling, animal feed, fertilisers and farm inputs. Members/suppliers supply the cooperative with malting barley, which is sold through the Malting Company of Ireland, a joint venture with Glanbia which sells to the brewing and distilling industry, and used by the cooperative in the production of animal feedstuff sold under its own feed brand. The cooperative owns and operates 26 retail stores under the ‘Co-op SuperStores’ and ‘Co-op Stores’ brands. These stores and milling facilities allow for a back chain or loop to its milk supplier/farmer shareholders, thus keeping farm input costs under control and continuing to make milk profitable. The cooperative holds a 66 per cent share of the Munster Bovine/Munster Cattle Breeding Group Limited and a 20 per cent holding in the National Cattle Breeding Centre Limited, both artificial insemination services conducted under licence from the Department of Agriculture as well as a 50 per cent holding in cooperative Animal Health Limited with Glanbia which manufactures and wholesales inputs for livestock and husbandry. Dairygold experimented with a different structure in 2006 when it divested significant assets, brands and land to Reox Holdings, its own spin-off plc, to deal with its consumer foods, DIY and property interests (McCarthy & Ward, 2014). Its stock value fell during the financial crisis that followed and the cooperative lost its Dairygold brand for consumer foods. It has

The role of the farmer: an Irish perspective  201 opted for a more singular focus in the past decade or so and has significantly increased its processing capacity through a substantial capital investment programme in a cheese plant, whey facility, milk evaporator and dryer facility, subsequently regaining a strong balance sheet. This expansion has been funded through increased member funding for investment through a revolving loan fund, compulsory for the first six years of its existence; government funding; and more recently a loan note open to members and employees. Similar thinking influenced the Glanbia 2022 buy-back situation and shows that farmers are willing to invest to maintain control over processing and marketing facilities into the future. By increasing member investment in the cooperative, Dairygold has moved to resolve historical weaknesses in member commitment among Irish dairy cooperatives whereby there was little investment by members (Knapp, 1964; Jacobson & O’Leary, 1990; ICOS, 1990). The cooperative currently offers milk suppliers a fixed milk-price scheme to help deal with milk-price volatility. In terms of sustainability programmes for its members, Dairygold provides its milk suppliers with a carbon footprint number on their milk statements so that they can measure improvement. It collaborates with the Teagasc (the Agriculture and Food Development Authority) GHG MACC mitigation scheme (Greenhouse Gas Marginal Abatement Cost Curve) to reach a range of sustainability targets. While it has achieved approval under Bord Bia’s Sustainable Dairy Assurance Scheme in which all of its milk suppliers are certified, it has been involved in protracted legal proceedings following an objection by locals based on planning permission the cooperative had received for a cheese plant and considering waste and odours (Woods, 2017; Kennedy, 2021). Carbery – West Cork Federated Model Carbery Group is based in Ballineen, West Cork, Ireland. It is owned by four independent multi-purpose dairy cooperatives, namely Barryroe, Bandon, Lisavaird and Drinagh. These cooperatives supply milk to Carbery, which is then responsible for processing and marketing. Carbery Group also comprises nine fully owned subsidiaries across the world, with four in the USA, two in the UK and one in each of Brazil, Italy and Thailand. It is also involved in a joint venture with Barbers UK, trading under the name of Barbery, with 50 per cent ownership. Carbery Group has 793 employees globally (not including the employees in the four co-ops) and 1,215 farmer shareholders. In 2020 Carbery’s revenue was €459.5 million, which represented an increase of 5.8 per cent on the previous year, and it had an operating profit of €24.2 million. Carbery processed 596 million litres of milk at its Ballineen Plant. Carbery came into being in 1992, when the four owner-cooperatives took a vote on a merger proposal. Two of the cooperatives voted in favour and two against. After this decision, the cooperatives jointly decided to take an alternative approach to the development of scale. The cooperatives were already in a joint venture with a local private processing plant called Express Dairies UK, of which they owned 20 per cent. In 1993, this plant came up for sale. The cooperatives bought out the remaining 80 per cent for £21 million and set up Carbery Milk Products (now Carbery Group). The details of the four cooperatives are presented in Table 12.1. The ownership of Carbery Group is divided as follows: Drinagh (35.5 per cent), Bandon (20.6 per cent), Lisavaird (18.2 per cent), Barryroe (16.1 per cent) and individual farmers (9 per cent). The individual suppliers’ shareholding was introduced relatively recently, allowing a direct shareholding in Carbery independent of their individual cooperative membership. The

202  Handbook of research on cooperatives and mutuals Table 12.1 Cooperatives

West Cork agricultural cooperatives in 2020 Members

Employees

Sales (€000)

Net profit

Debt/Equity

Milk supply (million litres)

(before tax) €’000 Bandon

682

351

159,669

7,787

3.58%

146

Barryroe

604

312

146,979

9,521

6.05%

106

Drinagh

2,315

208

142,758

13,780

0.47%

214

Lisavaird

1,025

337

145,575

5,745

3.69%

128

Source: ICOS Annual Report 2020.

purpose of introducing this shareholding was to ‘copper-fasten active milk supplier control of Carbery’ (O’Brien, cited in O’Mahony, 2014). Each of the four cooperatives is independent in its own right and has full autonomy for the running of its own cooperative, each of which has its own board of directors. The board of Carbery is made up of representatives from each of the four cooperatives, with Bandon, Lisavaird and Barryroe having two representatives and Drinagh having three due to its greater ownership share. The representatives are normally the CEO and the chairman of each cooperative. This contrasts with the Ornua governance model, where there is a limited presence of user-member representatives on the board. Each of the four cooperatives supplies the majority of its milk to the Carbery plant for processing. There is no limit on the amount supplied. While the four cooperatives did previously manufacture and pack butter, they ceased doing this by 2000. Bandon still packs, but does not manufacture, cheese and butter. Carbery manufactures cheddar cheese and more recently has added mozzarella to its portfolio. Most of its cheddar cheese primarily goes to the UK market, under the well-known brand of Dubliner Cheese (marketed through Ornua). However, this market has come under pressure with Brexit. In 2020 Carbery opened a new pasta filata (stretched curd – mozzarella and grilling cheese) plant, at a cost of €78 million. This was partly funded by a European Investment Bank loan of €35 million. As well as dairy, Carbery is involved in food ingredients, categorised as Taste and Nutrition. The Taste division is operated through Synergy, which is the Carbery Group’s international flavour and taste business, focusing on business-to-business solutions with flavours, extracts and essences. The Nutrition division focuses on the development, production and marketing of nutritional ingredients for performance and lifestyle nutrition, infant formula and clinical nutrition markets. Carbery is also involved in the production of alcohol for the business-to-business market. Some of the alcohol is used for the production of biofuel in the plant. Since its foundation, Carbery has put particular focus on the development of its own in-house R&D (McSweeney, cited in Byrne & Ward, 2011). Carbery is well known for its early sector leadership in whey-derived ingredients. In 2012, Carbery set up Carbery Greener Dairy Farms™ in conjunction with Teagasc. This is a sustainability programme set up to measure, monitor and optimise environmental efficiency measures and reduce carbon footprint on dairy farms. The programme started with 12 farmers and has now extended to 62 dairy farmers in West Cork. To date, 38 of these farmers have graduated from the UCC Diploma in Environmental Science and Social Policy. The Carbery Greener Dairy Farms™ programme was based on a previous European project called

The role of the farmer: an Irish perspective  203 Table 12.2

Activity in each of the four West Cork cooperatives Activity in the four cooperatives that own Carbery

Barryroe Co-op

5 retail outlets; grain blending; seed assembly; pig production and processing; hardware; service station; part owner of Clona Dairies; supply of Five Farms Irish Cream Liqueur

Lisavaird

Retail stores, grain processing; wind farming; pig fattening; part owner of Clona Dairies; seafood

Drinagh

grain blending and assembly; retail stores; restaurant; part ownership of technology park; pharmacies

Bandon

cheese packing; onion production; daffodil drying; retail stores

Source: Noreen Byrne.

the Dairyman Project, with 120 dairy farmers in 10 regions of North-west Europe. Carbery was the first to start such an endeavour in Ireland. In 2020, Carbery, in conjunction with a number of other partners, set up the Farm Zero C project to create a climate-neutral dairy farm. This is based on the Shinagh Farm, which is owned by Carbery and the four West Cork cooperatives. A commercial working dairy farm, it is seen as a flagship project in Ireland for setting out best practice in reducing carbon emissions on dairy farms. In addition to Shinagh Farm, there are ten other monitor farms in the project. Carbery, in partnership with other organisations, also developed the Biofinery Glas project in 2020, which involves testing a small-scale grass biorefinery on five Carbery farms in West Cork. A first in Ireland, the biorefinery converts freshly harvested grass into a range of products, including cattle feed fibre and grass whey for fertiliser or bioenergy. The high-protein grass feed helps to lower the carbon emissions from dairy farming as it can replace imported soybean feed (Carbery, 2020). Carbery was also recently successful in securing European Innovation Partnership (EIP) funding for a tree planting project on their member farms and is actively involved in the Agricultural Sustainability Support and Advisory Programme (ASSAP) water quality advisory service. Table 12.2 outlines the wide range of other activities and services provided by the four cooperatives locally for their members and wider community. O’Mahony (2014) indicates that a key similarity between the four cooperatives is that they sought growth opportunities within their own communities, thereby responding directly to the needs of their own members and the wider local area. Effectively, they are ‘designed for use’ (Briscoe et al., 1982), and thereby have maintained their cooperative relevance (O’Mahony, 2014). An example of this is where Barryroe set up a pig processing facility to secure the interests of the many pig suppliers in the area. This might not have happened in a bigger cooperative focused on dairying (O’Mahony, 2014:41). The other three cooperatives have responded in similar ways. The diverse nature of the services across the four cooperatives highlights the embedded nature of the cooperative in their own local communities. If the cooperatives had decided to merge in 1992, it is likely that much of this activity would not exist in these local communities today. In addition to the level of services provided, the four cooperatives, who each decide on their own milk price, have tended to offer the highest milk prices in the sector. The federated structure of Carbery allows for the combination of local embeddedness and scale – in other words, the best of both worlds (Ward, Briscoe & Linehan, 1982; Ward, 2000).

204  Handbook of research on cooperatives and mutuals

DISCUSSION AND SUGGESTIONS FOR FUTURE RESEARCH This chapter has discussed trends in supply chain governance in the dairy sector in Ireland. The cooperative is the primary organisational structure used by farmers to vertically integrate their farm through dairy processing. Significant restructuring and amalgamations over the years in Irish dairy cooperatives mirrored the wave of mergers and other changes to agricultural cooperatives across Europe and elsewhere through the 1990s. Various factors played a role in the evolution of the cooperatives in Ireland, including ambition of both management and members; government and EU policy; heavy dependence on exports for growth; ability to invest in a value-added diversified product mix; and a prevailing narrative of the benefits of mergers for the purpose of scale, countered by a desire to retain a number of cooperatives for the purposes of benchmarking and competition. While typically supply chain governance has remained in cooperative form, various corporate structures were trialled in the latter part of the twentieth century. For example, two of the larger dairy cooperatives used a hybrid structure through the plc. In 2022 these cooperatives sought to remove, or did remove, themselves from the plc and re-mutualised into a traditional-looking cooperative structure like the other Irish dairy cooperatives. There is clearly a desire by farmers to control the dairy-processing assets through the cooperative governance structure. This is evidenced by the 2022 vote by Glanbia members to increase its ownership in Glanbia Ireland from 60 per cent to 100 per cent, by the investment in Dairygold by its members and by the reluctance of the West Cork cooperatives to amalgamate. A deal between Kerry Group and Kerry Co-op on the future of the group’s dairy business is currently being debated. The EU policy regarding quotas had a major impact on Irish cooperatives in that it did not allow them to expand, causing boards to look to other enterprises and countries to diversify. Plcs were seen to be advantageous in raising capital to fund expansion and in managing a complex business environment. Joint ventures and alliances allowed traditional cooperatives to achieve the same ends, although not to the same degree. All four approaches to Irish dairy supply chain governance as outlined in this chapter led to growth in scale and internationalisation. The cooperatives have had significant success in product diversification and accessing international markets over time. For example, Glanbia expanded into the United States. This was not unique to the EU as Canada uses a similar quota system and its largest cooperative, Agropur, acquired dairy-processing plants in the United States. This is non-member business for both cooperatives. The market environment has changed with the removal of quotas, and time has allowed for reinterpretation of the benefits of the co-op plc structure, not least because of the inherent tensions that exist between plc and co-op. On the consumer side of the supply chain, while the green image of Irish dairy has been well received on global markets, there are increasing demands for greater evidence behind sustainability claims. There have also been more planning regulation challenges to dairy expansion based on environmental concerns. Any denting of the image of Irish dairy could result in shocks on the output side on the global market. While the cooperative business, through its non-member activities, may be somewhat protected from such input and output shocks, farmers themselves would seem to be fully exposed. This is in tandem with evolving EU climate change policy which presents significant challenges for the dairy sector. It is unclear in 2022 whether nitrogen fertiliser regulation will operate, in effect, as a type of quota, and what implications that may have for governance systems of cooperatives in the EU.

The role of the farmer: an Irish perspective  205 Irish dairy cooperatives are more likely to be mixed or multi-purpose relative to cooperatives in other countries. This has helped to provide various sources of income to the cooperatives. These income sources face competitive pressures and trends distinct to those of the dairy sector. While the members may desire to retain a variety of services which serve a range of farm production needs, it is important to have an understanding of competition and trends in these industries. For example, new technologies in micronutrients present opportunities for the cooperative but may weaken the cooperative’s dependence on the primary product and the farmer. Irish farmers are involved in significant collaboration across the industry, not least through their involvement in the second-level cooperative Ornua, which has supported their success in sourcing international markets. This sense of agency and level of networking could be leveraged more for farmers themselves to take greater control of the future direction of the Irish dairy industry. The embedded nature of the cooperative in its local community was evidenced by support for the West Cork cooperatives in their development of local services and initiatives. However, changes in the rural economy and society as well as in the cooperatives (Crowley, 2006), and the decline in the number of family farms, put pressure on traditional ties and interdependencies within local communities and may weaken the local embeddedness of cooperatives. Irish dairy farmer-producers have had the opportunity to compare different approaches taken by their cooperatives to governance and strategy over the past 30 years: Dairygold’s 100 per cent farmer-owned approach, the West Cork federated approach and the ups and downs of the plcs. The ‘de-merger’ activity of the latter would seem to recognise that milk processing is best carried out in close proximity to the farmer-producers, and arguably there has been a reappraisal of the benefits of the plc structure in terms of its benefits and downsides for farmers. Some research on evaluating member attitudes towards their cooperative would help provide some benchmarks to evaluating the influence of the plc structure on cooperatives. Research on interdependencies and collaboration within the dairy sector might illuminate the achievements of the different approaches adopted by the cooperatives. Finally, research into the changing nature of ties between members, members and their cooperatives, and the communities in which they are based would lead to a greater understanding of how the cooperatives might remain accessible to the influence and control of members while dealing with an ever-changing environment.

NOTE 1. The authors would like to acknowledge the input of John O’Brien, farmer and former director of Barryroe, and Michael Cronin, former CEO of Newmarket Co-op and Adjunct Professor, Department of Food Business and Development. The authors also wish to thank an anonymous reviewer for helpful comments and suggestions.

REFERENCES Boland, M. and Cook, M.L. (2013) The Irish Dairy Industry and the evolution of Glanbia. A paper presented to the International Conferences on Economics and Management of Networks (EMNet), Agadir, Morocco, November 21–23, 2013.

206  Handbook of research on cooperatives and mutuals Bord Bia (2021) www​.bordbia​.ie/​ Breathnach, P. (2000) The evolution of the spatial structure of the Irish dairy processing industry. Irish Geography, 33(2), 166–84. Byrne, N. and Ward, M. (2011) Carbery – Federated Model, Enterprise Ireland Case Study. Centre for Cooperative Studies, UCC. Byrne, N., Ryan-Doyle, M. and McCarthy O. (2022) The role of Agricultural cooperatives in www​ Irish Agri-Advisory Services, Dublin: ICOS Golden Jubilee Trust. Available at https://​ .ucc​.ie/​en/​media/​academic/​foodbus​inessandde​velopment/​centreforco​-ops/​Co​-operativesandAgri​ -AdviceReportUCCGJT​.pdf Carbery (2020) Annual Report 2020. Available at: www​.carbery​.com/​carbery​-annual​-report​-2020/​ Carroll, B. (2021) Irish dairy cooperative development: a qualitative network perspective. Unpublished PhD dissertation. Stirling: University of Stirling, School of Applied Social Science. Collins, C. (2020) The Story of Lisavaird Co-op: 1025–2020. Skibbereen: Inspire. Cook, M. (2018) A lifecycle explanation of cooperative longevity. Sustainability, 10(5), 1586. Crowley, E. (2006) Land Matters: Power Struggles in Rural Ireland. Dublin: The Lilliput Press. Dairygold (2021a) Annual Report. Available at: www​.dairygold​.ie/​wp​-content/​uploads/​2021/​04/​ Dairygold​-Annual​-Report​-2020​-WEB​.pdf Dairygold (2021b) www​.dairygold​.ie/​ Donnellan, T. (2015) Overview. In Donnellan, T., Hennessy, T. and Thorne, F. (eds), The End of the Quota Era: A History of the Irish Dairy Sector and Its Future Prospects. Teagasc. Food Vision 2030 (2021) A World Leader in Sustainable Food Systems. Dublin: Department of Agriculture, Food and the Marine, Government of Ireland. Glanbia (2021) www​.glanbia​.com/​ Glanbia (2020) Annual Report. Available at: www​.glanbia​.com/​annualreport2020 ICOS (1990) Co-op Shares: A New Approach. Dublin: ICOS. ICOS (2020) Irish Cooperative Organisation Society, Annual Report 2020. Irish Dairy Board (1986) Irish Dairy Board, Annual Report 1986. Jacobson, R. and O’Leary, C. (1990) Dairy Cooperative Issues in Ireland: With Special Reference to PLC Activities. Cork: Centre for Cooperative Studies, University College Cork. Kennedy, J. (2021) Dairygold updates members virtually. Irish Farmers Journal, 20 January. Available at: www​.farmersjournal​.ie/​dairygold​-updates​-members​-virtually​-597089 Kennelly, J.J. (2008) The “Dawn of the Practical”: Horace Plunkett and the cooperative movement. New Hibernia Review/Iris Éireannach Nua, 12(1), 62–81. Knapp, J.G. (1964) An Appraisal of Agricultural Co-operation in Ireland. Dublin: Department of Agriculture/Dublin Stationery Office. McCarthy, O. and Ward, M. (2014) Irish agricultural modelling and remodelling: responding to a dynamic business and policy environment. In Mazzarol, T., Reboud, S., Mamouni Limnios, E., and Clark, D. (eds), Research Handbook on Sustainable Cooperative Enterprise: Case Studies of Organisational Resilience in the Cooperative Business Model. Cheltenham: Edward Elgar Publishing, pp.67–81. O’Mahony, S. (2014) Do smaller multi-purpose farmer-owned co-ops in Ireland have a future? Sustainable and profitable co-operation within and between multi-purpose co-ops during an era of expected rapid growth. Unpublished report for Nuffield Scholarship. Dublin: ICOS Golden Jubilee Trust. Ornua (2021) Annual Report 2020. Available at: /www​.ornua​.com/​reports/​ Ryan, M. (2013). The Story of Arrabawn Co-op So Far: Celebrating the Centenary of the Founding of Nenagh Co-op Creamery and the Golden Jubilee of the Founding of Mid-West Co-op Creameries. PB Print Solutions, Ireland. Ward, M., Briscoe, R. and Linehan, M. (1982) Co-operation between Cooperatives: A Case Study of Agricultural Cooperatives in the North-East of the Republic of Ireland. Cork: Centre for Cooperative Studies, University College Cork. Ward, M. (2000) Ireland’s multipurpose dairy co-ops. In: Briscoe, R. and Ward, M. (eds) The Cooperatives of Ireland. Cork: Centre for Cooperative Studies, University College Cork.

The role of the farmer: an Irish perspective  207 Woods, K. (2017) Locals are trying to block a “smelly” €60m Dairygold factory in their “sleepy village”. The Journal, Sep 9 2017. Available at: www​.thejournal​.ie/​dairygold​-cheese​-factory​-cork​-3​-3589058​ -Sep2017/​

PART IV CROSS-SECTOR APPLICATIONS

13. Risk and uncertainty in cooperative business Frayne Olson and Matthew S. Elliott

INTRODUCTION This chapter describes various forms of risk and uncertainty cooperatives are exposed to, their prevalence, and the potential mitigation efforts. This chapter cannot address all possible sources, outcomes, or methods to mitigate risk and uncertainty. Instead, the chapter will focus on a framework for understanding risk and uncertainty and use examples within an agricultural or producer-owned cooperative. The purpose is to explain the state of the art in understanding risk and risk mitigation. Researchers and decision-makers from other types of cooperatives can adapt the concepts discussed in this chapter to their respective industries, cooperatives, and research programs. The chapter concludes with areas for future research on risk and uncertainty in agricultural cooperatives that can inform cooperative leaders on optimal risk mitigation efforts in the future. Frank Knight introduces a distinction between risk and uncertainty (Knight, 1921). Risk refers to situations where future events can be identified, but the outcomes are unknown. When the decision-maker is exposed to risk alone, the individual has enough information to estimate objective probabilities of outcomes or develop subjective probabilities. However, when the decision-maker is exposed to uncertainty, they do not have enough information to formulate accurate odds about possible outcomes. Decision-makers often can reduce or mitigate risk through hedging, insurance, or simple contracting. However, decision-makers cannot use these same techniques to mitigate uncertainty as risk. Rather, decision-makers must use alternative strategies, which we will discuss.

THE CONTINUUM OF RISK AND UNCERTAINTY The basic concepts of risk and uncertainty discussed by Knight will be maintained throughout this chapter, but viewed as a continuum rather than as discrete categories. Particular emphasis will be placed on identifying risks and uncertainty that harm the decision-maker instead of risks and uncertainty that can benefit the decision-maker. There are multiple types of risk: ● absolute risk is where all possible outcomes and the probability for each outcome are known, but the exact outcome of each event is unknown (for example, rolling a dice); ● statistical risk is where the set of possible outcomes are known, the decision-maker can estimate the probability of each outcome, and each event is unknown (for example, crop yields or futures market price); ● subjective risk is where the set of possible outcomes can be estimated but may not be complete, and there is enough information for the decision-maker to form subjective probabilities about each outcome (for example, development of new technology); 209

210  Handbook of research on cooperatives and mutuals ● uncertainty is where outcomes can be identified or proposed, but there is not enough information for the decision-maker to estimate subjective probabilities about each outcome (for example, the outbreak of a war or new federal policies); and ● absolute uncertainty is where outcomes cannot be identified or estimated and a decision-maker cannot calculate the probability of each outcome (for example, an event that has never happened before, sometimes referred to as a “Black Swan” event). For simplicity, in the remainder of this chapter, we will use ‘risk’ to refer to the continuum from absolute risk to absolute uncertainty.

THE CONTINUUM OF IDIOSYNCRATIC TO SYSTEMIC RISK The second dimension of risk is the scope of adverse impacts across economic systems or individuals. Risk can be described as idiosyncratic or systemic and can be considered along a continuum. Idiosyncratic risk refers to adverse outcomes that are often isolated to a person or specific asset, while systemic risk refers to adverse outcomes that impact an entire system.

A FRAMEWORK FOR IDENTIFYING THE TYPES OF RISK Figure 13.1 combines the two dimensions of risk into a single graphic formed of four general quadrants. The four quadrants in the figure can categorize the different types of risk measures and the scope of impacts on decision-makers. For example, insurance products are typically offered only for idiosyncratic risk. Insurance policies can be obtained for an individual or a business. Actuaries must have accurate historical information to estimate insurance premium rates based on probabilities. In addition, the adverse event(s) cannot be too widespread or systemic, that premiums which the insurance company receives would not cover indemnities the insurance company is obligated to pay out, or the insurance system would become insolvent and unstable. As risks shift from narrow impacts (idiosyncratic) to widespread effects (systemic risk), there are changes to the available information to understand the risk and limits to strategies to mitigate the risk. For example, changing federal policies that affect industry profitability are more systemic risks. Decision-makers typically have enough information to form subjective probabilities about changes to federal policies (for example, a reasonable range of volumetric blending rates for ethanol mandated by the government). However, the policy changes would be too widespread for any type of insurance product to be offered that would protect against the policy change. Instead, firms can mitigate risk by diversifying into sectors that are not entirely dependent on one federal policy.

SOURCES OF RISK IN AGRICULTURE Before evaluating the types of risk and available mitigation strategies for cooperatives, it is helpful to identify the primary sources of risk. In the case of agriculture cooperatives, there are

Risk and uncertainty in cooperative business  211

Source: Authors.

Figure 13.1

The continuum of idiosyncratic and systemic risk and uncertainty

typically seven sources of risk in the agricultural economics literature (Boehlje & Trede, 1977; Barry, 1984; Komarek et al., 2020). The seven sources are: ● ● ● ● ● ● ● ●

production; market; price; institutional or legal-social; personal or human; financial; technological; and asset risk.

Georgiava and Kirechev (2017) organize the sources of risk into external and internal threats, but their list of sources of risks is similar to those provided in previous articles. We will provide an overview of each source of risk category and present examples of impacts for members and cooperatives. Production Risk Production risk is typically associated with the unknown quantity and quality of agricultural products due to weather, climate, biological production systems, and perishability. In addition, many agricultural products have a seasonal production pattern with significant output or

212  Handbook of research on cooperatives and mutuals quality reductions when production operations, such as planting, harvesting, processing, and retailing, are delayed. At the farm level, production risk can be measured by the variability of input–output relationships, such as fertilizer requirements per crop bushel or fluctuations in yield per acre that can create risks for farm members. Production risks can also directly impact the agricultural cooperatives that provide inputs or market products for their patron-members. For example, non-constant sales volumes for feed, fertilizer, animal and plant health products, seed, and fuel can result in significant fluctuations in a cooperative’s net income. Variability in product quality can also be a significant production risk at the farm level and in later stages of the value chain. Variability in quality can be measured by the product’s physical properties (for example, solubility and density) or by chemical composition that may not change the physical properties but does change the appearance (for example, color). Because the quality characteristics impact the product’s desirability and value, physical and chemical composition must be measured and studied to understand relationships with inputs, external factors, and end value to measure and mitigate risk. Production risks typically introduce significant storage, transportation, and customer satisfaction risks. For example, product perishability based on time that impacts value includes chemical fluid milk changes due to souring. Perishability and variability can also make it challenging to manage input logistics and inventory levels that are adequate yet not overstocked to cause exorbitant inventory costs or risk to inventory value changes from product deterioration. For example, due to drought, low fertilizer sales volumes could negatively impact the cooperative’s net margins and increase inventory costs. Alternatively, a wet season may increase the demand for crop protection chemicals to reduce quality loss, resulting in temporary shortages and leaving the impression that the cooperative is not a reliable supplier or marketer for members. Frequent experiences of not being prepared for changes in input or market demands from members may raise the risk to future sales volume from loyal customers. Variability in purchase volumes for marketing or processing cooperatives, either due to changing local production or shifting patronage levels, can impact the cooperative’s equity needs and value proposition in the long term. For example, high volume years can strain the cooperative’s transportation, handling, processing, and storage capabilities. Low volume years can result in net losses due to the high fixed costs of operating most agricultural marketing or processing cooperatives under capacity. Estimating the appropriate size and capacity of new handling, processing, or storage facilities is complex. For example, the cooperative’s management team may estimate the size of a new grain drying system based on current usage and future growth projections. However, the cooperative’s board of directors may insist on a larger capacity to handle grain volumes during years with very wet harvest conditions, even though there is a low probability that these conditions will occur. However, a larger capacity processing and handling system may require greater member equity and increase the likelihood of reduced patronage payments. Production risk can be highly idiosyncratic or moderately systemic, depending upon the cause of the quantity or quality variability. For example, hail storms can cause severe yield damage for local fields, but the damage is typically isolated to a small geographic area. In contrast, a drought can impact yield and quality in multiple states. Also, animal diseases can infect and spread within a specific farm or spread across a nation (an example is China’s African swine fever outbreak). Diseases are more likely to have systemic impacts because of loss of production and export or import controls that change market access to control the spread.

Risk and uncertainty in cooperative business  213 Market and Price Risk Market and price risk refer to unknown input and output prices, shifts in supply and demand, changes to market access, and changing consumer preferences. Unknown input and output prices are a significant source of risk for farm and ranch managers. Major crop, meat, and milk products have futures and options markets providing a variety of price risk management products to mitigate risk. These products also have various information sources reporting relevant news, supply and demand information, and price forecasts. However, many agricultural inputs and outputs do not have futures markets or market information and price data to make statistical estimates of price risk. As a result, the products are more challenging to develop and implement marketing plans, increasing the costs for reducing the market risk. Examples include organic and non-genetic modified agricultural products, specialty or small market crops and livestock, fruits, vegetables, nuts, and pulse crops. Other examples that do not have as effective price risk management products include inputs such as fertilizer, crop and livestock health products, seed and breeding livestock. In many cases, even individuals or firms trading these markets have difficulty gathering information, interpreting changes in market conditions, and mitigating the risk of price changes. Market power, pooling risk, and opportunistic trading are commonly cited motivations for individuals to form marketing or processing cooperatives. Cooperatives can reduce costs through economies of scale and scope, increase purchasing and sales power through larger volumes, and have better market and price information because they trade more frequently. However, many of the firms with which a local cooperative competes or trades are still much more extensive and have more diversified market and price information sources than the cooperative. As a result, cooperatives have used the federated system to gather more general information and broader market access, to further reduce opportunism and risk. In some cases, cooperatives have been formed to process raw agricultural products into food ingredients, industrial components, or consumer-ready products. The motivation is often to capture efficiencies from coordinating agricultural production with processing, distribution, and sales to generate profits that can be distributed back to the cooperative’s patron-members. A risk management benefit of value-added processing is that ingredient and consumer-level prices tend to be more stable than raw agricultural commodities. Thus producers may use the cooperative to mitigate raw product risks and achieve more stable value-add product chains. However, the trade-off is that value-added products are more susceptible to changing consumer preferences and processing or information technology shifts, which can introduce uncertainty in value-added chains that is difficult to mitigate. Agricultural commodity prices are systemic within the commodity market and can be correlated with other agricultural commodities. However, local prices are also impacted by local supply and demand conditions, implying some idiosyncratic characteristics that futures contracts may not mitigate using a regional or international commodity exchange or hedging using an imperfect hedge product. Once again, the management strategies available to manage price and market risk can vary significantly by agricultural product. Moreover, the systemic nature of the price risk can vary by product too. Careful attention needs to be paid to the sources of market risk and the systemic nature.

214  Handbook of research on cooperatives and mutuals Institutional Risk Institutional risk refers to unexpected changes in formal institutions—such as federal, state, or local laws, policies, and regulations—and informal institutions, such as social norms. An example of an unexpected change in formal institutions is the ban on United States chicken exports imposed by South Korea when avian influenza was detected in the United States. An example of unexpected change in informal institutions is when social networks cause changes in preferences for agricultural production systems or food. For example, major food retailers have sought more information about agricultural production and processing practices to verify and label products on their shelves as sustainable using various environmental and social metrics. Changes to institutions to gain traceability of production and processing increase record-keeping and transaction costs for farm producers and food processors with little or no adjustment in product prices. Institutional risks can be both systemic and idiosyncratic. For example, changes in federal policies are typically systemic to an industry. On the other hand, an idiosyncratic institutional risk could be the shifting social norms when redefining business culture after a merger or acquisition of cooperatives. Cooperative managers and boards point to establishing a new shared business culture as a critical element of post-merger or acquisition performance. The implicit norms and culture within a business enforce optimal behavior when no explicit contracts or enforcement mechanisms are available to guide the employee to make decisions that enhance the value of the cooperative. Even though there are examples of unexpected formal institutional change, public policy or regulatory changes are debated during public hearings and can be anticipated. Farm managers and cooperative leaders can expect the passage and implementation of changing policies or rules and plan for these changes. However, the specific details are not known until the policy or regulation is passed into law and implemented. Still, government authorities’ final policy implementation will influence specific decisions and execution to adapt to the new policy. In these instances, performing a subjective risk analysis of alternative policy outcomes, with flexible organizational policies harmonizing with federal policies, becomes a critical risk mitigation strategy. Changes in institutional structures, either formal or informal, often require subjective probabilities, and the decision-maker may or may not be able to identify all possible outcomes. Thus, institutional changes often appear in the uncertainty region of the risk continuum. Institutional risk also tends to be more systemic than idiosyncratic because shifting policy, regulation, or norms often impacts many individuals, businesses, or even industries. Thus, effective risk mitigation efforts may require integration or coalition-building through alliances and other umbrella organizations. Human Risk Human risk refers to the risk of key individuals developing health and poor relationships that can harm the organization. Personal health can include injury, illness, or death of crucial individuals, leaders, or employees. Poor relationships between crucial individuals can also result in reduced information flow, lower job performance, and potentially the firing or resignation of critical individuals. Human risk can dramatically impact performance at the farm level if the

Risk and uncertainty in cooperative business  215 farm manager has health problems or dies. In addition, deteriorating family relationships can negatively impact a farm succession plan. Agricultural cooperatives can also be negatively impacted by human risk. Attracting and retaining high-quality employees and management is a continual challenge, especially for businesses operating in rural areas. An unexpected illness or death of a key management team member can dramatically impact the cooperative’s performance. Conflict within a cooperative’s board of directors or between the board and management team can also affect the cooperative’s performance. Human risk tends to be more idiosyncratic than systemic to an individual or business. However, the spread of COVID has shown that human risk can also have systemic characteristics. Financial Risk Financial risk is associated with debt financing for a business or organization. Debt financing can be an essential tool for business growth, and considerable research has gone into estimating optimal debt structure and risk balancing. However, the sources and balance of credit and debt can also impact financial risk. Sources of risk include variability in interest rates, shifting credit policies by lenders, and changing borrowers’ creditworthiness. Using multiple lenders for short-term and long-term debt, balancing the proportion of term debt versus seasonal credit, using variable versus fixed-rate loans, and supplier versus traditional lender financing can impact the financial risk exposure of farm operations and cooperatives. Supplier financing refers to short-term credit for purchasing seed, feed, fertilizer, and plant or animal health products. Interest rates on this short-term credit may be higher than traditional financing, but the credit application process is less intensive. Farm operations often use a combination of conventional financing, such as operating notes and term debt, and input suppliers to meet the total credit needs for their businesses. Some input suppliers will use preferential interest rates and financing terms as a sales strategy. In addition, many grain merchandisers and some agricultural processors offer deferred pricing and deferred payment contracts for grain sales. These contracts provide farm operators flexibility to manage sales and income tax liabilities. However, these contracts also expose the farm manager to counterparty risk if the grain merchandiser or processor files for bankruptcy after the grain has been delivered and before payments are made. Necessary buyer bonding and state-run indemnity funds can help compensate for a grain dealer’s bankruptcy. Still, the compensation does not fully cover the financial losses from non-payment due to bankruptcy. Cooperatives often provide supplier financing programs for their patron-members’ purchases. Providing supplier financing can increase sales. However, supplier financing can increase the cooperative’s financial risk exposure. Developing and implementing strong credit policies can reduce problems with accounts receivable, decrease bad-debt allowances and limit counterparty risk. However, some cooperatives have had difficulty collecting overdue payments from their patron-members because cooperatives have become too lenient on supplier financing. Technological Risk Technological risk includes developing and adopting new technologies. Technology development refers to a firm’s investment in research and development and estimating potential

216  Handbook of research on cooperatives and mutuals returns from this investment. The risk for technology adoption includes two alternative scenarios. The first is investing in a new technology that does not generate the expected returns, or where the adoption takes longer and is more expensive than anticipated. The second is not investing in new technology when competitors successfully adopt and implement it, resulting in a competitive disadvantage. Examples at the farm level include adopting precision agriculture equipment, which includes managing the information collected from the equipment. However, the issues with new technology adoption have increased significantly in recent years. For example, managing and analyzing the high volume of data collected from ground-based precision agriculture systems and drone or satellite-based imagery is becoming more complex. Agricultural cooperatives also deal with new technology adoption issues. Examples include adopting precision agriculture technologies at the farm level, helping patron-members manage data and information, adding remote sensing to propane and petroleum storage tanks at patron-members’ homes or farms to manage deliveries and inventories better, or installing electric vehicle charging stations at convenience stores. Technological risk can have both idiosyncratic and systemic characteristics, depending on the technology. The idiosyncratic aspects relate to the ability of the farm manager or cooperative to integrate the technology into their business successfully. Technology adoption may require additional training or certification to safely and effectively use the new technology. The systemic aspects can include how rapidly the new technology is adopted within an industry and the economies of scale needed to implement the technology. Systemic aspects can also relate to how quickly the technology advances, from first-generation to second or third-generation. In some cases there may be advantages to waiting for the second or third-generation technology to become available because of problems with the first generation, or moving to a second or third generation quickly might mean that the cooperative cannot recoup the costs of the first-generation technology. Asset Risk Asset risk refers to damage or loss of physical assets due to fire, wind, hail, social conflict, or theft. Even though private insurance is available for most of these events, the disruption or loss of business activity can significantly increase the total cost of damage to physical assets. Both farm managers and agricultural cooperatives are exposed to asset risk. The formation of mutual insurance companies is a response to asset risk. Interactions of Sources of Risk Even though we discuss each source of risk as a separate category, there are often interactions between the different sources of risk. For example, production risk due to hail may cause or contribute to asset risk and financial risk. Also, there may be an additional technological risk to key persons when there is a human risk because only a few individuals know how to use the technology. In addition to identifying the source of risk, attention needs to be paid to matters where the source or risk can have additional effects or include multiple sources.

Risk and uncertainty in cooperative business  217

RISK MITIGATION Once the sources of risk have been identified, cooperative leaders can identify various mitigation strategies. The mitigation strategies can be ranked by their costs and ability to mitigate the risks. Cooperative managers and boards can then evaluate and compare mitigation strategies with the sources of risk. Below is a list of selected mitigation strategies commonly found in risk analysis texts. Efforts were made to include as many alternatives as possible, but the list is not exhaustive. Hedging Hedging significantly reduces but does not eliminate price risk. Hedging is defined as taking opposite positions in a futures market and a highly correlated cash market for the same commodity. An example of hedging is a grain merchandiser buying corn from a farm manager at a fixed cash price and selling an appropriate number of corn futures market contracts to protect against an adverse price movement. Cross-hedging is taking opposite positions in a futures market and a highly correlated cash market for closely related commodities. An example of cross-hedging is a grain merchandiser purchasing grain sorghum, or milo, from a farm manager and selling an appropriate number of corn futures market contracts. When the correlation between the futures and cash market prices for the commodities weakens, the level of risk mitigation also weakens. Hedging is a widespread practice for both farm and cooperative managers. Sequential Purchases–Sales Many agricultural inputs and products do not have futures markets to allow hedging or options-based price risk management strategies. Thus, alternative strategies such as sequential purchases or sales may be utilized where the cooperative incorporates a more significant number of transactions with smaller quantities. Sequential purchases or sales over a more extended period usually result in an average purchase or sales price near the market average price. This strategy works well for relatively liquid cash markets. However, the strategy becomes more complex in smaller, specialized markets where trading volumes are low or sporadic. These are sometimes referred to as ‘thin’ markets. Additional storage capacity is usually required for farm managers who sequentially purchase inputs or sell products into thin markets. Cooperatives who trade in thin markets typically try to make ‘back-to-back’ purchases and sales to limit the risk of unexpected price movements. Once again, a back-to-back purchase-sales strategy can be challenging to implement in thin markets. Cooperatives that trade in these markets also tend to have larger storage capacity, increasing inventory management costs and exposing the cooperative to the risk of quality loss. Contracting Contracting provides a high level of flexibility for buyers and sellers, but the trading partners incur negotiating, monitoring, and enforcement costs. Contracts can be viewed as a communication tool to clarify more complex or unique transactions. Unfortunately, contract terms

218  Handbook of research on cooperatives and mutuals cannot describe every contingency and are considered ‘incomplete’. Thus, parties to contracts may require renegotiations if an unforeseen contingency significantly changes the initial contract’s total value or distribution of value. Contracting is commonly used in agriculture for both procuring inputs and selling output. Contracts can specify the product or service quantity and quality, price or pricing formulas, premiums or discounts for quality or performance, delivery or execution time, location of delivery, payment or financing terms, and mediation or arbitration when there are disputes. Non-performance and enforcement costs (for example, legal fees) are also risks with contracting. Insurance Insurance is a common risk mitigation strategy. The buyer of an insurance policy compensates the insurance provider for accepting the risk of pre-determined events or outcomes. The challenge for both the insurance buyer and seller is to estimate the probability and economic value of the risk and establish a premium rate that is acceptable for both parties. As noted previously, insurance is most common for idiosyncratic risks with enough historical information to estimate statistical probabilities accurately. Insurance companies and market traders may offer customized insurance policies or over-the-counter derivatives based on subjective probabilities. However, the premium rates on these products can be costly. Diversification Diversification of investments, products, business units, or enterprises is commonly used by the business and investing communities. Risk mitigation occurs when the alternative investments, products, or enterprises (1) have returns impacted individually by unrelated events or (2) have returns that are impacted differently by an event, resulting in weakly or negatively correlated returns. Enterprise, or business unit, diversification is commonly used by farm managers and cooperatives to mitigate risk and uncertainty. However, enterprise diversification can also increase the demands on management to maintain efficiency and specialization in each business unit and ensure the units are working collaboratively to meet the firm’s overall goals. The degree of risk mitigation and additional management skills will depend on how unrelated the enterprises are. For example, a supply cooperative that sells fertilizer and crop protection chemicals will have different management and diversification than a grain merchandising cooperative that operates convenience stores. The relative size of each enterprise, or investment weighting in portfolio theory, will also influence diversification’s overall benefits and costs. Geographic diversification is another method used to reduce production risks in agriculture. A farm or cooperative business’s strategy may specialize in a single or small number of enterprises to gain from economies of scale but expand into diverse geographic regions or production areas with different environmental or market conditions. Again, diversification benefits are best when similar events impact each region differently or different events occur in each region.

Risk and uncertainty in cooperative business  219 Additional Capacity or Assets As noted previously, agricultural products have unique characteristics and different production and consumption patterns. For example, some products have seasonal variation with relatively stable consumption patterns, some are storable but perishable products, and others require specialized production, processing, and handling assets. The resulting variation in product quantity and quality, combined with price premiums and discounts, provides an economic incentive to establish additional production, processing, and handling of agricultural products relative to other manufacturing industries. The motivations for different physical assets may also require additional human capital to operate equipment and manage operations. The additional asset and human capacity needed for a high volume of low-quality production periods increases the cost to the business. However, the margins per unit during these periods may also change, especially during periods with low-quality production. High volume periods may result in more spoilage or waste of raw or processed products. Due to capacity constraints, an inability to purchase or sell produced products may damage a firm’s reputation because it is viewed as an unreliable trading partner to handle variations in production. Because cooperatives are owned and controlled by their trading partners, patron-members can seek to increase investments at the cooperative to mitigate production risks at the farm level by increasing capacity. While economies of scale may be gained by having the cooperative maintain excess capacities, the patron-members may better manage the production risks at the farm level and not at the cooperative, where the excess capacity increases the cooperative’s risk of financial loss from high marginal costs. Extra Physical Inventories A closely related strategy is to maintain additional physical inventories of inputs or outputs to reduce the negative impacts of low volume or low-quality periods or supply chain disruptions. However, the cost of maintaining additional inventories and storage capacity should be weighed against the efficiency and financial losses from the inability to access inputs or produce or process outputs. Once again, in many cases, the timeliness of farm-level or cooperative-level operations can significantly impact net margins and profitability. Additional Human Capital The variability and seasonality of agricultural production can also make managing human capital more difficult. Cooperatives need to have sufficient or temporary labor pools and management to adjust to high volume periods. In some cases, seasonal workers may be available. However, hiring seasonal employees with the appropriate skills, training, or knowledge can be difficult. Some farm managers and cooperatives have diversified their businesses with enterprises with different peak labor requirements and cross-trained their employees to work in multiple enterprises, attempting to increase labor efficiency and mitigate risks from insufficient human capital. Developing management and board succession plans for a cooperative or farm business is becoming more critical as farms, ranches, and cooperatives become more complex. Board and management training programs are encouraged to enhance the skills and knowledge of a cooperative’s top decision-makers. Some cooperatives have also initiated associate board

220  Handbook of research on cooperatives and mutuals members to allow members to learn more about the roles and responsibilities of serving the cooperative’s board and use the associate board to recruit interested and motivated members to run for an open board position. Revenue, Cost-sharing, and Performance-based Pay There are two interrelated concepts involving revenue or cost-sharing techniques to mitigate risk. The first is how profits or losses from a business are shared with its owners, and the second is how profits or losses are shared with key decision-makers within an organization. For example, farm managers use crop share or variable cash lease agreements to reduce crop or pasture land risk. Some crop share leases also specify that the landowner share in the cost of critical inputs, like the seed, fertilizer, or crop protection chemicals. These crop share or variable cash lease agreements can include lease rate adjustments based upon yield, production, price, or gross revenue. The variable lease rates for land reduce the farm manager’s risk exposure relative to a fixed cash lease payment. Alternatively, cooperatives distribute profits or losses to their patron-members proportional to use, or patronage, rather than investment. This system provides incentives to patronize the cooperative. Patronage is then linked to investment in the cooperative and managed by the cooperative’s board of directors. Some cooperatives have combined both direct investment and patronage-based investments. The dual role of the member-patron as investor and customer is one of the unique attributes of the cooperative business models. The allocation of profits and losses proportional to patronage distributes the risk of the cooperative back to its users. While the board of directors is directly responsible for balancing the risks and returns of the cooperative, the cooperative’s patron-members have limited control regarding the cooperative’s risk exposure and the management of the cooperative. Unfortunately, the increased flexibility to manage risk using profit sharing can introduce vaguely defined property rights issues, resulting in opportunistic exploitation and high monitoring and bonding costs. Thus risk mitigation that can be conducted using hedging, insurance, or simple contracts are preferred over vague revenue and profit sharing agreements. A large body of literature has evaluated corporate management compensation based on financial performance. The principal-agent model is often used as the theoretical framework for these analyses. The objective is to align the owner (principal) incentives with the firm’s management (agent), making decisions consistent with the owner’s goals and objectives. Within investor-owned firms, this typically means a portion of the management’s compensation is based upon the short-term and long-term performance of the company. The challenge becomes establishing a proper set of performance signals that can be measured and appropriate compensation rates on each measure to align the manager with the owner’s objective optimally. In addition, the manager may not have the same risk preference as the owner. Thus, the owner may need to construct performance-based pay that aligns with the manager’s risk preference and optimally meets the owner’s objective. The objective functions of cooperative businesses are more complex and diverse than those of investor-owned firms. Many benefits from patronizing and owning a cooperative may be captured at the member level rather than reported on the cooperative’s financial statements. As a result, cooperatives have a more difficult time developing management compensation plans because the cooperative’s financial performance is only a portion of the patron-member value

Risk and uncertainty in cooperative business  221 proposition. Thus, designing management incentive contracts and determining management performance for compensation is infinitely more challenging. Access to Timelier and More Reliable Information Access to reliable, timely information can improve decision-making and manage risk more effectively. Active participation in market transactions and building a solid information network within an industry are the most common activities used to gather market and price information. Access to information is essential for products or services that do not have futures markets. In some cases, public and private information sources can supplement organizations’ active information-gathering activities. Public information sources are often free or available at a low cost. Private sources require subscription fees and may include market or price data and customized analysis. Information flow within organizations can also improve decision-making and reduce risk impacts through better management strategies or faster response times to changing conditions. However, managing and transferring information to the correct decision-makers promptly within large organizations requires planning, policies, training, and effort. Cooperatives can collect hard-to-access information and disseminate it to their patron-members to encourage patronage. Sharing information with member-patrons can also improve the member level’s decision-making and risk management strategies. The cooperative’s patron-members may also be incentivized to share more information about their farm operations, plans, or preferences to help reduce risk due to better coordination. Part of the member-patron value proposition, and a strategic advantage for the cooperative, can be gaining efficiencies from coordinating the cooperative and patron-member activities. However, the information sharing should be limited to patron-members only and not available to individuals who are not patrons of the cooperative. Working Capital Reserves Flexibility and adaptability are often listed as traits that reduce the impacts of adverse outcomes. In other words, being able to shift operations quickly and easily can be an advantage. Substantial working capital can allow firms to generate and spend cash quickly to adjust to unexpected events or outcomes. Examples include adding seasonal labor, leasing additional equipment, covering unexpected repair costs, or purchasing additional inventories when prices fall unexpectedly. One of the primary advantages of working capital is that the main sources, such as cash, inventories, and accounts receivable and payable, are managed within the firm. Substantial working capital is essential for both farm operations and cooperatives. However, maintaining large reserve capital pools may invite opportunistic exploitation if the rights to the reserve capital are not defined and appropriately monitored. Reserve Borrowing Capacity While additional working capital reserves are essential, these reserves may not be large enough to adjust to changing conditions. Short-term or long-term borrowing may be necessary. Maintaining additional borrowing capacity, or maintaining low debt levels, can be an essential risk management strategy. Once again, research on optimum debt levels, financial

222  Handbook of research on cooperatives and mutuals and business risk balancing, and the balance between short-term and long-term debt can guide farm managers and cooperative leaders. Incremental Investments or Delayed Decision-making Incremental investments can be an effective risk strategy when significant capital investments are made and there is uncertainty. An example is financing research and development activities. A pre-determined amount of funds is committed to an identified phase in the development process. Once either the funds are exhausted or the development phase is completed, progress is evaluated, and a decision regarding further investment is made. If the project has not met expectations or fails, funding is stopped, and any losses are recognized. If the project does meet expectations, additional funds are committed, and a new phase is identified. The process of funding in sequential steps is continued until the project is either fully implemented or unsuccessful.

MATCHING RISK TYPES WITH MITIGATION STRATEGIES It is impossible to avoid or eliminate all risks. Indeed, there would likely be no firm profits without accepting some risk. In addition, every risk mitigation strategy comes with a cost—either a financial, transaction, or opportunity cost—to enact the risk mitigation effort. Additionally, substantial efforts and financial commitment may be necessary to build a coalition of other entities to create risk mitigation for more systemic risks. As a result, decision-makers must assess the available risk mitigation strategies, rank them according to their costs and ability to mitigate risk, and decide if those efforts would be optimal. Farm managers and cooperatives should construct exhaustive tables with alternative strategies and ranks similar to what we describe in Table 13.1.

FUTURE RESEARCH AREAS IN RISK AND UNCERTAINTY FOR COOPERATIVES There is a need for further research into understanding the multiple mitigation strategies that cooperatives use and their ability to enhance member welfare while minimizing risk. Furthermore, research needs to focus on how managers and cooperatives can match optimal mitigation efforts given the type of risk to which the cooperative is exposed. Considerable research has been conducted to evaluate risk and risk management strategies at the farm level (Komarek et al., 2020). Less work has been done to investigate the risk at the cooperative level or investigate the risk-shifting between the cooperative and its patron-members and whether the mitigation efforts improve performance. The areas outlined in this section are not intended to be complete but rather provide suggestions for specific issues seen as necessary by cooperative agricultural leaders. The emphasis will be on applied research questions, although additional theoretical research may be required to evaluate the selected topics and issues thoroughly.

Risk and uncertainty in cooperative business  223 Table 13.1

Matching risk types, scope, and mitigation strategies Source of risk

Mitigation strategy

Mitigation strategy in

Type of risk (risk

Scope

or uncertainty)

(idiosyncratic or

Absolute risk

Individual &

Rolling fair dice

N.A.

N.A.

Statistical risk

business

Market (e.g., change in local

Hedging

Commodity futures

Production (e.g., changes in

Access more information

Production contracting to

planted acres or input use)

to calculate better

coordinate investment

agriculture

systemic)

supply and demand) Subjective risk

hedging

subjective probabilities through contracting Uncertainty

Institutional risk (e.g., the

Diversification of

Contract specialty crop

counterparty to a contract goes

contracting parties

with multiple companies

out of business) Absolute

Market (e.g., unauthorized

Reserve borrowing

Quarantine land area

uncertainty

experimental seed variety found

capacity

where the seed was harvested

in farmer’s truck sample) Absolute risk

Industry &

Rolling fair dice

N.A.

N.A.

Statistical risk

National

Production risk (e.g., plant and

Industry Regulations and

USDA-Animal and Plant

animal disease)

Monitoring

Health Inspection Service

Financial risk (e.g., Rapid

Short-term loans with

Short-term loans with

increase in federal funds interest

fixed interest rate

fixed interest rate

Subjective risk

rate) Uncertainty

Institutional risk (e.g., changes in

Lobbying Associations

cooperative taxation policy)

National Council of Farmer Cooperatives

Absolute

Market risk (e.g., change in

Export market

Federated cooperatives

uncertainty

phytosanitary trade regulations

diversification

with sales offices in multiple countries

for wheat in the major importing country) Absolute risk Statistical risk Subjective risk

Uncertainty

Global

Roll of fair dice

N.A.

N.A.

Production risk (e.g., animal

Global monitoring

World Organization for

disease like Mad Cow)

organizations

Animal Health

Institutional risk (e.g., changes in

Global organizations to

Rainforest Alliance

preferences for more sustainable

form uniform standards

food supply)

for production

Institutional risk (e.g., outbreak

Trade agreements

of a war)

World Trade Organization

Absolute

Human risk (e.g. human disease

Access to timely and

World Health

uncertainty

pandemic)

reliable information

Organization

Source: Authors.

Managing Federated Cooperative Allocations by Local Cooperatives Each year, a cooperative’s board of directors, senior management, and auditor discuss allocating the cooperative’s net income or losses and redemption of historical retained earnings. These decisions have significant implications for the cooperative’s cash flow, equity management, and income tax liability. They also impact the member’s value stream from the cooperative. A substantial amount of research has been conducted on these topics (for example, Boland & Barton, 2013; Kenkel, 2015).

224  Handbook of research on cooperatives and mutuals Local cooperatives’ systems to retain and redistribute federated cooperative earnings or losses can impact the local cooperative’s cash flow, equity levels, and income tax liability. Local cooperatives’ systems to manage federated income allocations and equity management can also influence the value generated for local cooperative patron-members. However, limited research has been conducted on how net income or loss allocations and equity redemption policies from federated cooperatives are managed by local cooperatives. On the local cooperative’s income statement, earnings from federated cooperatives are most often included as net income or net losses. Federated cooperative earnings or losses are typically listed as an individual item on the local cooperative’s income statement so that local cooperative members can evaluate the performance of the local cooperative separate from the federated cooperative. There are also instances when the earnings distributed from the federated cooperative are more significant than local earnings. A common assumption is that local cooperatives re-allocate federated earnings to local cooperative members using the same income allocation and equity redemption system used by the federated cooperative. However, discussions with the local cooperative board of directors and general managers indicate that this re-allocation system can vary significantly across local cooperatives. A phase-one research question would determine the alternative systems that federated cooperatives use to allocate net income or loss and manage equity redemptions. The research would then include the alternative systems local cooperatives use to manage federated net income or loss allocations and equity redemptions. A phase-two research question would be to evaluate how the interaction of these systems impacts the financial stability of the local cooperative and the value generated for the local cooperative’s patron-members. Mergers, Acquisitions, Alliances, and Joint Ventures Agricultural cooperatives have been consolidating, through mergers and acquisitions, and creating hybrid structures, such as alliances and joint ventures. While mergers, acquisitions, alliances, and joint ventures are distinctly different, they are often grouped to separate them from the internal growth of the cooperative. The motivation for cooperatives to explore these types of collaborative arrangements and how the arrangements are structured can be very complex and is not fully understood. Various economic factors can drive merger activity, including consolidation of the farm operations patronizing cooperatives, changing production and marketing technologies, changes in economies of scale and scope, and increasing competition from investor-owned firms and neighboring cooperatives. Several previous research studies have pointed to potential capital constraints as a rationale for mergers and acquisitions. Examples include Parliament and Taitt (1989) and Richards and Manfredo (2003). Grashuis and Elliott (2018) expand an analysis beyond capital constraints by incorporating spatial competition and potential merger partners to analyze cooperative mergers and acquisitions. However, Das and Teng (1998) propose that the resources each partner brings to a strategic alliance, combined with relational and performance risks, influence the chosen alliance-making process and organizational structure. The four categories of resources listed are financial, technological, physical, and managerial. Relational risks refer to opportunistic behavior by alliance partners, such as “shirking, distorting information, stealing the partner’s skills, clients and personnel” (p.26). Performance risk is “the probability that the strategic

Risk and uncertainty in cooperative business  225 objectives of an alliance may not be achieved, given that the best possible cooperation exists between the partners” (p.25). Van der Krogt et al. (2007) apply the concepts in Das and Teng and add an analysis of the cooperative’s risk aversion and equity capital constraints to evaluate the European dairy industry. These research efforts provide examples of theoretical and empirical research which frame the complex nature of mergers, acquisitions, alliances, and joint ventures of agricultural cooperatives. However, many additional research questions remain. For example, little information is available about the primary motivations driving agricultural cooperative mergers, acquisitions, alliances, or joint ventures. Information that would be invaluable to collect and analyze regarding cooperative mergers includes: ● a clear understanding of the driving forces which initiated merger or growth discussion; ● the types of alternative structures or organizational forms considered during early negotiations; ● whether the parties used outside advisors to facilitate the pre-agreement discussions and decision-making; ● information gathering and sharing with cooperative members and employees both pre and post-agreement, and unexpected challenges during agreement implementation; ● length of transition from agreement signing until gains from the agreement have been fully realized; ● expected and unexpected post-agreement performance issues; and ● lessons learned. Additional information that would be valuable to collect regarding joint ventures or alliances includes: ● was the new entity created to start a different experience or consolidate an existing business unit(s); ● is the unit considered a related or unrelated diversification strategy; ● how will it be governed; and ● how will the value created be passed on to the patron-members of the parent cooperative(s)? Within the context of risk, a few additional questions arise for mergers: ● How did the existing geographic scope, business unit mix, and relative size impact the new entity’s financial performance? ● Did the variability of net income change from pre to post-merger or acquisition? ● What is the degree of the common cooperative member base, competitiveness of overlapping business units? ● Did the venture gain efficiencies from improved asset use, labor or management utilization, and stabilization of cooperative returns? Managing Non-hedgeable Input or Output Commodities Many agricultural cooperatives trade non-hedgeable commodities used as agricultural production inputs or marketed as raw agricultural commodities. Examples include commercial fertilizer,1 livestock feed, some seeds, crop or livestock health products, fruits, vegetables, nuts, pulse crops, minor oilseeds, organic and non-genetically modified crops, livestock, white and

226  Handbook of research on cooperatives and mutuals durum wheat, and malt barley. While many of these commodities may be considered small, many cooperatives were formed to reduce the risk of producing small, niche products without stable markets. As noted previously, these markets are sometimes referred to as ‘thin’ markets because few buyers and sellers have limited market information and low trading volumes. Because these commodities are non-hedgeable, the cooperative must directly manage the differing risk profiles of each product, service, and market. The most common risk management strategies used include back-to-back purchases and sales, increased use of contracting rather than spot market transactions, larger buy–sell margins to compensate for adverse outcomes, and a sound cooperative financial condition to absorb financial losses. Cooperatives trading in non-hedgeable commodities must also rely on business contacts and personal relationships to gather information about changing market conditions. However, there is little theoretical or empirical research to determine the success or optimality of these strategies (Adjemian et al., 2016). Contract Design Contracting is becoming more common in agriculture (MacDonald & Burns, 2019), and there is a growing need for research on contracting and contract design (Hueth et al., 2007; Vavra, 2009). There have been selected attempts to study agricultural contract design (e.g., Sykuta & Parcell, 2003; Boessen et al., 2010; Schlecht & Spiller, 2012). However, there are still unanswered questions regarding contract design, monitoring, and enforcement. Sykuta and Cook (2001) provide a conceptual framework to explain why contract design may vary by organizational structure, like an investor-owned firm, an open membership cooperative, or a defined membership cooperative. For example, contracts between cooperatives and their patron-members may have similar contract terms as contracts with investor-owned firms, but the enforcement of these terms may differ. Further, the inclusion of a force majeure or act-of-god clause can differ in alternative contracts. Even though a force majeure clause can reduce the risk exposure for one trading partner, the clause will likely increase the exposure for the other contract partner. Also, the potential risk mitigation realized by marketing and input supply cooperatives can be influenced by how well the cooperative coordinates any back-to-back contracts for the original purchase of inputs or re-sale of agricultural products. Less is known about potential differences in contingency clauses in cooperative contracts than about IOFs. Future research needs to compare contracts offered by different organizations for the same activities to establish whether cooperatives accept or mitigate additional risk compared to IOFs for similar types of transactions using contracts. Even though contracts are becoming more common in agriculture, contracts do not typically cover all expected purchases or sales volumes of non-hedgeable commodities traded by cooperatives or farm managers. Less is known about how contracts fit within the portfolio of risk strategies for non-hedgeable commodities and what weight contracting should have within the risk management portfolio. Risk Preferences of Cooperative Leaders Governance and decision-making regarding risk and risk management strategies within cooperatives are different from that in investor-owned firms. Operational decision-making is generally led by the cooperative’s chief executive officer (CEO), while the cooperative’s board

Risk and uncertainty in cooperative business  227 of directors leads strategic decision-making. This shared decision-making system requires close coordination between the CEO and the cooperative’s board regarding goals, objectives, and priorities. Sharing timely information about the cooperative’s performance, engaging in open communication about challenges and opportunities, and prioritizing the cooperative’s financial investments are critical to a cooperative’s long-term success. The risk preferences of cooperative board members, both individually and collectively, and the risk preferences of the CEO can impact both communication and decision-making. The risk preferences of farm managers have been a topic of research for many years (Young et al., 1979; Pennings & Garcia, 2001; Iyer et al., 2020). However, it is unclear whether the risk preferences of individual farm managers making decisions about their operations shift when they are asked to manage the investments of the cooperative’s patron-members. In addition, it is possible that the risk preferences of the combined board of directors, as a group, are different from the “average” preference of the individual board members. During the discussion and debate about critical decisions, subjective probabilities concerning possible outcomes can be influenced, and peer pressure can sway concerns about adverse outcomes. Further, cooperative CEOs have unknown risk preferences. The cooperative’s board of directors is responsible for hiring, evaluating, and compensating the CEO. Given possible selection bias during the hiring and evaluation process, how closely do the board’s collective risk preferences match the CEO’s? Does a difference in risk preference cause conflict between the board and CEO when making critical decisions? Risk-shifting between Cooperatives and Members While considerable research has been conducted on the market and price risk exposure at the farm level, less has been done to understand and evaluate market and price risk at the cooperative level. An underdeveloped research area is the price and market risk-shifting between the cooperative and its patron-members. In some instances, cooperative patron-members have transferred market and price risk from their farm operations to the cooperative because they can better manage the risk. For example, marketing cooperatives typically offer daily price bids for specialty crops or livestock to their patron-members even though the domestic or international buyers are not providing bids to buy the product. In other instances, the cooperative transfers the market and price risk back to its patron-members. For example, some processing cooperatives do not establish a transfer price for the raw agricultural products used for processing. Instead, they use price pools and retain per-unit capital to reduce the cooperative’s risk exposure. The cooperative sells the processed product, subtracts the processing and administrative costs, and distributes the remaining net earnings to the member-patrons after the marketing year. A pooling strategy substantially reduces the cooperative’s risk exposure and provide a more stable market for the patron-members’ production. However, it is unclear whether the risk exposure of the patron-member is higher or lower than in establishing a marketing contract with the cooperative at a specific transfer price.

228  Handbook of research on cooperatives and mutuals

NOTE 1. Futures markets and over-the-counter markets are available for some fertilizer products, but the trading volumes are considered very small.

REFERENCES Adjemian, M., Brorsen, B.W., Hahn, W., Saitone, T.L., & Sexton, R.J. (2016). Thinning Markets in US Agriculture (No. 1476-2016-120990). Barry, P.J. (Ed.). (1984). Risk Management in Agriculture (Vol. 506). Ames, IA: Iowa State University Press. Boehlje, M.D., & Trede, L.D. (1977). Risk management in agriculture. Journal of ASFMRA, 41(1), 20–9. Boessen, C., Parcell, J., Franken, J., Lawrence, J., Plain, R., & Grimes, G. (2010). Producer perceptions and attitudes toward hog marketing contracts. Agribusiness, 26(3), 405–24. Boland, M.A., & Barton, D.G. (2013). Overview of research on cooperative finance. Journal of Cooperatives, 27, 1–14. Das, T.K., & Teng, B.S. (1996). Risk types and inter‐firm alliance structures. Journal of Management Studies, 33(6), 827–43. Das, T.K., & Teng, B.S. (1998). Resource and risk management in the strategic alliance making process. Journal of Management, 24(1), 21–42. Georgieva, T., & Kirechev, D. (2017). Research on the sources of risk for agricultural cooperatives in Northeastern Bulgaria. Trakia Journal of Sciences, 15(1), 206–15. Grashuis, J., & Elliott, M. (2018). The role of capital capacity, spatial competition, and strategic orientation to mergers and acquisitions by US farmer cooperatives. Journal of Co-operative Organization and Management, 6(2), 78–85. Hueth, B., Ligon, E., & Dimitri, C. (2007). Agricultural contracts: data and research needs. American Journal of Agricultural Economics, 89(5), 1276–81. Iyer, P., Bozzola, M., Hirsch, S., Meraner, M., & Finger, R. (2020). Measuring farmer risk preferences in Europe: a systemic review. Journal of Agricultural Economics, 71(1), 3–26. Kenkel, P. (2015). Profit distribution alternatives for agricultural cooperatives. Journal of Cooperatives, 30, 28–49. Knight, F.H. (1921). Risk, Uncertainty and Profit (Vol. 31). New York: Houghton Mifflin. Komarek, A.M., De Pinto, A., & Smith, V.H. (2020). A review of types of risks in agriculture: what we know and what we need to know. Agricultural Systems, 178, 102–738. MacDonald, J.M., & Burns, C. (2019). Marketing and production contracts are widely used in US agriculture.  Amber Waves: The Economics of Food, Farming, Natural Resources, and Rural America, 2019 (No. 1490-2020-725). Parliament, C., & Taitt, J. (1989). Mergers, Consolidations, Acquisitions: Effect on Performance of Agricultural Cooperatives (No. 1701-2016-139305). Pennings, J.M., & Garcia, P. (2001). Measuring producers’ risk preferences: a global risk‐attitude construct. American Journal of Agricultural Economics, 83(4), 993–1009. Richards, T.J., & Manfredo, M. R. (2003). Post‐merger performance of agricultural cooperatives. Agricultural Finance Review, 63(2), 175–92. Schlecht, S., & Spiller, A. (2012). A latent class cluster analysis of farmers’ attitudes towards contract design in the dairy industry. Agribusiness, 28(2), 121–34. Sykuta, M.E., & Cook, M.L. (2001). A new institutional economics approach to contracts and cooperatives. American Journal of Agricultural Economics, 83(5), 1273–9. Sykuta, M., & Parcell, J. (2003). Contract structure and design in identity‐preserved soybean production. Applied Economic Perspectives and Policy, 25(2), 332–50. Van der Krogt, D., Nilsson, J., & Høst, V. (2007). The impact of cooperatives’ risk aversion and equity capital constraints on their inter‐firm consolidation and collaboration strategies—with an empirical study of the European dairy industry. Agribusiness: An International Journal, 23(4), 453–72.

Risk and uncertainty in cooperative business  229 Vavra, P. (2009), Role, Usage and Motivation for Contracting in Agriculture, OECD Food, Agriculture and Fisheries Working Papers, No. 16, OECD Publishing. Young, D., Lin, W., Pope, R., Robison, L., & Selley, R. (1979). Risk Preferences Of Agricultural Producers: Their Measurement And Use (No. 2084-2018-2687).

14. The role of the marketing year and its implications for business strategy and finance Michael A. Boland1

A marketing year, and its role in agricultural businesses such as cooperatives, is best explained by thinking about time. A marketing year revolves around the pattern of agricultural production. It is generally a period of 12 months used for production, marketing, and uses for the commodity, which includes food, animal feed, industrial use, possible use as a seed, inventory changes, and exports. The marketing year begins at harvest when the new crop is brought into the market. In many cases some inventories may remain from the previous year, but this is much less than the new crop. Marketing years span calendar years and so a 2021 calendar year might include a 2021/22 marketing year. This chapter assumes that the marketing year is measured in the northern hemisphere and reflects an autumn or fall starting month. This chapter’s objective is to describe the marketing year and its importance to marketing cooperatives’ business strategy and finance decisions.

MARKETING YEARS FOR US AGRICULTURAL COMMODITIES Small grains such as barley, flax, oats, and wheat have a marketing year that begins June 1. Canola starts its marketing year June 1. Feed grains such as corn and grain sorghum or milo have a marketing year that begins September 1. Oilseeds such as rapeseed, soybeans, and sunflowers start their marketing year September 1. The products from the processing of these crops, including their oil and meal products, start their marketing year at the same time. Alfalfa hay has a marketing year beginning May 1 and peanuts have a marketing year starting August 1. Perennial crops such as: (1) stone fruit, such as peaches and plums; (2) citrus, such as lemons and oranges; (3) pome fruit, such as apples and pears; and (4) nuts, such as walnuts, almonds, and pistachios, operate on a marketing year. For example, citrus starts its marketing year November 1. For many fruits and vegetables there may be multiple marketing years within a 12-month period because their production periods span only a few weeks or months.

THE ROLE OF A COOPERATIVE AND A MARKETING YEAR Marketing cooperatives were formed to help pool risk from all producers and manage this risk within the cooperative. The crop is harvested in the fall, and over the course of the year the value of the crop becomes known as the cooperative discovers its value during the marketing year. Because many agricultural products are perishable, the price is always lowest at the beginning of the market year when supplies are greatest and tends to increase over the marketing year as the supply decreases and more information, such as quality, is known about 230

The role of the marketing year  231 the crop. The cooperative bears the price and quality risk by purchasing the farmer’s output at the beginning of the marketing year and pays the farmer a competitive price at harvest. The members finance the capital needed by the cooperative to build storage and processing assets to add value to the crop throughout the marketing year. Most farmers cannot manage this price risk on their own and instead manage it through their membership in a cooperative. In doing so, they also obtain additional marketing margin and have increased bargaining power to countervail the bargaining power held by buyers who could buy the crop at its lowest price at harvest when supplies are greatest, and to manage the crop inventory throughout the year to obtain more favorable prices (Erdman 1927). As consumers or farmers integrate backwards or forwards, Nourse (1942) noted that the cooperative becomes the competitive yardstick in an industry. For many agricultural crops processed as ingredients into other food products or processed into a consumer product, the value of the crop grown by the producer as a raw material for these ingredient and consumer products is not known at harvest but becomes known over time. This period of time is 12 months for most non-vegetable and berry crops as the supply of the crop is processed and before the new harvest occurs. Cooperatives tend to close their fiscal year with the close of the marketing year. Inventories are at their lowest value here, which is important since crop value tends to be lowest at harvest and highest as inventories become scarce and the crop is processed into its final value. However, occasionally this relationship can be upended and cooperatives have to write down the value of inventories, which has implications for the balance sheet and accounting identity.

THE CONCEPT OF POOLING These cooperatives will pay the member an advance payment at harvest corresponding to some percentage, often enough for the producer to pay the operating loan needed to plant that crop, of what the cooperative projects the total value of the crop to be once all the products have been created and sold. This is a delayed pricing situation. The cooperative commits to purchasing 100 percent of the members’ crop or whatever percentage the producer has committed to the cooperative, as some of these cooperatives have multi-year written marketing agreements to purchase a certain volume or acreage of volume from the member. This allows members to pool their risk, provides “a home” for all the members’ products, and creates opportunities for greater shared sales revenue and income. As such, the cooperative may not know what that volume will be because of unique growing conditions in that year. For example, many marketing cooperatives in California grow crops such as figs, almonds, peaches, prunes, raisin grapes, oranges, lemons, and other crops in a localized region. Climatic factors such as lack of rain, too much rain or frost, or too much heat can cause a decrease in volume. Similarly, certain orchard crops such as apples and pears, some stone fruits such as apricots and plums, and certain table olives may exhibit alternate bearing tendencies, with a large volume one year followed by a small volume the next year. All these issues affect the value of the crop over the marketing year. As the value becomes known over the course of the marketing year, the cooperative provides another payment to producers, generally 4–6 months after harvest, and a final payment at the end of the year when the total value of the crop is known, and that year’s pool is closed. The cooperative deducts the operating expenses needed to process the crop.

232  Handbook of research on cooperatives and mutuals In this way the cooperative has essentially little or no net income analogous to the concept of a patronage refund at the end of its fiscal year, which is typically on August 30. The board creates equity for asset investments by deducting or withholding a portion of the value of the crop and assessing each member a per-unit capital retain based on the members’ volume of business, according to the process described in the cooperative bylaws. Cooperatives with multiple pools such as vegetables and fruits have faced difficulty in dealing with property rights issues such as free-rider, horizon, influence, and portfolio. Cooperatives that have demutualized or gone into bankruptcy include Tri Valley Growers (Hariyoga and Sexton 2009) and Birds Eye Foods (Amanor-Boadu 2003).

COOPERATION BETWEEN MEMBERS AND THEIR COOPERATIVE The pooling concept requires coordination between the cooperative and producers regarding the production, harvesting, and delivery of commodities. Each producer-participant is paid the average price received for all product of like quality delivered during the duration of the pool. A member’s share of the pool proceeds is determined by the volume of product contributed and may be adjusted for either premiums or discounts related to quality differences. Pool operating costs are allocated among producers and deducted from their returns prior to settlement and are often linked with a multi-year contract or agreement. The cooperative decides the number of pools to use and how each is segregated regarding commodity type and grade, the geographic areas to include, and how long each pool will remain open. Many cooperatives use multiple pools. For example, the National Grape Cooperative owns Welch Foods. It operates Eastern and Western pools. The rationale is linked with the brix in grapes grown in different geographies. The higher the brix of the grape juice, the higher the volume of concentrate it produces. In general, the soil and water conditions in Washington gives its Concord grapes a higher brix than Concord grapes produced in Michigan, New York, and Pennsylvania. Washington Concord grapes tend to yield higher volumes of concentrate than Eastern Concord grapes. In contrast, Eastern Concord grapes have higher acids and deeper color, allowing them to be blended with concentrates from cheaper viniferous varieties without losing their taste. Thus, it makes sense to have two pools. In addition, because the full value of the grape harvest may not be known until 36 months in the future, growers are paid out accordingly during those 36 months at different time periods once the costs are fully known. Premiums and discounts are used to account for variations in product quality or timing of delivery, ensuring equitable distribution of marketing risks and assigning equitable allocation of expenses. The member is sacrificing short-term gains for long-term stability. Producers receive an average price, so cyclical fluctuations in price or changes in demand may be minimized among all producers in the pool. Some commodities do not have clear observable market prices, which makes it difficult to separate commodity value and patronage. For example, a price for fresh figs exists but figs used for processing or ingredient use such as those produced by Valley Fig Growers do not have prices until after the price discovery process for determining their value as an ingredient is known. Pooling cooperatives often exist for commodities such as fruit and vegetables that are perishable and whose full value is not known until the entire harvest has been processed. But there

The role of the marketing year  233 are exceptions. For example, a significant portion of cotton is marketed through marketing pools, but not all cooperative members participate. Some choose to market their cotton on their own. Some grain cooperatives offer marketing pools as a marketing and risk management option, but participation has historically been limited. There were lots of alternative buyers for feed grains like corn or oilseeds like soybeans, so growers did not need to use pooling methods, although their accounting and bylaws may reflect this to comply with tax issues, such as the section 199A deduction. Risk management programs are available and linked with price and storage in such cooperatives, and quality and grades are not as important. Clodius’ (1957) description of the bargaining cooperative is still relevant today. Bargaining cooperatives establish minimum prices and terms of sale for their members’ products, which are incorporated into contracts and establish price and terms of sale as sales agents for members’ products such as milk, pears, peaches, olives, prunes, and raisins.

INGREDIENT AND CONSUMER PRODUCTS FROM POOLING COOPERATIVES Many pooling cooperatives use their members’ products in ingredient use. For example, almonds are used in marzipan and almond paste. But Blue Diamond Growers has successfully branded consumer almond products. Similarly, Pacific Coastal Producers utilize members’ fruits into processed products under a variety of private-label and store-brand products or food service products. Raisins from Sun-Maid Growers are used in ingredient and consumer products. Sunkist Growers has one of the most successful licensing programs in food products but most of its members’ products are Navel variety oranges and lemons. Bard Valley Date Growers brands its dates grown near Yuma, Arizona. Land O’ Lakes uses its label on manufactured dairy products such as butter and dairy spreads. Many commodities have a commodity checkoff program to promote the commodity and shift the demand curve to the right by investment in research and development of value added products, promotion of healthiness or nutrition, or similar issues. Such programs cannot fund investments that do not shift the demand curve, such as coupons, which just are a movement along a demand curve. Thus, cooperatives have advertised their own brands and the differentiated nature of those branded products (Crespi 2003; Boland et al. 2012). The majority of cooperatives with a brand do not have large amounts of brand value like those ranked in the annual Interbrand list of valuable brands. Williams (2012) describes many well-known co-op brands such as Amul, Land O’Lakes, Lurpak, Ocean Spray, Sun-Maid, Sunkist, Sunsweet, and Tillamook. New brands are being introduced. For example, in 2021, dairy cooperatives Glanbia and AMPI launched new butter brands.

RESEARCH NEEDS GOING FORWARD A lot of foundational research has been done by agricultural economists, especially by the University of California Gianni Foundation, in describing how the marketing year interacts with pooling cooperatives. This has been summarized by Sexton and Alston (2010). King et al. (2010) have two sections documenting research on cooperatives. But more research needs to be done.

234  Handbook of research on cooperatives and mutuals Is understanding the marketing year still relevant with some cooperatives operating in a global environment? Virtually all fruits and vegetables operate in a global world and reduction of trade barriers has helped facilitate opportunities for consumers to have fresh fruits and vegetables year round. Some cooperatives, such as Ocean Spray and Sunsweet, have developed global operations to help meet buyer needs. No current study exists documenting the extent to which cooperatives have developed global operations to meet buyer needs. What is the role of the marketing year in the Southern Hemisphere and in other industries? This chapter has focused on the marketing year in the northern hemisphere. For example, cooperatives in Australia, South Africa, and other countries utilize a marketing year. A contribution would be to develop a literature review of these studies to help inform academics and others and develop a global set of resources on this topic. Pinkerton (2015) suggests that pooling cooperatives could be one solution to overfishing in local fishing areas. How do cooperatives maintain market share as larger growers consider marketing directly? Sapiro (1923) argued that cooperatives should pool all of their grain into a single desk cooperative like those used in Australia and Canada in various grain products. That philosophical orientation was important in many fruit cooperatives. Meanwhile, Cook (1995) traced market share growth in various US industry sectors over time using US Department of Agriculture (USDA) data and concluded that market share growth had slowed down. No such data exists since the demise of those USDA studies. Anecdotally, it is likely that the market share of cooperatives in a sector has likely decreased over time, but these would be sector specific.

NOTE 1.

The author wishes to thank an anonymous reviewer for helpful comments and suggestions.

REFERENCES Amanor-Boadu, V., M.A. Boland, D.G. Barton, B. Anderson, and B. Henehan. 2003. “Birds Eye Foods.” Arthur Capper Cooperative Center, Case Study Series No. 03-06. Boland, M.A., J.M. Crespi, J. Silva, and T. Xia. 2012. “Measuring the Benefits to Advertising under Monopolistic Competition.” Journal of Agricultural and Resource Economics 37, 1: 1–12. Clodius, Robert L. 1957. “The Role of Cooperatives in Bargaining.” Journal of Farm Economics 39, 5: 1271–81. Cook, M.L. 1995. “The Future of U.S. Agricultural Cooperatives: A Neo-Institutional Approach.” American Journal of Agricultural Economics 77, 5: 600–8. Crespi, J.M. 2003. “The Generic Advertising Controversy: How Did We Get Here and Where Are We Going?” Review of Agricultural Economics 25: 294–315. Erdman, H.E. 1927. “The Cooperative Marketing Association as a Factor in Adjusting Production to Demand.” Journal of Farm Economics 7, 1: 73–81. Hariyoga, H. and R.J. Sexton. 2009. “The Rise and Fall of Tri Valley Growers Cooperative.” Journal of Cooperatives 23, 1: 87–100.

The role of the marketing year  235 King, R.P., M. Boehlje, M.L. Cook, and S.T. Sonka. 2010. “Agribusiness Economics and Management.”  American Journal of Agricultural Economics 92, 2: 554–70. www​.jstor​.org/​stable/​ 40648002 Nourse, E.G., 1942–5. “The Place of the Cooperative in Our National Economy,” American Cooperation 1942 to 1945. American Institute of Cooperation, Washington DC, pp.33–9. Pinkerton, E. 2015. “Groundtruthing Individual Transferable Quotas.” In E.P. Durrenberger and G. Palsson (eds), Gambling Debt: Iceland’s Rise and Fall in the Global Economy (pp.109–20). University Press of Colorado. www​.jstor​.org/​stable/​j​.ctt169wdcd​.14 Sapiro, A. 1923. “True Farmer Cooperatives.” World’s Work, pp.84–96. Sexton, R.J. and J.M. Alston. 2010. “The Giannini Foundation and The Economics of Collective Action in the Marketing of California Farm Products.” In W.E. Johnston and A. McCalla (eds), A.P. Giannini and the Giannini Foundation of Agricultural Economics. Available at https://​giannini​.ucop​.edu/​ publications/​apgiannini​-book/​ Williams, J. 2012. “The Cooperatives Behind the Brands.” Available at https://​ giannini​ .ucop​ .edu/​ publications/​apgiannini​-book/​https://​earthbound​.report/​2012/​07/​02/​the​-cooperatives​-behind​-the​ -brands/​

15. Towards a framework for formulating cooperative strategy Matthew S. Elliott, Frayne Olson, and Jasper Grashuis

INTRODUCTION This chapter works toward developing a framework for formulating a cooperative strategy. The term ‘strategy’ has varying definitions within strategic management textbooks and research publications. However, a consistent theme throughout the definitions is that strategy defines the mission and objective of an organization or firm. A firm strategy is a system that communicates priorities to guide decision-making—particularly when there is uncertainty of outcomes. It is forward-looking but influenced by the past. An effective strategy allows a firm to gain a sustained advantage over competitors due to focused resource allocation and decisiveness when there is uncertainty. The external business environment can influence strategy, but the emphasis of strategy is on actions that stakeholders of the organization can use to efficiently achieve the organization’s objectives, even when there is uncertainty as to what state of the environment may exist. A strategy is successful when the strategy leads to a sustained competitive advantage and maximum benefits over many environmental states. Hambrick and Fredrickson (2005) discuss what is and is not a strategy. They contend that many frameworks described in the literature are fragments of a firm strategy. They suggest a firm strategy defines two critical components: the mission and the objective of the firm. The mission and objective are chosen conditional on an analysis of the external business environment and various states that could appear. Internal organizational characteristics—such as the allocation of property rights and governance—are shaped to support a strategy once the core strategy is established (see Figure 15.1). The process used to determine how to meet the firm’s objectives, fulfill its mission and form a strategy can be decomposed into five elements: ● ● ● ● ●

arenas; vehicles; differentiators; staging; economic logic.

When formulating a strategy that meets the firm’s objectives, decision-makers must determine what vehicles (such as products, value chains, and markets) they will use to compete, how they will be different from the competition, what the stages or sequence of events to compete in an arena will be, and the fundamental logic that underlies the organization’s competitive advantage. Unlike the corporate strategy literature, the existing literature on formulating cooperative strategies is relatively scarce and underdeveloped. For example, using a survey of cooperative 236

Towards a framework for formulating cooperative strategy  237 leaders, Peterson and Anderson (1996) provided a taxonomy of 12 cooperative strategies which leaders could use. However, some of the strategies identified in the Peterson and Anderson (1996) article are fragments of firm strategies in the Hambrick and Frederickson framework (for example, competitive yardstick, agency costs). Other strategies identified by Peterson and Anderson (1996) are not strategies but activities or operational policies implemented to support a strategy (for example, conservative investment, savings bank). Though Peterson and Anderson highlight how cooperatives have unique strategies and formulations compared to investor-owned firms, their description of strategies includes fragments of strategies or supporting policies. Thus, this chapter aims to work toward a broader framework for cooperative strategy formulation that has been adapted from Hambrick and Fredrickson (2005). The Hambrick and Fredrickson framework is more suitable for cooperatives because it is more amenable to various organizational forms with unique objectives like cooperatives. The framework identifies two determinant components of a strategy that are unique to cooperatives and conditional on the environment: (1) the core mission and (2) the objectives (see Figure 15.1). Hambrick and Fredrickson’s term “mission” can include the cooperative’s mission, vision, and value statements. The term “objective” consists of the specific targets that direct the behavior the organization should exhibit (for example, maximize member satisfaction). Internal organizational arrangements that support a cooperative strategy include equity rights (Chaddad & Cook, 2004; Grashuis & Cook, 2017), governance (Chaddad & Iliopoulos, 2013; Bijman et al., 2014), and performance measures to determine if the cooperative has achieved its objective(s) (Soboh et al., 2009; Benos et al., 2018). Internal features of cooperatives, such as equity rights, rewards, brands, performance measures, and governance, are chosen to support the strategy and meet member objectives that leads to a competitive advantage in a multi-state environment. However, some internal features may be artifacts from a previous strategy during an earlier era. Thus, the internal characteristics may need to be adapted or modified to support the new strategy to best meet member objectives in the future. Indeed, many cooperatives have preserved their internal features even though their strategy (that is, mission and objectives) has shifted. Thus, cooperatives may need to reexamine their strategy and organizational arrangements to determine if the characteristics are supportive or constraining to their objectives or mission.

TOWARDS A FRAMEWORK FOR COOPERATIVE STRATEGY The Cooperative Mission The primary motivation for forming many traditional agricultural cooperatives was to counter large buyers and sellers in input and output markets (for example, Valentinov, 2007). Correspondingly, the primary rationale of many existing cooperatives is to act as a competitive yardstick and force fair pricing strategies by non-cooperatives. However, some cooperatives have since evolved and provide many functions beyond countering market power. For example, cooperatives seemingly have greater knowledge of their supply chain because of member involvement as equity holders and patrons. As a result, cooperatives may be better suited to monitor and enforce exchanges in the supply chain that reduce transaction costs and enable coordinated investment in specific assets. In addition, members may be more alert to

238  Handbook of research on cooperatives and mutuals

Source: Hambrick and Fredrickson (2005).

Figure 15.1

Putting strategy in its place

economic opportunities from investments in specific or specialized assets. Thus, some cooperatives have moved from a mission of competitive yardstick to one of better satisfying unique consumer and member demand (see Table 15.1). Most adaptations have allowed cooperatives to exhibit more offense-oriented (profit-oriented) behavior than simply defending against monopolists and offering fair pricing to members. Thus, many cooperatives often have a new mission. For example, the new mission may be to increase consumer demand by taking ownership of processing, marketing and communicating with consumers to promote and increase the use of member products. When the cooperative can maximize downstream claims for processed or branded products, it can create a more valuable supply that provides similar trust with consumers. Other cooperative missions may be associated with pooling risk or maintaining markets. Each of those missions would be distinct from a mission of being a competitive yardstick or adding value for consumers or members. When formulating a cooperative strategy, the cooperative must choose its primary mission. The mission is determined by fundamental environmental problems or opportunities that require collective action. The economic problems or opportunities must be reoccurring in many environmental states for a sustained competitive advantage to be realized by cooperatives.

Towards a framework for formulating cooperative strategy  239 Table 15.1

Peterson and Anderson’s taxonomy of theoretical cooperative strategies

Strategy

Source of differential member returns

Returns strategy: ● Countering market power: ● Competitive yardstick

Elimination of deadweight loss from market power

● Countervailing power

Bargaining strength moving market equilibrium toward competitive ideal

● Improving cost efficiencies: ● Deal costs

Information economies in contracting, monitoring, planning, communicating and enforcing deals that arise in exchange

● Agency costs

Information economies in monitoring management and strategies

● Serving missing markets: ● Member demand

Information economies in regard to member product specifications

● Consumer demand

Information economies in regard to farm level effects and product specifications from the consumer level in the market chain

Risk management strategies: ● Direct strategies: ● Pooling

“Averaging” prices across time and markets

● Savings bank

Saving member returns in “good” times and paying them back in “poor” times

● Maintain-the-market

Producing returns in times when non-cooperative firms would abandon a market

● Indirect strategies: ● Conservative investment

Restricting cooperative investment to “safe” assets

● Diversification

Expanding cooperative investment to include risk reducing, non-member centered assets

● Selective vertical integration

Integrating into markets with negative covariance between cooperative and member returns

Source: Peterson, H.C., & Anderson, B.L. (1996). Cooperative strategy: theory and practice. Agribusiness: An International Journal, 12(4), 371–83.

The Cooperative Objective In corporate strategic management theory, managers design and execute each strategy to maximize profit on behalf of their shareholders. Unlike corporate firms, cooperatives often do not have a single, simple objective such as maximizing profit. Indeed, cooperatives have mixed, multiple, or competing objectives (Soboh et al., 2009; Benos et al., 2018). The lack of a single objective is because members maintain equity in the cooperative through buying inputs or selling outputs. Members are thus investors and customers or suppliers (Limnios et al., 2018). Therefore, the intent is often to maximize profit or value jointly at the member and cooperative levels. Cooperatives may choose to maximize member welfare by maximizing gains for members at the cooperative level, through enhanced prices, and at the farm level, by increasing the use and processing of the members’ products. However, suppose the cooperative chooses to maximize member welfare. In that case, the choice could limit the value addition if the cooperative strictly focused on maximizing profit at the cooperative level. Thus cooperatives that pursue brand quality and downstream value creation need to identify their primary objective. For example, the value-added ‘branding’ strategy may not maximize value creation to a product if the target is to maximize member welfare. Alternatively, the cooperative may change its objective to maximize returns per unit processed rather than maximizing welfare (for example, Bateman, Edwards, & LeVay, 1979). In that case, the cooperative’s policies may need to

240  Handbook of research on cooperatives and mutuals restrict the quality and quantity of member deliveries. As a result, some members are likely to become dissatisfied. When more nebulous objectives of the cooperative are chosen for the strategy (for example, maximize member welfare or satisfaction), the possible sets of internal characteristics that can sustain the strategy become more limited. More importantly, the targets that a cooperative sets for management, and monitors to determine performance, become more difficult to describe or determine if the cooperative has succeeded or is effective. External Characteristics An analysis of the external environment in which the cooperative operates needs to be conducted for cooperatives to formulate a strategy. Cooperatives should evaluate whether the fundamental mission and objective(s) are needed to provide a collective action solution to an economic problem or to capture an economic opportunity. An external environmental analysis should also consider the existing state and likely states in the short to medium term. When there is a fundamental shift of likely environments, where the economic problem or opportunity that requires collective action no longer exists, then a reevaluation of strategy is necessary. External environmental characteristics that need to be examined during strategy formulation include: ● the economic fundamentals of the sectors and business segments in which the firm operates; ● the geographic scope of the market; ● potential partners and competitors; ● related versus unrelated diversification; ● the nature of the value chain (for example, market, modular, relational, captive, or hierarchy); ● threats of new entries; ● available substitutes; ● buyer and supplier power; ● federal, state, and local policies. Most existing cooperatives began with a local orientation, or limited geographic scope, as their members come from a contiguous, central location with a need for greater competition or specific asset investment (McCorriston, 2002; Sexton & Xia, 2018). Cooperatives with a local orientation often use countervailing market power to reduce bargaining costs and enhance price competitiveness or invest in specific assets when assets and markets are missing. For example, research has shown the positive impact of cooperatives on producer welfare in local monopsonies, oligopsonies, or mixed markets (for example, Fousekis, 2011; Liang & Hendrikse, 2016; Panagiotou & Stavrakoudis, 2018). As a result, a cooperative may need to strategically select a location to maximize the competitive impact if the purpose is to countervail market power or supply missing markets (Fousekis, 2015). The response of industry competitors to the cooperative strategy also needs to be considered. For example, will competitors respond by developing substitute products or services, or would the strategy invite new entrants? How would competitors respond if the cooperative objective is to provide countervailing power and a competitive yardstick by offering a fair price for products and services to members at cost? Would the competitor lower their prices to

Towards a framework for formulating cooperative strategy  241 take the cooperative’s business or maintain their existing market share, or would the competitor cede market share, eventually exit, or seek to partner? Grahuis (2020) demonstrated how grain marketing cooperatives positively impact the pricing of private and investor-owned grain companies within a 20-mile radius, for example. Some cooperatives have broadened their geographic scope primarily using mergers and acquisitions (Grashuis & Elliott, 2018; Grashuis & Franken, 2020). Other cooperatives have regional orientations with an international scope of operation. Indeed, some of the largest cooperatives in the United States (for example, CHS, DFA, Land O’Lakes) have been formed or expanded with other cooperatives as partners through a federated system. Generally, broadening the expansion of the collective action using a single, coherent strategy can be positive as long as diverging interests and offsetting organizational costs do not create a limiting factor to a successful strategy. Whether organizational growth in geography is associated with a specific strategy is uncertain. Most likely, non-local cooperatives face more regional or national competitors and must therefore engage in either cost leadership or product or service differentiation by seeking to grow with partners. For example, many mergers and acquisitions by grain marketing cooperatives appear to be motivated to reduce the production costs of the cooperative using scale and scope efficiencies rather than countervailing market power by global grain companies (Briggeman et al., 2016). Some cooperatives have expanded their firm by enterprise or business unit diversification, often through mergers, acquisitions, or joint ventures. Business unit diversification can offer economies of scope and firm-level risk management benefits if managed effectively. For example, agricultural production systems often have peak seasonal physical and human capital demand. Sharing assets across related business units or cross-training employees in multiple units with different seasonal demands can increase efficiency. Enterprise diversification is commonly used as a risk management technique when hedging or insurance alternatives cannot lower risk exposure to an acceptable level. However, business unit diversification can also place additional demands on the cooperative’s senior management to guide, monitor, and coordinate multiple enterprises. Choosing business units in related industry segments can reduce management responsibilities but may not offer the desired revenue-stabilizing effects the cooperative can gain from diversification. Adding new business units may increase the cooperative’s patronage levels by bringing in new members, or increasing the patronage levels of existing missing assets and markets units may also increase the heterogeneity of members’ economic interests, making strategy formulation and resource allocation within the cooperative more difficult and less focused. There are also examples of agricultural cooperatives which have historically managed related diversification well but needed to evaluate closing a business unit due to shifting economic conditions. Closing business units can create tension within the cooperative’s membership if it is not well justified and communicated. The nature of the value chain is also an essential environmental factor in determining cooperative strategy. Gereffi, Humphrey, and Sturgeon (2005) have described five types of value chains based on transaction costs, knowledge and capabilities of suppliers, and the ability to coordinate with suppliers using contracts. The five different types of value chains are described as: ● a market, where the costs to switch counterparties in transactions are low;

242  Handbook of research on cooperatives and mutuals ● a modular chain, where more custom types of products are made by suppliers using generic assets; ● a reputational supply chain, where complex interactions create greater dependence on different stages of the supply chain through networks; ● a captive supply chain, where there are many suppliers with asset-specific investments which only have one buyer; and ● a hierarchical chain, where the governance of the entire chain from the raw input to the final value-added good is coordinated and controlled by a single firm. Cooperatives are primarily engaged in supply chains that are reputational, captive, or hierarchical to create and capture value due to the inherent organizational efficiencies of the cooperative to counter market power, reduce asymmetric information, and reduce agency costs when production or consumption is dispersed. Cooperatives may have difficulty pursuing a so-called market or customer orientation at the downstream stage of the value chain (Hardesty, 2005; Bijman, 2010; Hanf & Schweickert, 2014). For example, compared with non-cooperatives in the same agri-food sectors, cooperatives have significantly less brand equity (Grashuis, 2017) and knowledge of consumer marketing. However, external circumstances may require cooperatives to pursue value-added opportunities by developing brand equity and consumer marketing programs. When the external circumstances dictate a change in strategy, a reformulation of the internal characteristics may be necessary. An example is Organic Valley, whose customer orientation was manifested by changes in consumer preferences for more specifications that required greater coordination of the raw product with processing and retailing (Su & Cook, 2015). The federal, state, and local policies also impact cooperative strategy formulation. In France, for example, cooperatives are legally obligated to develop member activity in their regions (Filippi, 2014). Many French cooperatives use geographical indications to communicate the product origin to consumers, implying a market and objective to increase consumer demand through awareness of member process that results in highly valued end-user product specifications. In the United States, product origin is communicated using trademarks, including state-sponsored designations such as Jersey Fresh and Wisconsin Grown (Onken & Bernard, 2010). Cooperatives with connections to states or regions have an inherent capacity to efficiently use such marketing mechanisms to capture price premiums. Internal Characteristics of a Cooperative that Support Strategy Internal features of a firm are not a strategy in themselves. However, internal features are essential in supporting a cooperative’s strategy to achieve a sustained competitive advantage. If the internal characteristics of the cooperative do not support the strategy, then changes need to be made to the internal characteristics. A non-exclusive list of internal characteristics of cooperatives that are important to support cooperative strategy includes: ● ● ● ● ●

the cooperative’s measure of performance; the nature of ownership (for example, member-investor, traditional, investor-share); the governance (for example, values, proportional voting, one-member one-vote); the type of umbrella organization (for example, alliance, federated, centralized, or hybrid); risk management policies;

Towards a framework for formulating cooperative strategy  243 ● the differentiators to create and capture value (for example, low cost, unique premium attributes, style); and ● the vehicles for enhancing competitive advantage (for example, brand, price, trust, reliability). A primary internal characteristic needed to support a strategy is identifying cooperative performance measurements and designing incentives and performance metrics to achieve the desired objective (for example, maximize member welfare). While cooperative performance can use similar metrics as corporate firm performance, such as return on equity (ROE) or return on assets (ROA) (Grashuis & Su, 2019), the presence of multiple objectives implies a need to use multiple indicators to measure or evaluate cooperative performance. Some non-financial indicators are subjective (Franken & Cook, 2015), with member satisfaction arguably the most popular construct in the empirical literature (for example, Breitenbach & Brandão, 2021; Grashuis & Cook, 2021). However, cooperatives should seek unique measures of performance that support their fundamental mission and objective. For example, suppose the fundamental mission of the cooperative is to provide the countervailing power in transactions, and the objective is to minimize prices of consumed products for members. In that case, a measure of the value of the cooperative that should be communicated to members is the profitability— hopefully low—of the industry! Indeed, if the objective is to provide competitive markets, the market should approach a perfectly competitive equilibrium where the cooperative’s products and services are at cost. Alternatively, suppose the fundamental mission is to increase consumer demand for the member products. In that case, the measure of performance of the cooperative could be to maximize the number of member products sold. A performance measure will show if the cooperative activities increase consumed quantities. For example, some cooperatives pursue product differentiation where they use the farmer-owned identity of the organization to pursue a fundamental mission of fairness, quality, and trust in the supply and value chain (Webb, 1996; Spear, 2000). The intent is that consumers are more likely to buy additional amounts of products when they trust the supply and value chain. As a result, there is a rightward shift in demand for the product. For example, Florida’s Natural uses the farmer-owned label to differentiate its chains from competitors like Minute Maid (owned by Coca-Cola) and Tropicana (owned by PepsiCo) (Trejo-Pech et al., 2018). Additional internal characteristics that support a cooperative strategy include ownership and governance. For example, in the traditional cooperative model, members possess non-appreciable ownership and the equity is allowed to be redeemed but not transferred. Over time, alternative cooperative ownership structures (Chaddad & Cook, 2004; Grashuis & Cook, 2017) and governance (Chaddad & Iliopoulos, 2013; Bijman et al., 2014) have been adopted. Most adaptations to cooperative ownership structure have allowed cooperatives to pursue more offense or profit strategies rather than provide defensive balancing to market power. For example, some cooperatives issue preferred stock to both members and investors, and many other cooperatives use subsidiaries to facilitate the pursuit of more risk and profit. The most extreme example is the new generation cooperative (Harris et al., 1996; Grashuis & Cook, 2018), a particular adaptation with a closed, defined membership, specifications on product quality and quantity to be delivered, and high upfront capital investment. The new generation cooperative’s structure is suitable for commodity producers with value-added potential in the downstream segments of the value chain (for example, pasta, dairy, turkey).

244  Handbook of research on cooperatives and mutuals Cooperatives with an explicit profit orientation may need to convert to investor-owned firms or demutualize to pursue an objective to maximize profits. For example, the avocado marketing cooperative Calavo and the walnut marketing cooperative Diamond Walnut Growers converted to corporations in 2001 and 2005, respectively, to escape the inherent constraints of cooperatives in pursuing sustained profit maximization opportunities (Stanford & Hogeland, 2004; Hardesty, 2009). As previously mentioned, in these cooperatives control is often more separated from ownership as decision-making is delegated to non-members in profit-oriented enterprises (that is, professionals) (Chaddad & Iliopoulos, 2013; Bijman et al., 2014). While cooperatives with a non-traditional governance structure incur more agency costs (Grashuis, 2019a), the possibility of a net benefit is realized through task specialization and specific knowledge of downstream processing, marketing, and communication to achieve value-added returns. Changes in strategy may lead to diverging interests and objectives of members, often indicated by age, farm size, education, or household income (Höhler & Kühl, 2018). Variability in such characteristics is linked to lower membership satisfaction (Grashuis & Cook, 2021). Generally, the notion is that increasing member heterogeneity harms cooperatives in efficiently determining and implementing a single cooperative strategy (Hooks et al., 2017; Iliopoulos & Valentinov, 2017). Instead, as member heterogeneity increases, cooperative strategy formulation becomes difficult to agree upon between members and management and leads to vague or competing strategy formulations. Thus, even though a strategy may be successful at a more local geographic scope, the same strategy may have difficulties scaling up because of diverging member interests. Cooperative leaders may tinker with internal characteristics to ameliorate problems in cooperatives with greater member heterogeneity to support a change in strategy (for example, Cook & Iliopolous, 2016). For example, cooperatives may use multiple equity structures to separate equity rights and risk to maintain member satisfaction. Indeed, Michigan Milk Producers Association implemented a multiple equity structure system to expedite patronage cash refunds and equity redemptions for relatively old members who may disagree with a new strategy (Campbell, 2009). As cooperatives pursue profit-oriented strategies, they generally increase non-member business. Such non-member business is often conducted in subsidiaries or joint ventures with other organizations. Thus cooperatives can be parent corporations to subsidiaries with different missions and objectives than the cooperative. Some changes to internal governance are driven or restricted by federal, local, and state policies. In the US, in most instances, cooperatives may not derive more than 50 percent of their revenue from non-member businesses, to maintain antitrust protection. Also, non-member income cannot be distributed to members as patronage without double taxation. Instead, non-member income is assigned as unallocated equity and only taxed at the cooperative level. As a result, changes to the nature of equity credits may be necessary to continue supporting a profit-oriented strategy with increasing non-member business, so it is not disadvantaged by tax laws or restricted by incorporation statutes.

LEVELS AND RESPONSIBILITY OF STRATEGY FORMULATION Within the Hambrick and Fredrickson (2005) framework, strategy formation does not begin until after the firm’s mission and objectives have been formalized and an analysis of external

Towards a framework for formulating cooperative strategy  245 characteristics has been performed. In investor-owned firms, the mission and objectives are relatively straightforward: maximize profits and share values, manage risk exposure, and pursue the firm’s growth. The analysis of external characteristics is typically performed by the senior management team, which is also responsible for formulating strategy. However, as noted previously, cooperatives can have a complex set of objectives, which may be conflicting. One of the most significant challenges for strategy formation within cooperatives is to specify, delineate, and communicate the cooperative’s mission, vision, and objectives to patron-members, management, employees, and external constituents such as lenders, business associates, and policymakers. Establishing the cooperative’s mission and objectives is a primary responsibility of the board of directors, which is most commonly composed of cooperative members elected by their peers. The senior management team often analyzes external characteristics with input from the board of directors. Hambrick and Fredrickson (2005) identify five major elements within the strategy creation process; arenas, vehicles, differentiators, staging, and economic logic. These five major elements identify how the cooperative will meet its objective(s) and fulfill its mission. Arenas include spaces where the firm will be active. What market segments or product categories will be emphasized? What geographic areas and core technologies will be used? Vehicles refer to the means used to achieve the desired presence in the arena. Will the firm use acquisitions, joint ventures, or licensing agreements, or will it rely on internal development and growth? Differentiators identify how the firm will distinguish itself from competitors. Will the firm use price, product reliability, customization, image, or styling? Staging is the sequence and timing of moves to engage in the arena. Economic logic identifies an economic problem that enables cooperatives to have a fundamental competitive advantage. Examples include lowest cost through scale advantages, lowest cost through scope and replication advantages, premium prices due to unmatchable service, or premium prices due to proprietary product features. In the business literature, some alternative systems and criteria have been identified to guide strategy creation in investor-owned firms (for example, Mintzberg et al., 2001). However, in investor-owned firms, the senior management team is generally responsible for setting and communicating strategies. In contrast, the strategy formation process in cooperatives is often shared between the board of directors and senior management. The processes and responsibilities of cooperative strategy formulation are not consistent or understood. For example, senior management is responsible for communicating the strategy to mid-level management and employees. The responsibility for communicating the strategy to cooperative members is less clear and often shared between senior management and the board of directors. Many cooperatives hold an annual strategic planning session. In some cases, outside facilitators or consultants are invited to help guide the session or provide additional information or analysis. Ideally, the board of directors and management team would jointly develop and agree on the cooperative’s objectives and overall strategic plan, with final approval provided by the board of directors. Anecdotal evidence suggests this is not always how a cooperative’s strategy is developed. For example, there can be disagreement on the cooperative strategy within the board or between the board and managers. Alternatively, there can be agreement on strategy (that is, mission, objectives), but differences in how those strategies are implemented (for example, organizational policies or the arenas and vehicles used to achieve the objectives). Rothaermel (2019) describes four general classes of strategy based on the geographic scope and activities of the cooperative: global, corporate, business, and operational levels. These alternative strategy classes may be useful for cooperative management and boards

246  Handbook of research on cooperatives and mutuals when setting responsibilities and the tasks for formulating strategy. Global scope refers to business activities outside of the firm’s domestic markets. Corporate-level strategies focus on a firm’s geographic scope, related and unrelated business unit diversification (for example, adding and closing business units), vertical integration and strategic alliances, joint ventures, mergers, or acquisitions. All cooperatives face questions regarding corporate-level strategies. Business-level strategies focus on how a firm competes in a single or closely related product line or business unit (that is, the arenas, vehicles, differentiators, staging, and economic logic). Much of the research in strategic management, such as that of Porter (1980), focuses on business-level strategy. Operational-level strategies focus on branding and marketing, finance, human resources, and research and development. The cooperative board of directors should limit their involvement in operational strategy formulation. Limited participation in operational strategy does not mean the board should not understand core issues at the operational level. However, the board of directors should not be actively engaged in creating and monitoring operational strategy. Instead, the CEO and the cooperative’s management team should develop and lead operational strategy and make necessary changes. In contrast, one of the primary responsibilities of the board of directors is to develop the cooperative’s mission, vision, and values statements and objectives that develop the corporate-level strategy. Further, some internal characteristics of the cooperative, such as governance rules and equity rights, need to be evaluated by the board of directors to determine if those policies fit the corporate strategy. The CEO provides input into the corporate-level strategy-making process and helps integrate operational issues (that is, how the cooperative will obtain the objectives and fulfill the mission) into the final decisions. Still, the board of directors is primarily responsible for setting the strategic direction for the cooperative. At the business level, some alternative systems and criteria exist to determinate the responsibility of strategy between the board and CEO. Cooperative boards and management must share decision-making responsibilities and accountability when developing business-level strategies. Again, the CEO should be authorized to make operational and human resource decisions and be held accountable for these decisions. Consequently, the CEO has a significant role in business-level strategy (that is, determining how the cooperative will meet its objectives). The board’s responsibility in corporate-level and business-level strategy is to prioritize major capital expenditures across business units and align the corporate-level strategy with member needs. Thus, major resource allocation decisions remain with the board, and they should be held accountable for these decisions if the prioritization of investment is not executed properly or does not reflect member desires.

EVALUATION OF STRATEGY USING THE FRAMEWORK Strategy that is not in harmony with the environment or is typically successful in only a limited number of states cannot be sustained. Additionally, strategies implemented without supportive internal characteristics may limit the gains from a successful strategy. For example, managers may be motivated to execute strategies that maximize profits at the cooperative level, but the tradeoff may be that the cooperative cannot maximize member-patron satisfaction. Consequently, demand for cooperative membership may fall. Suppose the board and members use falling membership as a metric to force the managers to alter the policies that support the

Towards a framework for formulating cooperative strategy  247 maximization of cooperative profits. In that case, the strategy becomes incompatible with the performance metric used by the board to monitor management implementation of the strategy. Alternatively, a strategy to build brand identification through downstream processing and market promotion may be challenging without the appropriate expertise or performance metric that best signals the cooperative has met its target for brand identification. For example, if the primary monitoring of the brand recognition strategy is conducted by a cooperative board of directors of upstream producer members, monitoring of cooperative effectiveness may be poor because upstream producers have little knowledge of downstream activities or consumer perceptions. Alternatively, suppose the cooperative performance metric chosen is to maximize member satisfaction, but the objective is to maximize consumption of member products. In that case, the managers may pursue market promotion activities that do not enhance the brand value to target consumers. Rather, the manager may pursue market promotion campaigns and brand recognition that improves member satisfaction or the positive perception that members have of their product with little value-added due to increased consumer demand. Indeed, some studies found that farmer cooperatives do not have a reputation for high-quality production despite cooperative efforts to create that brand recognition and a high-quality perception among consumers as their primary strategy (Mérel et al., 2009; Pennerstorfer & Weiss, 2013; Faysse & Simon, 2015). Careful attention must be paid to all the components of cooperative strategy—particularly internal ones. If the component becomes incompatible, adaptation of strategy components is necessary. The cooperative strategy should be reevaluated as the external characteristics of the industry, value chain, technology, competition, or state policies change. A particular point of emphasis should be examining whether the internal characteristics of the cooperative still support the strategy. A secondary point of emphasis is exploring whether a broader change to strategy is necessary because a competitive advantage from the fundamental mission and objectives of the cooperative cannot be obtained in the existing environment. In the latter case, the cooperative may need to redefine the cooperative mission or objective to continue creating and capturing value for members or exit. When the mission and objective of the cooperative change, it is often necessary to reinvent the internal characteristics to support the strategy. Below, we discuss a few open research questions regarding the strategic management of agricultural cooperatives. Can models and frameworks from the corporate strategic management literature be applied to cooperatives? Popular models and frameworks include the Five Forces Model (used to explain industry-level profitability), the Boston Consulting Group Matrix (used to inform sell-or-keep decisions for business divisions based on market growth and share), the SWOT Matrix (used to canvas firm-level competitiveness), and the Ansoff Matrix (used to inform growth opportunities based on risk). Considering the underlying objective of profit maximization, it is debatable if such models and frameworks can or should be applied to cooperatives. A possible answer to the question may be provided by case study research in which the models and frameworks are applied to a small number of cooperatives. Then, potential shortcomings of the models and frameworks may inform alterations to facilitate better insight into cooperatives’ strategic position and direction.

248  Handbook of research on cooperatives and mutuals Are offense-oriented cooperatives more likely to exit than defense-oriented cooperatives? As explored extensively in case study research (Fulton & Hueth, 2009), cooperatives exit because of reasons common to all business organizations (for example, poor management) as well as reasons common to cooperatives (for example, capital constraints, free-rider problems). In a study of new generation cooperatives, Grashuis and Cook (2018) noted that their offensive orientation may have accelerated exit decisions. However, it is necessary to study a sample of defense-oriented and offense-oriented cooperatives to answer the above question. Ideally, survival analysis with a competing risk scenario (for example, bankruptcy, dissolution, merger, acquisition) could be used to estimate the impact of strategic orientations on the survival time of cooperatives. Are member, firm, or industry characteristics more critical when designing strategies? None of the internal or external characteristics exist in isolation. Furthermore, there is potential for internal characteristics to have limited compatibility in terms of defensive or offensive orientations. For example, some member characteristics (for example, majority of older and smaller membership) may relate more strongly to defensive orientations. In contrast, some industry characteristics (for example, absence of large competitors) relate more strongly to offensive orientations. Cooperatives must design strategies with internal and external aspects in mind. Considering the need for detailed information, (multiple) case study research is needed to investigate how directors and managers process all the characteristics of the environment and the cooperative mission and objectives to formulate a strategy. Are high-performing cooperatives’ strategy formation process and implementation different from low-performing cooperatives? If so, what are the differences? A key part of strategic planning is developing and prioritizing the goals and objectives of a cooperative. Each cooperative’s goals and objectives can be unique and guide the strategy formation process and performance evaluation. The hypothesis is that high-performing cooperatives with strong financial performance and high member satisfaction have a well-defined strategy formation and implementation process. In contrast, low-performing cooperatives either do not have a strategy formation process or do not have a consistent approach. A case study of selected high and low-performing cooperatives could identify critical differences in their strategy formation and implementation. Based on this information, a survey of different cooperatives could determine how many utilize the high-performing cooperatives’ techniques. How is the heterogeneity of cooperative members’ economic interests measured, and how does this impact the cooperative’s strategic direction? The cooperative’s board of directors is responsible for determining the mission and objectives of the cooperative, which are then integrated into the strategic analysis to shape the strategy ultimately. Very little is known about how the diversity of members’ economic interests is defined, measured, and used to develop the cooperative’s mission and objectives. The hypothesis is that high-performing cooperatives have developed systems to elicit member input and feedback on the cooperative’s performance and member value creation. Moreover,

Towards a framework for formulating cooperative strategy  249 these high-performing cooperatives have used this information to guide strategy formation. There may also be differences between systems used by small cooperatives compared to large cooperatives. A case study approach may provide insights into how cooperatives identify and handle member economic diversity and strategy formulation.

REFERENCES Bateman, D.I., Edwards, J.R., & LeVay, C. (1979). Agricultural cooperatives and tie theory of the firm. Oxford Agrarian Studies, 8(1), 63–81. Benos, T., Kalogeras, N., Wetzels, M., De Ruyter, K., & Pennings, J.M. (2018). Harnessing a ‘currency matrix’ for performance measurement in cooperatives: a multi-phased study. Sustainability, 10(12), 4536. Bijman, J. (2010). Agricultural cooperatives and market orientation: A challenging combination? In Market Orientation (pp.151–68). London: Routledge. Bijman, J., Hanisch, M., & van der Sangen, G. (2014). Shifting control? The changes of internal governance in agricultural cooperatives in the EU. Annals of Public and Cooperative Economics, 85(4), 641–61. Breitenbach, R., & Brandão, J.B. (2021). Factors that contribute to satisfaction in cooperator-cooperative relationships. Land Use Policy, 105, 105432. Briggeman, B.C., Jacobs, K.L., Kenkel, P., & Mckee, G. (2016). Current trends in cooperative finance. Agricultural Finance Review, 76(3), 402–10. Campbell, D. (2009). Storm shelter. Rural Cooperatives, November/December 2009, 8–13. Chaddad, F.R., & Cook, M.L. (2004). Understanding new cooperative models: an ownership–control rights typology. Applied Economic Perspectives and Policy, 26(3), 348–60. Chaddad, F., & Iliopoulos, C. (2013). Control rights, governance, and the costs of ownership in agricultural cooperatives. Agribusiness, 29(1), 3–22. Cook, M.L., & Iliopoulos, C. (2016). Generic solutions to coordination and organizational costs: informing cooperative longevity. Journal on Chain and Network Science, 16(1), 19–27. Cucagna, M.E., & Goldsmith, P.D. (2018). Value adding in the agri-food value chain. International Food and Agribusiness Management Review, 21, 293–316. Faysse, N., & Simon, C. (2015). Holding all the cards? Quality management by cooperatives in a Moroccan dairy value chain. The European Journal of Development Research, 27(1), 140–55. Filippi, M. (2014). Using the regional advantage: French agricultural cooperatives’ economic and governance tool. Annals of Public and Cooperative Economics, 85(4), 597–615. Fousekis, P. (2011). Free-on-board and uniform delivery pricing strategies in a mixed duopsony. European Review of Agricultural Economics, 38(1), 119–39. Fousekis, P. (2015). Location equilibria in a mixed duopsony with a cooperative. Australian Journal of Agricultural and Resource Economics, 59(4), 518–32. Franken, J.R., & Cook, M.L. (2015). Informing measurement of cooperative performance. In Interfirm Networks (pp.209–26). Dordrecht, Netherlands: Springer. Fulton, M. E., & Hueth, B. (2009). Cooperative conversions, failures and restructurings: an overview. Journal of Cooperatives, 23, i–xi. Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78–104. Grashuis, J. (2017). Branding by U.S. farmer cooperatives: an empirical study of trademark ownership. Journal of Co-operative Organization and Management, 5(2), 57­–64. Grashuis, J. (2019a). The agency cost of ownership and governance adaptations in farm producer organizations. Agricultural Finance Review, 80(2), 200–11. Grashuis, J. (2019b). The impact of brand equity on the financial performance of marketing cooperatives. Agribusiness, 35(2), 234–48. Grashuis, J. (2020). The competitive impact of cooperatives on the spot market: A spatial analysis of Iowa corn prices. Journal of Agricultural & Food Industrial Organization, 18(2), 1–11.

250  Handbook of research on cooperatives and mutuals Grashuis, J., & Cook, M.L. (2017). Toward an updated typology of US farmer cooperatives: survey evidence of recent hybrid ownership restructuring. In Management and Governance of Networks (pp.149–70). Dordrecht, Netherlands: Springer. Grashuis, J., & Cook, M. (2018). An examination of new generation cooperatives in the upper Midwest: successes, failures, and limitations. Annals of Public and Cooperative Economics, 89(4), 623–44. Grashuis, J., & Cook, M.L. (2021). Members of cooperatives: more heterogeneous, less satisfied? International Food and Agribusiness Management Review, 1–14. Grashuis, J., & Elliott, M. (2018). The role of capital capacity, spatial competition, and strategic orientation to mergers and acquisitions by US farmer cooperatives. Journal of Co-operative Organization and Management, 6(2), 78–85. Grashuis, J., & Franken, J. (2020). Exit strategies of farmer cooperatives in the United States: A competing risks analysis. Journal of Co-operative Organization and Management, 8(2), 100–19. Grashuis, J., & Su, Y. (2019). A review of the empirical literature on farmer cooperatives: performance, ownership and governance, finance, and member attitude. Annals of Public and Cooperative Economics, 90(1), 77–102. Hambrick, D.C., & Fredrickson, J.W. (2005). Are you sure you have a strategy? Academy of Management Perspectives, 19(4), 51–62. Hanf, J.H., & Schweickert, E. (2014). Cooperatives in the balance between retail and member interests: the challenges of the German cooperative sector. Journal of Wine Research, 25(1), 32–44. Hardesty, S.D. (2005). Cooperatives as marketers of branded products. Journal of Food Distribution Research, 36, 237–42. Hardesty, S.D. (2009). The conversion of Diamond Walnut Growers. Journal of Cooperatives,  23, 40–52. Harris, A., Stefanson, B., & Fulton, M.E. (1996). New generation cooperatives and cooperative theory. Journal of Cooperatives, 11, 15–28. Hooks, T., McCarthy, O., Power, C., & Macken-Walsh, Á. (2017). A cooperative business approach in a values-based supply chain: a case study of a beef cooperative. Journal of Co-operative Organization and Management, 5(2), 65–72. Höhler, J., & Kühl, R. (2018). Dimensions of member heterogeneity in cooperatives and their impact on organization—a literature review. Annals of Public and Cooperative Economics, 89(4), 697–712. Iliopoulos, C., & Valentinov, V. (2017). Member preference heterogeneity and system-lifeworld dichotomy in cooperatives: an exploratory case study. Journal of Organizational Change Management, 30(7), 1063–80. Liang, Q., & Hendrikse, G. (2016). Pooling and the yardstick effect of cooperatives. Agricultural Systems, 143, 97–105. Limnios, E.M., Mazzarol, T., Soutar, G.N., & Siddique, K.H. (2018). The member wears four hats: a member identification framework for cooperative enterprises. Journal of Co-operative Organization and Management, 6(1), 20–33. McCorriston, S. (2002). Why should imperfect competition matter to agricultural economists? European Review of Agricultural Economics, 29(3), 349–71. Mérel, P.R., Saitone, T.L., & Sexton, R.J. (2009). Cooperatives and quality-differentiated markets: strengths, weaknesses, and modeling approaches. Journal of Rural Cooperation, 37, 201–24. Mintzberg, H., Ahlstrand, B., & Lampel, J.B. (2001). Strategy Safari: A Guided Tour through the Wilds of Strategic Management. London: FT Publishing. Onken, K.A., & Bernard, J.C. (2010). Catching the ‘local’ bug: a look at state agricultural marketing programs. Choices, 25(1), 1–7. Panagiotou, D., & Stavrakoudis, A. (2018). Free-on-board and uniform delivered pricing strategies in pure and mixed spatial duopolies: the strategic role of cooperatives. The Journal of Economic Asymmetries, 18, e00109. Pennerstorfer, D., & Weiss, C. R. (2013). Product quality in the agri-food chain: do cooperatives offer high-quality wine? European Review of Agricultural Economics, 40(1), 143–62. Peterson, H. C., & Anderson, B. L. (1996). Cooperative strategy: theory and practice. Agribusiness: An International Journal, 12(4), 371–83. Porter, M.E. (1980). Competitive Strategy. New York: Free Press. Rothaermel, Frank T. (2019). Strategic Management. New York: McGrawHill.

Towards a framework for formulating cooperative strategy  251 Sexton, R.J., & Xia, T. (2018). Increasing concentration in the agricultural supply chain: implications for market power and sector performance. Annual Review of Resource Economics, 10, 229–51. Soboh, R.A., Lansink, A.O., Giesen, G., & Van Dijk, G. (2009). Performance measurement of the agricultural marketing cooperatives: the gap between theory and practice. Review of Agricultural Economics, 31(3), 446–69. Spear, R. (2000). The cooperative advantage. Annals of Public and Co-operative Economics, 71(4), 507–23. Stanford, L., & Hogeland, J.A. (2004). Designing organizations for a globalized world: Calavo’s transition from cooperative to corporation. American Journal of Agricultural Economics, 86(5), 1269–75. Su, Y., & Cook, M.L. (2015). Price Stability and Economic Sustainability—Achievable Goals? A Case Study of Organic Valley®. American Journal of Agricultural Economics, 97(2), 635–51. Trejo-Pech, C.O., Spreen, T.H., & House, L.A. (2018). Florida’s Natural and the Supply of Florida Oranges: Case Study. International Food and Agribusiness Management Review, 21, 437–54. Valentinov, V. (2007). Why are cooperatives important in agriculture? An organizational economics perspective. Journal of Institutional Economics, 3(1), 55–69. Webb, T. (1996). Marketing the cooperative advantage. Journal of Co-operative Studies, 87, 10–15.

16. Profit distribution and financial performance in cooperative firms Phil Kenkel, Brian Briggeman, and Keri Jacobs1

INTRODUCTION Many cooperatives generate equity from retained profits, so profit distribution and retention choices affect the growth and financial health of the cooperative. Cooperative boards of directors face complex decisions regarding whether profits are permanently retained at the cooperative level, temporarily retained by distributing them as revolving equity, or distributed (not retained) as cash patronage. Directors also must decide how taxes are passed through to members or paid by the cooperative. Research on cooperative members’ perceptions toward patronage refunds is limited. However, several studies suggest that members prefer patronage refunds to price adjustments and that patronage impacts participation in cooperatives, including the quality and quantity of commodities delivered (Fulton and Adamowicz,1993). Numerous researchers have examined the implication of profit distribution choices on the member’s return from the cooperative. The analysis is complex because profit distribution is interrelated with the cooperative’s potential growth and funds available to redeem previously issued revolving equity. In general, the research results suggest that the members’ long-term financial health is improved by retaining necessary profits in the form of revolving equity relative to unallocated retained earnings. Several studies also suggest that the structure of non-qualified revolving equity creates higher member benefits relative to qualified revolving equity. The relative tax rates at the cooperative and member levels are essential factors for profit distribution, and the opportunity cost for funds at the member level is also impactful. Agricultural cooperatives can enhance profits that are not measured at the cooperative level. Despite that fact, the financial performance of the cooperative is vitally important both for the members’ financial health and for the potential growth and financial stability of the cooperative firm. Previous research suggests that cooperatives and investor-owned firms’ resource allocation efficiency are similar. In addition, similar financial measures such as profitability, asset utilization, expense efficiency, solvency, and liquidity are moderately predictive of a cooperative’s future profitability. However, research results have not suggested a relationship between cooperative size and financial performance. There is some evidence that large and small cooperatives have different sources of financial stress. Most of the financial health measures of cooperatives are impacted by profit distribution and equity management decisions. As a result, financial performance, profit distribution, and member benefit are interrelated. Cooperative boards of directors face complex challenges in balancing financial stability and the members’ financial returns.

252

Profit distribution and financial performance in cooperative firms  253

PROFIT DISTRIBUTION AND FINANCIAL PERFORMANCE IN COOPERATIVE FIRMS A tenet of cooperative finance is profit distribution through patronage refunds. Cooperatives are member-owned organizations. A benefit of being member-owned is the sharing of member-patron profits. Profits are redistributed back to members or patrons based on use, typically tied to the business volume the patron conducts with the cooperative. Many cooperatives create the majority of their equity out of retained profits. Because of that structure, profit distribution is interrelated with equity creation. Profit distribution can take various forms, such as cash patronage, retained patronage, or allocated equity, or can even be distributed as cooperative retained earnings or unallocated equity. However, if a cooperative does not have solid financial performance, there will be no profits to distribute back to the patrons. Therefore, consideration of the financial performance of cooperatives must also be considered. In this chapter we explore the financial performance of cooperatives, the various mechanisms cooperatives utilize to distribute profits, and the implications of patronage refunds for patrons and cooperatives.

OVERVIEW OF COOPERATIVE PROFIT DISTRIBUTION The cooperative business model creates unique issues concerning profit distribution. As previously mentioned, cooperatives distribute profits based on the use of the cooperative rather than in proportion to equity investment. Investor-owned firms distribute profits in proportion to equity. Many cooperatives create a majority of their equity by retaining a portion of profits. This is accomplished by distributing a portion of profits in the form of allocated revolving equity (equity held in the name of a specific patron redeemed into cash later by the cooperative) and retaining profits as unallocated retained earnings. Therefore, a cooperative’s profit distribution choices are technically profit retention and distribution choices, but they are commonly described by the simpler term of “profit distribution.” A cooperative’s profit distribution choices impact the cooperative’s cash flow, taxation, balance sheet structure, and growth rate while also impacting the member’s cash flow, taxation, and direct financial return. The cooperative’s profit distribution choices also affect whether the taxation on the cooperative’s profits is retained at the cooperative level or passed on to the patron. In the latter case, the choices also affect the passing timing through taxation. Cooperative profit distribution is the purview of the board of directors. At fiscal year-end, a cooperative’s board of directors will evaluate the cooperative’s financial position, determine long-term goals, and discuss strategies to meet these long-term goals. Other chapters within this Handbook address the strategy and management of the cooperative. The focus here is on the board of directors’ profit distribution decisions. The first step in the decision process is typically to separate patronage-based profits from non-patronage-based profits. Most cooperatives distribute patronage only to the members doing business with the firm. In that case, non-patronage-based profits are analogous to non-member-based profits. Some agricultural cooperatives operate under a specific tax structure that allows and requires them to distribute patronage to members and non-members. For that reason, the term “non-patronage based profits” is the most accurate.

254  Handbook of research on cooperatives and mutuals Once the amount of patronage-based profits is identified, there are still many remaining components of the profit distribution decision. The decision components are interrelated and can be approached in any order. It is most convenient to describe them as sequential steps. The first step is to determine what portion of the patronage-based profits will be retained in the form of unallocated retained equity and what portion will be allocated to the patrons. The next step is to determine what portion of the allocated patronage will be distributed in cash and what portion will be distributed in the form of revolving equity. The final decision is whether the revolving equity portion will be qualified or non-qualified, with different tax effects. As mentioned, these profit distribution decisions impact the amount and type of new equity created, the cash available for capital expenditures, and the cooperative level’s taxation. The board must consider the equity and cash-flow needs of the cooperative. The decisions also impact the members’ equity holdings, cash receipts, and tax liability associated with the cooperative. Those profit distribution decisions impact the members’ financial benefit from the cooperative, another important criterion for the board of directors. A detailed flow chart is presented to help illustrate the board of directors’ profit distribution choices. In Figure 16.1, cooperatives start with Total Net Income before Patronage and Taxes, the number of funds available to either capitalize the business or distribute back to member-patrons. The next set of nodes on the flow chart indicates the profits’ source. In the case of patronage business, these are profits from individuals eligible to receive patronage from the cooperative. In most cooperatives, this category represents member-based profits. Non-patronage business is similarly defined as profits from business done with individuals who are not eligible to receive patronage. This category typically reflects business conducted with non-members, although some cooperatives allow members to make transactions on a non-patronage basis. Non-patronage profits are included in the cooperative’s taxable income and are taxed at the standard corporate rate. The cooperative retains the after-tax portion as retained earnings, which is no different from an investor-owned firm retaining after-tax profits. The bottom part of the flow chart shows that the cooperative must pay the taxes on non-patronage business profits and hold it as retained earnings. In order to distinguish retained

Figure 16.1

Simplified flow chart of cooperative taxation options

Profit distribution and financial performance in cooperative firms  255 earnings from equity from allocated equity (equity that is held in the name of a specific member), many scholars use the terms “unallocated retained earnings,” “unallocated equity,” or “unallocated reserves.” Patronage business profits can be distributed to the member-patron or held at the cooperative. A board of directors can allocate patronage business profits to the member-patron. An allocated patronage distribution indicates the member-patron has the claim. Unallocated means the cooperative has the claim to the patronage distribution. Suppose the cooperative board of directors decides to distribute patronage on an unallocated basis (that is, retention of profits). In that case, the cooperative must pay the taxes on those profits. The member never receives the profits held as unallocated retained earnings and has no tax liability for those profits. There are two dimensions to the choices of distributing patronage-based profits. The distribution can be in cash or equity (typically revolving equity), and the distribution can be qualified or non-qualified. The term “qualified” refers to whether the distribution qualifies to be deductible from the cooperative’s taxable income in the year the profits are distributed. Before discussing the taxation issues related to patronage distributions, it is essential to note that cooperatives are single taxation entities. This means that profits are taxed at the cooperative or the patron’s tax rate, but not both. Please refer to the cooperative taxation chapter in this Handbook for more detail on single taxation. When a cooperative makes a qualified patronage distribution, the cooperative deducts the distribution amount in the year of distribution. The distribution becomes part of the patron’s taxable income in that same year. Qualified distributions can either be paid in cash or in the form of qualified revolving equity (see Figure 16.1). When a qualified revolving equity patronage distribution is made, the patron receives notice of an increase in its equity holdings, and the cooperative increases the allocated equity category on its balance sheet and its cash holdings. Because patrons are subject to the tax liability for qualified patronage distributions, US federal law requires that at least 20 percent of the distribution be paid to the patron as a cash patronage refund. The logic of that requirement was to ensure that the patron received sufficient cash to pay the tax liability on the qualified equity patronage. Because many cooperative patrons have effective tax rates above 20 percent, many cooperative boards strive to keep the cash portion higher than the legal minimum. Qualified equity patronage is eventually redeemed into cash by the cooperative in a subsequent year, subject to the cooperative’s equity retirement program. Because of this structure, the cooperative creates additional allocated equity by distributing equity patronage and redeeming previously issued equity into cash. The equity is often described as “revolving equity.” For more on equity retirement programs, please read the chapter “Capitalization, Equity, and Growth in Cooperative Firms” in this Handbook. The cooperative board can also elect to make a non-qualified patronage distribution. The term “non-qualified” simply refers to the fact that the distribution is not tax-deductible to the cooperative nor taxable income to the patron in the year of distribution. Cash patronage is always qualified, so there is no cash option for non-qualified patronage. Suppose the cooperative elects to make a non-qualified revolving equity distribution. In that case, the distribution amount is not deducted from the cooperative’s taxable income in the current year. However, it is instead deducted from income in the year that the equity is redeemed into cash. Similarly, the patron does not include the distribution into their taxable income in the year the patronage was distributed but rather in the year the equity was redeemed. Ultimately, the tax liability is

256  Handbook of research on cooperatives and mutuals passed through to the patron, but the timing is shifted from the year of distribution to equity redemption. When a cooperative distributes non-qualified revolving equity patronage, they do not deduct the distribution from taxable income. In the absence of other deductions, the cash retained is the after-tax portion of the non-qualified distribution. The cooperative board must consider that tax liability when deciding the cash patronage distribution. In a steady state, the fact that the non-qualified distribution was not deductible may be partially offset by the deduction from redeeming previously issued non-qualified equity. Most cooperatives would still need to select a smaller cash portion when issuing non-qualified equity patronage to achieve the same cash flow as a qualified distribution. Because of the tax effect, non-qualified distribution with a lower cash portion could provide the patron with an equivalent after-tax cash flow relative to a qualified distribution with a higher cash portion. Profit Distribution in Federated Cooperatives Multi-locational cooperatives can be organized as either centralized or federated. Under the centralized structure, all operations are managed out of the central office, and the producers are direct member-owners. Under the federated systems, local cooperatives are member-owners of a larger regional cooperative. The centralized structure creates no additional issues for profit distribution since there is a single board and a single level of patrons. The federated structure creates a two-tiered structure of profit distribution, matching the two-tiered structure of membership. Under the federated structure, the board of the federated cooperative makes the previously described profit distribution decisions. The local cooperative receives that patronage and the regional cooperative’s qualified patronage becomes part of the local cooperative’s total net income. The local cooperative is not taxed on that income if it distributes it to its patrons in a tax-deductible form within eight and a half months. The local cooperative’s profit distribution decisions are therefore distributing both the income generated at the local cooperative level and the pass-through patronage from the federated regional cooperative. The federated structure can create cash-flow issues when the cash and equity portions differ between the federated and local level or when the choice of qualified or non-qualified revolving equity patronage differs. For example, when the regional cooperative distributes a lower cash portion relative to the local cooperative, the local cooperative must reduce its cash balance to pass through the regional patronage. Cash-flow issues can also occur when the equity management systems differ. For example, if the local cooperative is revolving equity more rapidly than the regional, it effectively redeems the local member’s pass-through regional equity patronage, while that equity has not yet been redeemed to the local cooperative. Because of the coordination issues, some local cooperatives segregate equity patronage into local and regional categories or even decide not to allocate regional patronage. Financial Performance of Cooperatives In order for a cooperative to create the net income which is the starting point of profit distribution, it must use its assets and human resources to create revenues. The ability of a cooperative, or other firms, to create economic value is typically described as financial performance. That term is also used to indicate the overall financial health of the firm. The cooperative business

Profit distribution and financial performance in cooperative firms  257 model creates some unique issues in measuring financial performance. Many agricultural cooperatives were formed to offset market power by investor-owned firms. The cooperative patrons receive a benefit from the presence of the cooperative in terms of more competitive prices but the amount of the benefit is not observable or reported on any financial statements. This is often described as the “invisible benefit” of cooperatives. Because members are customers, cooperative patrons are impacted both by their price transaction with the cooperative and by profit distribution. A cooperative could therefore provide benefit to members through favorable prices while not generating or distributing profits. A final dimension of the financial performance of cooperatives is their potential to provide a missing service that adds value at the farm level. A classic example has been that of a sugar beet processing cooperatives. Sugar beets have historically been more profitable than alternative crops but sugar beet production is only possible where producers have access to a nearby processing facility. The sugar beet cooperative therefore creates financial value by allowing members to grow a more profitable crop, in addition to any profits generated at the cooperative level. Kenkel (2021) documented a similar situation in a study on the economic impact of Oklahoma cotton cooperatives. The study found that the returns from cotton production had historically been $85/acre higher than wheat and $100/acre higher than grain sorghum, which were the major alternative crops. The opportunity to grow the more profitable cotton alternative was only possible because of the presence of cotton-ginning and warehousing cooperatives. While acknowledging other possible dimensions of financial performance, most research and discussion of cooperative financial performance concentrates on the financial performance of the cooperative firm. One of the most commonly used measures of cooperative performance is the return on equity. That financial ratio measures the profitability of the cooperative, which has obvious linkages to the value received by members via patronage and equity redemption payments. In many cases, the cooperative member did not make a direct equity investment but rather received the majority of its equity from equity patronage distributions. The return on equity is an important performance measure since the members of the cooperative could collectively decide to liquidate the cooperative and employ their equity capital in an alternative with a higher rate of return. The companion measure of return on assets is also frequently used as a measure of profitability performance since it removes the impact of the cooperative’s financial leverage (debt/asset ratio). The federated cooperative structure creates some unique adjustments to those profitability measures. The profitability of local cooperatives is often measured by the return on local equity and the return on local assets. The return on local equity is defined as the local net income divided by local equity. Local net income is, in turn, measured as the local cooperative’s net income before receipt of any patronage from regional cooperatives. Local equity is defined as the local cooperative’s total equity minus the amount of equity in a regional cooperative. The return on local assets is similarly defined as local net income divided by local assets, with local assets equaling total assets minus regional equity. The rationale for these measures is that the profitability and patronage of the regional cooperative is outside of the control of the local cooperative’s board and management. The local profitability measures are designed to more accurately measure the performance of the local cooperative. While profitability measures are the most commonly used metric to compare performance across cooperative firms or compare cooperatives to investor-owned firms, there are additional measures. As with other firms, the financial health of a cooperative business includes

258  Handbook of research on cooperatives and mutuals the dimensions of liquidity, solvency, and efficiency. While those aspects of cooperative performance can be measured by standard financial ratios, cooperative leaders face unique challenges in managing those measures. As discussed previously, most cooperatives create the majority of their equity out of the profit stream. That creates challenges in managing solvency because the source of additional equity is linked to profitability and profit distribution. While equity redemption is important to maintain member benefit and keep equity proportional to use, equity redemption adversely impacts liquidity and solvency. Cooperative boards of directors must actively manage their firm’s balance sheet as they make profit distribution and equity management decisions. Asset utilization and expense management are also important elements of cooperative financial performance. In cooperative firms, managing efficiency is particularly important because it provides the opportunity to increase profitability without adversely impacting patrons through less favorable prices. For that reason, cooperative boards of directors closely monitor measures of asset utilization such as sales/total assets and sales/average inventory and efficiency measures such as personnel expense/gross margin. Those measures also highlight the complexity of the cooperative business model. Patrons may benefit from access to infrastructure, available inventory, and employee services at the farm level. Cooperative boards of directors must consider those impacts and strive for maximum efficiency at the cooperative level.

PREVIOUS RESEARCH Financial Performance of Cooperatives Numerous authors have examined the determinants of financial performance in agricultural cooperatives. Moller, Featherstone, and Barton (1996) found that low earnings were the major source of financial stress followed by high interest rates and high financial leverage. Pokharel, Regmi, Featherstone, and Archer (2019) also examined the sources of financial stress in agricultural cooperatives with similar conclusions. Boyd, Boland, Dhuyvetter, and Barton (2007) and McKee (2008) both found that the financial measures of profitability, solvency, liquidity, and efficiency were key determinants of the future return on equity of agricultural cooperatives. Several authors, including Hines (2014) and Grashuis (2018), have used a DuPont model approach to identify the specific financial variables most closely linked with cooperative performance. Their results indicate that profit margins and fixed and variable cost factors were the most significant factors. The impact of governance factors on cooperative financial performance has also been investigated. Bond (2009) estimated the relationship between board size and firm characteristic variables on six measures of financial health for a sample of 44 agricultural cooperatives. Board size had an ambiguous relationship. The authors suggested that non-governance factors may yield a greater impact on financial performance. The relationship between cooperative size and cooperative performance has been examined in numerous studies. Boyd, Boland, Dhuyvetter, and Barton (2007) and McKee (2008) found no relationship between sales and asset size and cooperative performance while Singh, Madhvendra, Kumar, and Tiwari (2019) actually found a negative relationship. Moller, Featherstone, and Barton (1996) found that smaller cooperatives were more likely to face prof-

Profit distribution and financial performance in cooperative firms  259 itability problems, while interest rate and leverage issues were more closely linked to financial stress in larger cooperatives. The topic of whether cooperative firms are efficient in their employment of financial resources has also been the focus of numerous research studies. Sexton, Wilson, and Wann (1989) examined the price-output equilibrium, the allocative efficiency, and the utilization of capital assets among sample cotton-ginning cooperatives. The results indicated that the San Joaquin Valley cotton-ginning cooperatives tended to over-employ variable inputs but did not underuse capital. Akridge and Hertel (1992) employed a multiproduct analysis to compare the efficiency of Midwestern agricultural cooperatives with investor-owned grain handling and farm supply firms. The results suggested that cooperatives and investor-owned agribusiness had similar efficiency with respect to variable costs. Investor-owned firms appeared to be more effective in their use of plants and equipment while cooperatives made more efficient use of other fixed inputs. Soboh and Dijk (2012) examined the differences in technical and scale efficiency of European dairy-processing cooperatives and investor-owned dairy-processing firms. The results indicated that cooperatives were slightly less efficient when a firm-level profit maximization objective function was assumed but outperformed investor-owned dairies using an input-orientated approach that was more in line with the cooperative objectives. Most studies of cooperative financial performance have focused on profitability at the cooperative level. However, some studies have examined the apparent goals and behavior of cooperative firms. Lerman and Parliament (1990) examined the financial performance of cooperatives and investor-owned firms. The research found no significant difference in profitability suggesting that cooperatives may be following similar goals relative to investor-owned firms. Hind (1999) surveyed employee and farmer groups in ten case-study cooperatives. Hind found that member-centered and corporate-centered goals were not incompatible and both could be achieved. Research on Profit Distribution Helmberger and Hoos (1962) wrote a seminal article that describes the cooperative firm. In their argument, they contend that a cooperative firm has a primary difference when compared to a traditional firm as agricultural economists thought of it at the time. Whereas traditional firms were formed to seek the highest return on investment, individuals forming cooperatives did so to create service-at-cost institutions. In short, cooperatives strive to maximize the profitability of their members at both the farm and cooperative levels, which equates to minimizing costs at the cooperative level. While Helmberger and Hoos build arguments for cooperatives minimizing costs, they also develop a theoretical model that recognizes that the member-patrons are the owners of the cooperative firm and therefore are entitled to any surpluses generated by the cooperative. Here these surpluses are patronage distributions that flow back to the member-patron in a similar fashion as described in Figure 16.1 earlier in this chapter. Helmberger and Hoos develop a theoretical model analogous to a profit-maximizing firm to show that cooperative firms that minimize cost are acting in a similar manner to their profit-maximizing counterparts. Further research went on to examine the nature and effects of patronage refunds. Dahl and Dobson (1976) studied supply cooperatives in Wisconsin and found that financing costs were greatly reduced by increasing cash patronage refunds and reducing revolving fund capital from their current levels. Royer (1982) also examined the effects of patronage refunds. His study

260  Handbook of research on cooperatives and mutuals assumed that the cooperative had the objective of maximizing producer profits, including both prices and patronage refunds. The result showed how both price and expected patronage refunds could shift the raw product supply to the cooperative and the level of output. VanSickle and Ladd (1983) considered the cooperative finance decisions faced by supply and marketing cooperatives. They solved for the optimal cash patronage refund and dividend payments that maximized total after-tax profits of members, the present value of cash patronage refunds paid to members, and net dividends on capital stock paid to members. They concluded that cooperatives should pay 70 percent of their patronage refunds in cash, pay the minimum required dividend payment, and retain the remainder in the revolving fund account. Royer and Shihipar (1997) analyzed how the cash proportion of cash patronage refunds affects an individual patron’s cash flow and how their preference between cash refunds and the revolving period is affected by demographic factors. They concluded that the median voter rule would predict supply cooperatives would only pay the minimum of 20 percent in cash patronage refunds. Knoeber and Baumer (1983) also modeled the optimal ratio of cash and retained patronage for the median member of an agricultural cooperative using a two-portfolio model. The results indicated that the expected rate of return and expected variance in return for the cooperative and farm investments impacted the optimal portion of retained patronage. Royer and Smith (2007) modeled the interaction between patronage refunds and pricing in processing cooperatives. The results suggested that cooperatives can successfully distribute profits as patronage refunds while using prices to maintain optimal output levels. Various authors have also examined the optimal choices for cooperatives to retain profits. Royer (2017) and Kenkel (2015) examined the implications of retaining profits in the form of unallocated equity. The research examined the effect of retaining profits as unallocated retained equity relative to retention as qualified or non-qualified retained patronage on the net present value (NPV) of the patron’s lifetime stream of patronage and equity redemption payments from the cooperative. Both researchers noted that the patron’s benefit from the cooperative, as measured by that NPV, is heavily influenced by the cooperative and patron tax rates. Royer (2017) concluded that cooperatives with low tax rates and low growth rates and whose patrons are characterized by high marginal tax rates are most likely to benefit from retaining profits as unallocated equity. Kenkel (2015) used a simulation model to project the patron’s NPV at two tax cooperative and patron tax rates. He used higher tax rates from tax schedules and lowered effective tax rates from the firm and farm databases. His results indicated that retaining profits in the form of unallocated equity was inferior to retention as non-qualified revolving equity under both tax scenarios. Russel and Briggeman (2014) reached a similar conclusion on how the cooperative’s and patron’s tax structure could create an advantage to retaining profits as non-qualified retained patronage refunds relative to unallocated retained earnings. They also found that a membership that consists of more risk-averse patrons will prefer to have its profits retained at the lower variability investment, whether that is the cooperative or the farm. Cooperative boards of directors face a complex balancing act as they consider pricing and profit distribution strategies. Several authors have investigated the attitudes of cooperative members toward patronage refunds. Galor and Sofer (2019) found that cooperatives can be successful without paying patronage. However, a bigger emphasis on member service is required to attain that success. Fulton and Adamowicz (1993), in a study of factors determining member commitment to a cooperative, found that Canadian farmers were more likely to patronize the Alberta Wheat Pool if they expected to receive or knew they were receiving a patronage refund. Briggeman and Jorgensen (2009) investigated the preference of farm

Profit distribution and financial performance in cooperative firms  261 credit cooperative member-borrowers for cash patronage relative to lower fixed interest rates. Their results indicated that member-borrowers strongly prefer patronage refunds relative to lower fixed interest rates. Zhang, Mallory, and Barry (2013) conducted similar research on farm credit cooperatives. They found regional differences in farm credit cooperative profit distribution decisions which likely reflected member heterogeneity in preferences for patronage refunds versus discounted interest rates. Cechin, Bijman, Pascucci, Zylbersztajn, and Omta (2013) examined differences in the quality of producers delivering to cooperatives and IOF agribusinesses in the Brazilian broiler industry. They found that patronage and other seller-buyer relationships explained the higher quality of products delivered to the cooperative processors.

SUGGESTIONS FOR FUTURE RESEARCH Throughout this chapter, we have focused on describing the decisions to distribute patronage income as well as the previous research in this area and the financial condition of cooperatives. A distinguishing factor of the cooperative business model is distributing patronage income. Theoretical and empirical models have been developed to explain, from an agricultural economist’s view, how patronage refunds fit into the optimization of the cooperative’s objective function, whether that is to minimize cost or maximize member benefits. Looking forward, there are opportunities to extend the research on examining the financial condition of cooperatives and patronage distribution decisions. Further research is needed to increase the understanding of the financial performance in cooperative firms and the financial issues and strategies facing cooperatives, including the distribution and retention of profits. Barton, Boland, Chaddad, and Eversull (2011) identified critical financial challenges facing cooperatives. They found that financing asset growth, maintaining sufficient profitability, and managing business risks while maintaining ownership were critical challenges. Similarly, Boland et al. (2021) added further research priorities to those identified in 2011. Through a survey of current farmer cooperative directors, Boland et al. identified research priority areas of the future of the farm and its evolution, data collection and analysis, and regulation’s impact on cooperative financial performance. Briggeman, Jacobs, Kenkel, and McKee (2016) explored recent financial trends affecting grain marketing and farm supply cooperatives. They observed that cooperatives were making large investments in upgrading infrastructure due to changing cropping patterns and increasing grain yields. They also found that boards had shifted profit distribution toward creating a higher ratio of unallocated retained earnings. Continued research is needed to investigate the need for asset growth in cooperative firms and the implication of alternative methods of retaining the profits to fund that growth. There is also a need for further research in the development and validation of representative cooperatives. A number of cooperative researchers, including Beierlein and Schrader (1978), Junge and Ginder (1986), Kenkel (2015), Kenkel and Briggeman (2018), Kenkel et al. (2019), and Royer (2017) have used a simulation approach and analyzed alternatives in the context of a representative cooperative(s). This research approach appears to be fruitful due to the ability to model firm and patron cash flows over one or more equity revolving cycles. Collaboration on the characteristics of representative cooperatives could also enhance future research efforts.

262  Handbook of research on cooperatives and mutuals Another area of research is to extend and apply theoretical and empirical models developed in the literature. For example, Knoeber and Baumer (1983) developed a two-asset portfolio model examining whether the median farmer-member would prefer to have their patronage distribution held at the cooperative or returned back to them. An extension of this work could be to examine the impact of retiring that retained patronage back to the farmer and examine if that longer-run decision impacts the best distribution decision for the median farmer-member. Sexton, Wilson, and Wann (1989) specifically tested cooperative theory models for cotton gin cooperatives. However, additional applications to other types of agricultural cooperatives as well as other cooperatives operating in different industries should be conducted. Further evidence of applying previous research with current data is noted by Clymer et al. (2021), applying the optimization model of Featherstone and Rahman (1996). Clymer et al. found evidence, contrary to Featherstone and Rahman, that farmer cooperatives no longer follow a strict cost minimization model but rather more follow profit maximation. Testing the models discussed in this chapter should be an area for future research. A final area of research is the integration of experimental and behavioral research methods into the financial and patronage decisions of the cooperative. As noted by Sexton, Wilson, and Wann (1989), many cooperative theoretical models yield conflicting propositions as to the objective function of the firm. A specific area of debate is whether cooperatives seek to maximize profits at the cooperative level or focus on maximizing member welfare. It is possible that experimental and behavioral research methods could better assess the implications of cooperative decisions. Very little research has been conducted in this area. One article that utilized experimental approaches was by Briggeman and Jorgensen (2009). They examined Farm Credit Association member-borrower preferences for higher cash patronage payments or lower interest rates via a conjoint analysis of a hypothetical loan decision. Their findings suggest that member-borrowers strongly preferred receiving patronage payments over lower interest-rate loans. The results were based on a survey of borrowers responding to a hypothetical choice of patronage versus an interest-rate change. Despite rigorous methodology, any experimental study raises the question of whether the response to a hypothetical decision is legitimate. While hypothetical bias could have impacted the study finding, Briggeman and Jorgensen’s finding does suggest cooperative members have preferences that could influence the board of directors’ decision to distribute patronage. Future research should consider these extensions as well others in the cooperative finance literature.

NOTE 1.

The authors wish to thank the reviewers for helpful comments and suggestions.

REFERENCES Akridge, J. and T.W. Hertel. (1992). Cooperative and Investor-Orientated Firm Efficiency: A Multiproduct Analysis. Journal of Agricultural Cooperative, 7, 1–14. Barton, D., M. Boland, F. Chaddad and E. Eversull. (2011). Current Challenges in Financing Agricultural Cooperatives. Choices, 26(3), 181–4. Beierlein, J.G. and L.F. Schrader. (1978). Patron Valuation of Farmer Cooperatives under Alternative Finance Policies. American Journal of Agricultural Economics, 60(4), 636–41.

Profit distribution and financial performance in cooperative firms  263 Boland, M.A., Briggeman, B.C., Jacobs, K., Kenkel, P., McKee, G. and Park, J.L. (2021). Research Priorities for Agricultural Cooperatives and their Farmer-Members. Applied Economic Perspectives and Policy, 43, 573–85. Briggeman, B. and Q. Jorgensen. (2009). Farm Credit Member‐borrowers’ Preferences for Patronage Payments. Agricultural Finance Review, 69(1), 88–97. Briggeman, B.C., K.L. Jacobs, P. Kenkel and G. Mckee. (2016). Current Trends in Cooperative Finance. Agricultural Finance Review, 76(3), 402–10. Bond, J. (2009). Cooperative Financial Performance and Board of Directors Characteristics: A Quantitative Investigation. Journal of Cooperatives, 22, 22–44. Boyd, S., M. Boland, K. Dhuyvetter and D. Barton. (2007). Determinants of Return on Equity in U.S. Local Farm Supply and Grain Marketing Cooperatives. Journal of Agriculture and Applied Economics, 39(1), 201–10. Cechin, A., J. Bijman, S. Pascucci, D. Zylbersztajn and O. Omta. (2013). Quality in Cooperatives versus Investor-owned Firms: Evidence from Broiler Production in Parana, Brazil. Managerial and Decisions Economics, 34(3), 230–43. Clymer, A., W. Bowman, E.A. Yeager and B.C. Briggeman (2021). Are Cooperatives Transitioning from Cost Minimizers to Profit Maximizers? Agricultural Finance Review, 81(4), 568–77. Dahl, W.A. and W.D. Dobson. (1976). An Analysis of Alternative Financing Strategies and Equity Retirement Plans for Farm Supply Cooperatives. American Journal of Agricultural Economics, 58(2), 198–208. Featherstone, A.M. and M.H. Rahman. (1996). Nonparametric Analysis of the Optimizing Behavior of Midwestern Cooperatives. Review of Agricultural Economics, 18(2), 265–73. Fulton, J.R. and W.L. Adamowicz. (1993). Factors that Influence the Commitment of Members to Their Cooperative Organization. Journal of Agricultural Cooperation, 8, 39–53. Galor, Z. and M. Sofer. (2019). The Reserve Fund: Is it a Necessary Anchor for a Successful Cooperative? Journal of Co-operative Organization and Management, 7(2), 100089. Grashuis, J. (2018). A Quantile Regression Analysis of Farmer Cooperative Performance. Agricultural Finance Review, 78(1), 65–82. Helmberger, P. and S. Hoos. (1962). Cooperative Enterprise and Organizational Theory. Journal of Farm Economics, 44(2), 275–90. Hind, A.M. (1999). Cooperative Performance: Is There a Dilemma. Journal of Cooperatives, 14, 30–43. Hines, C.A. (2014). Profitability Drivers of Farmer Cooperatives: A DuPont Model Analysis. unpublished thesis, Department of Agricultural Economics, Kansas State University. Junge, K.A. and R.G. Ginder. (1986). Effects of Federal Taxes on Member Cash Flows from Patronage Refunds. Journal of Cooperatives, 16, 22–37. Kenkel, P. (2015). Profit Distribution Alternatives for Agricultural Cooperatives. Journal of Cooperatives, 30, 28–49. Kenkel, P. (2021). Economic Impact of Oklahoma’s Cotton Cooperatives. Research Report, Department of Agricultural Economics, Oklahoma State University, AE#2021-1. Kenkel, P. and B.C. Briggeman. (2018). Impact of Tax Reform on Agricultural Cooperatives and Members. Journal of Cooperatives, 33, 1–28. Kenkel, P., G. McKee, M. Boland and K. Jacobs (2019). The New Role of Agricultural Cooperatives in Pooling and Distributing Tax Deductions. Western Economics Forum, 17(2), 16–23. Knoeber, C.B. and D.L. Baumer. (1983). Understanding Retained Patronage Refunds in Agricultural Cooperatives. American Journal of Agricultural Economics, 65(1), 30–7. Lerman, Z. and C. Parliament. (1990). Comparative Performance of Cooperatives and Investor-Owned Firms in U.S. Food Industries. Agribusiness, 6(6), 527–40. McKee, G. (2008). The Financial Performance of North Dakota Grain Marketing and Farm Supply Cooperatives. Journal of Cooperatives, 21, 15–34. Moller, L.G., A. Featherstone and D. Barton. (1996). Sources of Financial Stress in Agricultural Cooperatives. Journal of Cooperatives, 11, 38–50. Pokharel, K.P., M. Regmi, A.M. Featherstone and D.W. Archer. (2019). Examining the Financial Performance of Agricultural Cooperatives in the USA. Agricultural Finance Review, 79(2), 271–82.

264  Handbook of research on cooperatives and mutuals Royer, J.S. (1982). A model for the short-run production and pricing decisions of cooperative associations. In Development and Application of Cooperative Theory and Measurement of Cooperative Performance, 24–49. ACS Staff Report (February). Washington, DC: US Department of Agriculture. Royer, J.S. (1987). Cash Flow Comparisons of Two Methods of Allocating Cooperative Patronage Refunds. Selected Paper, American Agricultural Economics Association, August 3, 1987. Royer, J.S. (2017). Financing Agricultural Cooperatives with Retained Earnings. Agricultural Finance Review, 77(3), 393–411. Royer, J.S. and M.L.M Shihipar. (1997). Individual Patron Preferences, Collective Choice, and Cooperative Equity Revolvment Practices. Journal of Cooperatives, 12, 47–61. Royer, J.S. and D.B. Smith. (2007). Patronage Refunds, Producer Expectations and Optimal Pricing by Agricultural Cooperative. Journal of Cooperatives, 20, 1–16. Russell, L.A. and B.C. Briggeman. (2014). Distributing Patronage Income under Differing Tax Rates and Member Risk Preferences. Journal of Cooperatives, 29, 27–49. Sexton, R.J., B.M. Wilson and J.J. Wann. (1989). Some Tests of the Economic Theory of Cooperatives: Methodology and Application to Cotton Ginning. Western Journal of Agricultural Economics, 14(1), 56–66. Singh, K., M. Madhvendra, M. Kumar and V. Tiwari. (2019) A Study on the Determinants of Financial Performance of U.S. Agricultural Cooperatives Journal of Business Economics and Management, 20(4), 633–47. Soboh, L. and V. Dijk. (2012). Efficiency of Cooperatives and Investor Owned Firms Revisited. Journal of Agricultural Economics, 63(1), 142–57. VanSickle, J.J. and G.W. Ladd. (1983). A Model of Cooperative Finance. American Journal of Agricultural Economics, 65(2), 273–81. Zhang, T., M. Mallory and P. Barry. (2013). Determinants of the Patronage Refund Decision of Farm Credit Associations. Agricultural Finance Review, 73(1), 102–18.

17. The implications of taxation and tax policies for cooperatives and members Phil Kenkel, Keri Jacobs, and Brian Briggeman1

INTRODUCTION The federal tax treatment of agricultural cooperatives in the United States is unique. US cooperatives can retain taxation at the firm level or pass taxation through to the patron. The mechanism by which cooperatives can achieve “pass-through” taxation is different relative to other firms. Cooperatives also have the option of initially keeping the taxation at the cooperative level and transferring it to the patron at a later time. In recent years, agricultural cooperatives have taken advantage of an additional role in creating and distributing tax deductions between the cooperative firm and the patrons. All of those choices have implications for the patron’s benefit from the cooperative and for the cooperative’s potential growth rate. For that reason, it is important to understand the body of research relating to cooperative taxation and areas for future research.

OVERVIEW OF COOPERATIVE TAXATION The taxation structure of many forms of business in the US is dictated by the choice of the legal business form or by a semi-permanent election with the IRS. The taxation situation of cooperatives differs in that the extent to which the federal tax obligation is retained at the cooperative level or passed through to the patron is determined by the decisions the cooperative board of directors makes on an annual basis. While a complete discussion of cooperative taxation, including state-level taxation, is beyond the scope of this chapter, it is helpful to understand the basic structure (for a more complete discussion see Frederick, 2013). Subchapter T of the US Internal Revenue Code describes the taxation of corporations operating on a cooperative basis, with some exceptions. Those exceptions include mutual saving banks, insurance cooperatives, rural electric and rural telephone cooperatives, and health maintenance organizations. Subchapter T also describes taxation for a more restrictive form of agricultural cooperative described in Section 521 of the code. The main difference in Section 521 taxation relates to the tax-deductibility of dividends paid on equity capital and the treatment of non-member business. Frederick (2013) provides a good overview of the requirements and provisions for Section 521. Under Subchapter T, a cooperative can deduct patronage refunds from its federal taxable income and that refund becomes taxable income for the patron. A patronage refund is a distribution of patron profits from the cooperative to the patron based on the amount of business done with the cooperative. (We use the term “patron” to refer to a customer of the cooperative who is eligible to share in profit distribution.) The statutory definition of a patronage refund requires that the amount paid must be on the basis of quality or value of business done with 265

266  Handbook of research on cooperatives and mutuals the patron, the refund is paid under a pre-existing obligation to distribute such amount, and the amount of the refund is determined in reference to the net income of the organization from business done with or for its patrons. A patronage distribution is distinctly different from a dividend paid on the basis of ownership percentage which is the common profit distribution system in investor-owned firms. The IRS describes patronage distributions as “patronage dividends” but most cooperative scholars prefer the term “patronage refund,” to avoid confusion with dividends paid in proportion to stock ownership. As mentioned, there are some differences in the tax treatment of patronage refunds for cooperatives meeting the more restrictive requirements under Section 521. All businesses operating on a cooperative basis can generally deduct patronage refunds on member-based profits. Section 521 cooperatives must treat members and non-members equally with respect to patronage but can also deduct patronage refunds of non-member profits. Because of that restriction and other requirement of Section 521, only a minority of agricultural cooperative pursue that status. Most cooperatives operating under Section 521 have little or no non-member profits. Patronage refunds may be paid in cash or in the form of equity. A retained patronage or equity patronage refund is typically redeemed into cash by the cooperative in some future year. Cooperatives can exclude cash patronage from their taxable income in the year they distribute it. Much confusion has resulted from the fact that, from an accounting perspective, cooperatives treat patronage refunds as deductions. Technically, a tax deduction must be specifically created by statute. Cooperatives are therefore technically excluding the patronage amount from their gross income. Equity patronage refunds can be structured as “qualified” or “non-qualified.” The term “qualified” refers to the fact that the refund qualifies to be excluded from taxable income in the current year. A cooperative excludes qualified patronage from its taxable income in the distribution year. If the cooperative chooses to distribute non-qualified equity patronage, that distribution is not excludable in the current year but is excluded in the future year when the cooperative redeems the equity into cash. The term “non-qualified” can therefore be thought of as indicating that the refund does not qualify to be excluded from income in the distribution year. In general, any income a cooperative keeps as retained earnings, whether from patronage or non-patronage income, is included in the cooperative’s taxable income. The patron’s tax liability associated with the cooperative is, in essence, the reciprocal of the cooperatives. The distributions and payments that are excluded from the cooperative’s taxable income create taxable income for the patron. The cooperative patron includes cash patronage distributions, qualified equity patronage distributions, and cash redemption of non-qualified equity patronage in their regular taxable income. Under that structure, the patron’s cash flow from cash patronage is reduced by the tax obligation on both that cash portion and any accompanying distribution of qualified equity patronage. Perhaps for that reason, the IRS requires cooperatives issuing a qualified patronage refund to make at least 20 percent of their total patronage distribution as cash patronage. Patrons with a higher marginal tax rate can still experience negative cash flows from a patronage distribution of cash and qualified equity patronage. A simplified flowchart of a cooperative’s taxation choices is provided in Figure 17.1. Note that the figure does not reflect all possible taxable income or deductions not related to cooperative taxation.

The implications of taxation and tax policies for cooperatives and members  267

Source: Author.

Figure 17.1

Cooperative income distribution flow chart

Taxation of Federated Cooperatives Federated cooperatives, also called regional cooperatives, were created when local agricultural cooperatives desired to pursue economies of scale and scope by creating and jointly owning a larger cooperative. The federated cooperative is a larger cooperative owned by the smaller cooperatives with which it does business. The federated cooperative is established under a state cooperative law and determines federal taxes pursuant to Subchapter T. In terms of taxation, the federated cooperative allocates its patron-based earnings to its patrons (the local cooperatives) on the basis of business volume. The local cooperatives add the regional patronage refunds into their operating income. The local cooperatives then make the previously described decisions of allocating and distributing those total earnings. If the local cooperatives decide to distribute the regional patronage refund to their patrons, the local cooperatives have up to eight and a half months to make this distribution to their patrons as either cash, qualified stock, or a qualified per-unit retain distribution. When this occurs, the cooperatives would exclude the distributed regional patronage refund from their respective taxable income. The patron receiving the distribution would pay their federal marginal tax rate on these funds. If the cooperatives choose to retain the regional patronage refund without making an equity allocation to their members, then the cooperatives would pay their federal tax rate on these funds. As discussed in previous chapters, the federated structure can create cash flow issues for local cooperatives when profit distribution and/or equity redemption decisions differ between the two firms. Similar issues can occur with federal taxation choices. For example, if the federated cooperative makes a taxable patronage distribution to the local cooperative and the local cooperative does not pass it on to its members in a tax-deductible form, the local

268  Handbook of research on cooperatives and mutuals cooperative’s taxable income and tax payments will increase. Another issue occurs when a federated cooperative pays non-qualified equity patronage to a local cooperative that does not issue non-qualified patronage. If the local cooperative computes patronage on a tax basis, which is a common practice and is explained in more detail in the next section, the regional patronage is reflected in the local cooperative’s earnings and flows through to members in the year the equity is redeemed. The members’ realized cash benefit and the taxable income from the regional non-qualified patronage could therefore be different from those of patrons doing business when the regional patronage was distributed. Book versus Tax Differences The previous example of regional patronage highlights another taxation consideration. Cooperative firms can calculate patronage based on either book or tax-based income. Tax-based income is based on IRS rules and regulations while book-based income is based on generally accepted accounting practices. There can be both permanent and temporary differences between the two income calculations. For example, accelerated depreciation creates a temporary difference. Accelerated depreciation recognizes the expense earlier in the life of a purchased asset but the same total depreciation expense is eventually reflected under both approaches. The Section 199A deduction discussed in a following section of this chapter is an example of a permanent difference. The choice of tax or book-based patronage calculation has implications for both the cooperative and the patron. In general, book-based patronage calculations more closely match patronage to the patrons creating the income. On the other hand, tax-based patronage calculations more closely match cash outflows to the cooperative’s available cash flow. Kenkel (2021) provides a discussion of the considerations and implications of book versus tax differences for cooperative firms and patrons. Recent Changes in Cooperative Taxation The basic structure of cooperative taxation in the US continues to revolve around the provisions of Subchapter T. While Subchapter T as enacted in 1969 remains the foundation of taxation of cooperative firms in the US, there have been a number of amendments, including additional provisions, over the years. Additionally, regulation, interpretation, enforcement, and adjudicated decisions also bring context and clarity to federal taxation under Subchapter T. The most recent example of a significant new tax provision began in 2004, when a new benefit for cooperative patrons emerged from Congress. The American Jobs Creation Act (AJCA) of 2004 added the Section 199 Domestic Production Activities Deduction (DPAD) to the Internal Revenue Code (the evolution and implications of this new tax deduction are discussed in a subsequent section). The process ultimately led to a new tax deduction for cooperatives designated Section 199A. This created a new role for agricultural cooperatives in pooling and distributing tax deductions. This new aspect of the cooperative value package appears to be quite significant. Kenkel et al. (2019) concluded that the total cooperative-level tax deduction is often greater than the amount of cash patronage distributed. The deduction also created another complex decision for the cooperative board of directors. Cooperative boards must make a decision on an annual basis as to what portion of the tax deduction they will retain at the cooperative level and what portion they will distribute to the patrons. In the

The implications of taxation and tax policies for cooperatives and members  269 absence of any pass through, producers could actually be disadvantaged from a federal taxation perspective by marketing through a cooperative. Taxation of Cooperatives Internationally The taxation of cooperative businesses internationally is a complex subject, and one outside the scope of this chapter. While the International Cooperative Alliance principles provide some guidance on what constitutes a cooperative business, they are not specific enough to provide a legal definition. For that reason, the legal definition of a cooperative business varies across countries. Some countries define multiple classes of cooperatives. For example, Canada defines the “non-income cooperative,” the “income earning cooperative,” and the “exempt cooperative” (Ish, 1975). In addition to the challenges stemming from the lack of a universally accepted definition of a cooperative, the structure of business taxation varies by countries. Business taxation includes structures of taxation of income, value-added, assets, and other financial measures. The taxation of cooperative businesses is impacted by both the calculation of taxable income and tax rate. That makes it difficult to classify cooperative taxation in an individual country without an in-depth understanding of the tax regulations. Readers who are interested in a more global perspective on cooperative taxation are referred to Ibarra (2014) and Ish (1975). Despite the diversity in approaches to cooperative taxation, there are some practices that are fairly common internationally, typically flowing from policy considerations reflecting that cooperatives, unlike investor-owned firms, align the interests of owner, member, and user-patron. Hence, tax structures often do not apply taxation at the cooperative level on profits which are distributed to patrons and taxed at the patron level. It is also often common for the cooperative tax structure to not apply to profits generated from transactions with non-patrons (third parties) and have those profits taxed in the same manner as other businesses. Finally, when cooperatives are eligible for unique tax treatment, that tax structure is often linked with organizational and operational restrictions such as democratic governance, prevalently mutualistic character, obligations for mandatory reserves, and limited access to equity markets. Readers interested in understanding the structure of cooperative taxation in a particular country might do well to start by investigating those common provisions.

PREVIOUS RESEARCH RELATED TO COOPERATIVE TAXATION A number of research articles have explored the implications of cooperative taxation on cooperatives’ financial performance, boards of directors’ decisions, and member-patron benefits. The purpose of this section is to provide a literature review of relevant articles that explores the logic of cooperative taxation, implications of taxation on profit distribution and growth rates, and the new role of pooling and distributing tax deduction. The Logic of Cooperative Taxation This structure of cooperative taxation has created and continues to create numerous research questions. Prior to 1951, only a limited class of cooperatives qualified for tax-exempt status. The tax status of most businesses operating on a cooperative basis evolved from court deci-

270  Handbook of research on cooperatives and mutuals sions and administrative rulings. Various researchers contributed to this evolution by examining and discussing the taxation of cooperative firms. Over time, the research arguments came to be called the “tax logic” of cooperative taxation. The logic of the tax treatment of cooperatives centered on the concept that the tax structure was not created because cooperatives were thought to deserve special privileges, but rather because of their distinctive form of operations (Pollack, 1966; Fredrick, 2013). Some specific components of the tax logic discussion are the price adjustment characteristic, the agent characteristic, and the partnership comparison (Pollack, 1966). The price adjustment characteristic argued that cooperatives do not have net income because a cooperative deals at cost. The patronage refund is therefore simply an adjustment to the price at which the cooperative sold or bought from its patrons (Packel, 1941; Adcock, 1948). The agent characteristic related to the fact that the cooperative was acting as an agent for the patron (Asbill, 1956; Kassman and Sexton, 1954). The cooperative acts as the agent passing through profits to the patrons. In the case of non-cash patronage, the cooperative, acting as the agent for the entire membership, makes the decision to immediately re-invest a portion of profits in the form of stock patronage. The partnership comparison theory described the cooperative as similar to a partnership; as in a partnership, income and taxation should be attributed to the owners (Copeland 1955; Jenson, 1958). All of the tax logic theories had their proponents and critics. Many other authors contributed to the discussion that ultimately led to the structures of Subchapter T. Long after Subchapter T was enacted, Sexton and Sexton (1986) argued that cooperative taxation was fair, though not because of the previously described tax logic arguments. Instead, they argued that in forming a cooperative, patrons were developing a vertically integrated firm. They viewed the cooperative as a vertical subsidiary of the parent firms (farmers) and considered cooperative taxation equivalent to a consolidated tax return. The passage of Subchapter T in 1962 clarified the tax treatment of businesses operating on a cooperative basis, including the treatment of cooperatives that had been previously described as “tax exempt.” The treatment for that more restrictive form of cooperatives was described in Section 521 of Subchapter T and those firms are now often described as “Section 521 Cooperatives.” Subchapter T also clarified the requirements for a distribution to be considered a patronage refund and made it clear that when the cooperative was able to exclude a distribution from its taxable income, that distribution created taxable income to the patron. Subsequent to Subchapter T research and discussion on the tax logic of cooperative taxation diminished, and, with a few exceptions, the focus shifted to the implications of the taxation structure for cooperatives and their patrons. Implications of Taxation for Profit Distribution A number of authors, including Beierlein and Schrader (1978), Knoeber and Baumer (1983), Junge and Ginder (1986), Royer (1987, 2001, 2017), and Kenkel (2015), examine the implications of cooperative and patron taxation on a cooperative’s alternatives for distributing and retaining profit. Many of the studies, including Junge and Ginder (1986), Royer (1987), Russel and Briggeman (2014), and Kenkel (2015), analyzed how the cooperative’s and patron’s tax structure could create an advantage to retaining profits as non-qualified retained patronage refunds. Kenkel’s (2015) analysis considered the impact of the Section 199 deduction, which

The implications of taxation and tax policies for cooperatives and members  271 effectively reduced the cooperative’s tax rate, and as a result provides the strongest case for non-qualified revolving equity. Cooperatives can also retain profits in the form of unallocated equity or retained earnings. Royer (2012), Royer (2017), and Kenkel (2015) examined the implications of retaining profits in the form of unallocated equity. As with the analysis of qualified and non-qualified retained patronage refunds, the research examined the effect of unallocated retention on the net present value (NPV) of the patron’s lifetime stream of patronage and equity redemption payments from the cooperative. The patron’s benefit from the cooperative, as measured by that NPV, is heavily influenced by the cooperative and patron tax rates. Royer (2017) concluded that cooperatives with low tax rates and low growth rates, and whose patrons are characterized by high marginal tax rates, are most likely to benefit from retaining profits as unallocated equity. Kenkel (2015) uses a simulation model to project the patron’s NPV at two tax cooperative and patron tax rates. He used higher tax rates from tax schedules and lower effective tax rates from firm and farm databases. His results indicated that retaining profits in the form of unallocated equity was inferior to retention as non-qualified revolving equity under both tax scenarios. Impact of Taxation on the Growth Rate of the Cooperative As discussed in previous chapters, most agricultural cooperatives create additional equity from internally generated funds. Because of that structure, if the cooperative desires to maintain the same leverage level, the growth of the cooperative is limited by the level of profits generated and retained by the cooperative. The amount of profits retained is impacted by the cooperative’s taxation, so the growth rate of the cooperative is also influenced by taxation. Caves and Peterson (1986) examined the impact of the cooperative tax structure on the potential growth using internally generated funds. They concluded that, due to the tax structure, a newly formed cooperative could grow faster than a corporation that employed the same retention rate. The structure of equity rotation or paying back retained patronage refunds to member-patrons, however, eventually slowed the growth rate and could easily swing the growth advantage to the corporate form. Li, Jacobs, and Artz (2015) revisited the issue of whether cooperative firms face a capital constraint. The authors discuss whether various features of the cooperative firm might result in a greater or lesser reliance on equity capital relative to a similar investor-owned firm. The authors point out that cooperatives deduct both the cost of borrowing and the qualified retained equity patronage from taxable income. That creates an additional incentive for equity financing. Royer (2017) modeled patron benefits of a cooperative financed by various combinations of allocated revolving equity and unallocated retained earnings. Among the study’s conclusions was the observation that cooperative’s tax rate had implications for both the growth rate of the cooperative and the optimal form of equity financing. Research on the New Role of Pooling and Distributing Tax Deductions As discussed previously, a new role for cooperatives in pooling and distributing tax deductions began to evolve in 2005. Due to the significance to cooperatives and cooperative patrons, it is useful to understand the evolution and structure of this deduction. Section 199 DPAD was created as part of the American Jobs Creation Act (AJCA) of 2004. Part of the stated purpose of DPAD was to encourage the production of real goods inside the US. The deduction phased in over time but eventually became equal to a minimum of 9 percent of qualified production

272  Handbook of research on cooperatives and mutuals activities income (QPAI) or 50 percent of the W-2 wages allocable to the domestic production. The purpose of the wage cap was to channel the deduction towards firms with higher wage expense and thus increase domestic employment. Agricultural producers—and therefore their cooperatives—were considered manufacturers of a domestic product and were eligible for DPAD. The final rules and regulations for Section 199, issued in 2006, included a provision allowing cooperatives to pass on the deduction to their patrons. Starting in 2008, the IRS began to issue private letter rulings supporting the concept that agricultural marketing cooperatives could structure their cash payments for commodities as per unit retain payments in money (PURPIM) and that the cooperative did not have to deduct the PURPIM in calculating their QPAI (Harris and McEowen, 2013). Assuming the IRS were to apply the interpretative reasoning in the private letter rulings more generally, this theoretically increased the potential DPAD for many cooperatives where commodity sales were a significant portion of their business. The likely result was that cooperatives engaged in marketing agricultural and horticultural products should be considered to have produced the commodities that they marketed for the patron and the DPAD for products sold by a cooperative could be calculated at the cooperative level. The cooperative could then elect to retain the deduction or pass all or part of it on to its members based on their patronage (Harris and McEowen 2013). The advantage to calculating the deduction at the cooperative level was that the W-2 wage limitation, which was typically the binding constraint on the deduction, was based on the cooperative’s wages. Many producers have little or no W-2 wages so their DPAD at the farm level was limited. When the deduction was calculated at the cooperative and passed on to the member, the producer’s share was not limited by either its adjusted gross income or its W-2 wages (Harris and McEowen, 2013). It should be noted that the benefit of cooperative-level calculation varies across farming sectors. For example, grain famers tend to have very low W-2 wages and therefore get little benefit from the farm-level calculation, while dairy farmers have higher W-2 wages. It is interesting to note that the structure of this new cooperative tax provision is consistent with the previously discussed “Agent” and “Vertical Integration” theories of cooperative taxation. The cooperative is in essence being assumed to operate as an agent for the producers attributing their production activities to the cooperative level. The decision to calculate the DPAD at the cooperative level and the portion passed on to the patron are dependent on choices made at the cooperative level. DPAD therefore created a new role for agricultural cooperatives in pooling and distributing tax deductions. The cooperative board also took on a new agency role on behalf of its membership. The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the DPAD deduction for most firms, but created new tax deductions under Section 199A. One aspect of Section 199A created a deduction for agricultural cooperatives which is similar to DPAD. As with our discussion of taxation, this discussion of Section 199A is general and is not meant to cover every detail. Similar to DPAD, a cooperative can retain the Section 199A deduction or pass a portion or all of it on the patrons. A separate provision of Section 199A created a deduction to businesses including farm operations that are organized as pass-through taxation entities such as sole proprietorships, partnerships, limited liability companies, or S Corporations. That created the possibility of a cooperative patron receiving both a deduction at the farm level and a pass-through deduction from the cooperative. In an attempt to address that issue, Section 199A also specified that

The implications of taxation and tax policies for cooperatives and members  273 producers who market commodities through a cooperative face a potential offset in their farm level deduction. That offset in their farm-level deduction is calculated as the lesser of 9 percent of the producer’s qualified business income or 50 percent of their farm W-2 wages related to the commodity sales. The offset is not related to the amount of Section 199A passed on to the producer by the cooperative. Section 199A further solidified and complicated the role of agricultural cooperatives in creating and distributing tax deductions. Cooperative patrons with W-2 wages face a negative tax consequence by marketing through their cooperative. That makes it important for the cooperative to pursue the cooperative-level Section 199A deduction and pass on a sufficient portion to prevent the patron from being disadvantaged. Section 199A also added another dimension of patron heterogeneity because the cooperative related offset depended on the level of farm W-2 wages. Patrons with different W-2 wage levels have different tax impacts from marketing through a cooperative. Several authors have examined the impact of Section 199A on cooperatives and their patrons. Kenkel, Boland, and Barton (2014) concluded that the patron’s internal rate of return (IRR) was maximized when the Section 199 deduction was retained at the cooperative level and retained patronage was shifted from qualified to non-qualified equity. Royer (2017) indicated that the Section 199 deduction did not have a major impact on the analysis of retaining profits as unallocated equity but also concluded that the deduction might be more valuable at the patron level. Kenkel et al. (2019) analyzed the portion of the Section 199A deduction that needed to be passed on to keep patrons of representative grain cooperatives equivalent to producers marketing through non-cooperative firms. They concluded that the required pass-through percentage ranged from 21 percent to 67 percent of the cooperative’s deduction. The differences were due to differences in W-2 wages in the representative cooperatives which changed the cooperative’s total Section 199A deduction and the percentages were based on the level needed by the average patron. Swanson, Bekkerman, and Taylor (2019) explored the impact of the Section 199 deduction on the grain price basis of grain marketing cooperatives. One premise of their investigation was that cooperatives were distributing a benefit in the form of tax deduction which might allow them to be less competitive in terms of grain price bids. Their results indicated that Section 199, especially as interpreted in the 2008 IRS letter rulings, had the effect of widening the basis (reducing grain prices) of cooperative grain firms relative to investor-owned firms by almost 5 cents per bushel on average. The authors did point out that the full welfare effect of Section 199 on patrons could not be determined without also considering its effect on cash patronage and investment at the cooperative level.

SUGGESTIONS FOR FUTURE RESEARCH Agricultural cooperatives have a unique taxation structure under United States federal law which adds to their unique financial model. A rich body of past research has focused directly on cooperative federal taxation and indirectly on taxation impacts on profit distribution, pricing, capital structure, growth, and other elements of the cooperative business model. Cooperatives have flexibility in both the degree and timing of transferring taxable income from the firm to the patron. That complicates the modeling of the firm and patron cash flows and also makes it more difficult to synthesize research results. Researchers make different

274  Handbook of research on cooperatives and mutuals assumptions about the cooperative’s profit distribution choices and appropriate tax rates for the cooperative and patron. Some researchers attempt to model representative tax rates while others analyze results over a range of rates. The structure of revolving equity is also interrelated with taxation. Revolving equity is not even considered in some financial research and when it is included it may be modeled as either qualified or non-qualified and at a fixed representative revolving period or as an endogenous function of available cash flows. Collaboration on modeling cooperative taxation issues would enhance future research. Recent policies have created even more tax-related decisions for cooperative boards of directors. Additional research is needed to help practitioners understand the tax implications of profit distribution, revolving equity, and Section 199A decisions. A number of cooperative researchers, including Beierlein and Schrader (1978), Junge and Ginder (1986), Kenkel (2015), Kenkel and Briggeman (2018), Kenkel et al. (2019), and Royer (2017), have used a simulation approach and analyzed alternatives in the context of a representative cooperative(s). This research approach appears to be fruitful due to the ability to model firm and patron cash flows over one or more equity revolving cycles. Collaboration on the characteristics of representative cooperatives could also enhance future research efforts. An equally important area of needed research is investigation of the tax situation of cooperative patrons. Information on the effective tax rate and taxable income situation of the median cooperative patron is critical to the analysis of profit distribution and Section 199A decisions. The extent to which cooperative patrons can utilize pass through Section 199A deductions is a particularly relevant question. Understanding the heterogeneity of patron tax situations is equally important. Finally, cooperative researchers should position themselves to be able to respond to future proposals to change cooperative tax policy. Section 199A is classified as a temporary tax deduction and, unless extended, is scheduled to expire after 2025. Research-based information on the extent that cooperative firms retained or passed on the deduction and on the impact of the deduction to cooperatives and patrons will be vitally important to any effort to extend the provision. All elements of tax policy are potentially subject to change and proposals to “reform” cooperative taxation have occurred periodically (for example, Zivan, 1971). There is always the potential for fundamental changes in cooperative taxation; hence, cooperative scholars should be prepared to add research-based insights into any future debate. Much research has been done on cooperative taxation issues. Research findings have been extended to practitioners and has been impactful for cooperatives and their patrons. A new generation of cooperative scholars and practitioners is needed to continue to improve the understanding of taxation-related issues. Cooperative scholars also need to assist the broader research community in understanding and modeling cooperative taxation to enable economists to extend their research approaches to the cooperative business model.

NOTE 1.

The authors wish to thank the reviewers for helpful comments and suggestions.

The implications of taxation and tax policies for cooperatives and members  275

REFERENCES Adcock, A.W. (1948) “Patronage Dividends: Income Distribution or Price Adjustment.” Law and Contemporary Problems, Summer 1948, Vol. 13 No. 3, pp.505–25. Asbill, Mac Jr. (1956) “Cooperatives: Tax Treatment of Patronage Refunds.” Virginia Law Review, Vol 43 No. 8, pp.1087–1112. Beierlein, J.G. and L.F. Schrader (1978) “Patron Valuation of Farmer Cooperatives under Alternative Finance Policies.” American Journal of Agricultural Economics, Vol. 60 No. 4, pp.636–41. Caves, R.E. and B.C. Petersen (1986) “Cooperatives’ Tax Advantage: Growth, Retained Earnings, and Equity Rotation.” American Journal of Agricultural Economics, Vol. 68 No. 2, pp.207–13. Copeland, J. (1955) “Patronage Refunds and the Income of Cooperatives and Their Patrons.” Proceedings of the Annual Conference on Taxation, National Tax Association, Vol. 48, pp.419–26. www​.jstor​.org/​stable/​23407073 Frederick, D.A. (2013) “Income Tax Treatment of Cooperatives.” Cooperative Information Report 44, Part I, Business and Cooperative Services, USDA Rural Development, USDA. www​.rd​.usda​.gov/​ sites/​default/​files/​cir44​-4​.pdf Harris, Phillip E. and Roger A. McEowen. “Domestic Production Activity Deduction for Members of Cooperatives.” Center for Agricultural Law and Taxation, Iowa State University: Ames, Iowa, 2013. www​.calt​.iastate​.edu/​system/​files/​CALT​%20Legal​%20Brief​%20​-​%20Domestic​%20Production​ %20Activity​%20Deduction​%20for​%20Members​%20of​%20Cooperatives​.pdf Ibarra, M.A. (2014) “Tax Treatment of Cooperatives and EU State Aid Policy.” Revista Vasca de Economía Social—Gizarte Ekonomiaren Euskal Aldizkaria. Ish, D. (1975) “Some Aspects of the Taxation of Canadian Co-operatives.” McGill Law Journal, Vol. 21, No. 1, pp.42–78. Jensen, A. (1958) “The Federal Income Tax Status of Nonexempt Cooperatives.” Utah Law Review, Vol. 5, No. 1, pp.23–45. Junge, K.A. and R.G. Ginder (1986) “Effects of Federal Taxes on Member Cash Flows from Patronage Refunds.” Journal of Cooperatives, pp.22–37. Kassman, H.M. and J.J. Sexton (1954) “The Income Tax Treatment of Cooperatives.” National Tax Journal, Vol. 7, No. 1, pp.50–63. www​.jstor​.org/​stable/​41789982 Kenkel, P. (2015) “Profit Distribution Alternatives for Agricultural Cooperatives.” Journal of Cooperatives, Vol. 30, pp.28–49. Kenkel, P. (2021) “Implications of Book versus Tax Based Patronage in Agricultural Cooperatives.” The Cooperative Accountant, Summer, pp.33–8. Kenkel, P., M. Boland and D. Barton (2014) “Understanding Nonqualified Distributions.” The Cooperative Accountant, LXVII: 2–10. Kenkel, P. and B.C. Briggeman, (2018) “Impact of Tax Reform on Agricultural Cooperatives and Members.” Journal of Cooperatives, Vol. 33, pp.1–28. Kenkel, P., G, McKee, M. Boland and K. Jacobs (2019) “The New Role of Agricultural Cooperatives in Pooling and Distributing Tax Deductions.” Western Economics Forum, Fall, pp.16–23. Knober, C.A. and D.L. Baumer (1983) “Understanding Retained Patronage Refunds in Agricultural Cooperatives.” American Journal of Agricultural Economics, Vol. 65, No. 1, pp.30–7. Li, Ziran, Keri L. Jacobs and Georgeanne M. Artz. “The Cooperative Capital Constraint Revisited.” Agricultural Finance Review, Vol. 75, 253–66. Packel, Israel (1941) “Cooperatives and the Income Tax.” University of Pennsylvania Law Review, Dec., pp.137–44. Pollack, M.A. (1966) “Taxation of Cooperatives: A Tentative Explanation of a Problem in Semantics.” Wisconsin Law Review, Vol. 930. Royer, J.S. (1987) “Cash Flow Comparisons of Two Methods of Allocating Cooperative Patronage Refunds.” Selected Paper, American Agricultural Economics Association, August 3, 1987. Royer, J.S. (2001) “Agricultural Marketing Cooperatives, Allocative Efficiency, and Corporate Taxation.” Journal of Cooperatives 16 (2001): 1–13. Royer, J.S. (2012) “The Increasing Use of Unallocated Retained Earnings by Farmer Cooperatives.” Cornhusker Economics, University of Nebraska, March 14, 2012.

276  Handbook of research on cooperatives and mutuals Royer, J.S. (2017) “Financing Agricultural Cooperatives with Retained Earnings.” Agricultural Finance Review, Vol. 77, No. 3, pp.393–411. Russell, L.A. and B.C. Briggeman. (2014) “Distributing Patronage Income Under Differing Tax Rates and Member Risk Preferences.” Journal of Cooperatives, Vol. 29, pp.27–49. Sexton, R.J. and T.E. Sexton (1986) “Taxing Co-ops: Current Treatment is Fair, But Not For Reasons Given by Co-op Leaders.” Choices, Vol. 1, No. 2 (Second Quarter 1986), pp.21–5. www​.jstor​.org/​ stable/​43602429 Swanson, A., A. Bekkerman and M. Taylor. (2019) “Cost and Cooperation: The Effects of Section 199 on the Basis Offered by Grain Marketing Cooperatives.” Proceedings of the NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. Minneapolis, MN. www​.farmdoc​.illinois​.edu/​nccc134. Zivan, Jerome A. (1971) “Need for Reform in Taxation of Agricultural Cooperatives.” Georgia Law Review, Vol. 5, No. 3, pp.529–39.

18. Capitalization, equity, and growth in cooperative firms Keri Jacobs, Phil Kenkel, and Brian Briggeman1

INTRODUCTION Every firm manages a capital structure: a mix of debt and equity used to finance its assets and operations. A commonly held business principle is that firms strive to grow equity, which happens vis-à-vis invested capital and retained profits. However, cooperative corporations and traditional corporations (that is, investor-oriented firms or IOFs) have a clear differentiation in their accounting of and approaches to managing capitalization, equity, and growth. These differences center on the “why,” “how,” and “for whom” dimensions of equity and growth. The inextricable link between use, ownership, and control in a cooperative—as opposed to investment, ownership, and control in an investor-oriented firm (IOF)—created through patronage allocations to and equity contribution by owners gives rise to complexities in managing a cooperative’s equity and debt that do not manifest in an IOF.2 The confounding and elegant distinction is in the financial translation of use to ownership and in the perpetual transfer of ownership. This chapter seeks to identify key equity and capitalization issues unique to agricultural cooperatives in the US, summarize the current state of knowledge in these areas, and highlight the important gaps and inconsistencies that exist in the scholarly research. The ultimate overarching goal of this effort is to positively impact cooperatives and their stakeholders by fostering awareness of the uniqueness of the model for researchers new to cooperatives and, hopefully, by aiding in the generation of novel ideas and approaches to understanding and assessing cooperative equity management and capitalization. The chapter begins with an overview of the cooperative equity accumulation process and equity redemption models. The logic of cooperative equity and finance is considered in the context of cooperative principles. Following this is a survey of the literature addressing equity structure and redemption, capitalization, and growth, largely grounded in common property rights issues. The chapter concludes with a discussion of emerging issues and research needs and offers suggestions for approaches to investigate them.

OVERVIEW OF COOPERATIVE EQUITY AND CAPITALIZATION Equity Composition A cooperative’s equity structure refers to the mix or use of three types of equity: direct investment (also known as “stock” and “subscriptions”); retained allocations of patronage (allocated equity); and unallocated retained earnings.3 Direct investment happens when a producer is approved as a member of the cooperative and buys a “membership share” or “common stock 277

278  Handbook of research on cooperatives and mutuals share.” This share purchase begets ownership as well as benefits afforded member-patrons, such as voting rights and ownership and patronage distributions. For most agricultural cooperatives, the “patron” and “owner” roles are concurrent at the beginning of a patron’s use of the cooperative. These roles can separate if, for example, a producer retires and no longer earns patronage but still has ownership (equity) in the cooperative. When a producer no longer meets the requirements for membership or patronage, the direct investment piece (or “membership share”) is commonly liquidated and returned to the producer. Retained allocations of patronage are accumulations of ownership as equity in the cooperative over time through the patronage mechanism. 4 When the cooperative board of directors issues patronage from its patron-level profits, it may allocate a portion as cash and the remainder as allocated equity in the patron’s name, or “allocated revolving equity.” “Allocated” refers to the fact that ownership is assigned to a specific patron and “revolving” reflects that equity is typically redeemed into cash by the cooperative at some later date.5 These first two pieces of equity—direct investment and retained allocations—are commonly jointly referred to as “allocated members’ equity.” However, it is more descriptive to call it allocated patron equity. This equity is considered “non-permanent” since there is an expectation that it will eventually be redeemed to the owner through a planned redemption cycle or through payment to an estate. Unlike in publicly or privately held IOFs, where owners expect a return to the contribution of capital (for example, dividends), there is no direct return from ownership of allocated equity in most cooperatives.6 Because profits are distributed in proportion to use, and not impacted by equity holdings, there is typically no market for equity in an open-membership cooperative. The third piece is unallocated retained earnings or retained earnings. These are profits not allocated to a patron. Unallocated retained earnings are created by retaining the profits from non-patron or non-member business and/or retaining a portion of patronage-based profits. This is an annual board decision. Unallocated retained earnings are considered “permanent equity” in the sense that there is no redemption mechanism. Typically, only in the event of cooperative dissolution or purchase would this equity be accessible by existing members and patrons. In this sense, unallocated equity is technically the patrons’ or owners’ equity. Note that these retained earnings are similar in many regards to retained earnings in IOFs, but the property rights over these are distinct in cooperatives versus IOFs. Most agricultural cooperatives operating today are “open-membership” cooperatives, including those organized around grain and oilseed marketing, ag input supply, cotton, some dairy, and others. “Open” refers to the ability of a producer to become a member at any time so long as they meet the requirements for membership, accept the terms and responsibilities of such, and are approved by the board. It is common for a producer to be a member and/or patron of more than one open-membership cooperative, even one in the same business (for example, grain marketing), and exclusivity or full commitment of production or purchasing is not commonly required. In open agricultural cooperatives, the direct investment for an individual or entity is often trivial (less than $1,000), implying that total direct investments as a share of the cooperative’s total equity is exceedingly small in contrast with retained allocated equity. Owners have no ability to sell or exchange their equity and the value of an owner’s equity at redemption is unchanged from when it was assigned (presuming losses are/were not assigned to patrons). Whether the cooperative’s total equity structure is more heavily weighted to allocated or unallocated equity is a board decision. For many cooperatives, its equity structure has evolved with changing cooperative tax policies and incentives (Briggeman & Mashange, 2020).

Capitalization, equity, and growth in cooperative firms  279 The alternative structure to an open-membership cooperative is a closed or “New Generation Cooperative” (NGC), a form more common in value-added processing (for example, ethanol, livestock processing, specialty products that use a marketing pool). The hallmarks of an NGC are defined membership (often the number of members depends on the capacity of the processing), delivery rights/obligations, and significant upfront equity contributions (Hackman, 2001). Unlike in an open-membership cooperative, equity in an NGC is contributed by members who purchase a “membership share” or “membership stock” that gives them the right (and sometime obligates them) to deliver a specified quantity of the cooperative’s primary input needs. A marketing agreement governs the delivery rights and terms, and the share purchase price and usage obligations are calculated as a percentage of the total required input and equity. Member-owners can receive patronage, and unlike in an open-membership cooperative, the use of the cooperative is limited to members holding usage rights. Due to this structure, both direct investment equity and patronage allocations are proportional to use and therefore to each other. Members in a closed cooperative are typically allowed to sell their share if they can find someone who meets the membership criteria and is willing to purchase. In contrast to open-membership cooperatives, a market for the equity/usage right can develop. If the cooperative is profitable, potential new members will have an incentive to purchase a usage right from an existing member, thereby sharing in the patronage. Equity Management Strategies Systems The principle of “member economic participation” is a foundational rationale for patron- and member-contributed equity. Equity accumulation is a key differentiating factor between IOFs and cooperatives. IOFs, including public and private corporations, can seek passive or outside investors who otherwise have no vested interest in the corporation’s business. Cooperatives are limited in their ability to access non-member or non-patron capital because equity capital must be provided by those using the cooperative. Open-membership cooperatives create most of their equity out of their profit stream (versus direct investment). Users not eligible for patronage who use the cooperative generate profits that are held as retained earnings or unallocated equity. Patronage-eligible users generate profits that are held as allocated equity. These cooperatives strive to complete the circle of benefits by redeeming allocated equity into cashback to patrons. The continual creation of equity from profits—allocated and unallocated—and destruction of equity through redemptions is a balancing act which the cooperative navigates through a process called equity management. The cooperative board of directors considers a multitude of factors when selecting an equity management strategy, including its own cash flow, financing needs, member benefits and returns, and capital structure, among others. There are two broad types of equity management systems: one that focuses on the redemption strategies and one that focuses on the patrons’ proportional contribution of equity. The most common equity management program is one where a patron’s allocated equity is redeemed to cash based on a triggering event, such as the patron’s age (for example, 65 years of age) or the age of the equity (for example, allocated 12 years ago). Under these “trigger” strategies, a patron’s equity accumulation is a function of the board’s profit allocation choices and is not influenced by the member’s equity balance. That is, boards are managing more to the redemption side of the process rather than the accumulation of equity side. How these equity management systems perform in terms of member value,

280  Handbook of research on cooperatives and mutuals returns, or maintaining proportionality between use and equity contribution has received considerable attention in the literature. The second type of system, called a base capital system, formally concentrates on matching equity holdings with patronage volume. A member’s or patron’s equity requirement is established in proportion to an expectation or average annual level of usage. This is common in dairy cooperatives, where a member’s base capital is set at some dollar per hundredweight of expected milk marketed during the year. A new patron’s annual patronage allocation will be all or mostly allocated equity (also called per-unit capital retains) until the patron’s base equity capital amount is met. After that, patronage allocations may be primarily cash allocations so long as proportionality is maintained between the patron’s equity contribution and use. When a member’s business volume declines, they receive equity redemption payments to retain proportionality. The base capital needs of each member-patron are established by the board on a per-usage basis and can fluctuate to fund expansions, improve the equity mix, and so forth. Other equity redemption programs include “estate redemption,” “percentage of equities,” hybrid approaches combining age-of-patron and revolving equity, discounted equity payments for accelerated redemption, and so forth. Kenkel (2020) gives a useful overview of common and creative equity redemption strategies and their performance, and Eversull (2010) reviews common redemption practices and trends of farmer, rancher, and fishery cooperatives. A cooperative’s equity management process is at the discretion of the board and may be specified generally in the cooperative’s bylaws. Even when the bylaws are more prescriptive about a system, the board typically has discretion in selecting the parameters (for example, revolvement period), to accelerate, decelerate, or suspend redemptions if warranted by their financial situation. In the case of an age-of-patron system, the cooperative’s bylaws might indicate the age at which equity redemption begins and specify how quickly (in years) the equity position should be redeemed (for example, five years).7 Bylaws are generally less prescriptive if an age-of-stock (revolving fund) system is used. In the chapters on cooperative taxation and profit allocations, the issue of equity allocated as “qualified” and “non-qualified” is examined. Each has unique tax attributes and therefore creates tradeoffs and opportunities at the board level, and the literature discussed later takes up this issue as well. However, from an overall equity accumulation and redemption perspective, aside from taxation, the two equity types are not otherwise remarkable from a capitalization perspective. They do have implications for “growth,” and those are discussed in the context of existing literature. Federated Cooperative Equity The federated cooperative system creates a complex ownership structure among agricultural cooperatives, particularly for local (centralized) cooperatives receiving allocated equity from the regional (federated) cooperatives they patronize. For example, hundreds of local grain and farm supply cooperatives in the Midwest have equity ownership simultaneously in AGP, Inc (a soy-processing cooperative), CoBank (a cooperative lender), and CHS (an agricultural marketing and supply cooperative). This “regional” equity is carried on the local cooperative’s balance sheet as an asset. When the regional cooperative issues patronage to the local cooperative, the local cooperative must decide whether to allocate the equity in turn to its own patrons. Whether the regional cooperative allocates patronage as qualified or non-qualified equity matters to this decision and has implications for the local cooperative’s own equity

Capitalization, equity, and growth in cooperative firms  281 management strategy. A full treatment of equity across this two-tiered cooperative system is beyond the scope of this chapter, but readers interested in this complexity will find additional discussions of it in the profit distribution and taxation chapters of this Handbook.

STATE OF KNOWLEDGE AND CRITICAL ISSUES OF COOPERATIVE EQUITY, EQUITY AND CAPITAL STRUCTURE MANAGEMENT, AND GROWTH Much of the scholarly work on US agricultural cooperatives contemplates, in some fashion, equity and the management thereof. Cooperative principles, operating objectives, profit allocation, growth, governance, property rights, and even consolidation, acquisition, and joint ventures have implications for and are influenced by equity and equity management. Within the substantial literature concerning cooperative equity, research strands such as equity composition, redemption strategies, capital constraint, and growth are innately interwoven. This chapter does not attempt to encapsulate all or even most of the equity-relevant works but rather identifies the primary questions with which the literature occupies itself and points readers to works containing a richer accounting of its scholarly history. Profit distribution decisions directly impact equity; therefore, the reader should not isolate this chapter from the chapters on cooperative taxation and profit distribution. A Derived Rationale for Cooperative Equity: The Cooperative Principles Cooperative equity, and the methods for its allocation, management, levered value, and even growth, are rationalized in the context of the principles of cooperation. To varying degrees, and without substantial argument, the principles have guided how scholars, practitioners, and cooperatives think about managing equity. However, in Royer’s (1992) thought-provoking examination of founding principles such as democratic control, service at cost, financing proportion to patronage and by current patrons, limited returns to equity capital, and accumulation of reserves, he argues convincingly that, in some cases, the cooperative principles have led not to equitable treatment of patron-members but to inequitable treatment and equity practices guided by economic motivations and self-interest rather than a notion of collective action. He uses a case study to contrast cooperatives with patron-owned corporations in dimensions of control, earnings distributions, and equity, highlighting that a patron-focused corporation more succinctly reflects the intent of the cooperative principles. Royer argues that proportionality of patronage and equity is more consistent with cooperative principles, is equitable, and more efficiently balances ownership and use. He posits that the service-at-cost principle obliges cooperatives to allocate all patron-based income to patrons and assign only non-patron income to reserves (retained earnings). And he asserts that cooperatives should pay dividends/returns on the equities of former patron-members to right the inequity where a large class of former-members and equity providers has no control (voting) ability to benefit from the cooperative’s decision yet bears substantial risk and opportunity cost to their capital. In a follow-up to Royer’s piece, Cook (1992) expands this thinking further and in some dimensions rebuts Royer’s position, particularly as it relates to the opportunity costs of capital and the motivations for collective action (for example, market failures).

282  Handbook of research on cooperatives and mutuals The collective assessment of Royer (1992) and Cook (1992) on what the cooperative principles imply for equity, patronage, and capitalization cannot be overappreciated, and neither can the significance and consequences of the questions that stem from them. Equity Structure and Redemption A cooperative’s mix of patron- and non-patron business and its profit allocation choices jointly determine its equity composition. The board must manage equity by balancing the cooperative’s financial needs (cash flow and equity capital) with the needs and expectations of patrons to whom allocations were made. The cross-cutting questions practitioners and researchers have regarding these decisions include: How should the cooperative balance permanent and allocated equity, and to what end? How do different equity redemption methods influence patron value and cooperative performance? How do property rights theories and cooperative principles inform our thinking? Briggeman, Jacobs, Kenkel, and McKee (2016) discuss recent trends among agricultural cooperative toward more permanent equity (unallocated equity) versus allocated revolving equity in response to changing member demographics, industry, and consolidation. Cook and Iliopoulos (2000) discuss the same trends as Briggeman et al. (2016) but take an ill-defined property rights perspective. The shift toward more permanent equity commonly arises when the cooperative expands into business lines with greater non-patron business, when there are tax advantages to not allocating profits, or when the cooperative board prioritizes permanent equity or revolving equity. In many cases, the shift from relatively more to fewer allocations from profits reduces the allocated equity redemption period (a benefit to patrons) but can generate fewer overall benefits to patrons (Royer & Shihipar, 1997; Kenkel, 2020; Power, Salin, & Park, 2012). However, because unallocated equity does not revolve, the only mechanism for patrons to capture profits that are not allocated is to liquidate the cooperative. Dahl and Dobson (1976) address the challenges of a revolving equity structure, pointing in turn to literature identifying that cooperatives face relatively high capital costs associated with a revolving fund and under-leverage. Regarding equity allocations, they find that the Wisconsin farm supply cooperatives in their study could substantially reduce their capital costs if they use less revolving fund capital and more debt and permanent equity. When unallocated equity becomes very large relative to allocated equity, patron-members can benefit greatly by liquidating the cooperative to access unallocated retains (Boland, 2012). A case study by McKee and Jacobs (2017) describes how and why this occurred in a Midwest grain marketing cooperative. Proportionality Cooperatives encounter property rights issues as an artifact of their equity management strategy, and specifically of the translation of use to ownership vis-à-vis patronage allocations and the equity redemption process. Cooperative scholars generally agree that the ‘efficient’ way to manage equity from a property rights perspective and patron-value perspective is by maintaining proportionality: maintaining a patrons’ equity proportional to the use (Royer, 1992). In many, if not most, cooperative organizations, an owner’s proportional use of the cooperative over time does not match their investment (allocated equity). Under some equity management systems, relatively young or new members likely have a higher “use” proportion

Capitalization, equity, and growth in cooperative firms  283 than ownership initially, but over time the accumulation of their allocated equity proportion surpasses their proportional use. This is one manifestation of the horizon problem: when a patron’s claim to the benefits of their investment does not match the horizon over which benefits are generated. Royer (2003) identifies the pros and cons of a base capital plan and explores the issue of proportionality in that context. A key benefit of base capital to the cooperative is the ability to adjust patrons’ equity requirements based on changing conditions and opportunities for reinvestments. Ease of administration and explanation to patron-members is a clear challenge with this plan, as is operation when the cooperative is subject to frequent membership changes or highly variable “use” by patrons. Barton and Schmidt (1988) and Kenkel (2020) analyze several common equity redemption models to understand how each performs in terms of a set of roughly comparable criteria: the cooperative’s capital needs (equity target or redemption budget), proportionality, and patron benefits (that is, the value of redemptions to patrons). Kenkel concludes that while the age-of-patron system had a place when agricultural cooperatives were forming and needed longer redemption cycles, it performs poorly by all criteria except ease of management. Both find the base capital plan performs best in terms of proportionality, but Kenkel notes one disadvantage is the low member benefit early in the patron’s investment period. Drawing from the combined conclusions, if the cooperative more heavily weights efficiency and value from the patrons’ perspective, the revolving fund or percentage pool plans should be chosen. If flexibility and focus on cooperative capital are most important, the base capital plan is preferred. Ultimately, the success of these equity redemption systems depends on the triggering parameters such as the age of the patron and age of equity, and the size of the base capital investment. Capital Structure and Growth Maintaining sufficient equity to support debt financing of revenue-generating assets is a hallmark of cooperatives’ equity management and growth strategies. A robust literature examines cooperatives’ mix of equity capital and debt to finance its operations and short and longer-term obligations. The primary investigational questions are variations on: Are cooperatives capital-constrained? What is the optimal capital structure for cooperatives? What is the implied cost of capital in cooperatives? The crux of these questions is the impact of capital structure on cooperative growth. In addition to these important strategical questions, the mechanics of the equity management system impact the proportionality of equity and use, member benefit, and the portion of the cooperative’s annual profits that must be dedicated to equity retirement payments. Note these are primarily challenges accruing to open-membership cooperatives. The capital constraint hypothesis suggests cooperatives are constrained in accessing the necessary risk capital for investments and growth. Cook (1995) and Cook and Iliopoulos (2000) discuss the limitations of cooperative equity in the context of vaguely defined property rights. Equity is generated from patronage-based income or from non-patronage sources where residual claims to it are not clearly defined (for example, who “owns” and can access the unallocated retained earnings). Further, cooperative members and patrons may be unwilling to invest due to the free-rider, horizon, and portfolio problems. These property rights issues are believed to limit a cooperative’s ability to acquire equity because only patrons or members retain residual claims on the business and they may not have sufficient risk appetite for levered

284  Handbook of research on cooperatives and mutuals asset investments. In empirical investigations, Dahl and Dobson (1979) find that agricultural cooperatives could substantially reduce their costs of capital by relying less on revolving fund equity and utilizing more debt and permanent equity. Schrader (1989) points to cooperatives’ dependence on patron-provided capital as a key factor in limiting growth. Whether cooperatives are capital-constrained is largely an empirical question, and one for which a common approach is by direct comparison of capital structures of cooperatives and IOFs (Lerman & Parliament, 1990, 1993; Parliament, Fulton, & Lerman, 1989; Chaddad, Cook, & Heckelei, 2005; Van Der Krogt, Nilsson, & Host, 2007; Soboh & Dijk, 2012; Li, Jacobs, & Artz, 2015). Lerman and Parliament (1990) assert that cooperatives may, by necessity, rely more heavily on debt for investments but find leverage ratios among cooperatives versus IOFs that are not significantly different. In a later study, they find that cooperatives and IOFs financed assets with approximately the same equity proportion between 1973 and 1983 (about 50 percent equity financing), but in the period after that IOFs reduced equity financing relative to cooperatives, opting to weight financing toward longer-term debt (Lerman & Parliament, 1993). Hardesty and Salgia (2004) find a significantly lower relative use of debt among cooperatives versus comparable IOFs in grain, dairy, fruit and vegetables, and input supply. More recently, Li et al. (2015) rationalize a potential preference for equity financing based on cooperatives’ ability to deduct the cost of borrowing and qualified retained equity patronage from taxable income. Further, the collective effect on capital structure will depend on whether the cooperative is primarily behaving as an “extension of the farm” or as an entity that creates patron value by maximizing profitability. In their panel study, lower overall leverage positions are observed among cooperatives relative to IOFs, but whether cooperatives are capital-constrained is not clear. As cooperatives in their study became more profitable, they increased their leverage; IOFs behaved in the opposite way. Cooperatives had much lower ratios of long-term to current debt, which could suggest a constraint on long-term borrowing or be indicative of managers’ view of equity as a costless source of capital. Most cooperatives create the majority of their equity from retained profits, which may explain the correlation between profitability and greater use of equity. Researchers have generated insights about capital structure and its role more broadly. Chaddad et al. (2005) study the role financial constraints, primarily internal funds in the form of cash flow measures, have in cooperatives’ capital investments. When the capital structure is also modeled, the sensitivity of investments to cash flow increases, indicating that cooperatives are capital-constrained. A study by McKee, Jacobs, and Kagan (2020) addresses capital structure from the perspective of internal financing and trade credit offered by ag supply cooperatives. Their results demonstrate that cooperatives take on more financing (debt capital) to support the inventory needs of members as a form of collective financing with shared repayment risk, particularly when members face liquidity constraints. Correspondingly, Li et al. (2015) find evidence of cooperatives’ significantly greater propensity to leverage inventory through debt compared with IOFs. In the context of consolidation, Richards and Manfredo (2003a, 2003b) hypothesized that the consolidation of cooperatives is in response to capital constraints. Indeed, among other covariate explanations, as the shadow value of capital increases (capital becomes more valuable) and as cooperatives are less liquid and more leveraged, their propensity to merge or go through other forms of consolidation increases. Van Der Krogt et al. (2007) largely corroborate this based on dairy cooperative and IOF collaboration and consolidation activities in the EU, finding that equity capital constraints that arise from common property rights issues

Capitalization, equity, and growth in cooperative firms  285 generated “cautiousness” about external growth strategies, and that cooperatives were more likely to engage in joint ventures and other “explorative collaborations” while IOFs preferred takeover strategies and strategic equity moves. Sustainability of Growth Apart from growth as a more generic measurement of sales, investments, or equity capital, the literature contemplates cooperatives’ sustainable growth rate (SGR) as a metric by which to evaluate cooperatives’ consolidation activities, patronage allocation decisions, tax policies, and equity management. Adapted to cooperatives, the SGR is the maximum growth rate of sales that can sustain given a targeted capital structure and patronage and equity management policies. The empirical exploration of SGR and contributing factors by Smart, Briggeman, Tack, and Perry (2019) is perhaps the most comprehensive to date and serves as a starting point for understanding equity management and capital structure in the context of growth. Using a panel of cooperative financial data from 1996 to 2014 and a DuPont-like identification strategy, a time-varying overall SGR for cooperatives is estimated—from -4 percent to nearly 15 percent over the period—and drivers of its change postulated. Then, individual cooperatives’ SGRs are calculated and analyzed in terms of components: earnings retention, net profit margin, operating efficiency, and leverage. Not surprisingly, the most important driver of SGR is net profit margin; however, it is somewhat anomalous, particularly considering the discussion and hypotheses around equity management, that earnings retention is not important. In their study, Smart et al. (2019) estimate the difference between a cooperative’s actual rate of growth in sales and SGR in its sustainable growth challenge (SGC) and regress that on the SGR components. They find that access to debt and operating efficiency are key levers in resolving the gap between SGR and SGC, which highlights the importance of, and important challenges embedded in, capital structure and equity management. Besides estimating SGR and its factors directly, there is historically mature literature that considers growth collaterally, particularly in the context of consolidation and taxation. Caves and Peterson (1986) examined the impact of the cooperative tax structure on the potential growth using internally generated funds. They concluded that, due to the tax structure, a newly formed cooperative could grow faster than a corporation that employed the same retention rate. The structure of equity rotation or paying back retained patronage refunds to member-patrons, however, eventually slowed the growth rate and can easily swing the growth advantage to the corporate form. Beierlein and Schrader (1978) sought to understand the impact of proposed policy changes related to cooperative taxation and antitrust exemptions on cooperative capital structures. Yet their most important findings may be of the relationship between capital structure, the co-op’s growth rate, and the subsequent patron benefits the co-op is able to generate. They simulate cooperative patronage (a patron benefit) based on capital structure, including varying arrangements of non-member debt and revolving equity (qualified and non-qualified). Not surprisingly, they found that capital structure does affect patron benefits and cooperative growth potential. While debt can increase the cooperative’s growth and enhance patron benefits in the short run, debt usage puts at risk the cooperative’s ability to survive economic downturns and limits future patron benefits.

286  Handbook of research on cooperatives and mutuals

EMERGING AND FUTURE RESEARCH DIRECTIONS Boland (2012) begins an overview of finance and equity management with the statement: “Cooperatives must be competitive like any business. The local farm supply and oilseed/grain marketing cooperative business model is unique but it is still a business that is subject to the principles of business finance, business management, and economics. It must be managed as a business that can compete in a capitalistic and highly competitive market economy.” He goes on to write: “Irrespective of its purpose and role, a cooperative should strive to be as profitable as possible and then distribute those profits to its patrons.” Anecdotally, this statement is a mostly accurate reflection of the current agricultural cooperative business culture, cooperative board room discussions, and outreach messages from cooperative extension experts. Yet, it does not square with most of the applied research findings in this chapter. Many scholars observe that, over time, cooperatives seem to lose their reflection of cooperative principles and “behave” more like IOFs in financial and operational pursuits, due in part to operating in increasingly capitalistic and competitive markets (Schrader, 1989; Royer, 1992; Cook, 1992; Hind, 1997; Clymer, Bowman, Yeager, & Briggeman, 2021). Royer (1992) and Cook (1992) argue too that the cooperative principles themselves create “paradoxes” in the equitable treatment of patron-owners, and this clearly has implications for equity management. Further, the applied cooperative finance and equity literature commonly contextualizes hypotheses by contrasting cooperatives with IOFs and evaluates cooperative outcomes and behaviors against the IOF-informed backdrop, and perhaps rightly so. While the commonly used approach of viewing cooperatives as a special case of corporations is practically appealing, it is also limiting because it implicitly places the cooperative condition—including the cooperative principles—as a constraint on profit maximization.8 If cooperatives are behaving and making decisions more like IOFs, their future may be grim, because they have multiple significant financial and governance constraints that IOFs do not. This may partially explain why, for example, the application of utility or profit maximization models, even with an attempt to model farmer profits and preferences, generates findings that do not withstand well the scrutiny of cooperative principles and property rights approaches. Perhaps more important, it also may explain why the literature contemplates cooperatives are behaving more like IOFs but are not achieving the same results. For example, there remains ambiguity in the literature as to whether cooperatives are, in ways that matter, capital-constrained. The natural juxtaposition of cooperatives, created by the uniqueness of cooperative objectives and how that flows through to equity management decisions, implicates several areas for potentially fruitful research. At a high level, there is certainly a need for a theoretical or quasi-theoretical framework to inform empirical investigations of cooperative “performance,” including to inform equity management choices. The literature may have extended utility and profit maximization models as far as they can go regarding cooperatives. Behavioral and experimental methods could be employed to gain more traction, even qualitatively, on cooperative performance even in terms of provision of public goods, market performance along supply chains, and so forth. Parliament et al. (1989) suggested nonmarket and contingent valuation techniques including hedonics, elicited or stated preferences, and an “incremental” value approach to understanding the additional value created by cooperatives in their markets. This is indeed a lofty objective.

Capitalization, equity, and growth in cooperative firms  287 More specialized investigations arise directly from equity structure and capital structure management choices. There are two primary areas for exploration. First, the literature on cooperative capital constraints is unsettled in the sense of whether they simply have different capital structures or truly are behaving as if they face a capital constraint. Cooperatives seem to adjust their use of internal financing with economic conditions, and perhaps do so differently than IOFs, but whether that constitutes a constraint is unclear. How can the counterfactual be observed? A confounding factor in trying to identify the counterfactual—what they would have done if they were not capital-constrained—is that cooperatives have different objectives than IOFs. A higher-level question that has not been explored is whether cooperatives are constrained compared to non-publicly traded corporations. Much of the cooperative versus IOF literature contrasts conditions of publicly traded IOFs with cooperatives. Non-publicly traded IOFs are closer to cooperatives in terms of their external capital environment and prospects. An understanding of how capital access is different for cooperatives and non-publicly traded corporations or even LLCs could be illustrative in understanding the true nature, if it exists, of cooperative constraints on access to capital and accumulation. A second primary area of cooperative equity and capital management research needs to be centered on the role of boards. Within this are two strands. The first is related to anecdotal evidence suggesting that cooperative boards may view allocated equity as a mandatory obligation to be paid in the future. These have merit because of member unrest during the 1960s and 1970s when few cooperatives were redeeming allocated equity into cash (Cook, 1976). Cook notes that during this tumultuous time, cooperative members in Iowa, Nebraska, New Mexico, Rhode Island, and South Carolina successfully convinced their state governments to pass legislation requiring cooperatives to retire allocated equity to an estate. In these five states, it is clear that allocated equity is a future obligation that must be paid back to patrons. In an extreme case, the decision to revolve allocated equity back to patrons in cash can be made in a similar fashion as repaying a debt obligation to a lender. If the extreme case does arise, could a cooperative be capital-constrained because it effectively has too many future obligations to pay? What implications could this have on cooperative growth, access to debt capital, and future profitability? The second strand related to the board is the political and economic motives of board members. As board composition changes, what impacts might be expected on equity management decisions? Do these create or ease equity accumulation concerns? Finally, research on capital structure, equity composition, and equity management literature has a data problem. Many investigations rely on a lender’s customer financial data for cooperatives. Lender data are the “gold standard” for agricultural cooperative data because they are often a panel of audited cooperative financial data. Indeed, researchers are fortunate to have access to these. A criticism, however, of these data is whether the outcomes—for example, debt usage, equity redemption strategies, retained earnings—are endogenous to the lender. What role does the lender play in the decisions that lead to these outcomes? A potential remedy to the lender financial data issue is to collect primary data from cooperative leaders, directors, or members on a focused research question. One area to explore primary data collection would be in the growing body of experimental and behavioral literature among agricultural economic journals. Much of this literature has not addressed many cooperative finance problems, such as those discussed within this equity management chapter as well as those in other chapters within this Handbook. One such research question that could be examined with experimental and behavioral techniques is: What are member attitudes toward and willingness to make tradeoffs between equity revolvement versus funding cooperative

288  Handbook of research on cooperatives and mutuals growth versus paying cash patronage? The findings from answering this important question could greatly help guide cooperative senior leaders and boards as they strive to deliver value to their membership. For many agricultural cooperatives, non-patron business is an increasing or, in some cases, an already dominant share of total revenues and profits. What effect is non-patron or non-member business having on cooperatives’ ability to maintain their cooperative significance? What are the strategies boards should consider to maintain “enough” patron ownership to ward off dissolution or acquisition? This chapter did not fully contemplate the impact of equity redemption and management on the producer-owners and patrons. A perennial question, and one becoming ever more important, is how the cooperative’s equity management strategies impact multi-generational patrons. As agricultural production is increasingly consolidated, “patrons” are increasingly family corporations and LLCs with, effectively, infinite lives. If the cooperative seeks to enhance member and patron benefits through profit allocation, how does this change in light of an evolving patron lifecycle? Finally, more evidence is needed in terms of how cooperatives can optimally manage equity and capital in environments where their growth is internally versus externally focused. External growth vis-à-vis consolidation or cooperation undoubtedly requires a different equity and capital posture. Further, cooperatives and stakeholders will benefit by understanding equity management strategies in pre- and post-consolidation periods.

NOTES 1. 2.

The authors wish to thank the reviewers for helpful comments and suggestions. Herein, “owner” refers to one with an ownership stake (equity) in the cooperative. Ownership arises via direct equity contribution (that is, a membership certification or shares) or patronage-based use that results in retained allocated equity. Often the term “member” is used interchangeably with “owner,” but this chapter avoids confusing the governance role members provide with the capitalization and ownership role of owners and patrons. 3. Other nomenclature exists for these terms. For example, retained savings or reserves indicate unallocated profits or retained earnings. 4. For a thorough accounting of the process and nuances of patronage allocations and the tax implications for cooperatives and patrons from its qualified or nonqualified designation, see the chapters “Profit Distribution and Financial Performance in Cooperative Firms” and “The Implications of Taxation and Tax Policies on Cooperatives and Members.” 5. There are cases where cooperatives, even agricultural cooperatives, do not revolve allocated equity due to financial hardships or because by-laws do not require it. This is not the norm, and those that do not consistently revolve equity typically do pay estates—but again, not all. 6. A few agricultural cooperatives have used “preferred shares” which do generate investment returns, typically subordinate to patronage; however, this is not the norm and doing so involves a complex securities offering process which most cooperatives are unable or unwilling to undertake. 7. An age-of-patron program that redeems a percentage of the patron’s equity over a set number of years (for example, five years, 20 percffent each year) after the triggering age has also been called an “age-of-patron pro rata pool.” The benefit to the cooperative is to reduce the burden of an age-of-patron redemption that pays 100 percent of the equity at the triggering age. 8. In the context of profit allocation and equity management, that cooperatives are a “special case” of traditional corporations is driven by tax code and cooperatives’ status as pass-through entities.

Capitalization, equity, and growth in cooperative firms  289

REFERENCES Barton, D.G. & Schmidt, R.L. (1988). An evaluation of equity redemption alternatives in centralized cooperatives. Agribusiness, 3, 39–58. Beierlein, J.G. & Schrader, L.F. (1978). Patron valuation of farmer cooperatives under alternative finance policies. American Journal of Agricultural Economics, 60(4), 636–41. Boland, M.A. (2012). Cooperative finance and equity management. Retrieved from http://​ageconsearch​ .umn​.edu/​handle/​143556 Briggeman, B.C., Jacobs, K.L., Kenkel, P. & McKee, G. (2016). Current trends in cooperative finance. Agricultural Finance Review, 76(3), 402–10. Briggeman, B.C. & Mashange, G. (2020). Rising equity and retained earnings for U.S. farmer cooperatives. ACCC Fact Sheet Series, 15. Retrieved from https://​accc​.k​-state​.edu/​research/​factsheets/​ACCC​ %20Fact​%20Sheet​%2015​_Rising​%20Equity​%20and​%20Retained​%20Earnings​%20for​%20US​ %20Farmer​%20Cooperatives​_22December2020​.pdf Chaddad, F.R., Cook, M.L. & Heckelei, T. (2005). Testing for the presence of financial constraints in U.S. agricultural cooperatives: an investment behavior approach. Journal of Agricultural Economics, 56, 385–97. Caves, R.E. & Petersen, B.C. (1986). Cooperatives’ tax ‘advantages’: growth, retained earnings, and equity rotation. American Journal of Agricultural Economics, 68(2), 207–13. Clymer, A., Bowman, W., Yeager, E.A. & Briggeman, B.C. (2021). Are cooperatives transitioning from cost minimizers to profit maximizers? Agricultural Finance Review, 81(4), 568–77. Cook, M.L. (1976). An economic and legal analysis of farmer cooperative equity capital redemption policies. (Publication No. 7610655) [Doctoral Dissertation, University of Wisconsin-Madison ProQuest Dissertations Publishing]. Cook, M.L. (1992). Cooperative principles and equity financing: a discussion of a critical discussion. Journal of Agricultural Cooperation, 7, 99–104. Cook, M.L. (1995). The future of U.S. agricultural cooperatives: a neo-institutional approach. American Journal of Agricultural Economics, 77(5), 1153–9. Cook, M.L. & Iliopoulos, C. (2000). Ill-defined property rights in collective action: the case of U.S. agricultural cooperatives. In C. Menard (Ed.). Institutions, Contracts and Organizations (Chapter 22). Edward Elgar Publishing. Dahl, W.A. & Dobson, W.D. (1976). An analysis of alternative financing strategies and equity retirement plans for farm supply cooperatives. American Journal of Agricultural Economics, 58(2), 198–208. Eversull, E. (June 2010). Cooperative equity redemption. Research report 220, United States Department of Agriculture, Rural Business-Cooperative Programs, Washington, DC. Retrieved from www​.rurdev​ .usda​.gov/​rbs/​pub/​RR220 Hackman, D. (2001). What is a new generation cooperative? AgDecision Maker File C5-112, Iowa State University Extension, December 2001. Hardesty, S.D. & Salgai, V.D. (2004). Comparative financial performance of agricultural cooperatives and investor-owned firms. NCERA-194 Research on Cooperatives Annual Meeting, Nov 2–3, 2004. Hind, A.M. (1997). The changing values of the cooperative and its business focus. American Journal of Agricultural Economics, 79, 1077–82. Kenkel, P. (2020). Comparison of alternative equity management systems. Journal of Cooperatives, 35, 103–28. Lerman, Z. & Parliament, C. (1990). Comparative performance of cooperatives and investor-owned firms in U.S. food industries. Agribusiness, 6(6), 527–40. Lerman, Z. & Parliament, C. (1993). Financing growth in agricultural cooperatives. Review of Agricultural Economics, 15(3), 43141. Li, Z., Jacobs, K.L. & Artz, G. (2015). The cooperative capital constraint revisited. Agricultural Finance Review, 75(2), 253–66. McKee, G. & Jacobs, K.L. (2017). Governance structures and the value of the firm: the case of Great Lakes Cooperative and Green Plains Renewable Energy. Journal of Cooperatives, 32, 46–58. McKee, G., Jacobs, K.L. & Kagan, A. (2020). Trade credit use in agricultural cooperatives: pricing and firm performance. Journal of Cooperatives, 35, 74–101.

290  Handbook of research on cooperatives and mutuals Parliament, C., Fulton, J. & Lerman, Z. (1989). Cooperatives and investor owned firms: do they march to the same drummer? Staff Paper 89-22, Department of Agricultural and Applied Economics, University of Minnesota, June 1989. Power, G.J., Salin, V. & Park, J.L. (2012). Strategic options associated with cooperative members’ equity. Agricultural Finance Review, 72(1), 48–67. Richards, T. & Manfredo, M. (2003a). Cooperative mergers and acquisitions: the role of capital constraints. Journal of Agricultural and Resource Economics, 28(1), 152–68. Richards, T. & Manfredo, M. (2003b). Post-merger performance of agricultural cooperatives. Agricultural Finance Review, 63(2), 175–92. Royer, J.S. (1992). Cooperative principles and equity financing: a critical discussion. Journal of Cooperatives, 7(20), 79­–98. Royer, J.S. (2003). The base capital plan for managing cooperative equity. Cornhusker Economics, 126. Retrieved at https://​digitalcommons​.unl​.edu/​agecon​_cornhusker/​126 Royer, J.S. & Shihipar, M.L.M. (1997). Individual patron preferences, collective choice, and cooperative equity revolvement practices. Journal of Cooperatives, 12, 47–61. Schrader, L.F. (1989). Equity capital and restructuring of cooperatives as investor-oriented firms. Journal of Agricultural Cooperation, 4, 41–53. Smart, N., Briggeman, B.C., Tack, J. & Perry, E. (2019). Examining U.S. grain marketing and farm supply cooperatives’ sustainable growth rates. Agribusiness, 35(4), 625–38. Soboh, L. & Dijk, V. (2012). Efficiency of cooperatives and investor owned firms revisited. Journal of Agricultural Economics, 63(1), 142–57. Van Der Krogt, D., Nilsson, J. & Host, V. (2007) The impact of cooperatives’ risk aversion and equity capital constraints on their inter-firm consolidation and collaboration strategies—with an empirical study of European dairy industry. Agribusiness, 23(4), 453–72.

PART V SOCIAL, ENVIRONMENTAL AND ECONOMIC IMPACTS

19. Differential economic impacts for cooperative business structures: an application to farmer-owned cooperatives in New York State Todd M. Schmit, Frederick C. Tamarkin, and Roberta M. Severson1

INTRODUCTION Cooperatively structured businesses play an important, but arguably under-valued, role in local, state, and national economies. Cooperative organizations have maintained relevance and even demonstrated dominance in significant sectors of the modern-day business environment, particularly in agriculture and within rural economies in the United States. Indeed, 76 of the cooperatives listed in the National Cooperative Bank’s “Top 100” for 2020 were in agriculture (49), rural electricity (22), and farm credit (5) sectors, with a combined revenue representing 68 percent of the total (NCB 2021). Notably, the top three were all in agriculture: CHS, Dairy Farmers of America, and Land O’Lakes (NCB 2021). Cooperatives are characterized by the consolidation of member-owners who patronize the firm, have limited control rights to the firm’s assets, and possess the residual rights to the firm’s earnings. The goal of the cooperative is designed to further the collective welfare of its member-owners, which may include both pecuniary and non-pecuniary benefits and which can affect spending patterns of the firm and their resultant impacts on local economies (Novkovic 2012; Iliopoulos and Theodorakopoulou 2014; Iliopoulos and Valentinov 2017; Munch et al. 2021). Policymakers and community development agents are increasingly interested in alternative business models for locally owned businesses that will be responsive to community needs and stimulate local economic growth. Cooperatively structured businesses are a tool advocated to address market failures, stimulate a local economy, and improve the social welfare of local member-owners (McNamara et al. 2001; Majee and Hoyt 2011; Theodos et al. 2018; Munch et al. 2021). Accordingly, developing a framework to estimate their economic impacts requires detailed attention to cooperative spending patterns and how they differ from comparable firms organized under different structures. For example, distributing residual earnings to user-owners in proportion to patronage instead of dividends on shareholder investment has important implications.2 Dedicated purchasing of commodities from members for resale or processing and the provision of supplies and services for members may also affect the proportion of economic activity occurring within defined regional economies. Cooperatives that promote a community focus or have competitive advantages in sourcing locally may choose to source additional inputs or services from more localized sources (Fulton and Hammond Ketilson 1992; Zeuli and Deller 2007; ICA Group 2012; Theodos et al. 2018). Particularly when procuring raw farm commodities or supplies to members for resale, locational cost advantages of proximate sourcing 292

Differential economic impacts for cooperative business structures  293 make economic sense regardless of firm structure. However, differences in member pricing, utilization of economic surplus, and more localized spending on other inputs and services can affect a firm’s impact. The challenge in estimating economic contributions for cooperatives is in the proper delineation of expenditures and additional outlays that differ from those of other firms. Collecting primary data for the economic region of study can result in differences in impacts and the distribution of them among local industries; however, the ability and extent of such model customization is often compromised by the cost of primary data collection and rigidities in economic modeling to distinguish differences in economic activity (McFadden et al. 2016; Schmit et al. 2019; Jablonski et al. 2022). The primary issue with existing input-output (IO) and Social Accounting Matrix (SAM) models is that they do not distinguish among business structures; hence, any study estimating the economic impacts of cooperatives requires customization to the unique operations and economic activities (Zeuli and Deller 2007; Uzea 2014).3 However, once this has been done, a comparison of results relative to the “average industry firm” provides empirical evidence of the differences in economic impact for cooperatives versus other firms (Dudensing and Park 2013). Similar to previous work, we utilize IO/SAM methods to assess the economic impacts of cooperative economic activity. A selection of publications estimating the economic impacts of cooperatives through these methods is summarized in Table 19.1.4 While not exhaustive, the list suitably demonstrates differences in model customizations that reflect (or not) differences in economic activities for a cooperative business. Based on the cooperative surveys administered (if available) and author explanations, nearly all account explicitly for employee compensation of cooperative firms; however, most utilize existing (default) industry multipliers with no model customizations of intermediate input expenditures (for example, McNamara 2001; Zeuli et al. 2003; Deller et al. 2009; Park et al. 2009; Duguid et al. 2015; Karaphillis et al. 2015; Karaphillis et al. 2017; Duguid & Karaphillis 2019; Demko et al. 2021). Others limit attention on input purchases to member purchases in marketing cooperatives or total costs of goods sold in supply cooperatives (for example, Folsom 2003; McKee 2011; ICA Group 2012; Herian and Thompson 2016). While this is reasonable in terms of predominant local purchases (and thereby impact), only Coon and Leistritz (2001, 2005), Bhuyan and Leistritz (1996), and Frick et al. (2012) develop customized input spending patterns. Interestingly, based on the authors’ reading of the papers, only about half explicitly account for member distributions of residual earnings (Table 19.1). As expected, nearly all ignore capital investments made by cooperatives. Intermediate transactions do not include capital purchases within an IO framework and, instead, are treated as investments (Horowitz and Planting 2009). This type of expense is distinct from intermediate expenses, as they are motivated to enhance future capacity. Total capital expenses have little bearing on current multiplier estimates because of the intertemporal nature of investments (that is, the costs are incurred today, but the reward is realized in the future). However, should capital purchases accrue through local wholesale or retail businesses, their margin on those purchases is appropriate to include. Only Herian and Thompson (2016) have such expenditures, and they are using total capital investment levels. The primary contribution of this research is to conduct a fully detailed cooperative spending composition and member distributions through the combination of primary data collection (cooperative surveys), detailed review of corresponding annual reports, and aggregate cooperative business volumes from USDA (2021). In particular, we develop full production functions

Canada

Canada

Duguid & Karaphillis (2019)

Karaphillis et al. (2017)

United States

Texas

Deller et al. (2009)

Park et al. (2009)

Agriculture

All

All

Agriculture

IMPLAN

IMPLAN

IMPLAN

IMPLAN

Survey

Federal

Survey

Survey

Survey

Survey

Yes

Yes

Yes

Yes

Yes

No

Limited

Yes

No

Yes

Yes

No

No

No

No

Total

Limited

No

No

No

No

No

No

No

No

No

No

Yes (total)

Investment

a

Notes: Survey = cooperative survey by authors, Federal = federally available data, State = State available data, Database = online business database, Industry = data provided by industry or industry associations. Source: Author compilation.

Wisconsin

Indiana

Zeuli et al. (2003)

McNamara et al. (2001)

Colorado

All

IMPLAN

Minnesota

Folsom (2003)

Yes

Yes

Yes

Survey

Survey, State

No

Authors Authors

All

Montana

Bhuyan & Leistritz (1996)

Frick et al. (2012)

Authors

Yes

All

Yes

North Dakota

Yes

Coon & Leistritz (2001)

Limited

Limited

No

No

No

No

Yes

No

No

inputs Limited

Yes

RIMS II

Yes

No

Yes

distributions

benefits Yes

Customized expenditure categories Member Intermediate

Wages &

Authors

Survey, Industry

IMPLAN

Database

Federal,

Survey

Survey

Data sourcea

IMPLAN

Food

IMPLAN

multipliers

Country, Provincial

IMPLAN

Model base

Coon & Leistritz (2005)

United States

ICA Group (2012)

Rural Electric

Agriculture, Food,

All

Agriculture

Industry

McKee (2011)

Ohio

Manitoba

Demko et al. (2021)

Karaphillis et al. (2015)

British Columbia

Nebraska

Herian & Thompson (2016)

Duuid et al. (2015)

Location

Summary of literature and model customizations to estimate the economic impacts of cooperatives

Author (Year)

Table 19.1

294  Handbook of research on cooperatives and mutuals

Differential economic impacts for cooperative business structures  295 by detailed commodity for four cooperative categories: agricultural marketing cooperatives (MC), agricultural supply and service cooperatives (SSC), rural electric cooperatives (REC), and Farm Credit System cooperatives (FCC) in New York State (NYS). We enumerate both the level of spending and the proportion of that spending made in NYS for each input. Second, all economic activity in NYS is accounted for regardless of cooperative location/headquarters. All RECs (4) and FCCs (2) operating in the state participated and provided publicly available financial reporting data. Gross and net (to avoid double-counting) business volumes for MCs and SSCs operating in NYS are available from USDA (2021). Previous studies have either limited their results to survey respondents or used ad hoc extrapolation approaches to enumerate total economic activity (Table 19.1). Third, we carefully account for the level and type of member distributions (current cash patronage refunds and equity redemptions) to their classification (qualified or unqualified) and appropriately account for income taxes consistent with subchapter T provisions of the Internal Revenue Service (IRS) code. Fourth, we include the wholesale margin on average annual capital expenditures. In particular, marketing cooperatives have substantial asset investments each year. Their margin is included to the degree that they are procured through local agents (as enumerated by our survey). Finally, we compare our cooperative impact results with corresponding industry averages for an equivalent direct output effect. We continue with a review of our analytical framework, followed by a discussion of the data collected, enumeration of direct effects, and composition of cooperative spending patterns. The impact results are discussed next, along with comparison of impacts using standard industry default data. We close with implications of our work and directions for future research.

ANALYTICAL FRAMEWORK As in previous work, we follow an IO modeling approach using the IMPLAN software.5 An argument against using IO methods to measure the contribution of cooperatives to local economies is the inability to account for the unique (financial) relationships cooperatives have with local economies (Zeuli and Deller 2007; Uzea 2014). However, this presumes the use of existing average industry production functions and multipliers from the baseline data and software, for example, with RIMS or IMPLAN. Models in IMPLAN are fully customizable to incorporate alternative production functions based on primary data collection, either within the existing software or by outputting the baseline models, making adjustments, and running the models externally (for example, Schmit and Jablonski 2017). In this sense, IO methods are well designed because, in contrast to more aggregate economic analyses, IO methods differentiate effects by economic sectors. Conventional macroeconomic models trace changes in aggregate economic indicators such as national or regional income, gross national or regional product, and employment. These models, however, do not address the composition of these changes by production sector, nor do they trace the resultant effects throughout the economy (Schmit and Boisvert 2014). IO models can accommodate more sector-specific or region-specific detail than Computable General Equilibrium (CGE) models, given their lower computational burden (Schmit and Boisvert 2014; Jablonski et al. 2022).6 The IO model provides an insightful way to depict and investigate the underlying processes that bind an economy together. Its strengths lie in a detailed representation of the production sector’s primary and intermediate input requirements, the distribution of sales of individual

296  Handbook of research on cooperatives and mutuals industries throughout an economy, and the interrelationships among these industries and other economic sectors of an economy. The methodology’s analytical capacity lies in its ability to estimate the indirect and induced economic effects stemming from the direct expenditures that lead to additional purchases by final users in an economy.7

BOX 19.1 WHAT ARE DIRECT, INDIRECT AND INDUCED EFFECTS? 1.

2.

3.

Direct effects: The set of expenditures applied to the predictive model for impact analysis. It is a series of (or single) production changes or expenditures made by producers and consumers as a result of an activity or policy. These initial changes are determined by an analyst to be a result of this activity or policy. Indirect effects: The impact of local industries buying goods and services from other local industries. The cycle of spending works its way backward through the supply chain until all money leaks from the local economy, either through imports or by payments to value-added. Induced effects: The response by an economy to an initial (direct) change that occurs through re-spending of income received by a component of value-added. IMPLAN’s default multiplier recognizes that labor income (employee compensation and proprietor income) is not a leakage to the regional economy. This money is recirculated through the household spending patterns causing further local economic activity.

Source: IMPLAN (2022).

These indirect and induced changes in economic activity result from what is commonly known as “multiplier” effects throughout the various sectors in the economy (see Box 19.1). An initial expenditure of one dollar and the expansion of output in one sector set in motion a cascading series of impacts in the form of additional expenditures in other sectors. The initial direct spending and resultant indirect increases in business spending are associated with changes in output or sales, changes in employment and income, and changes in payments to land, capital, and other primary factors of production. Part of these direct and indirect effects is in the form of the increased labor income generated in the economy due to the increased economic activity. To the extent that this additional income is spent within the local economy, there are additional effects, referred to as induced impacts. To understand and trace by sector these indirect and induced economic effects resulting from cooperative economic activity, we enumerate direct effects for each cooperative type across several metrics and comprehensively define their spending patterns. In turn, this provides the analytical and empirical basis for estimating the indirect and induced impacts from the initial cooperative direct effects. Multipliers For any individual sector, the output multiplier is defined as the direct plus indirect plus induced sales throughout the economy resulting from a one-dollar increase in sales to final demand.8 However, the total output generated throughout the economy is only one measure of the economic impact due to a direct increase in sales to final demand. To develop comparable

Differential economic impacts for cooperative business structures  297 measures for income and employment multipliers, we must change the comparison base. In the case of an output multiplier, the natural base of comparison is in terms of the same direct change in output. An explanation of the economic metrics used in our analysis is included in Box 19.2.

BOX 19.2 METRICS CONSIDERED IN OUR ANALYSIS 1.

2.

3.

4.

Output: The value of annual industry production, expressed in producer prices. For manufacturers, this would be sales plus/minus change in inventory. For service sectors, production = sales. For retail and wholesale trade, output = gross margin and not gross sales. Labor income: All forms of employment income, including employee compensation (total payroll costs of the employee paid by the employer; that is, wages and benefits) and proprietor income (payments received by self-employed individuals and unincorporated business owners). Value-added: Gross regional product derived from the income paid to owners of the factors of production. It is calculated as the difference between an industry’s total output and the cost of its intermediate inputs. It consists of employee compensation, proprietor income, other property-type income, and net taxes on production and imports. Employment (Jobs): The average number of monthly jobs, both full and part-time.

Source: IMPLAN (2022).

To construct an income multiplier, the natural base of comparison is a direct dollar change in income. Accordingly, we must consider increasing final demand by enough to generate a dollar of income directly. These multipliers are defined as the direct plus indirect plus induced income effect due to a direct increase in income of one dollar. This transformation allows one to level the playing field across sectors regarding direct income changes. In so doing, the size of the income multiplier varies inversely with the direct income coefficient (that is, the dollars of income needed to produce one dollar of goods). The smaller is the share of payments to labor in the total value of outputs; the larger is the income multiplier for that sector. In other words, the smaller the direct income coefficient, the larger the direct change in output per additional dollar of income in that sector. Thus, there is a larger direct change in output to generate indirect and induced changes in sales and income throughout the economy. The logic of changing the base of comparison for the income multiplier extends directly to an employment multiplier, defined as the direct plus indirect plus induced employment for a direct unit change in employment. As in the case of the income multiplier, the employment multiplier tends to be large when the direct employment coefficient (that is, the employment per dollar of output) is small. Furthermore, since wage rates differ by sector, it is unlikely that the employment and income multipliers will be ranked the same across sectors of the economy. Member Distributions Of particular relevance for estimating cooperative economic impacts in an IO framework is accounting for member distributions through cash patronage refunds and redeemed equities.

298  Handbook of research on cooperatives and mutuals Specifically, two issues must be addressed: income tax provisions and the construct through which the distributions are analyzed. Cooperatives benefit from the single taxation principle in the United States; that is, for some distributions, income is taxed at the cooperative level or the member level but not both. To design cooperative production functions in our analysis, income taxes are included in the survey enumeration and directly accountable to net taxes on production and imports (TOPI). Income taxes at the member level depend on the nature of the distribution. For qualified distributions, both the cash and equity portions of the patronage refunds are taxable to the member in the year of distribution. Since tax obligations are satisfied in the year of distribution, there is no tax implication to the member when equity is eventually redeemed. For nonqualified distributions, the distribution is taxable to the member in the year of redemption. Through our detailed financial survey and inspection of annual reports, we appropriately apply income tax rules to member distributions.9 Concerning the analysis of patronage refunds, the literature is mixed. For example, Folsom (2003) considers patronage refunds as part of personal income, Zeuli et al. (2003) treat them as a separate shock to final demand, and Coon and Leistritz (2001, 2005) and Deller et al. (2009) treat them as household income. Differences in the application are reasonable given variation in cooperative types and functions. In our study, we employ different strategies for the household-owned (REC) and farmer-owned (MC, SSC, FCC) cooperatives. Since RECs have farm and non-farm members, member distributions (that is, allocated credits, in their terminology) are allocated as income through household spending patterns.10 In so doing, not all of the distributions to members are spent locally based on their spending pattern. For the farmer-owned cooperatives, we inherently consider their ownership in the cooperative as an extension of their farm business. We assume that member distributions are distributed to the farm business and allocated through average farm-spending patterns on intermediate inputs and value-added components.11 Doing so necessarily implies that not all distributions are spent (for example, allocations to other property income, savings), nor necessarily spent locally (that is, intermediate inputs procured by farms may be nonlocal). Representative Industries By definition, total economic activity within IMPLAN industries includes cooperative and non-cooperative firms. The comparison of “cooperative” and “industry average” impacts is not pure. The degree of overlap depends on the level of cooperative business activity (or market share) within the IMPLAN-defined industries. We compare the economic impact results for each cooperative category based on the data we collect with the respective industry in IMPLAN to which they are assigned based on the nature of their business operations. The average industry results follow IMPLAN’s average (default) industry spending patterns and estimates of local spending (see footnote 2). The larger the share of an industry that cooperatives comprise, the more similar the spending patterns on inputs and allocations to value-added. In so doing, to the degree that cooperatives have higher market shares, the differences in impact will necessarily be more conservative. In any event, they provide a reasonable comparison to the specific impacts accruing to cooperative firms.12 Since no RECs in NYS generate electricity, RECs are compared to the “electric power transmission and distribution” industry in IMPLAN (Industry code 49). FCCs are compared to the combination of “monetary authorities and depository credit intermediation” (433)

Differential economic impacts for cooperative business structures  299 and “nondepository credit intermediation and related activities” (434) industries to reflect the primary competitors of Farm Credit System cooperatives. SSCs are compared to the combination of “retail—building material, farm/garden equipment, and supplies” for supply activities (399) and “support activities for agriculture and forestry” (19) for service activities. Finally, MCs are compared to the combination of IMPLAN industries 79 through 88 to reflect the primary manufacturing industries where agricultural marketing cooperatives operate in NYS, that is, fruit, vegetable, and dairy-product processing.13 For comparisons with multiple industries, cooperative direct output effects are apportioned based on the IMPLAN industry’s relative output in NYS. For NYS, RECs are largely limited geographically, and FCCs are a small proportion of the competitor credit financing available. As opposed to the Midwest and other areas of the United States, agricultural supply and service cooperatives are less common in NYS. The cooperatives that exist commonly encompass both functions. Only in marketing cooperatives, and particularly in dairy processing, do marketing cooperatives hold a relatively large share. Based on our industry comparisons, RECs, FCCs, SSCs, and MCs represent approximately 0.08 percent, 0.15 percent, 0.55 percent, and 37.91 percent of total industry output, respectively.

COOPERATIVE DATA Spending patterns for the four types of cooperatives are based on a survey sent to all agricultural cooperatives operating in NYS in 2016. Importantly, the financial surveys explicitly ask for both the level and percentage of NYS activity attributable to output, intermediate inputs, member distributions, and other value-added components. In combination with corresponding annual reports, we fully allocate output to various intermediate input and value-added sectors. Responding supply, service, and marketing cooperatives were largely limited to larger cooperatives operating in the state. To this degree, the relatively low response rate of all cooperatives in these categories (12 percent) is offset by the large business volumes of the responding firms relative to the totals reported by USDA (92 percent). Given the large reported volume shares, average cooperative spending patterns in the state would largely reflect these larger firms. The output allocations to intermediate inputs, member distributions, and other value-added categories from the 2016 survey are used and applied to the 2019 estimates of net cooperative business volumes for these categories (USDA 2021). There are a small number of Rural Electric (4) and Farm Credit (2) cooperatives operating in the state, and all responded to the 2016 survey. Combined with their annual reports and other public financial reporting documents, we fully allocate output value to intermediate inputs and value-added components. Annual reports and public financial reporting documents from 2019 were used to update output and value-added components while retaining the intermediate input spending pattern from 2016. Farm Credit output includes net interest income (total interest income minus interest payments to CoBank, their funder) and other service income. NYS Direct Effects The direct contributions of agricultural cooperatives in NYS for 2019 are reported in Table 19.2. As expected, marketing cooperatives dominate the totals and include several large cooperatives in fruit and dairy-product manufacturing operating in multiple states. The direct

300  Handbook of research on cooperatives and mutuals Table 19.2 Co-op type

Direct contributions to New York State economy, by cooperative type, 2019 Output

Employee

($M)

compensation

Other property

Value-

Jobs Average capital

distributions income and taxes

Member

added ($M)

purchases ($M)

($M)

($M)a

($M)

29.15

9.55

1.58

8.65

19.78

84

2.17

183.14

38.77

60.84

62.96

162.57

305

1.05

39.90

19.94

0.11

0.84

20.88

180

0.71

Marketing

4,160.55

213.57

28.49

137.35

379.41

4,106

14.67

Total

4,412.74

281.84

91.01

209.80

582.65

4,675

Rural electric Farm credit Supply & service

(whol. margin)

Notes: a Gross cash patronage refunds and equity redemptions prior to income tax adjustments as necessary. Sources: Author survey, Cooperative Annual Reports, USDA (2021).

contributions represent the proportion of total activity attributable to NYS member business based on the survey results. Further, to avoid double-counting and for consistency with wholesale/retail trade industries defined as their margins in IMPLAN, the business volume of supply cooperatives operating in NYS – as wholesale or retail firms – is reduced by the total costs of goods sold (COGS) using the net margin proportion of supply cooperatives in the United States from USDA (2021). State-level margins are not reported; however, the relative margins are likely similar. Recall that for SSCs and MCs we use net business volumes from USDA (2021) to avoid double-counting of economic activity between agricultural cooperatives. Spending Patterns The cooperative spending patterns and comparative industry averages are shown in Table 19.3 (REC, FCC) and Table 19.4 (SSC, MC). To avoid double-counting as goods move along the supply chain, purchases from wholesale and retail trade sectors are margined to reflect only the value of the services provided by these sectors in delivering commodities from producers’ establishments to purchasers. The values of the commodities (in producer prices) are apportioned to one or more deliveries to final demand, depending on the location and allocation of final deliveries.14 As the survey delineation of expenditures is based on total firm output, we show both total output and the output attributable to NYS member business for 2019. Accordingly, gross absorption values (GAV), that is, dollars of expenditure or outlay per $1 of output, are comparable across cooperative and industry categories, but the percentages attributable to NYS activity (%NY) are not. To compare localized spending, total dollars of NYS spending, by category, are shown at the bottom of each table.15 While we leave a detailed examination of the GAVs across components and categories to the interested reader, it is reasonable to conclude the spending patterns are indeed different. For example, in Table 19.3, RECs appear to have a cost advantage of electricity purchases (GAV = 0.260) relative to that of their industry peers (GAV = 0.592). FCCs have relatively similar total intermediate input expenditures per dollar of output, but operate on a model that distributes a relatively high proportion of residual earnings through patronage distributions (GAV = 0.322); comparable profits in the industry aggregate are likely in the form of shareholder dividends and reflected in other property income (GAV = 0.685). In Table 19.4, agricultural supply and service firms have a much larger share of intermediate input purchases per dollar of output (that is, 0.728 versus 0.342), and marketing cooperatives appear to pass

Differential economic impacts for cooperative business structures  301 Table 19.3

Rural electric and farm credit spending patterns and comparative IMPLAN industry averages

Output (2019)a

Electricity Trans. & Distn. Cooperative   Industry 49

Total output ($M)

29.15

New York output ($M)

29.15

Expenditure componentb

 

Credit & Related Services Cooperative   Ind. 433-434 318.82

29.15

GAV

%NY  

Utilities

0.260

100.0

Construction services

0.003

Manufactured goods

183.14

GAV

%NY  

0.000

63.9

0.592

100.0

0.002

0.004

0.7

Wholesale trade services

0.002

Retail trade services Transportation/storage services

183.14

GAV

%NY  

GAV

%NY

41.5

0.003

57.1

0.000

95.2

91.1

0.006

57.1

0.003

91.1

0.008

4.5

0.002

0.0

0.002

9.0

95.3

0.001

94.7

0.001

1.4

0.000

94.7

0.000

100.0

0.000

91.6

0.000

0.5

0.000

86.8

0.000

43.2

0.004

66.2

0.000

0.9

0.002

75.7

Information communications

0.007

66.4

0.001

78.8

0.009

58.0

0.003

73.0

Finance and insurance services

0.014

48.0

Agriculture Mining

Real estate and rental

0.002

98.9

0.006

57.1

0.056

97.3

0.001

89.3

0.001

58.8

0.003

92.0 90.9

Administrative services

0.028

45.0

0.007

90.4

0.082

56.2

0.017

Ent./Accom./Food services

0.002

25.0

0.001

80.0

0.008

57.8

0.005

73.6

Other services

0.001

0.001

48.3  

0.007

57.5  

0.005

57.3

Total intermediate inputs c

0.321

90.3

0.619

42.4

0.125

55.2

0.096

89.8

Employee compensation

0.328

100.0

0.103

100.0

0.214

56.8

0.215

100.0

Prop. inc./Member distns.d

0.054

100.0

0.002

100.0

0.322

59.2

0.004

100.0

Other prop. income + taxes e

0.297

 

 

0.277

 

 

0.339

 

 

0.685

 

Total value-added

0.679

 

 

0.381

 

 

0.875

 

 

0.904

 

Intermediate inputs

8.46

7.64

22.05

15.73

Employee compensation

9.55

3.00

38.76

39.43

Prop. inc./Member distns.

1.58

Cap. purchases (Wh. margin)f

2.17

100.0  

New York Spending ($M) and Jobs

Total NYS spending

21.76

NYS jobsg

84.00

0.04  

 

2.17

60.82  

 

12.85  

 

20.56

1.05

0.66  

 

122.8  

 

305.00

1.05

 

56.87  

 

273.50

 

Notes: a Rural electric co-ops operate fully within NY; farm credit co-ops do business within and outside the state. Total output includes all output regardless of location. NY output is the proportion of total output attributable to NY member business. For appropriate comparison, the level of NY output is assigned to the industry. Farm credit output includes net interest income (interest income from borrowers less interest payments to CoBank for lent funds) and services income. b Gross absorption value (GAV) = dollars of expenditure per $1 of output, %NY = percent of expenditures occurring in NY. %NY for cooperatives are based on total firm output. Accordingly, GAVs are comparable across cooperative and industry categories but %NY are not. Their combination (total NY spending) is shown at the bottom of the table. c Numbers may not add due to rounding. GAVs equal to 0.000 are greater than 0.0000 but less than 0.0005. d For ease of exposition, member distributions are categorized under proprietor income. They are technically analyzed through household and farm-spending patterns, for rural electric and farm credit cooperatives, respectively, with appropriate income tax consequences levied based on the nature of the distributions. e Per convention, other property-type income and taxes on production and imports do not generate additional impact (they are exogenous). They are included here for completeness; by definition, output = intermediate inputs + value-added. f Wholesale margin of average annual capital purchases. For comparison, they are included in industry categories of equal amounts. g NY jobs for cooperatives based on author survey data and USDA (2021). Jobs for industries are equal to their jobs to output ratio multiplied by NY co-op output. Sources: Author survey, IMPLAN (2022).

302  Handbook of research on cooperatives and mutuals on higher prices to their farm supplier members than in the industry aggregate (that is, 0.636 versus 0.349). The levels of NY spending at the bottom of Table 19.3 and Table 19.4 illustrate where cooperative gains in economic impacts accrue and, not surprisingly, vary by type of cooperative. For example, REC impact gains accrue largely through higher employment/wages and patronage refunds, while relative FCC benefits are generated from member distributions of residual earnings. SSC impact gains largely accrue through more localized spending on intermediate inputs, and employee compensation to a lesser degree. Finally, MC impact gains accrue primarily through local intermediate input purchases, and patronage refunds to a lesser degree. The nature of these differences in spending will necessarily carry through to the results presented next. In any event, based on the industry aggregates used for comparison, total NYS spending is higher for each cooperative category relative to average industry firms.

EMPIRICAL RESULTS The economic impact results are summarized in Tables 19.5 and 19.6. Table 19.5 presents the total results and results differentiated by spending (that is, on intermediate inputs, employee compensation, and the margined capital purchases) and member distribution categories. Table 19.6 compares the total results for cooperatives relative to the industry aggregates selected. Economic Impacts and Multipliers The total direct, indirect, and induced effects of cooperative business activity in NYS are summarized on the left side of Table 19.5. We include metrics on jobs, labor income, and output. For cooperatives, direct labor income is defined as employee compensation and member distributions (Table 19.2); for the industry aggregates, direct labor income encompasses employee compensation and proprietor income. RECs in NYS contribute to a total of 180 jobs, $18.7 million in labor income, and $53.7 million in total output. Compared to the initial direct effects, computed multipliers are 2.14, 1.68, and 1.84, respectively. To interpret, every job employed directly by RECs generates an additional 1.14 in backward-linked industry sectors. Similarly, every $1 in the income generated by the cooperative creates an additional $0.68 in income in other sectors in the NYS economy. The differences in indirect and induced effects distinguish impacts accruing from business-to-business input transactions and spending out of income, respectively. An additional $0.35, $0.96, and $5.50 are generated in backward-linked industries for each dollar of income generated in FCC, SSC, and MC. Food manufacturing multipliers are relatively large in NYS due to large agricultural production sectors, and, in the case of cooperatives, from their members. The comparable number to MC for the average industry aggregate (79-88) is $3.03 (Table 19.6). The difference between the multipliers, as discussed above, is primarily due to a lower labor income coefficient; that is, the amount of labor income per dollar of output for cooperatives is lower (0.06) than it is for the average industry firm (0.10).16 In comparing the results, the levels of multipliers should be evaluated in conjunction with, and not instead of, the total impacts generated. The middle and rightmost columns of Table 19.5 delineate economic impacts for cooperatives between spending activities and member distributions. In an IO framework, the direct,

Differential economic impacts for cooperative business structures  303 Table 19.4

Agricultural supply & service and marketing cooperative spending patterns and comparative IMPLAN industry averages Ag Supply & Support Services

Output (2019)a Total output ($M) New York output ($M) Expenditure Componentb

Cooperative

 

Food Manufacturing  

Ind. 19 & 399

248.2

 

Ind. 79-88

22,710.52

39.90 GAV

Cooperative

39.90 %NY  

4,160.55

4,160.55

GAV

%NY  

GAV

%NY  

GAV

%NY

Agriculture

0.002

17.2

0.636

16.4

0.349

77.2

Mining

0.000

15.2

0.001

0.1

Utilities

0.009

25.7

0.012

97.2

0.007

13.1

0.011

94.8

Construction services

0.004

42.1

0.004

91.1

0.003

5.9

0.004

91.1

Manufactured goods

0.263

3.3

0.029

16.0

0.221

6.0

0.314

25.1

Wholesale trade services

0.001

9.8

0.016

94.7

0.015

9.1

0.004

82.1

Retail trade services

0.003

10.4

0.005

86.9

0.000

0.9

0.004

82.1

Transportation/storage services

0.061

14.5

0.038

65.8

0.025

10.0

0.044

52.1

Information communications

0.048

19.8

0.014

75.6

0.001

11.8

0.003

78.2

Finance and insurance services

0.023

16.3

0.022

95.1

0.002

11.6

0.004

97.5

Real estate and rental

0.100

24.4

0.090

91.4

0.005

9.9

0.003

82.2

Administrative services

0.095

2.1

0.097

91.7

0.007

4.2

0.034

91.3

Ent./Accom./Food services

0.061

18.4

0.004

83.6

0.001

7.3

0.002

75.6

Other services

0.058

13.7  

0.010

66.3  

0.007

11.7  

0.006

49.7

Total intermediate inputsc

0.728

13.7

0.342

81.0

0.929

13.4

0.869

59.7

Employee compensation

0.252

31.9

0.411

100.0

0.050

18.9

0.094

100.0

Prop. inc./Member distns.d

0.004

11.5

0.037

100.0

0.004

31.9

0.002

100.0

 

0.210

 

0.017

 

 

0.034

 

0.071

 

 

0.131

 

Other Prop. income + Taxese

0.016

Total value-added

0.272

Intermediate inputs

20.10

11.06

2,823.38

2,157.16

Employee compensation

19.94

16.42

213.57

391.68

Prop. inc./Member distns.

0.11

1.46

28.49

Cap. purchases (Wh. margin)f

0.71

Total NYS Spending NYS Jobsg

 

 

 

40.86 179.82

 

    0.658     New York Spending ($M) and Jobs

0.71

 

 

29.65  

 

427.13

14.67

10.15  

 

3,080.10  

 

4,106.48

14.67

 

2,573.69  

 

6,130.24

 

Notes: Supply and Service and Marketing cooperatives do business within and outside the state. Total output includes all output regardless of location. NY output is the proportion of total output attributable to NY member business. For appropriate comparison, the level of NY output is assigned to the industry. Business volume for supply cooperatives represents the net margin, total sales less the cost of goods sold (USDA 2021). b Gross absorption value (GAV) = dollars of expenditure per $1 of output, %NY = percent of expenditures occurring in NY. %NY for cooperatives are based on total firm output. Accordingly, GAVs are comparable across cooperative and industry categories but %NY are not. Their combination (total NY spending) is shown at the bottom of the table. c Numbers may not add due to rounding. GAVs equal to 0.000 is greater than 0.0000 but less than 0.0005. d For ease of exposition, member distributions are categorized under proprietor income. They are technically analyzed through farm-spending patterns, with appropriate income tax consequences levied based on the nature of the distributions. e Per convention, other property type income and taxes on production and imports do not generate additional impact (they are exogenous). They are included here for completeness; by definition, output = intermediate inputs + value-added. f Wholesale margin of average annual capital purchases, scaled by net cooperative business volume (USDA 2021). For comparison, they are included in industry categories of equal amounts. g NY jobs for cooperatives based on author survey data and USDA (2021). Jobs for industries are equal to their jobs to output ratio multiplied by NY co-op output. Sources: Author survey, IMPLAN (2022). a

304  Handbook of research on cooperatives and mutuals Table 19.5

Agricultural cooperative economic contributions in New York State, by cooperative category and type of outlay  

Total Labor

Effect

Spendinga Labor

 

Member Distributionb Labor Income

Output

Jobs

($M)

($M) Jobs ($M)   Rural Electric Cooperatives

($M)  

Jobs

($M)

($M)

Direct

84.00

11.14

29.15

79.44

9.55

27.56

4.56

1.58

1.58

Indirect

40.90

4.14

15.20

32.20

3.59

13.69

8.70

0.55

1.50

Induced

54.90

3.43

52.70

3.29

2.20

0.14

0.37

179.80

18.70

164.34

16.43

50.21

15.46

2.27

3.46

2.14

1.68

Direct

305.00

99.61

183.14

203.68

38.77

122.30

101.32

60.84

60.84

Indirect

232.90

17.48

43.16

141.60

13.31

28.52

91.30

4.17

14.64

Induced

285.10

17.77

48.37

208.90

13.03

35.48

76.20

4.74

12.89

Total

823.00

134.86

274.67

554.18

65.11

186.31

268.82

69.75

88.36

2.70

1.35

Direct

179.82

20.05

39.90

179.33

19.94

39.80

0.48

0.11

0.11

Indirect

151.20

11.39

33.18

151.00

11.38

33.16

0.20

0.01

0.02

Induced

125.80

7.85

21.36

125.70

7.84

21.34

0.10

0.01

0.02

Total

456.82

39.28

94.45

456.03

39.15

94.29

0.78

0.12

0.15

2.54

1.96

Income

Total Multiplierc

Multiplier

Multiplier Direct

Income

Output

9.33   53.67

Output

8.95  

1.84 Farm Credit Cooperatives

1.50 Agricultural Supply and Service Cooperatives

2.37 Agricultural Marketing Cooperatives

4,106.48

242.06

4,160.55

4,078.36

213.57

4,132.06

28.12

28.49

28.49

Indirect

15,950.80

1,014.93

3,845.13

15,910.40

1,013.08

3,838.65

40.40

1.85

6.49

Induced

5,063.10

315.34

857.64

5,029.70

313.26

851.97

33.40

2.08

5.67

25,120.38

1,572.33

8,863.32

25,018.46

1,539.91

8,822.67

101.92

32.42

40.65

6.12

6.50

Total Multiplier Direct

2.13 All Agricultural Cooperatives

4,675.30

372.85

4,412.74

4,540.82

281.84

4,321.73

134.48

91.01

91.01

Indirect

16,375.80

1,047.93

3,936.67

16,235.20

1,041.35

3,914.02

140.60

6.58

22.65

Induced

5,528.90

344.39

936.70

5,417.00

337.42

917.74

111.90

6.97

18.96

26,580.00

1,765.17

9,286.11

26,193.02

1,660.61

9,153.49

386.98

104.56

132.62

5.69

4.73

2.10

Total Multiplier

Notes: Spending includes intermediate inputs, employee compensation, and the wholesale margin on capital purchases. Direct labor income represents only employee compensation. b Direct labor income represents the value of member distributions. Direct, indirect, and induced effects are additive across spending and member distribution categories. As such, the direct employment and output effects for member distribution represent the number of jobs required to produce that value of output for redistribution to members. Income tax consequences are accounted for in the impact calculations; that is, the direct effects here are gross distributions. c Multipliers are computed for the total direct effects. Multiplier defined as the total effect (direct + indirect + induced) divided by the direct effect. Sources: Author survey, IMPLAN (2022). a

Differential economic impacts for cooperative business structures  305 indirect, and induced effects are additive (linear) across these categories. As such, the direct employment and output effects for member distributions represent the number of jobs required to produce that value of output for redistribution to members. Naturally, for cooperatives with higher member distributions per dollar of output (for example, FCC), the proportions of total economic impact attributable to member distributions are higher. For those with limited patronage refunds (for example, SSC), nearly all impacts are attributable to their local spending activity. In the case of marketing cooperatives, paying members higher prices for their products will reduce profit distributions available to members (reducing impacts from member distributions). However, it will increase the impact of cooperative spending activities due to the higher prices. Only to the degree that the relative level of patronage refunds (to output) is stable over time do the distinctions of cooperative impact across spending and member distributions categories hold. Naturally, profits (and residual earnings to members) can and do change over time. Further, determinations of member pricing and distributions of residual earnings are board decisions and subject to variation over time given market conditions and cooperative strategy. For ease of exposition, we leave a detailed review of the impact results to the interested reader. In summary, agricultural cooperatives in NYS contributed to more than 26,000 jobs, nearly $1.8 billion in labor income, and over $9.2 billion in total output (Table 19.5). We next attend to how these results would look if, instead, the same levels of direct output were channeled through the average industry firm. Industry Comparison Table 19.6 summarizes the economic impact results if the level of direct output of the cooperative was instead channeled through the industry aggregate firms. By definition, the direct output effect is identical to the cooperatives. However, the number of direct jobs and allocation to labor income are determined by the industries’ average jobs to output and labor income to output ratios, respectively. Identical modeling activities were applied in IMPLAN and, ultimately, reflect the differences in spending patterns illustrated in Table 19.3 and Table 19.4. Given the higher levels of total NYS spending by cooperatives, higher total output effects for cooperatives are expected. However, given differences in direct job coefficients and the distributions of spending on intermediate inputs and value-added components, positive or negative differences can result across individual direct, indirect, and induced categories. Higher jobs and labor income coefficients for RECs contribute to the large increases in those total effects (more than double), while the change in total output is more modest, albeit substantial (+16 percent). Large patronage distributions drive the positive changes for FCCs. A negative change in total jobs for SSCs is driven by the lower direct jobs coefficient, even though both the indirect and induced jobs effects changes are positive. As jobs are, arguably, a cruder measure of impact (that is, not all jobs are created equal), the relatively large labor income results for SSCs (for direct, indirect, and induced effects) give a more meaningful result (+34 percent). Finally, a lower direct jobs coefficient for marketing cooperatives is offset by larger indirect effects due to higher local spending on intermediate inputs. Given the larger market shares for MCs within the IMPLAN 79-88 aggregate, the more modest percentage changes are expected. Given differences in cooperative functions and spending allocations across cooperative types, it is expected that the results, when compared to the average industry firm, will vary.

306  Handbook of research on cooperatives and mutuals Table 19.6

Effect

Comparison of New York State cooperative economic impacts and average industry defaults for same level of direct output  

Cooperativesa Labor Income Jobs

 

Industry defaultb Labor Income

Output

Co-op percent changec

Output

Labor

($M) ($M)   Jobs Jobs ($M) ($M)   Electricity Transmission and Distribution (Industry default = IMPLAN 49)

Income

Output

Direct

84.00

11.14

29.15

20.56

3.04

29.15

308.6

266.1

0.0

Indirect

40.90

4.14

15.20

30.20

3.29

12.66

35.4

25.7

20.1

3.43

9.33

25.50

1.59

4.32

115.3

115.6

115.7

18.70 53.67 76.26 7.92 46.13 135.8 Credit and Related Services (Industry default = IMPLAN 433-434)

136.0

16.4

Induced

54.90

Total

179.80

Direct

305.00

99.61

183.14

273.50

40.09

183.14

11.5

148.5

0.0

Indirect

232.90

17.48

43.16

92.50

10.60

22.27

151.8

64.9

93.8

Induced

285.10

17.77

48.37

207.40

12.94

35.22

37.5

37.4

37.3

Total

823.00

134.86 274.67 573.40 63.62 240.63 43.5 Agricultural Supply and Service (Industry default = IMPLAN 19, 399)

112.0

14.1

Direct

179.82

20.05

39.90

427.13

17.87

39.90

-57.9

12.2

0.0

Indirect

151.20

11.39

33.18

68.70

5.56

15.55

120.1

104.8

113.4

Induced

125.80

7.85

21.36

94.10

5.87

15.97

33.7

33.7

33.7

Total

456.82

39.28 94.45 589.93 29.30 71.43 -22.6 Food Processing and Marketing (Industry default = IMPLAN 79-88)

34.1

32.2

Direct Indirect Induced Total Direct Indirect Induced Total

4,106.48

242.06

4,160.55

6,130.24

401.86

4,160.55

-33.0

-39.8

0.0

15,950.80

1,014.93

3,845.13

12,215.60

891.16

3,018.33

30.6

13.9

27.4

315.34

857.64

5,248.00

327.10

890.02

-3.5

-3.6

-3.6

1,572.33 8,863.32 23,593.84 1,620.11 8,068.90 6.5 Total Industries (Industry default = IMPLAN, 19, 49, 79-88, 399, 433-434)

-2.9

9.8

5,063.10 25,120.38 4,675.30

372.85

4,412.74

6,851.41

462.86

4,412.74

-31.8

-19.4

0.0

16,375.80

1,047.93

3,936.67

12,407.00

910.61

3,068.80

32.0

15.1

28.3

5,528.90

344.39

936.70

5,575.00

347.49

945.54

-0.8

-0.9

-0.9

26,580.00

1,765.17

9,286.11

24,833.41

1,720.96

8,427.09

7.0

2.6

10.2

Notes: a Labor income includes employee compensation and member distributions for cooperatives and employee compensation and proprietor income for the industry averages. b Comparative industries in IMPLAN (code) include: Support activities for agriculture and forestry (19), Electric power transmission and distribution (49), Frozen fruits, juices and vegetables manufacturing (79), Frozen specialties manufacturing (80), Canned fruits and vegetables manufacturing (81), Canned specialties (82), Dehydrated food products manufacturing (83), Fluid milk manufacturing (84), Creamery butter manufacturing (85), Cheese manufacturing (86), Dry, condensed, and evaporated dairy product manufacturing (87), Ice cream and frozen dessert manufacturing (88), Retail – building material and farm/garden equipment and supplies stores (399), Monetary authorities and depository credit intermediation (433), and Nondepository credit intermediation and related activities (434). The level of cooperative output (direct effect) is apportioned to industries by their relative contribution to total industry output for each category. c Cooperative activity is included in the total industry estimates in IMPLAN. The percentage of cooperative output in NYS relative to total industry estimates are 0.08 percent, 0.15 percent, 0.55 percent, and 37.91 percent, for rural electric, Farm Credit, supply and service, and food processing cooperatives respectively. Sources: Author survey, IMPLAN (2022).

Differential economic impacts for cooperative business structures  307 Ultimately, higher levels of NYS spending necessarily contribute to positive percentage changes for cooperatives given the same direct output effect. In total, cooperative economic impacts were 7.0 percent, 2.6 percent, and 10.2 percent larger with respect to jobs, labor income, and industry output relative to the average industry firm (Table 19.6).

CONCLUSIONS Economic impact assessments are based on the level and location of spending relative to the local economy of interest. To that end, analyzing any business structure requires careful attention to their representative spending patterns on intermediate inputs, spending on employee compensation, and how firm profits are allocated and utilized. Cooperative spending patterns may differ based on the location of the member business, attention to local sourcing of inputs, and how residual earnings are allocated. Given a generally common goal to focus on “community” and “local economies,” it was hypothesized that cooperatives (in aggregate) generate larger economic impacts than the average industry firm. To analyze this ultimately requires detailed financial information and an appropriate “industry average” for comparison. Our hypothesis is generally confirmed; however, more detailed inspections on industry metrics (for example, jobs versus output) or within the total effects (for example, direct versus indirect versus induced effects) reveal that not all effects are necessarily larger for cooperatives. This is not a failing on the part of cooperatives but rather a result of differences in business operations, particular sub-industry distinctions, and existing market conditions. Remember, economic impact assessments provide a “snapshot” of economic activity over a given period; these snapshots can and do change over time. Is it possible to find an investor-owned firm (IOF) whose mission includes supporting local businesses (through local input purchases) and distributing dividends to local investors that are then spent locally? Of course, in that case, the comparison to a similarly structured cooperative may show little differences in impact. The objectives of this research were to (1) develop a comprehensive framework to incorporate the uniqueness of cooperative business operations and influence economic impact, (2) enumerate representative spending patterns for agricultural cooperatives in NYS, and (3) assess the differences in economic impacts of the “average” cooperative to the “average” industry firm. To this end, we were successful. However, the results should be viewed as one, not the only, measure of cooperatives’ impact on local economies. The definition of “impact,” particularly in the research of cooperatives, transcends current financial and economic impacts. Indeed, capturing the value related to countervailing market power, missing goods and services, and local economic stability remains outside the scope of the research study (Uzea 2014; Uzea and Duguid 2015). These are not simple problems to solve. The literature has explored issues related to addressing market failures, albeit primarily through analyzing market power and effects at the firm level, without particular attention to local welfare effects or impacts on local communities (Zeuli and Deller 2007). Further, econometric approaches regarding cooperative longevity proposed by Zeuli and Deller (2007) remain ripe for exploration given the availability of business data that specifies firm business structure. How do local economies look in the absence of cooperatives? How does one estimate prices received (paid by members) in the absence of the cooperative? An assessment of these counterfactuals needs new thinking and new approaches to address them (Uzea and Duguid 2015).

308  Handbook of research on cooperatives and mutuals Additional research on the value members ascribe to democratic control and ownership rights is only beginning to be enumerated (for example, Munch et al. 2021). Are member value gains additive to or a proper offset of, perhaps, lower economic impact? Furthermore, what is the value and impact of social and human capital gains of members and communities due to member participation and cooperative activity (Novkovic 2012)? An extensive literature exists on evaluating community capitals and their impact on local economies or various forms of business activity (Schmit et al. 2017). Opportunities to link new data on community capital assets (for example, Schmit et al. 2021) with cooperative business activity provide unique opportunities to address new and lingering issues of cooperative research. Careful examination of these issues is a top priority for our continuing research.

NOTES 1.

2.

3.

4. 5.

6. 7. 8. 9. 10.

This work was supported by the United States Department of Agriculture, National Institute of Food and Agriculture, Smith Lever 2014-15-268. We are thankful to the Northeast Cooperative Council for their assistance in survey efforts and data collection, along with follow up interviews with the responding cooperatives. We also thank an anonymous reviewer for helpful comments and suggestions. The authors have no financial interest in or benefit from the direct application of this research. The views expressed are the authors’ and do not necessarily represent the policies or views of any sponsoring firms or agencies. All errors remain our sole responsibility. Cooperatives can distribute residual earnings through dividends based on investment (to members and/or nonmembers based on the organization’s bylaws), but this is less common and is not subject to the single taxation principle (subchapter T) of the Internal Revenue Service like patronage refunds. Cooperatives can also retain earnings (unallocated to members) within the organization with comparable tax effects as other businesses. For example, industry spending patterns in IMPLAN (a commonly utilized resource in economic impact studies) depict gross intermediate input purchases per dollar of output that are invariant across defined local economies (for example, fruit farming in Washington State has an identical intermediate input spending pattern as in New York). Furthermore, the percentages of inputs purchased locally are based on gravity flow models that restrict all purchasers (industries and institutions) of inputs to source identical local proportions (IMPLAN 2020). Zeuli and Deller (2007), Deller et al. (2009), Uzea (2014), and Uzea and Duguid (2015) provide more detailed discussions of alternative methods used in the literature and the benefits and costs in using them. Technically, we incorporate our analysis into a state-level IMPLAN SAM. A typical SAM provides a mapping into functional categories for households, usually based on household income class; however, the IMPLAN SAM does not serve this purpose except under restricted conditions (Alward and Lindall 1996). For more information comparing alternative model strategies, benefits, and limitations to estimating economic impacts of cooperatives see Zeuli and Deller (2007), Uzea (2014), and Uzea and Duguid (2015). There are many standard texts on IO methods; for example, Yan (1969), Richardson (1972), Miller et al. (1989), and Miller and Blair (2009) discuss some of the more advanced topics in IO analysis. Final demand is the value of goods and services produced and sold to final users during the calendar year. Final use means that the good or service will be consumed and not incorporated into another product. Survey instruments are available from the authors upon request. Since IMPLAN currently has nine household spending categories by income level, we chose the middle category, with annual income between $50,000 and $75,000. As allocated credits are a small proportion to total output, this particular choice has little effect on the final impact results.

Differential economic impacts for cooperative business structures  309 11. An average farm spending pattern is constructed (including intermediate inputs and allocations to value-added) based on farm industries in IMPLAN associated with the types of cooperatives modeled (that is, fruit, vegetable, and dairy farming), and weighted by level of industry output. 12. All results are modeled through an Analysis-by-Parts approach in IMPLAN to which spending on intermediate inputs, employee compensation, and proprietor income (member distributions for cooperatives) are defined separately based on the data collected (Lucas 2019). An alternative approach is to create new cooperative industry sectors based on the data collected and subtract their economic activity from the IMPLAN industries they comprise (for example, Schmit and Jablonski 2014). Impacts can then be assessed directly through standard IMPLAN approaches. However, as the degree of market share for cooperatives in an industry falls, the results from both approaches will be more similar. 13. Specifically, these industries include “frozen fruits, juices and vegetables manufacturing” (79), “frozen specialties manufacturing” (80), “canned fruits and vegetables manufacturing” (81), “canned specialties” (82), “dehydrated food products manufacturing” (83), “fluid milk manufacturing” (84), “creamery butter manufacturing” (85), “cheese manufacturing” (86), “dry, condensed, and evaporated dairy product manufacturing” (87), and “ice cream and frozen dessert manufacturing” (88). 14. The cooperative surveys specifically ask whether input purchases are from producer (farm or manufacturing), wholesale, retail, or service sectors. Margins are applied where applicable. 15. Specifically, NYS spending for cooperatives is equal to total output times GAV times %NY. NYS spending for industry aggregates is equal to NY output times GAV times %NY. 16. Using the direct labor income and output values, the labor income coefficient for marketing cooperatives is calculated as 242.06 / 4160.55 = 0.058 (Table 19.5). For the average industry firm, it is 401.86 / 4160.55 = 0.096 (Table 19.6).

REFERENCES Alward, G. and S. Lindall, 1996. Deriving SAM multipliers using IMPLAN. Paper presented at the 1996 IMPLAN Users Conference, Minneapolis, MN. Bhuyan, S. and F.L. Leistritz. 1996. Economic impacts of cooperatives in North Dakota, 1996. AE 96009. Department of Agribusiness & Applied Economics, North Dakota State University, Fargo, ND. http://​dx​.doi​.org/​10​.22004/​ag​.econ​.121043 Coon, R.C. and F.L. Leistritz. 2005. Economic contribution North Dakota cooperatives make to the state economy. AAE 05001, Department of Agribusiness & Applied Economics, North Dakota State University, Fargo, ND. http://​dx​.doi​.org/​10​.22004/​ag​.econ​.23663 Coon, R.C. and F.L Leistritz. 2001. Economic contribution North Dakota cooperatives make to the state economy. AE 20011. Department of Agribusiness & Applied Economics, North Dakota State University, Fargo, ND. http://​dx​.doi​.org/​10​.22004/​ag​.econ​.23678 Deller, S., A. Hoyt, B. Hueth and R. Sundaram-Stukel. 2009. Research on the economic impact of cooperatives. University of Wisconsin Center for Cooperatives, Department of Agricultural and Applied Economics, University of Wisconsin—Madison. https://​resources​.uwcc​.wisc​.edu/​Research/​ REIC​_FINAL​.pdf Demko, I., I.L. Knight and H. Scott. 2021. Cooperatives in Ohio’s economy: their contribution and the impact of Covid-19. Urban Publications. https://​engagedscholarship​.csuohio​.edu/​urban​_facpub/​1749 Dudensing, R. and J.L. Park. 2013. Assessing economic impacts of agricultural cooperatives. Mid-Continent Regional Science Association Conference Proceedings, pp.77–81. www​.mcrsa​.org/​ wp​-content/​uploads/​2018/​03/​MCRSA​-2013​-Proceedings​-1​.pdf Duguid, F. and G. Karaphillis. 2019. Economic impact of the co-operative sector in Canada. Cooperatives and Mutuals of Canada. https://​canada​.coop/​wp​-content/​uploads/​2021/​04/​coop​_gdp​_report​_english​ _web​.pdf Duguid, F., G. Karaphillis and A. Lake. 2015. Economic impact of the co-operative sector in Manitoba (2010). Manitoba Co-operative Association, Winnipeg, Manitoba. www​ .manitoba​ .coop/​ uploads/​ Resources/​Manitoba​%20Co​-op​%20Impact​%20Study​%20​-​%20FINAL​.pdf

310  Handbook of research on cooperatives and mutuals Folsom, J. 2003. Measuring the economic impact of cooperatives in Minnesota. RBS Research Report 200, United States Department of Agriculture, Rural Business Cooperative Service. Washington, DC. www​.rd​.usda​.gov/​sites/​default/​files/​RR200​.pdf Frick, M., J. Sheehy and A. Nedanov. 2012. Economic contribution Montana cooperatives make to the state economy. Division of Agricultural Education, Montana State University. https://​bib​.irb​ .hr/​datoteka/​604748​.FRICK​_Economic​_Contribution​_Montana​_Cooperatives​_Make​_to​_the​_State​ _Economy​.pdf Fulton, M. and L. Hammond Ketilson. 1992. The role of cooperatives in communities: examples from Saskatchewan. Journal of Agricultural Cooperation 7: 15–42. http://​dx​.doi​.org/​10​.22004/​ag​.econ​ .46281 Herian, M. and E. Thompson. 2016. The economic impact and tax revenue impact of Nebraska supply/ marketing and regional cooperatives. Bureau of Business Research Report. University of Nebraska – Lincoln. www​.nebr​.coop/​wp​-content/​uploads/​2016/​04/​Economic​-Impact​-Report​-14April2016​-final​ .pdf Horowitz, K.J. and M.A. Planting. 2009. Concepts and Methods of the Input-Output Accounts. Washington, DC: U.S. Department of Commerce, Bureau of Economic Analysis. ICA Group. 2012. Healthy Foods, Healthy Communities: Measuring the Social and Environmental Impact of Food Co-ops. Northampton, MA. https://​icagroup​.org/​wp​-content/​uploads/​2019/​04/​Healthy​ -Foods​-Healthy​-Communities​.pdf Iliopoulos, C. and I. Theodorakopoulou. 2014. Measuring and communicating the true value of membership: the case of the Pindos Poultry Co-operative. In T. Mazzarol, S. Reboud, E.M. Limnios, and D. Clark (eds) Research Handbook on Sustainable Co-operative Enterprise: Case Studies of Organizational Resilience in the Cooperative Business Model (p.223). Cheltenham: Edward Elgar Publishing. Iliopoulos, C. and V. Valentinov. 2017. Member preference heterogeneity and system-lifeworld dichotomy in cooperatives: an exploratory case study. Journal of Organizational Change Management 30: 1063–80. https://​doi​.org/​10​.1108/​JOCM​-12​-2016​-0262 IMPLAN. 2020. IMPLAN’s gravity model and trade flow RPCS. IMPLAN Group, Huntersville, NC, USA. https://​support​.implan​.com/​hc/​en​-us/​articles/​360008406173​-IMPLAN​-s​-Gravity​-Model​-and​ -Trade​-Flow​-RPCs IMPLAN. 2022. IMPLAN glossary, software, and New York State data. IMPLAN Group, Huntersville, NC, USA. https://​support​.implan​.com/​hc/​en​-us Jablonski, B.B.R., J.K. O’Hara, A. Bauman, T.M. Schmit and D. Thilmany. 2022. Using input-output analysis to estimate the economic impacts of food system initiatives. Ch. 8 In C.J. Peters and D.D. Thilmany (eds) Food Systems Modeling: Tools for Assessing Sustainability in Food and Agriculture (pp.157–79). Cambridge, MA: Elsevier. https://​doi​.org/​10​.1016/​B978​-0​-12​-822112​-9​.00002​-3 Karaphillis, G., F. Duguid and and A. Lake. 2017 Economic impact of the Canadian co-operative sector (2009 and 2010). International Journal of Social Economics 44(5): 643–52. https://​doi​.org/​10​.1108/​ IJSE​-09​-2015​-0225 Karaphillis, G., F. Duguid and A. Lake. 2015. Economic impact of the co-operative sector in British Columbia (2010). British Columbia Co-operative Association, Guelph, British Columbia. Lucas, M. 2019. IMPLAN Pro: the basics of analysis-by-parts. IMPLAN Group: Huntersville, NC. https://​support​.implan​.com/​hc/​en​-us/​articles/​115002799353​-IMPLAN​-Pro​-The​-Basics​-of​-Analysis​ -by​-Parts Majee, W. and A. Hoyt. 2011. Cooperatives and community development: a perspective on the use of cooperatives in development, Journal of Community Practice 19(1): 48–61. https://​doi​.org/​10​.1080/​ 10705422​.2011​.550260 McFadden, D., D. Conner, S. Deller, D. Hughes, K. Meter, A. Morales, T. Schmit, D. Swenson, A. Bauman, M.P. Goldenberg, R. Hill. B.B.R. Jablonski and D. Tropp. 2016. The Economics of Local Food Systems: A Toolkit to Guide Community Discussions, Assessments & Choices. Washington, DC: United States Department of Agriculture, Agriculture Marketing Service. www​ .ams​ .usda​ .gov/​publications/​content/​economics​-local​-food​-systems​-toolkit​-guide​-community​-discussions​ -assessments

Differential economic impacts for cooperative business structures  311 McKee, G. 2011. The economic contribution of North Dakota cooperatives to the North Dakota state economy. Agribusiness & Applied Economics Report No. 687. North Dakota State University, Fargo, ND. October. http://​dx​.doi​.org/​10​.22004/​ag​.econ​.117167 McNamara, K.T., J. Fulton and S. Hine. 2001. The economic impacts associated with locally owned agricultural cooperatives: a comparison of the Great Plains and the Eastern Cornbelt. Selected Paper, NCR-194 Research on Cooperatives Annual Meeting, October 30, 2001, Las Vegas, Nevada. https://​ ageconsearch​.umn​.edu/​bitstream/​31819/​1/​cp02mc23​.pdf Miller, R. and P. Blair. 2009. Input-Output Analysis: Foundations and Extensions, 2nd edition. Cambridge: Cambridge University Press. Miller, R.E., K.R. Polenske and A.Z. Rose (eds). 1989. Frontiers of Input-Output Analysis. New York: Oxford University Press. Munch, D.M., T.M. Schmit, and R.M. Severson. 2021. Assessing the value of cooperative membership: a case of dairy marketing in the United States. Journal of Co-operative Organization and Management 9(1): 100–29. https://​doi​.org/​10​.1016/​j​.jcom​.2021​.100129 National Cooperative Bank (NCB). 2021. Build Back for Impact: America’s Top Co-op Companies. New York, NY. https://​impact​.ncb​.coop/​hubfs/​assets/​resources/​NCB​-Co​-op​-100​-2021​.pdf Novkovic, S. 2012. The balancing act: reconciling the economic and social goals of co-operatives. In M.-J. Brassard and E. Molina (eds). The Amazing Power of Co-operatives (pp. 289–99). Quebec: Sommet international des cooperatives. Park, J.L., J.R. Baros and R.M. Dudensing. 2009. Communicating the value of Texas cooperatives: locally-owned agricultural cooperatives. RBD09-01, Roy B. Davis Cooperative Management Program, Texas AgriLife Extension Service, College Station, TX. https://​1yoo​7k3mjej72y​4ffj396xcv​ -wpengine​.netdna​-ssl​.com/​wp​-content/​uploads/​2013/​08/​Communicating​_Cooperative​_Value​.pdf Richardson, H.W. 1972. Input-Output and Regional Economics. New York, NY: Wiley. Schmit, T.M. and R.N. Boisvert. 2014. Agriculture-based economic development in New York State: assessing the inter-industry linkages in the agricultural & food system. EB 2014-03, Charles H. Dyson School of Applied Economics & Management, Cornell University. http://​publications​.dyson​.cornell​ .edu/​outreach/​extensionpdf/​2014/​Cornell​-Dyson​-eb1403​.pdf Schmit, T.M. and B.B.R. Jablonski. 2017. A practitioner’s guide to conducting an economic impact assessment of regional food hubs using IMPLAN: a systematic approach. EB 2017-01, Charles H. Dyson School of Applied Economics & Management, Cornell University. http://​publications​.dyson​ .cornell​.edu/​outreach/​extensionpdf/​2017/​Cornell​-Dyson​-eb1701​.pdf Schmit, T.M., B.B.R. Jablonski, A. Bonanno and T.G. Johnson. 2021. Measuring stocks of community wealth & their association with food systems efforts in rural & urban places. Food Policy 102: 102–19. https://​doi​.org/​10​.1016/​j​.foodpol​.2021​.102119 Schmit, T.M., B.B.R. Jablonski, J. Minner, D. Kay and L. Christensen. 2017. Rural wealth creation of intellectual capital from urban local food system initiatives: developing indicators to assess change. Community Development 48(5): 639–56. http://​dx​.doi​.org/​10​.1080/​15575330​.2017​.1354042 Schmit, T.M., R.M. Severson, J. Strzok and J. Barros. 2019. Improving economic contribution analyses of local agricultural systems: lessons from a study of the New York apple industry. Journal of Agriculture, Food Systems, & Community Development 8(C): 37–51. https://​doi​.org/​10​.5304/​jafscd​ .2019​.08C​.009 Theodos, B., C. Payton Scally and L. Edmonds. 2018. The ABCs of Co-op Impact. Washington, DC: Urban Institute. https://​ncbaclusa​.coop/​content/​uploads/​2021/​06/​ABCs​-of​-Impact​-FINAL​.pdf United States Department of Agriculture (USDA). 2021. Agricultural Cooperative Statistics 2019. Service Report 83. Rural Development, Washington, DC. www​ .rd​ .usda​ .gov/​ sites/​ default/​ files/​ publications/​sr83​_agr​iculturalc​ooperative​statistics​_2019​.pdf Uzea, F.N. 2014. Methodologies to measure the economic impact of co-operatives: a critical review. Journal of Rural Cooperation 42(2): 101. http://​dx​.doi​.org/​10​.22004/​ag​.econ​.249710 Uzea, N. and F. Duguid. 2015. Challenges in conducting a study on the economic impact of co-operatives. In M.J. Bouchard and D. Rousselière (eds). The Weight of the Social Economy: An International Perspective on the Production of Statistics for the Social Economy, Brussels: PIE Peter Lang. Yan, C-S. 1969. Introduction to Input-Output Economics. New York, NY: Holt, Rhinehart and Winston Zeuli, K. and S. Deller. 2007. Measuring local economic impact of cooperatives. Journal of Rural Cooperation 35(1): 1–17. http://dx.doi.org/10.22004/ag.econ.58682

312  Handbook of research on cooperatives and mutuals Zeuli, K., G. Lawless, S. Deller, R. Cropp and W. Hughes. 2003. Measuring the Economic Impact of Cooperatives: Results from Wisconsin. RBS Research Report 196, United States Department of Agriculture, Rural Business Cooperative Service, Washington, DC. www.rd.usda.gov/files/RR196. pdf.

20. Agricultural cooperatives and the transition to environmentally sustainable food systems Jos Bijman and Julia Höhler

INTRODUCTION Agriculture is faced with unprecedented challenges related to climate change, loss of biodiversity, food security and the need to reduce the use of water and fossil energy. Addressing these challenges requires making agriculture more environmentally sustainable. In addition, farmers are seeking improvements in both economic and social sustainability. Without a decent income farms will not survive, while safe working conditions and equal opportunities have been acknowledged as bottom-line conditions for socially sustainable farming. Agricultural cooperatives are important actors in the agrifood industry. Traditionally they supply farm inputs and process and sell farm products. Cooperatives generate benefits through economies of scale, bargaining power, risk sharing and product and market development. However, with the transition towards more sustainability agriculture, the role of the cooperative is changing. Members expect additional services that allow them to adopt more sustainable farming practices. In addition, cooperatives are intermediaries between farmers and the rest of society, seeking to align the spatial, temporal and organisational conditions of farming with the societal demand for more sustainable food production. In this chapter we focus on the environmental dimension of sustainability. While we acknowledge that social and economic sustainability is also important for farmers and their cooperatives, the largest sustainability challenge lies with the environment. For instance, agriculture and forestry contribute 13–21 percent of global greenhouse gas emissions (IPCC, 2022). Not only do farmers themselves experience the negative impact of unsustainable practices, in the form of droughts and excessive rainfall, they also encounter increasing pressure from consumers, governments and civil society organisations to reduce their environmental footprint. This chapter presents a narrative review of the literature on the role(s) agricultural cooperatives could or should play in the transition towards more environmentally sustainable agriculture. More specifically, we explore how cooperatives support their members in the adoption of more environmentally sustainable farming practices. Following Dessart et al. (2019), we define environmentally sustainable practices as farming practices whose main expected benefit – relative to conventional practices – is the provision of positive externalities on biodiversity, water, soil, landscapes and climate change. In addition to discussing the scant literature on what cooperatives are doing in practice, our paper presents what cooperatives could do (more). These recommendations are partly based on the theory of transitions and partly on several case studies of cooperatives that placed more emphasis on sustainability outcome. Our discussion will also deal with the limitations that cooperatives experience in fulfilling the demands of internal and external stakeholders. 313

314  Handbook of research on cooperatives and mutuals While this chapter deals with agricultural cooperatives in general, we acknowledge that there is great variety in organisational characteristics and functions (Bijman and Hanisch, 2020). For instance, size matters for the scale and scope of the contribution a cooperative can make to the sustainability transition. A small community cooperative can change quickly and implement more radical innovation, while a large producer cooperative with thousands of members will need more time to decide on the sustainability goals. While agricultural cooperatives are predominantly farmer-owned, there is a growing number of multi-stakeholder cooperatives in which farmers are one group of members (Leviten-Reid and Fairbairn, 2011). Empirical literature on the contribution of cooperatives to sustainability transition often focuses on these new forms of cooperatives, which include food cooperatives with both consumers and farmers as members (Ajates Gonzalez, 2017) and regional development cooperatives in which farmers, other land owners, citizens and sometimes even governmental agencies collaborate (Fonte and Cucco, 2017). The focus of this chapter will be on the traditional agricultural producer cooperatives. The chapter is structured as follows. We discuss what sustainability in agriculture means, and we present the shift in research and policy making from farming to food chains and to food systems. We then present our theoretical framework – transition theory – and discuss what a sustainability transition implies for agriculture. We go on to present what cooperatives do and could do to further the transition towards sustainable food systems. Following this, we discuss what issues have been left out of the literature and what future research could contribute to a better understanding of the role of cooperatives, and then conclude.

FROM FARMING TO FOOD CHAIN AND FOOD SYSTEM Defining and delineating sustainability is a challenging task. The concept of sustainable development goes back to the famous 1987 report ‘Our Common Future’, published by the World Commission on Environment and Development. Known as the Brundtland Report (named after the Norwegian prime minister Gro Harlem Brundtland, chair of the Commission), it defines sustainable development as development which meets the needs of current generations without compromising the ability of future generations to meet their own needs. In this early definition, sustainable development clearly focused on the environmental impact of human behaviour. As early as the 1960s, serious concerns were expressed about the negative environmental impact of farming. In particular, the unrestrained use of chemical pest control (such as herbicides and insecticides) posed a threat to biodiversity, soil health and even the health of farmers and farm workers (Carson et al., 1962). New regulations and better research lead to the abolishment of the most dangerous substances. A further step in the reduction of the negative environmental impact of pesticides came with the rise of integrated pest management, organic agriculture and biological pest control from the 1970s onwards (Council on Environmental Quality, 1972). Particularly in intensive crop farming, the amount of pesticides used per unit of product was substantially reduced by using better application tools and through improved formulations and increased farmer knowledge on how best to apply these chemicals (Dent, 1995). As a major user of land, water and other natural resources, agricultural production has a large impact on the natural environment. This impact is not only felt on the farm and in the direct vicinity of the farm, but also far away because of the greenhouse gas emissions. Also,

Agricultural cooperatives and environmentally sustainable food systems  315 Table 20.1 Theme

Themes and subthemes of environmental sustainability in agriculture Subthemes

Atmosphere

Greenhouse gases

 

Air quality

Water

Water withdrawal

 

Water quality

Land

Soil quality

 

Land degradation

Biodiversity

Ecosystem diversity

 

Species diversity

 

Genetic diversity

Materials and energy

Material use

 

Energy use

 

Waste reduction & disposal

Animal welfare*

Animal health

 

Freedom from stress

Note: * Although animal welfare is strictly speaking not an environmental issue, it is often included in assessments of environmental sustainability. Source: Adapted from FAO, 2014.

the long supply chains of farming inputs imply consequences on other parts of the world. An example is the use of soybeans grown in the Americas used for animal feed in Europe. When using a Life Cycle Assessment approach in measuring the environmental impact of meat and dairy production in Europe, the negative impact of soybean production on deforestation in South America is one of the major environmental impacts (Green et al., 2019). Table 20.1 shows that the impact of agriculture and food production on the environment has several dimensions. While earlier efforts to improve sustainability in agriculture were mainly about reducing negative environmental impact, such as reducing the use of pesticides and the leaching of minerals from manure applications, the concept has become more encompassing over the years. Since the turn of the millennium it has become common to distinguish environmental (planet), social (people) and economic (prosperity) dimensions of sustainability, the so-called Triple Bottom Line (Elkington, 1998). A next step in defining and operationalising sustainability is the Sustainable Development Goals (SDGs). In its 2015 General Assembly, the United Nations decided its Agenda 2030, which included 17 Sustainable Development Goals. Directly related to agriculture are Zero Hunger (SDG-2), Good Health and Well-Being (SDG-3), Responsible Production and Consumption (SDG-12) and Climate Action (SDG-13). The debate and research agenda on sustainable agriculture has also broadened in another direction. While the discussion on sustainable agriculture has long targeted on-farm production processes, in recent decades the attention has broadened towards the whole food chain (Fritz and Schiefer, 2008).1 Traditional supply chain management literature already emphasised the need for collaboration among core chain partners, in order to improve logistic efficiency, innovativeness, customer-responsiveness and transparency (Fawcett et al., 2012). More recent literature on sustainable food supply chains has emphasised the importance of balancing environmental and social dimensions of sustainability and has indicated that institutions and governance arrangements also determine the scope for improvements in environmental sustainability (Beske et al., 2014; Dania et al., 2018; Nematollahi and Tajbakhsh,

316  Handbook of research on cooperatives and mutuals 2020). In addition, more attention is paid to legitimisation processes and the involvement of non-traditional stakeholders. The most recent development in conceptualising sustainability in food production, distribution and consumption is the food system perspective (Ericksen, 2008). A food system is composed of all the processes and actors associated with food production, food transformation and food utilisation (Berkum et al., 2018). The food system includes production of inputs; growing of agricultural products; harvesting, packaging and processing of farm products; transportation; wholesale and retail trade; consumption of final food products; and disposal of food remains. While the core of the food system consists of the food chain, that is, the sequential activities of producing, transforming, distributing and consuming food products, the food system approach takes a wider perspective by including specific outcomes and enabling conditions. Three types of outcomes are distinguished: socio-economic (such as income and employment), food security (including safety and nutrition) and environmental (such as effects on biodiversity, climate, soil and water). Socio-economic enablers (or institutions) allow and guide the actions of businesses and consumers, while sustainability enablers are the biophysical conditions (including natural resources and climate) that facilitate or constrain those human actions. Food system thinking acknowledges the interaction among elements of the system, as well as feedback mechanisms. Compared to more conventional approaches, like farming systems, market modelling or sector or chain analysis, in which interventions are often designed to optimise the deployment of means of production (natural resources, labour, capital), food system thinking takes a holistic approach by explicitly paying attention to interactions, synergies, complementarities, interdependencies and trade-offs among all system elements (Berkum et al., 2018). In recent years many scholars and practitioners have expressed doubts whether sustainable food chains will be achieved without more fundamental change processes. These authors have claimed that a sustainability transition in the food system is needed (Poppe et al., 2009; Sutherland et al., 2015; Meynard et al., 2017). Achieving a sustainable food system requires a transition because it not only involves farming with low environmental impact, but also entails a new vision of agriculture as a protector of natural resources, as a repository of CO2, as a producer of healthy food, as a contributor to viable rural communities, and as a steward for attractive landscapes (Poppe et al., 2009). In the next section we define what transition means and discuss the requirements and implications of a sustainability transition in the food system.

A TRANSITION PERSPECTIVE A transition is a fundamental change that incorporates processes of ecological, economic, cultural, technological and institutional co-evolution (Geels, 2005; 2019). A transition combines interdependent changes at several scales and involves multiple public and private societal actors. The classical example is the energy transition, changing from fossil to renewable energy sources. For a transition to be successful, technological advances combined with organisational and institutional changes are needed, while actors at different geographical and institutional levels need to combine their efforts to co-create new practices, social organisations and guiding principles. The term transition is often used to refer to large-scale transformations deemed necessary to solve ‘grand societal challenges’ (Loorbach et al., 2017).

Agricultural cooperatives and environmentally sustainable food systems  317 In understanding transitions, it is common practice to apply the multi-level perspective (MLP) as developed by Geels (2005). The MLP conceptualises a transition to emerge through a dynamic process among three analytical levels. The first level is the regime, which represents dominant logic, vested interests and path-dependencies. Regimes are able to adjust, but only incrementally and slowly. The second level is the niche, where entrepreneurs work on radical innovations that deviate from the established norms and practices. The third level is the landscape, which is the combination of exogenous variables, including climate change, war, new technologies, economic crises and depletion of natural resources, which put pressure on the regime but also generate opportunities for niche innovations. Recent research on MLP has emphasised the possibilities for interaction between different regimes, such as agriculture and energy (Sutherland et al., 2015), or interaction between niche and regime, where regime actors may reorient to or even incorporate niche innovations (Geels, 2019; Runhaar et al., 2020). Loorbach et al. (2017) discern three distinctive research approaches in the study of transitions, each with its own respective disciplinary and methodological background and objectives: socio-technical, socio-institutional and socio-ecological. In the socio-technical approach, the emphasis is often on (technological) innovations and how these disrupt the existing regime. The socio-institutional approach gives explicit attention to the analysis of (power) networks and governance structures. In this approach the emphasis is on political and institutional change. In the socio-ecological approach, the focus lies on ecology and biology. Scholars using this approach study the vulnerability and resilience of natural resource systems and the role of human behaviour in affecting that resilience. These three approaches have several characteristics in common (Loorbach et al., 2017), as follows: ● Multi-actor dynamics: transitions involve multiple actors from various institutional backgrounds (including business, government, civil society). ● Reframing the problem: transitions require a minimum level of societal consensus on the problems at stake. ● Importance of visioning: transitions require actors to have ideas supporting a better future. ● Importance of experimenting: transitions will not materialize without experimenting with new methods, tools, processes, coalitions and governance forms. ● Importance of learning and evaluating: transitions require social learning, which implies not just dissemination of knowledge but, more importantly, changes in human behaviour and mental frameworks. Applying these insights to the sustainability transition in the agrifood industry has generated specific recommendations for farmers and their food chain partners. Sutherland et al. (2015) and Lamine et al. (2019) have argued that food chain actors need to: (a) acknowledge that farming is a regionally specific and multifunctional activity; (b) collaborate with unfamiliar stakeholders; (c) seek institutional change; and (d) engage in experimentation. We will briefly elaborate on each of these four arguments. Farming is regionally specific and multifunctional. Farming is heavily shaped by the local biophysical conditions, topography and climate, but also by the traditions, norms and socio-economic structures that have evolved in this natural environment. The large diversity in farming structures and practices is an important asset, as it is not only appreciated by the inhabitants of the region and visitors coming from other regions, but also a source of resilience. Farming is multifunctional because it has many functions other than producing food;

318  Handbook of research on cooperatives and mutuals farming also contributes to maintaining biodiversity, keeping an attractive landscape, producing sustainable energy and providing meaningful labour opportunities. More recently, carbon sequestration has been added as a new function of farming (Morgan et al., 2010). Collaboration with unfamiliar stakeholders implies that farmers and their food chain partners engage with societal organisations that look at agriculture from a different, often more critical, perspective. Environmental, animal welfare and nature conservation organisations, among others, can support the transition by providing new ideas, building legitimacy for change, exploring new collaborative ventures and jointly lobbying for favourable institutional conditions. Analysis of the supporting or constraining influence of current institutions is needed. Such institutions can be laws and regulations, but also customs and traditions. Institutional change requires dialogue and partnerships among multiple stakeholders, including those unfamiliar stakeholders mentioned above. As Rudd (2000) has argued, the sustainability transition requires the development of new norms of behaviour and the institutionalisation of rules and norms. This requires the participation of multiple stakeholders at different levels of institutionalisation. Finally, the sustainability transition requires experimentation. Since a transition brings risks and uncertainties and many farmers are risk averse, developing and implementing sustainable farming practices requires experiment and trial. In addition, there will not be one single transition pathway. In line with the diversity of farming systems (or farming styles), transition pathways will vary on the basis of local agro-ecological conditions, farm-specific resources, knowledge and skills of the farmer and regional market conditions. Experiments are needed to find out what works, under what conditions, and for who. The characteristics of transition processes as presented by Loorbach et al. (2017) and the application of these characteristics to sustainability transitions in agriculture by Sutherland et al. (2015) and Lamine et al. (2019) can be used to explore how cooperatives can contribute to those transitions. In the next section we will discuss the traditional and new role(s) of cooperatives in the sustainability transition.

ROLES OF COOPERATIVES IN THE SUSTAINABILITY TRANSITION Most agricultural cooperatives support their farmer-members with multiple services (Höhler and Kühl, 2014; Bijman et al., 2016). Key services are providing agricultural inputs (often combined with technical assistance) and selling farm products (often after some handling activity such as storage, sorting and grading or even processing). In addition, cooperatives may provide credit and other financial services. In an extensive review of the literature on cooperatives and producer organisations in developing countries, Bizikova et al. (2020) found the same main functions. These classical functions are a good starting point for exploring the role(s) of agricultural cooperatives in the transition towards more environmentally sustainable food systems. While members continue to demand the classical services, new activities and services are needed that focus on the sustainability transition and respond to the societal pressure for change. In this section we explore conventional and new roles of cooperatives in supporting the transition towards environmentally more sustainable food systems.

Agricultural cooperatives and environmentally sustainable food systems  319 Inputs, Experiments, and Technical Assistance Agricultural cooperatives have a long tradition of providing their members with the seeds, fertilisers, crop protection, machinery, animal feed and related services needed for agricultural production. The sustainability transition, however, requires different types of inputs, for instance biological instead of chemical crop protection. Also, the relationship between members and cooperative is likely to change. While traditionally cooperatives respond to the needs of their members in purchasing and producing inputs, in the sustainability transition they are more likely to initiate the development and purchase of other types of inputs and then convince members to apply these new inputs. Given the need for experimenting with new sustainable farming practices, but also for intermediating between farmers and other societal stakeholders, the initiative is more likely to lie with the cooperative instead of the individual members. This approach requires the cooperative to have a thorough understanding of the adoption behaviour of the members. Adopting new farming practices is not an easy step for farmers. They need to acquire and apply new knowledge, step away from routines, accept risks and uncertainties, and often engage with new food chain partners. Cooperatives can facilitate members and make adoption easier by demonstrating that the new sustainable farming practices work, shifting individual risks to collective risks, and linking members to outside networks that support the transition. The role of cooperatives in supporting farmers to adopt new inputs has been studied extensively, particularly in developing countries (Grashuis and Su, 2019; Candemir et al., 2021). Most of these studies, however, measured the impact of cooperative membership on the uptake of new crop varieties, fertilisers and crop protection agents without explicitly paying attention to sustainability. More recent research has focused explicitly on the adoption of sustainable farming practices. Many of these studies have been carried out in China, where after 2007 cooperatives were promoted by the government as a model to link smallholder farmers to modern food markets (Su and Cook, 2020). Reducing the environmental impact of farming was a key condition to improve market access, because urban consumers, with rising incomes, became increasingly critical of the unsustainable practices in traditional small-scale farming. Deng et al. (2021) show that agricultural cooperatives in China have led to an improvement in overall environmental performance of farmers. The authors claim, more generally, that cooperatives play an important role in improving agricultural sustainability in China by helping farmers ‘to adopt eco-friendly technologies and access environmentally friendly inputs with lower prices, promoting organic agricultural production and enhancing sustainable use of material inputs and natural resources’ (Deng et al., 2021: 13). These findings and arguments are supported by other studies that show that cooperative membership has a positive effect on the application of safe production practices in the Chinese pork sector (Ji et al., 2019); the adoption of organic soil amendments in the Chinese apple sector (Ma et al., 2018); the adoption of integrated pest management in the Chinese apple sector (Ma and Abdulai, 2019); the adoption of green control techniques in the Chinese vegetables sector (Yu et al., 2021); the reduction of chemical inputs in the Chinese fruits and vegetables sector (Zhou et al., 2019); and the shift of Chinese farmers from using conventional inputs to organic inputs (Wang et al., 2018). Groot Kormelinck et al. (2022) found, in a study of the fresh produce sector of Uruguay, that cooperatives experiment with sustainable farming practices and provide the knowledge that

320  Handbook of research on cooperatives and mutuals farmers need to substitute conventional inputs for sustainable inputs. In addition, cooperatives promote the exchange of knowledge among the members themselves. Some cooperatives even engage in the production of organic inputs (seedlings, crop protection) which are subsequently sold to both organic and conventional farmers. While these studies are rich in empirical analysis, they do not provide much theoretical guidance on how cooperatives (could) support the adoption of sustainable farming practices. Most of these studies compare farmers that are members of a cooperative with farmers that are not members, which does not tell us under what conditions members are willing to apply more sustainable techniques and to what extent the cooperative can influence those conditions. Organisational mechanisms at the level of the cooperative can enhance members’ willingness to reduce pesticide use. In a study on Chinese fruit and vegetable cooperatives, Zhou et al. (2019) showed process control, in the form of uniform production standards and the supply of specific inputs, does affect member behaviour towards sustainability. Building on this work, Mwambi et al. (2020), in a study on dairy cooperatives in Kenya, developed and tested a framework consisting of three types of control measures that the cooperatives apply to influence member behaviour: social control (social mechanisms that promote trust building and reduce free riding), process control (quality standards, farm inspection, inputs and training) and output control (quality tests and quality-based incentives). All three types of control measures proved to be relevant. While both of these studies were mainly focused on food safety issues, we expect that these organisation mechanisms are also relevant for cooperatives in supporting member adoption of sustainable farming practices. For a better understanding of how cooperatives can support and encourage their members to adopt sustainable farming practices we need to consult studies that explore the behavioural determinants of adoption. Linking those determinants to cooperative membership provides insights into how and to what extent cooperatives can induce adoption. In an extensive review of the literature on the determinants of farmer adoption of sustainable farming practices, Dessart et al. (2019) found three groups of factors that affect farmer behaviour: dispositional, social and cognitive factors. Dispositional factors refer to farmers’ internal propensity to behave in certain ways. One could think of risk attitude, moral concern, lifestyle, personality and farming styles. Social factors concern farmers’ interpersonal relationships, such as relationships with family, friends and other members of the community in which they live. Cognitive factors relate to learning and reasoning about specific sustainable practices. Knowledge, experiences and competences are all relevant, and so are perceptions about risks, costs, and difficulties. While we argue that three groups of factors affecting adoption behaviour could be used to explore how cooperatives can influence member behaviour towards the adoption of sustainable farming practices, such empirical study still has to be done. A transition towards more sustainable farming implies risks for individual farmers, both related to the production process and to marketing farm products. Studies on the conversion from conventional to organic agriculture have shown that the transition process involves higher risks (Berentsen et al., 2012). This raises the question of what cooperatives can do for their members to reduce the risks. Borgen (2004) has argued that collectively owned equity capital in agricultural cooperatives serves as an alleviation and absorber of external shocks, or unexpected and potentially damaging contingencies that cannot easily be dealt with by members individually and separately. Thus, the commonly owned equity has an ‘insurance function’, as it may ameliorate the need for individual insurance arrangements. Whether coop-

Agricultural cooperatives and environmentally sustainable food systems  321 eratives are willing to use this insurance function to cover the risks inherent in the transition to sustainable farming is still in question. To summarize, cooperatives can support members in the transition to more sustainable agriculture by providing new inputs, experimenting with new farming practices, providing training and technical assistance and bearing some of the cost and risk involved. Experiments are important for demonstrating the technical and economic feasibility of sustainable farming practices. While providing inputs is important, in the end there should also be market appreciation of the more sustainable farm products. Market Access Marketing farm products is one of the classical functions of an agricultural cooperative. This task includes collecting market information and informing members about trends in consumer markets. In the past, this marketing role of the cooperative has been reactive, by selling whatever members produce, benefiting from bargaining power and institutionalised markets. Over the years many agricultural cooperatives have become more proactive, by investing in product development and targeted marketing strategies (Cook and Plunkett, 2006). The sustainability transition also requires a proactive role of the cooperative. For instance, large European dairy cooperatives such as Arla Foods and FrieslandCampina explicitly present themselves as suppliers of sustainable dairy products.2 Being producers of major consumer brands, their sustainability strategies are part of the competition with other dairy companies but also with large retailers that seek to attract consumers with sustainability claims on their private label products. For farmers, large-sized cooperatives are important for countervailing power in a highly consolidated food retail market. Also, in negotiating with regard to the sustainability requirements of supermarkets, cooperatives need bargaining power to prevent the setting of unrealistic targets. In contrast, small cooperatives have more options to develop products for those consumers that have high sustainability demands. Some of these cooperatives develop new value chains by setting up their own stores. Selling at (organic) food markets has long been a strategy of organic farmers to differentiate themselves from conventional food chains and to communicate directly with conscious consumers (Anderson et al., 2019). While these short food supply chains score high on social sustainability, they do not necessarily score better on environmental sustainability compared to conventional food chains (Malak-Rawlikowska et al., 2019). An important strategic instrument for food companies to convince consumers to buy more sustainable food products (and to pay a higher price for these products) is the Corporate Social Responsibility (CSR) reputation of the cooperative (Maloni and Brown, 2006). While the wording of the term suggests a focus on social issues, CSR is often equivalent to corporate sustainability and its focus has traditionally been on environmental sustainability. A common definition of CSR is ‘the responsibility of an organization for the impacts of its decisions and activities on society and the environment’ (ISO 26000). While studies on CSR proliferated after the turn of the century, Hartmann (2011) was the first to provide a comprehensive overview of CSR in the food industry. In her presidential address to the European Association of Agricultural Economics, Hartmann (2011) emphasised the need to include the supply chain into the analysis of CSR by food companies. The combined activities of suppliers, processors and retailers determine the sustainability of a food product. Therefore, the CSR strategy of any company in the food chain includes how suppliers

322  Handbook of research on cooperatives and mutuals (and suppliers of suppliers) perform on sustainability. For agricultural cooperatives this poses advantages and disadvantages. By being member-owned, cooperatives can claim that their CSR strategies encompass at least two stages of the food chain, which may support the CSR reputation of the cooperative. On the other, the cooperative can only enhance sustainability to the extent that members are willing to apply more sustainable farming practices. As Baden et al. (2009) and Hartmann (2011) have argued, powerful companies in the food chain have the ability to enforce CSR measures on their suppliers. These arguments are in line with the claim by Gereffi and others that in buyer-driven global value chains the buyers, including retail and food processing companies, often determine the level of compliance with food quality and environmental standards (Gereffi et al., 2005; Lee et al., 2012). Unequal power relations in food chains are increasingly recognized as presenting a lack of social and economic sustainability and will influence the way stakeholders assess the CSR of large companies. In this respect, agricultural cooperatives have a competitive advantage as they represent the interests of the farmers, which are often the least powerful actors in the food chain. Whether cooperatives have been able to exploit this competitive advantage is still a question. A CSR strategy comes with the obligation to report on sustainability performance. Sustainability reporting is the practice of measuring and demonstrating accountability for organisational performance towards the goal of sustainable development. While most large companies (particularly those in the B2C market) publish a CSR report, in the food industry only a minority of all companies does so. Rottwilm and Theuvsen (2016) found that only 30 percent of German dairy companies (including cooperatives and investor-owned firms) reported their sustainability performance. The authors conjecture that the large number of SMEs in the food industry explains the low percentage. Westerholz and Höhler (2021) studied the CSR reports of 13 German dairy companies and found that cooperatives report with a higher quality, and more extensively, about their CSR strategies and activities compared to investor-owned dairies. These authors also provide a number of propositions on the relationship between the cooperative ownership structure and the type of CSR reporting. First, cooperatives are farmer-owned and include reporting on the sustainability achievement of their members. Second, CSR reports are not only meant for outside stakeholders; members also want to know what their cooperative is doing. Therefore, CSR reports of cooperatives can be expected to provide more detailed information than reports of investor-owned firms. Unambiguous CSR reporting requires standards and guidelines. Examples of sustainability standards are those of the Global Reporting Initiative (GRI) and the International Standards Organization (ISO). GRI is a nongovernmental organisation established in 1997 to produce guidelines and standards for sustainability reporting. ISO 26000, agreed upon in 2010, provides guidelines on social responsibility. Specifically for the food industry, ISO has developed the guidelines ISO/TS 26030:2019 on social responsibility and sustainable development in the food chain. GRI and ISO standards and guidelines aim to support any organisation in the food chain in contributing to sustainable development while considering all local laws, regulations and stakeholder expectations. ISO 26030 has been strongly promoted by the French food industry and the French government. According to Filippi (2020), ISO 26030 is increasingly adopted by French agricultural cooperatives, and is expected to strengthen their CSR reputation. ‘Even though the norm is voluntary, this label influences the perception of clients and distributors’ (Filippi, 2020: 500).

Agricultural cooperatives and environmentally sustainable food systems  323 Also, the International Cooperative Alliance (ICA, 2016) has published a guidebook on sustainability reporting. Just like any other (business) organisation, a cooperative needs to be accountable for its impact on society, more particularly for its performance towards the Sustainable Development Goals. Cooperative Principle #7 – Concern for Community – gives cooperatives the obligation to work towards the sustainable development of their communities. While the guidebook takes a broad perspective on sustainable development, environmental sustainability is the main part of it. All of these initiatives and standards do not disguise that there is still a lot of discussion on what proper sustainability reporting is. A uniform and globally accepted set of standards does not exist, partly because setting sustainability standards has become a business in itself (and thus leads to competition among standards) and partly because the field is still in development. There is debate on which dimensions of (environmental) sustainability should have priority and which indicators should be used (Olde et al., 2017; Chopin et al., 2021). The FAO (2014) makes a distinction between target indicators, practice indicators and performance indicators. Target indicators show which targets a company seeks to reach, both in terms of focus area and in terms of the level of reduction of negative impact. Reporting on practice indicators shows what companies are doing, while performance indicators present the actual level of achievement on a specific sustainability theme. Over the years, CSR reports of food companies, including cooperatives, have become less dependent on target indicators and disclose more on performance indicators (Stranieri et al., 2019). Dialogue, Networking and Lobbying One of the requirements of a transition process, according to Loorbach et al. (2017), is for the stakeholders to develop a vision on a sustainable future. This also applies to the members of an agricultural cooperative. Developing a common vision is perhaps the most difficult task, as members differ in their personal values as to specific sustainability goals and farms differ in their capabilities to improve on specific sustainability indicators. Both farm resources and biophysical conditions influence the ability to invest in sustainable farming practices. To develop a common vision on strategy and a plan of action, an extensive dialogue in the membership is needed (Battaglia et al., 2015). The uncertainties around governmental policies and sustainability accounting requirements also justify an elaborate dialogue among members about the goals, the paths, the concrete activities, the indicators and the level of financial incentives for more sustainable behaviour. According to Rudd (2000: 141), any community seeking a transition must ‘discuss alternative resolutions, consider adverse impacts and amelioration, engage in the production and provision of solutions, and provide for sanctions, monitoring, conflict resolution and evaluation of outcomes’. Case studies have shown that agricultural cooperatives have been organising more and more extensive dialogues among their members on the opportunities and challenges of sustainability (Bijman, 2022). Such discussions among the membership serve at least two purposes. First, they are the foundation underlying the decisions that cooperatives have taken on their role in the sustainability transition. Second, they are a source of knowledge exchange among members, thus facilitating learning processes for sustainable farming practices. In addition to facilitating dialogue within the membership, agricultural cooperatives have engaged in dialogue and networking with external stakeholders. These external engagements are an important source of better understanding of societal demands, but also an opportunity

324  Handbook of research on cooperatives and mutuals to share and discuss the technical and economic challenges that farmers face in the transition. Outside stakeholders have different perspectives on what needs to be done and what is feasible. Discussing objectives but also practical constraints not only creates better mutual understanding but also generates support for farmers engaging in the transition. Discussing and networking with outside stakeholders can also be important for obtaining external (policy) support. Bardsley and Bardsley (2014) showed that the Gran Alpin cooperative acted as a bridging organisation to find external support and legitimacy for the changes that members and cooperative initiated. Also, Groot Kormelinck et al. (2022) found that cooperatives act as intermediaries between farmers and other parties in the food system, including commercial service providers, institutional support agencies and civil society organisations. The intermediary role of cooperatives has also been found in studies on innovation in China (Yang et al., 2014) and Burkina Faso (Iyabano et al., 2021). Both studies showed that cooperatives play the role of intermediary between farmers on the one hand and governmental, research and commercial partners on the other hand. While not explicitly dealing with sustainability innovations, these studies are in line with the findings of Groot Kormelinck et al. (2022), showing that cooperatives have the potential to act as supporting intermediaries in linking agriculture and other segments of the food system. The extent to which cooperatives can make a major contribution to sustainability also depends on the geographical location and regional specificities. Several authors have argued that sustainability is very much a regional challenge rather than a challenge for individual farmers. While acknowledging global sustainability challenges such as climate change, Sutherland et al. (2015) argue that (European) policy makers should shift away from an agricultural policy focused on individual farms to a policy that deals with the sustainability transition of agriculture at the regional level. ‘The notion that sustainability is achieved at regional level not only takes into account that there will be regional differences in the forms and capabilities of agriculture, but also includes the tenet that interactions between individual farm models and farming systems at regional level are a key aspect of sustainability’ (Sutherland et al., 2015: 7). Since most cooperatives are strongly embedded in the regional economy, we assume that cooperatives will focus on improving sustainability at the regional level. Examples of cooperatives that work on maintaining and reinforcing regional biodiversity are nature conservation cooperatives (Polman and Slangen, 2002; Westerink et al., 2017). However, beyond the nature conservation cooperatives, which were explicitly established to achieve sustainability goals, the evidence on agricultural producer cooperatives working on regional sustainability objectives mainly comes from case studies. Obtaining external support, such as subsidies and legitimacy, is not necessarily a new task of the agricultural cooperative. Cooperatives often lobby for favourable agricultural policies, including market protection and subsidies. Such lobbying is done at local, regional or national level, depending on the jurisdiction of the supporting authorities. One example of local embeddedness is the cooperatives that participate in the short food supply chain (Laforge et al., 2017). However, the sustainability transition requires a broader lobbying strategy, as the financial support may come not only from governmental agencies but also from banks (for example, impact loans) and other actors in the food system, including nature conservation organisations. Cooperatives can also participate in political lobbying for social and environmental agendas,

Agricultural cooperatives and environmentally sustainable food systems  325 for instance as part of a sustainability and food sovereignty movement (Fonte and Cucco, 2017; Ajates Gonzalez, 2017). In sum, cooperatives can influence farmer behaviour towards sustainable practices by using social mechanisms such as dialogues, information exchange among members, trust building and developing common goals and by influencing the knowledge of the members through training, education and consultancy.

DISCUSSION AND FURTHER RESEARCH While the literature shows that agriculture cooperatives can play important roles in the sustainability transition, there is little empirical research on how cooperatives do this. Still, two streams of empirical studies provide some indication of future action. There are traditional impact studies – mostly in developing countries – that show that cooperative membership supports farmers in the uptake of new technology, including more sustainable farming practices. In addition, there are case studies of (small) cooperatives that have been established by farmers who have already made the shift towards more sustainable agriculture, such as those applying organic and agro-ecological farming. The importance of sustainability in agriculture would justify more empirical research on how (large) cooperatives support their members in applying more sustainable farming practices. The literature presents many case studies of small, community-based cooperatives that perform well on a limited number of sustainability criteria. Most of these community-based cooperatives have been set up explicitly to promote alternative food systems, such as short food supply chains (Vittersø et al., 2019), organic agriculture (De Los Ríos et al., 2016) or community-supported agriculture (Miralles et al., 2017). One of the innovative characteristics of these small community-based cooperatives is the involvement of non-farming stakeholders, such as consumers. Such a multi-stakeholder partnership within one cooperative seems to be in line with the recommendation of transition theory to collaborate with unfamiliar businesses and civil society organisations. However, having multiple interests within one cooperative is known to affect efficient decision-making. How (small) cooperatives have dealt with these governance challenges is often not disclosed, also because most case study research only reports on success stories. Another lesson from community-based cooperatives is that social capital is important in jointly setting and pursuing sustainability objectives. Another question for further research is whether the sustainable practices of those small community-based cooperatives can be scaled up towards large agricultural cooperatives. Given their vested (business) interests, it is still a question whether large agricultural cooperatives can and will copy the strategies and practices of small cooperatives, for instance because the small ones sell in niche markets and the large ones in commodity markets. However, large cooperatives have size-based benefits. First, they have the resources to initiate and support changes on a large scale. From a sustainable development perspective, large cooperatives generate a larger impact. Second, large cooperatives have the bargaining power to intermediate between the sometimes unrealistic requirements of large retailers and civil society organisations on the one hand and the risk-averse strategies of individual farmers on the other hand. The key challenge for the large cooperative lies in the combination of convincing its members to make the necessary transition and convincing customers and consumers to pay a higher price for sustainably produced food.

326  Handbook of research on cooperatives and mutuals Agricultural cooperatives are member-based organisations, applying democratic decision-making processes. This organisational structure guarantees that the cooperative is primarily working in the interests of its members. However, the traditional focus on member interests is compromised by two developments among agricultural cooperatives: the growing size of the cooperative enterprise (Nilsson et al., 2012) and the growing heterogeneity of the membership (Höhler and Kühl, 2014). These developments have made it more difficult for the (large) agricultural cooperative to convince individual members to follow a more sustainable trajectory. Another important finding of our review of the literature is that there has been very little attention given to the internal and external conditions that facilitate or hinder agricultural cooperatives in the sustainability transition. From earlier research on product quality improvement in agricultural cooperatives, it is known that the internal governance structure characteristics of member control and democratic decision-making may restrain the speed and scope of changes needed. It takes time to find a majority of members to support the changes. Literature on whether cooperatives are able to produce high quality products has shown that cooperatives and their members lack the resources and capabilities to invest in high quality production (Hendrikse and Bijman, 2002; Pennerstorfer and Weiss, 2013). However, the literature is inconclusive, as in some countries cooperatives are known for high quality products (Frick, 2017). Several authors have emphasised that cooperatives can invoke social mechanisms in support of higher quality production (Cechin et al., 2013). Some authors have claimed that agricultural cooperatives are by nature sustainable organisations. While this may be true for social sustainability, as cooperatives are participative and democratic organisations, evidence that cooperatives also score better on environmental sustainability has not yet been presented. Future research will show whether the organisational characteristics, such as farmer-ownership and democratic decision-making, are a burden or a benefit. Arguments against the cooperative would emphasise the heterogeneity of the membership leading to slow and conservative decisions and too much focus on member interests compared to societal interests. Arguments in favour would emphasise the close relationship between farmers and cooperative and the central (intermediary) role of the cooperative in the food system. An important lesson from the literature on product quality improvements in agricultural cooperatives is the importance of unambiguous incentives for producing higher quality products as well as the social mechanisms that prevent opportunistic behaviour. The same instruments can be used in influencing member behaviour towards adoption of sustainable agricultural practices. However, the comparison is only partially valid, as cooperatives are faced with at least three difficulties in influencing member sustainability behaviour. First, sustainable products often do not generate a higher price in the market, because powerful retailers often set the sustainability requirements unilaterally. Thus, the cooperative is faced with the dilemma of paying a higher price to members for more sustainable products, without obtaining a higher price in the market. A higher price for one farmer will then imply a lower price for another farmer. Such cross-subsidisation within the cooperative may encounter serious opposition in the decision-making bodies. Second, sustainability is not a uniform concept and not as easily measured as product quality. Thus, the cooperative has to decide on how to compare (and compensate) farmer performance on different sustainability indicators. Third, as many elements of sustainability are locally or regionally determined, because of biophysical differences, farmers differ in their interest in particular sustainability indicators. These

Agricultural cooperatives and environmentally sustainable food systems  327 different interests need to be aligned with the democratic decision-making structures of the cooperative. More research is needed on how cooperatives deal with these three challenges of convincing and facilitating members to adopt more sustainable farming practices. Agricultural cooperatives in Northwest Europe are developing and implementing menu strategies, where members can decide to focus on (and get reimbursed for) different sustainability targets that best fit their farming objectives. As indicated earlier, adoption of sustainable farming practices is influenced by dispositional, social and cognitive factors (Dessart et al., 2019). This framework can be used to develop hypotheses on how cooperatives can support the adoption of sustainable farming practices. We expect that the influence of cooperatives will be mostly on cognitive factors, but also to a certain extent on social factors. Given a fixed economic incentive, we hypothesise that cooperatives will influence the adoption of sustainable farming practices by providing information (through training as well as individual consultancy), supporting experiments and reducing individual risks. Future research should focus on the prevalence and impact of these support mechanisms.

CONCLUSION The goal of this chapter was to explore the roles that agricultural cooperatives (can) play in the sustainability transition. Literature on these (new) roles is rather scant. Case studies on small community-based cooperatives provide useful ideas on how other cooperatives can act within sustainable food systems; however, the question whether these ideas can be scaled towards large producer cooperatives is still to be answered. In the sustainability transition, the classical functions of the cooperative, such as providing inputs and marketing farm products, continue to be important. Providing proper inputs will allow farmers to apply more sustainable farming practices. Marketing sustainable farm products and obtaining a proper price for these products will allow the members to make the long-term investments in sustainable production methods. In addition to these classical functions, agricultural cooperatives will have to engage in new functions, for which they may need to develop new capabilities. Which are these new functions for sustainable food systems? Transition theory has shown which new tasks are needed. The first task is to set up an extensive dialogue among the members. Setting sustainability goals for the cooperative as a whole and for subgroups of the membership requires good discussions and inclusive decision-making. Dialogue is needed not only to develop a common vision, but also to get a better understanding of differences in the abilities and willingness of individual members to apply (particular) sustainable farming practices. The second task is to engage in discussions and networking with multiple outside stakeholders, in order to find new coalitions and gain societal support, but also to discuss with those stakeholders the (economic) challenges farmers face in the sustainability transition. The third task is supporting members in experimenting with sustainable farming practices – not only by providing new inputs and technical assistance, but also by sharing the economic risk of these experiments. In addition to these specific new functions, agricultural cooperatives may have to acknowledge more explicitly that they are an intermediary between farmers and other societal stakeholders, not just between farmers and buyers. Another part of this intermediary role is

328  Handbook of research on cooperatives and mutuals the facilitation of learning processes. Successful application of sustainable farming practices requires farmers to learn from experts and other farmers. More so than in the past, where the emphasis was on efficient handling of farm products, agricultural cooperatives have to engage in supporting and facilitating the change and learning processes of their members.

NOTES 1. Some of the literature uses the term ‘supply chain’ while other literature prefers ‘value chain’; we do not make this distinction and only use food chain. 2. https://​www​.arla​.com/​sustainability/​; https://​www​.frieslandcampina​.com/​sustainability/​

References Ajates Gonzalez, R. (2017). Going back to go forwards? From multi-stakeholder cooperatives to open cooperatives in food and farming. Journal of Rural Studies, 53, 278–90. https://​doi​.org/​10​.1016/​j​ .jrurstud​.2017​.02​.018 Anderson, C.R., Maughan, C., & Pimbert, M.P. (2019). Transformative agroecology learning in Europe: building consciousness, skills and collective capacity for food sovereignty. Agriculture and Human Values, 36(3), 531–47. https://​doi​.org/​10​.1007/​s10460​-018​-9894​-0 Baden, D.A., Harwood, I.A., & Woodward, D.G. (2009). The effect of buyer pressure on suppliers in SMEs to demonstrate CSR practices: an added incentive or counter productive? European Management Journal, 27(6), 429–41. https://​doi​.org/​10​.1016/​j​.emj​.2008​.10​.004 Bardsley, D.K., & Bardsley, A.M. (2014). Organising for socio-ecological resilience: the roles of the mountain farmer cooperative Genossenschaft Gran Alpin in Graubünden, Switzerland. Ecological Economics, 98, 11–21. https://​doi​.org/​10​.1016/​j​.ecolecon​.2013​.12​.004 Battaglia, M., Bianchi, L., Frey, M., & Passetti, E. (2015). Sustainability reporting and corporate identity: action research evidence in an Italian retailing cooperative. Business Ethics: A European Review, 24(1), 52–72. https://​doi​.org/​10​.1111/​beer​.12067 Berentsen, P.B.M., Kovacs, K., & van Asseldonk, M.A.P.M. (2012). Comparing risk in conventional and organic dairy farming in the Netherlands: an empirical analysis. Journal of Dairy Science, 95(7), 3803–11. https://​doi​.org/​10​.3168/​jds​.2011​-5200 Berkum, S. v., Dengerink, J., & Ruben, R. (2018). The food systems approach: sustainable solutions for a sufficient supply of healthy food. Wageningen: Wageningen Economic Research. http://​edepot​.wur​ .nl/​451505 Beske, P., Land, A., & Seuring, S. (2014). Sustainable supply chain management practices and dynamic capabilities in the food industry: a critical analysis of the literature. International Journal of Production Economics, 152, 131–43. https://​doi​.org/​10​.1016/​j​.ijpe​.2013​.12​.026 Bijman, J., & Hanisch, M. (2020). Understanding the heterogeneity among agricultural cooperatives. CIRIEC Working Paper 2020/13. Liège: CIRIEC. www​.ciriec​.uliege​.be/​wp​-content/​uploads/​2020/​ 12/​WP2020​-13​.pdf Bijman, J., Muradian, R., & Schuurman, J. (2016). Cooperatives, Economic Democratization and Rural Development. Cheltenham: Edward Elgar Publishing. Bijman, J. (2022). Cooperatives supporting sustainable farming practices. A perspective from The Netherlands. Forthcoming. Bizikova, L., Nkonya, E., Minah, M., Hanisch, M., Turaga, R.M.R., Speranza, C.I., … Timmers, B. (2020). A scoping review of the contributions of farmers’ organizations to smallholder agriculture. Nature Food, 1(10), 620–30. https://​doi​.org/​10​.1038/​s43016​-020​-00164​-x Borgen, S.O. (2004). Rethinking incentive problems in cooperative organizations. Journal of Socio-Economics, 33(4), 383. Candemir, A., Duvaleix, S., & Latruffe, L. (2021). Agricultural Cooperatives and Farm Sustainability—A Literature Review. Journal of Economic Surveys. https://​doi​.org/​10​.1111/​joes​ .12417

Agricultural cooperatives and environmentally sustainable food systems  329 Carson, R., Darling, L., & Darling, L. (1962). Silent Spring. Boston: Houghton Mifflin. Cechin, A., Bijman, J., Pascucci, S., Zylbersztajn, D., & Omta, O. (2013). Quality in cooperatives versus investor-owned firms: evidence from broiler production in Paraná, Brazil. Managerial and Decision Economics, 34(3–5), 230–43. https://​doi​.org/​10​.1002/​mde​.2586 Chopin, P., Mubaya, C.P., Descheemaeker, K., Öborn, I., & Bergkvist, G. (2021). Avenues for improving farming sustainability assessment with upgraded tools, sustainability framing and indicators: a review. Agronomy for Sustainable Development, 41(2). https://​doi​.org/​10​.1007/​s13593​-021​-00674​-3 Cook, M.L., & Plunkett, B. (2006). Collective entrepreneurship: an emerging phenomenon in producer-owned organizations. Journal of Agricultural and Applied Economics, 38(2), 421–8. Council on Environmental Quality (1972). Integrated Pest Management. Washington, DC: Council on Environmental Quality. Dania, W.A.P., Xing, K., & Amer, Y. (2018). Collaboration behavioural factors for sustainable agri-food supply chains: a systematic review. Journal of Cleaner Production, 186, 851–64. https://​doi​.org/​10​ .1016/​j​.jclepro​.2018​.03​.148 De los Ríos, I., Rivera, M., & García, C. (2016). Redefining rural prosperity through social learning in the cooperative sector: 25 years of experience from organic agriculture in Spain. Land Use Policy, 54, 85–94. https://​doi​.org/​10​.1016/​j​.landusepol​.2016​.02​.009 Dent, D. (1995). Integrated Pest Management. London: Chapman & Hall. Deng, L., Chen, L., Zhao, J., & Wang, R. (2021). Comparative analysis on environmental and economic performance of agricultural cooperatives and smallholder farmers: the case of grape production in Hebei, China. PLOS ONE, 16(1), e0245981. https://​doi​.org/​10​.1371/​journal​.pone​.0245981 Dessart, F.J., Barreiro-Hurlé, J., & van Bavel, R. (2019). Behavioural factors affecting the adoption of sustainable farming practices: a policy-oriented review. European Review of Agricultural Economics, 46(3), 417–71. https://​doi​.org/​10​.1093/​erae/​jbz019 Elkington, J. (1998). Accounting for the triple bottom line. Measuring Business Excellence, 2(3), 18–22. https://​doi​.org/​10​.1108/​eb025539 Ericksen, P.J. (2008). Conceptualizing food systems for global environmental change research. Global Environmental Change, 18(1), 234–45. https://​doi​.org/​10​.1016/​j​.gloenvcha​.2007​.09​.002 FAO. (2014). SAFA (Sustainability Assessment of Food and Agriculture systems) Guidelines Version 3.0. www​.fao​.org/​publications/​card/​en/​c/​70e3bf58​-704d​-4ec2​-b553​-d60f96fa04dc Fawcett, S.E., Fawcett, A.M., Watson, B.J., & Magnan, G.M. (2012). Peeking inside the black box: toward an understanding of supply chain collaboration dynamics. Journal of Supply Chain Management, 48(1), 44–72. https://​doi​.org/​10​.1111/​j​.1745​-493X​.2011​.03241​.x Filippi, M. (2020). Do French agrifood co-ops have a head start in corporate social responsibility? An initial examination of French co-ops and their practices. Review of Agricultural, Food and Environmental Studies, 101(4), 489–506. https://​doi​.org/​10​.1007/​s41130​-020​-00131​-x Fonte, M., & Cucco, I. (2017). Cooperatives and alternative food networks in Italy: the long road towards a social economy in agriculture. Journal of Rural Studies, 53, 291–302. https://​doi​.org/​10​.1016/​j​ .jrurstud​.2017​.01​.019 Frick, B. (2017). Some cooperatives produce great wines, but the majority does not: complementary institutional mechanisms to improve the performance of an indispensable organizational form. Journal of Wine Economics, 12(4), 386–94. http://​dx​.doi​.org/​10​.1017/​jwe​.2017​.33 Fritz, M., & Schiefer, G. (2008). Food chain management for sustainable food system development: a European research agenda. Agribusiness, 24(4), 440–52. https://​doi​.org/​10​.1002/​agr​.20172 Geels, F.W. (2005). Processes and patterns in transitions and system innovations: refining the co-evolutionary multi-level perspective. Technological Forecasting and Social Change, 72(6), 681–96. https://​doi​.org/​10​.1016/​j​.techfore​.2004​.08​.014 Geels, F.W. (2019). Socio-technical transitions to sustainability: a review of criticisms and elaborations of the Multi-Level Perspective. Current Opinion in Environmental Sustainability, 39, 187–201. https://​doi​.org/​10​.1016/​j​.cosust​.2019​.06​.009 Gereffi, G., Humphrey, J., & Sturgeon, T. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78–104. Grashuis, J., & Su, Y. (2019). A review of the empirical literature on farmer cooperatives: performance, ownership and governance, finance, and member attitude. Annals of Public and Cooperative Economics, 90(1), 77–102. https://​doi​.org/​10​.1111/​apce​.12205

330  Handbook of research on cooperatives and mutuals Green, J.M.H., Croft, S.A., Durán, A.P., Balmford, A.P., Burgess, N.D., Fick, S., …West, C.D. (2019). Linking global drivers of agricultural trade to on-the-ground impacts on biodiversity. Proceedings of the National Academy of Sciences, 116(46), 23202–8. https://​doi​.org/​10​.1073/​pnas​.1905618116 Groot Kormelinck, A., Bijman, J., Trienekens, J., & Klerkx, L. (2022). Producer organizations as transition intermediaries? Insights from organic and conventional vegetable systems in Uruguay. Available online: https://​doi​.org/​10​.1007/​s10460​-022​-10316​-3 Hartmann, M. (2011). Corporate social responsibility in the food sector. European Review of Agricultural Economics, 38(3), 297–324. https://​doi​.org/​10​.1093/​erae/​jbr031 Hendrikse, G., & Bijman, J. (2002). On the emergence of new growers’ associations: self-selection versus market power. European Review of Agricultural Economics, 29(2), 255–69. Höhler, J., & Kühl, R. (2014). Position and performance of farmer cooperatives in the food supply chain of the EU-27. Annals of Public and Cooperative Economics, 85(4), 579–95. https://​doi​.org/​10​.1111/​ apce​.12052 ICA (2016). Sustainability Reporting for Co-operatives: A Guidebook. Brussels: International Co-operative Alliance. www​.ica​.coop/​en/​media/​library/​publications/​sustainability​-reporting​-co​ -operatives​-guidebook IPCC (2022). Climate Change 2022. Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge University Press. https://​doi​.org/​10​.1017/​9781009157926 Iyabano, A., Klerkx, L., Faure, G., & Toillier, A. (2021). Farmers’ organizations as innovation intermediaries for agroecological innovations in Burkina Faso. International Journal of Agricultural Sustainability, 1–17. https://​doi​.org/​10​.1080/​14735903​.2021​.2002089 Ji, C., Jin, S., Wang, H., & Ye, C. (2019). Estimating effects of cooperative membership on farmers’ safe production behaviors: evidence from pig sector in China. Food Policy, 83, 231–45. https://​doi​.org/​10​ .1016/​j​.foodpol​.2019​.01​.007 Laforge, J.M.L., Anderson, C.R., & McLachlan, S.M. (2017). Governments, grassroots, and the struggle for local food systems: containing, coopting, contesting and collaborating. Agriculture and Human Values, 34(3), 663–81. https://​doi​.org/​10​.1007/​s10460​-016​-9765​-5 Lamine, C., Darnhofer, I., & Marsden, T.K. (2019). What enables just sustainability transitions in agrifood systems? An exploration of conceptual approaches using international comparative case studies. Journal of Rural Studies, 68, 144–6. https://​doi​.org/​10​.1016/​j​.jrurstud​.2019​.03​.010 Lee, J., Gereffi, G., & Beauvais, J. (2012). Global value chains and agrifood standards: challenges and possibilities for smallholders in developing countries. Proceedings of the National Academy of Sciences, 109(31), 12326–31. https://​doi​.org/​10​.1073/​pnas​.0913714108 Leviten-Reid, C., & Fairbairn, B. (2011). Multi-stakeholder governance in cooperative organizations: toward a new framework for research? Canadian Journal of Non-Profit and Social-Economy Research, 2(2). https://​doi​.org/​10​.22230/​cjnser​.2011v2n2a78 Loorbach, D., Frantzeskaki, N., & Avelino, F. (2017). Sustainability transitions research: transforming science and practice for societal change. Annual Review of Environment and Resources, 42(1), 599–626. https://​doi​.org/​10​.1146/​annurev​-environ​-102014​-021340 Ma, W., & Abdulai, A. (2019). IPM adoption, cooperative membership and farm economic performance. China Agricultural Economic Review, 11(2), 218–36. https://​doi​.org/​10​.1108/​CAER​-12​-2017​-0251 Ma, W., Abdulai, A., & Goetz, R. (2018). Agricultural cooperatives and investment in organic soil amendments and chemical fertilizer in China. American Journal of Agricultural Economics, 100(2), 502–20. https://​doi​.org/​10​.1093/​ajae/​aax079 Malak-Rawlikowska, A., Majewski, E., Wąs, A., Borgen, S. O., Csillag, P., Donati, M., … Wavresky, P. (2019). Measuring the economic, environmental, and social sustainability of short food supply chains. Sustainability, 11(15), 4004. www​.mdpi​.com/​2071​-1050/​11/​15/​4004 Maloni, M.J., & Brown, M.E. (2006). Corporate social responsibility in the supply chain: an application in the food industry. Journal of Business Ethics, 68(1), 35–52. https://​doi​.org/​10​.1007/​s10551​-006​ -9038​-0 Meynard, J.-M., Jeuffroy, M.-H., Le Bail, M., Lefèvre, A., Magrini, M.-B., & Michon, C. (2017). Designing coupled innovations for the sustainability transition of agrifood systems. Agricultural Systems, 157, 330–9. https://​doi​.org/​10​.1016/​j​.agsy​.2016​.08​.002

Agricultural cooperatives and environmentally sustainable food systems  331 Miralles, I., Dentoni, D., & Pascucci, S. (2017). Understanding the organization of sharing economy in agri-food systems: evidence from alternative food networks in Valencia. Agriculture and Human Values, 34(4), 833–54. https://​doi​.org/​10​.1007/​s10460​-017​-9778​-8 Morgan, J.A., Follett, R.F., Allen, L.H., Del Grosso, S., Derner, J.D., Dijkstra, F., … Schoeneberger, M.M. (2010). Carbon sequestration in agricultural lands of the United States. Journal of Soil and Water Conservation, 65(1), 6A–13A. https://​doi​.org/​10​.2489/​jswc​.65​.1​.6A Mwambi, M., Bijman, J., Mshenga, P., & Oosting, S. (2020). Adoption of food safety measures: the role of bargaining and processing producer organizations. NJAS: Wageningen Journal of Life Sciences, 92(1), 1–9. https://​doi​.org/​10​.1016/​j​.njas​.2020​.100337 Nematollahi, M., & Tajbakhsh, A. (2020). Past, present, and prospective themes of sustainable agricultural supply chains: a content analysis. Journal of Cleaner Production, 271, 122201. https://​doi​.org/​ 10​.1016/​j​.jclepro​.2020​.122201 Nilsson, J., Svendsen, G.L.H., & Svendsen, G.T. (2012). Are large and complex agricultural cooperatives losing their social capital? Agribusiness, 28(2), 187–204. https://​doi​.org/​10​.1002/​agr​.21285 Olde, E.M. de, Bokkers, E.A.M., & de Boer, I.J.M. (2017). The choice of the sustainability assessment tool matters: differences in thematic scope and assessment results. Ecological Economics, 136, 77–85. https://​doi​.org/​10​.1016/​j​.ecolecon​.2017​.02​.015 Pennerstorfer, D., & Weiss, C.R. (2013). Product quality in the agri-food chain: do cooperatives offer high-quality wine? European Review of Agricultural Economics, 40(1), 143–62. https://​doi​.org/​10​ .1093/​erae/​jbs008 Polman, N.B.P., & Slangen, L.H.G. (2002). Self-organising and self-governing of environmental co-operatives: design principles. In K. Hagedorn (ed.), Environmental Co-operation and Institutional Change (pp.91–111). Cheltenham: Edward Elgar Publishing. Poppe, K.J., Termeer, C.J.A.M., & Slingerland, M. (2009). Transitions towards sustainable agriculture and food chains in peri-urban areas. Wageningen: Wageningen Academic Publishers. https://​doi​.org/​ 10​.3920/​978​-90​-8686​-688​-5 Rottwilm, I., & Theuvsen, L. (2016). Nachhaltigkeitskommunikation in der Ernährungswirtschaft. In: C. Willers (ed.), CSR und Lebensmittelwirtschaft. Management-Reihe corporate social responsibility (1st ed., pp.119–37). Dordrecht: Springer Gabler. Rudd, M.A. (2000). Live long and prosper: collective action, social capital and social vision. Ecological Economics, 34(1), 131–44. https://​doi​.org/​10​.1016/​S0921​-8009(00)00152​-X Runhaar, H., Fünfschilling, L., van den Pol-Van Dasselaar, A., Moors, E. H. M., Temmink, R., & Hekkert, M. (2020). Endogenous regime change: lessons from transition pathways in Dutch dairy farming. Environmental Innovation and Societal Transitions, 36, 137–50. https://​doi​.org/​10​.1016/​j​ .eist​.2020​.06​.001 Stranieri, S., Orsi, L., Banterle, A., & Ricci, E.C. (2019). Sustainable development and supply chain coordination: the impact of corporate social responsibility rules in the European Union food industry. Corporate Social Responsibility and Environmental Management, 26(2), 481–91. https://​doi​.org/​10​ .1002/​csr​.1698 Su, Y., & Cook, M.L. (2020). Advances in agricultural cooperative research since 2007: a review of Chinese agricultural economics literature. Annals of Public and Cooperative Economics. https://​doi​ .org/​10​.1111/​apce​.12273 Sutherland, L.-A., Darnhofer, I., Wilson, G., & Zagata, L. (2015). Transition Pathways towards Sustainability in Agriculture: Case Studies from Europe. Wallingford: CABI. Vittersø, G., Torjusen, H., Laitala, K., Tocco, B., Biasini, B., Csillag, P., …Wavresky, P. (2019). Short food supply chains and their contributions to sustainability: participants’ views and perceptions from 12 European cases. Sustainability, 11(17), 4800. www​.mdpi​.com/​2071​-1050/​11/​17/​4800 Wang, Y., Zhu, Y., Zhang, S., & Wang, Y. (2018). What could promote farmers to replace chemical fertilizers with organic fertilizers? Journal of Cleaner Production, 199, 882–90. https://​doi​.org/​10​ .1016/​j​.jclepro​.2018​.07​.222 Westerholz, H.K., & Höhler, J. (2021). Corporate social responsibility reporting in the food industry— comparison of co-operatives and investor-owned dairies. Corporate Social Responsibility and Environmental Management, 29(1), 211–22. https://​doi​.org/​10​.1002/​csr​.2197

332  Handbook of research on cooperatives and mutuals Westerink, J., Jongeneel, R., Polman, N., Prager, K., Franks, J., Dupraz, P., & Mettepenningen, E. (2017). Collaborative governance arrangements to deliver spatially coordinated agri-environmental management. Land Use Policy, 69, 176–92. https://​doi​.org/​10​.1016/​j​.landusepol​.2017​.09​.002 World Commission on Environment and Development. (1987). Our Common Future. Oxford: Oxford University Press. Yang, H., Klerkx, L., & Leeuwis, C. (2014). Functions and limitations of farmer cooperatives as innovation intermediaries: findings from China. Agricultural Systems, 127, 115–25. http://​doi​.org/​10​.1016/​ j​.agsy​.2014​.02​.005 Yu, L., Chen, C., Niu, Z., Gao, Y., Yang, H., & Xue, Z. (2021). Risk aversion, cooperative membership and the adoption of green control techniques: evidence from China. Journal of Cleaner Production, 279, 123–288. https://​doi​.org/​10​.1016/​j​.jclepro​.2020​.123288 Zhou, J., Yang, Z., Li, K., & Yu, X. (2019). Direct intervention or indirect support? The effects of cooperative control measures on farmers’ implementation of quality and safety standards. Food Policy, 86. https://​doi​.org/​10​.1016/​j​.foodpol​.2019​.05​.011

21. The development of cooperative-designed indicators for the SDGs Fiona Duguid and Daphne Rixon1

INTRODUCTION After decades of work with the United Nations, 193 countries adopted the 2030 Agenda for Sustainable Development in 2015 (United Nations, 2019a). The Sustainable Development Goals (SDGs) provide “a shared blueprint for peace and prosperity for all people and the planet, now and the future” (United Nations, 2019b). Since the signing, there has been a growing need for and interest in measuring and reporting on the SDGs (Sustainable Development Solutions Network, 2015). In this time of dramatic climate change, political instability, and severe inequality, the SDG framework is crucial to the short and long-term sustainability of the planet and its people. The United Nations Sustainable Development Goals comprise 17 goals (Appendix A) and 169 targets. The UN states that the SDGs are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate, environmental degradation, prosperity, and peace and justice (United Nations, 2019a). The development of the SDGs, a new global framework, requires countries, businesses, communities, and civil society to measure and report on their impact regarding 17 Sustainable Development Goals (ICA, 2021; Novokic, 2020). The SDGs define an agenda for the sustainable development of all nations which adhere to economic growth, social inclusion, and environmental protection (Goyannes Gusmão Caiado, 2018; Stafford-Smith et al., 2017). The SDGs are intended to address sustainable development processes in both developed and developing countries and to facilitate action at all levels and with all actors, including government, civil society, the private sector, and the science community, to strengthen the capacity of the state to achieve the desired outcomes (Recuero Virto, 2018). Indicators are the backbone of monitoring progress towards the SDGs at the local, national, regional, and global levels. Indicators are the actual variable being measured.2 According to the theory of change, indicators focus on how to measure the implementation and effectiveness. A sound indicator framework will turn the SDGs and their targets into a management tool to help countries develop implementation strategies and allocate resources accordingly, as well as a report card to measure progress towards sustainable development and help ensure the accountability of all stakeholders for achieving the SDGs (Sustainable Development Solutions Network, 2015). Since all business enterprises, not just cooperatives, are expected to report on the SDGs, this chapter discusses how cooperatives can measure SDGs in a way that reflects the co-op difference. In particular, this chapter explores why cooperatives need to measure and report on the SDGs and link the SDGs to the seven principles of cooperatives, as well as how they can do this. 333

334  Handbook of research on cooperatives and mutuals Table 21.1

Cooperative principles

Principle

Description

1

Voluntary and Open Membership

2

Democratic Member Control

3

Member Economic Participation

4

Autonomy and Independence

5

Education, Training and Information

6

Cooperation among Cooperatives

7

Concern for Community

Source: ICA (n/d). Retrieved from www​.ica​.coop/​en/​co​-operatives/​co​-operative​-identity.

We argue that reporting on the SDGs in the context of the seven principles (Table 21.1) enables cooperatives to illustrate their cooperative difference from investor-owned firms (IOF), which are increasingly reporting on SDG performance. We also recognize that complete linkage between the SDGs and the seven principles may not be feasible; however, we expect there will be a considerable degree of correlation. Cooperatives have a unique opportunity to demonstrate their cooperative difference from other business enterprises through their non-financial performance reporting. We argue that to better distinguish themselves from investor-owned firms (IOFs), when measuring their SDG performance cooperatives could consider linking the SDGs to the seven principles whenever feasible. Indeed, we contend that reporting on SDGs in isolation from the seven principles does not demonstrate the cooperative difference.

PRIOR RESEARCH ON SDG REPORTING Reporting on the Seven Principles of Cooperatives The International Cooperative Alliance’s (ICA) Statement on the Cooperative Identity includes definitions, values, and seven principles by which cooperatives put the values into practice (Appendix B). Although the ICA provides explanations for each of the principles, they do not include a requirement for operationalizing the principles as reflected through key performance indicators (KPIs).3 The seven principles are not rules; instead, they guide cooperatives (Birchall, 2005). However, Passey (2005) explains that for organizations to be recognized by the ICA, it is necessary to adopt the definition, espouse values, and adhere to cooperative principles. It is argued by Birchall (2005) and Côté (2000) that the principles should form a framework to evaluate cooperatives against their performance. Rixon’s (2013a) research into reporting on the seven principles revealed that there was relatively little reference to the seven principles in the cooperative insurance sector in their annual reports. However, while the seven principles were not explicitly monitored and measured, Rixon found several examples of data reported in annual reports that could be linked to the principles. Similarly, other studies (Birchall, 2005; Brown and Hicks, 2007; and Novkovic, 2006) found little evidence of the seven principles in cooperative reporting. In a case study of 23 credit unions in Canada and the United States, Rixon (2013b) found that the seven principles were not explicitly measured as KPIs. Despite interviewees’ claims that the principles were a part of their corporate culture, Rixon’s research found an overall lack of awareness.

The development of cooperative-designed indicators for the SDGs  335 A similar finding was made by Kleanthous et al. (2019), who examined adherence to the seven principles of cooperatives during the 2008 financial crisis. They found the principles are no longer a universal guide to governance and accountability. Alves et al. (2019) contend that a cooperative’s activities should incorporate the seven cooperative principles. Their study of five mining cooperatives in Brazil found that some of these principles are ignored. Their interviews with the five participating cooperatives revealed that only one of the seven cooperative principles on voluntary and open membership is being followed by all of them. In contrast, two out of the five cooperatives followed four other principles related to required education, training and information and independence, cooperation among cooperatives, and concern for community; these had support in training from a public organization, namely a university. Several authors have examined non-financial reporting by cooperatives. For example, Gordon-Nembhard (2015) provides an overview of reporting and accounting for cooperative impact, and non-financial reporting is described by Glas (2015). However, there is minimal research on cooperatives’ reporting on the seven principles. Cooperative Reporting on SDGs The following section describes how cooperatives are reporting on their SDG performance. Bickford (2020) argues that cooperatives could serve an important role in addressing environmental crises. The International Cooperative Alliance (Beishenaly & Eum, 2021) recently published a report that provided a high-level SDG framework that cooperatives can use. They note that while the Statement on the Cooperative Identity references environmental sustainability as a part of the seventh principle, there is relatively little emphasis on sustainability, with the Guidance Notes to the cooperative principles explaining that environmental sustainability comprises one-third of the meaning of sustainable development. Bickford suggests that the cooperative principles should be changed to recognize humanity’s inextricable links with the natural world. Several studies have found evidence of cooperatives’ contribution to the SDGs. In their study of forestry cooperatives in Quebec and Honduras, Guillotte and Charbonneau (2020) found that the cooperatives under study adopted practices related to all SDGs except for SDG 14. The authors contended that the collective participation of members in ownership, control, and results, characteristic of cooperatives, represents an advantage in contributing to the fight against poverty (SDG 1), the reduction of inequalities (SDG 10), and the promotion of just, peaceful, and inclusive societies (SDG 16). They found that through member participation in property ownership, cooperatives promote their rights to economic resources and property (target 1.4) and encourage their empowerment and social and economic integration (target 10.2). Through a democratic governance structure and mechanisms, the authors suggested that member control results in greater accountability and transparency (target 16.6) and ensures that dynamism, openness, participation, and representation characterize decision-making (target 16.7). Guillotte and Charbonneau contend that collective participation in results provides equal opportunities, reduces inequalities in outcomes (target 10.3) through budgetary and salary policies, and promotes greater equality (target 10.4). Additionally, Mozas-Moral, Fernandez-Ucles, Medina-Viruel, and Bernal-Jurado (2021) examined Spanish wine cooperatives and found their performance is linked to SDGs 4, 8, 9, 12, 13, 15, and 17. The authors illustrate that the implementation of these SDGs improved the

336  Handbook of research on cooperatives and mutuals cooperative performance of the most innovative Spanish winemakers, thereby contributing to the economic development and prosperity of regions and nations. In their study of Brazilian cooperatives, Macagnam and Seiber (2021) identified 61 sustainability indicators from the primary stakeholders’ perspective, which were correlated in four pillars: economic, 20; social, 18; environmental, 13; and cultural, 10. Their analysis of the cooperative organizations’ websites revealed that the disclosure concentrated more on cultural and social pillars and neglected environmental and economic pillars. Based on their study on Brazilian mining cooperatives, Alves et al. (2019) argue that the use of cooperative principles can support the attainment of sustainability objectives within mining activities. Their study indicated that the participating cooperatives are not working in harmony with all those principles and have several difficulties in putting them into practice. Consequently, this could harm their mining cooperatives’ responses to collective needs and contributions toward sustainable development at local and global levels. Yakar Pritchard and Çalıyurt (2021) found that the economic and social performance indicator disclosure levels of the financial services cooperatives sector are higher than cooperatives in other sectors in their examination of 168 sustainability reports for cooperatives that use the Global Reporting Initiative (GRI) G4 reporting, and that is included in the Sustainability Disclosure Database (SDD-GRI). They also found that the agricultural sector’s labor practices and decent work category disclosure levels are lower than those of cooperatives active in the healthcare and financial services. Moreover, their study revealed that 69 percent of the cooperatives applying the GRI-G4 framework are large-scale enterprises, with only 14.3 percent considered SMEs. Overall, the disclosure levels of large-scale cooperatives are higher than those of SMEs, thereby implying that many small- and medium-sized cooperatives have yet to engage with sustainability reporting. In an earlier study conducted by Duguid and Balkin (2016) on the websites and annual reports of 118 cooperatives, the authors describe their five main findings. First, cooperatives are reporting on community donations, activities, and economic viability; however, sustainability was not reported as frequently as the other two dimensions. Second, those cooperatives that demonstrate their commitment to communicating sustainability have embraced the cooperative sustainability connection, as illustrated through the depth and breadth of talking about sustainability. Conversely, many more cooperatives are not reporting on their sustainability-related activities and impact, and many have minimal sustainability-related content on their websites or in their annual reports. Third, in many cases, cooperatives only mention sustainability in the context of their donations to the community. Fourth, financial cooperatives are leading the way in reporting about sustainability. Last, there is potential for sector federations, umbrella organizations, and research centers to expand their role in promoting sustainability. Linking the SDGs and the Seven Principles The Committee for Promoting and Advancing Cooperatives (COPAC) links the SDGs and the seven principles. In a report by COPAC (2020), it argued that cooperative values and principles such as democratic ownership, transparency, and accountability could play an essential role in helping cooperatives become critical partners in making development processes and institutions more effective and participatory. The report states that principle six, “cooperation among cooperatives,” is reflected through the multiple partnerships that have been formed

The development of cooperative-designed indicators for the SDGs  337 within the cooperative movement. The report claims that principle seven, “concern for community,” can motivate cooperatives to work for the sustainable development of their communities. Similarly, Herbert et al. (2016) contend that sustainability reporting can simultaneously incorporate adherence to and implementation of sustainable development principles. The authors argue that cooperatives’ principles can help achieve sustainable development goals (SDGs) since there are common goals between the two concepts. In a study of the handloom weaving industry in India, Bhowmik (2021) found that by providing sustainable employment (adhering to the SDGs) and through the better implementation of various welfare schemes, cooperatives in the handloom weaving industry can combine their economic and social goals. Similarly, Wanayama (2014) contends that SDGs such as poverty reduction, gender equality, and creating sustainable employment may be achieved through cooperatives’ efforts in production and marketing. Meanwhile, Sacchetti and Tortia (2020) claim that producers’ cooperatives perform social responsibilities and output and employment creation. Martinez-Leon et al. (2020) found in their study of Spanish cooperatives that as a result of their principles and values, cooperatives contribute to gender equality (SDG 5), decent work, economic growth (SDG 8), and the reduction of inequalities (SDG 10). The authors claim that the increased presence of women in cooperatives relative to other organizations improves their socio-professional position and economic income, thereby reducing poverty (SDG 1). Imaz and Eizagirre (2020) suggest cooperatives have a triple role as economic actors, social groups, and democratic organizations in advancing sustainability through their relationship with the local territory and vulnerable groups. In a study of cooperatives in Mexico, Díaz de León et al. (2021) found ten types of social benefits were associated with cooperatives: (1) social development, (2) social and solidarity economy, (3) culture and traditions, (4) decent employment, (5) social entrepreneurship, (6) cooperative networks, (7) cooperative culture, (8) health, (9) integral training, and (10) preservation of the environment. The authors point out that the ten types of social benefits correlate with the principles and values of cooperatives. In terms of cooperative principles, they found that promoting cooperative education and education in the solidarity economy and promoting ecological culture were associated with cooperatives. Díaz de León et al. note that cooperatives contribute to several SDGs: goal 1, no poverty; goal 3, good health and wellbeing; goal 4, quality education; goal 5, gender equality; goal 8, decent work and economic growth; and goal 12, responsible consumption and production. Problems with Reporting Frameworks and the Overall Lack of Reporting by Cooperatives Rawlston and Duguid (2020) found shortcomings in the current reporting models employed, such as GRI. They found support for a link between the principles and sustainability efforts, including activities relating to the SDGs. The authors identified a framework of stratification of stakeholder interests, mission, and organizational activity and impact. They developed a conceptual model of values alignment and impact measurement (based on cooperative principles to guide organizational performance reporting). The model will guide the development of appropriate metrics related to social and environmental value and economic value for an organization and thereby provide more meaningful information to stakeholders. When developing a reporting framework, it is essential to consider the needs of micro cooperatives. For

338  Handbook of research on cooperatives and mutuals example, Gosselin (2019) found that a Cooperative Performance Indicator framework did not fully meet the needs of micro, nonprofit bike cooperatives. Duguid and Balkin’s (2016) research found very few cooperatives using a sustainability reporting tool and none using a specific one for cooperatives. On the other hand, they found that the most talked-about indicator for cooperatives is donations to the community. Disappointingly, environmental indicators ranked very low. In their study of 300 cooperatives, Bollas-Araya (2016) found that 8.3 percent of the top cooperatives produced their sustainability reports following GRI guidelines. These cooperatives were located primarily in the Netherlands and Germany, and they were classified in the agri-food, insurance, wholesale, and retail sectors. In comparison, 82 percent of G250 companies report in such a way. In all, 52 percent of all the cooperatives that did report were externally assured, which bore greater similarity to the 59 percent of G250 companies. The lack of a reporting framework and guidelines can have a detrimental impact on the quality of SDG reporting. Carini et al. (2020) stress the importance of providing guidelines and defining specific indicators. The authors contend that the effectiveness of reporting frameworks can be compromised by vague indicators and a lack of clear guidelines as to how the indicators should be presented. Another area of concern identified by Carini et al. (2020) relates to the freedom companies have about which indicators to report and which to omit, since this casts doubt on the effectiveness of the reporting frameworks. Consequently, the lack of cooperative reporting on SDG performance can be attributed to the lack of a standardized framework in indicators. In her study of social impact reporting by credit unions in Ireland, McCarthy (2021) found they preferred a simplified approach using standardized indicators for all credit unions. Indeed, McCarthy (2021) argues that a simple suggested template or indicators would help stimulate credit unions to begin to engage and overcome the barriers to reporting on social impact. However, even when cooperatives eventually begin reporting on their SDG performance, it is essential to be mindful of management impressions. As is often the case in IOBs, Corrigan and Rixon (2017) found in their case study of electric cooperatives in the United States that while a significant number of KPIs were reported, these performance indicators largely serve impression management goals and operational demands rather than reporting on fulfillment of the seven cooperative principles that are fundamental to the cooperative movement. The literature review revealed minimal reporting on cooperative performance relative to the seven principles, mainly due to lack of incorporation into cooperatives’ strategic plans. Consequently, the principles are not operationalized and therefore not monitored and reported. Instead, some cooperatives maintain that the seven principles are just part of their culture. Similarly, there was relatively little evidence of operationalization of the SDGs and, therefore, minimal reporting on SDG performance. Our literature review found limited evidence of cooperatives’ widespread reporting on SDG performance. While several recent studies attributed cooperatives’ SDG performance to their principles and values, these studies did not provide specific linkages of the 17 SDG indicators to any of the seven principles. Instead, they just made general linkages. Finally, the lack of a cooperative SDG reporting framework may be contributing to the minimal level of reporting by cooperatives—particularly for small-to-medium-sized cooperatives that likely would not have the resources to develop a reporting system.

The development of cooperative-designed indicators for the SDGs  339

TOWARD A NEW FRAMEWORK FOR REPORTING SDGs BY COOPERATIVES This research aims to explore the question: How can co-ops measure the SDGs in a way that reflects the co-op difference? To that end, we have used action research as our methodology (Banks, Herrington & Carter, 2017; Eden & Ackermann, 2018; Fox & MacLeod, 2021). Action research emphasizes knowledge produced in the context of the application (Eden & Ackermann, 2018) and supports a process of creating and evidencing social and economic impact (Banks, Herrington & Carter, 2017). “Action research challenges the linear model of research, as individual, group, organizational, social and economic changes are expected to occur throughout the research process” (Ibid, p.542). This iterative co-creation process towards the desired outcome helps bridge theory and practice. We began by developing a set of indicators and connecting metrics, initially “crowdsourcing” indicators and metrics through a literature and content review. Novkovic’s (2020) report entitled “Sustainability Indicators from the Cooperative Perspective” proved to be a good starting point as that report provided a list of almost 90 indicators. We also brought in indicators and metrics from the following reporting tools: CEO Water Mandate, CDP Global, GRI, UNCTAD, and SO 14031. We were able to round out the environmental indicators, plus include indicators most commonly thought about in the corporate world. Finally, we brought in the Cooperative Performance Indicators (CPI) that were developed through the CEARC project to measure co-op performance based on the cooperative principles. These indicators expand the list to include cooperative-specific indicators. We developed a list of just over 470 indicators and metrics through this compilation process. The enormity of this list was purposeful, to be able to see themes, patterns, and crossovers. We then reduced the 470 indicators down to one more manageable but representative one. We did this via an analysis process using the 17 SDGs and seven cooperative principles. We associated each indicator or metric to one or more of the SDGs and one or more cooperative principles. We then conducted a frequency analysis to rank the metrics from “most frequent” to “less frequent.” As a result, we identified 50 indicators. With the 50 indicators, we turned to our pilot participants. Through the aid of Co-operative and Mutuals Canada, we had recruited a representative sample of cooperatives. Because the measurement framework we are designing is aimed at all cooperatives, we sampled based on geography, language, size, industry, and type. We ended up with 16 participants. With our pilot participants we ran two surveys to validate the chosen indicators and metrics. We gave participants the task to assess the 50 indicators based on four criteria: important for stakeholders, feasibility, relative to other metrics or indicators, and sector-specific. The “relative to other metrics or indicators” criteria allowed participants to assess whether the metric needed to have another metric or two to make sense or have meaning. Feasibility as an assessment criteria meant whether cooperative representatives would easily collect and report on the metric. The sector-specific criteria allowed for the specificity of an industry or sector to emerge. After this task, we were able to reduce the 50 indicators down to 25. Through an additional survey identifying importance, the participants were able to reduce the indicators down to 20 that we chose to build our framework.

340  Handbook of research on cooperatives and mutuals The importance of the involvement of stakeholders allowed us to identify whether any or all stakeholders would think the data collected about this indicator was essential for the success of their co-op.

ANALYSIS AND DISCUSSION Indicator and Metric Development Below, we discuss a profile framework following the metrics and indicators we identified in our research. Table 21.2 captures the profile framework that each cooperative would complete. Table 21.2

Profile framework

Contact information

Co-op information

Human resources

Financial information

Name

Type

# Members

$ Assets

Name of co-op/mutual

Mission statement

# Employees (FTE)

$ Liabilities

Address

Industry

# Total volunteer hours

$ Revenues

Website

Year of incorporation

# Directors on the Board

$ Expenses

Contact person

For-profit or nonprofit

$ Salaries

Email

Beneficiaries

$ Taxes

Direct impact on SDG

$ Patronage

The profile is a mix of metrics—some need filling in on an annual basis, and some just need to be validated for any updates each year. With the profile completed, the 20 SDG and co-op principle framework becomes more dynamic, allowing for percentages and other analyses and reporting to be done. Table 21.2 shows standard “tombstone-type” metrics,4 whereas others are more specific to the cooperative sector. The following discussion presents the 20 indicators and metrics as selected by the participants and research team and the aligning SDGs and cooperative principles. The expectation is the cooperative would be providing data annually on these indicators. Indicators reflect an overall goal (such as level of participation in the cooperative) whereas the metric measures progress toward this goal, in this case by calculating how many members withdrew their membership. Metric

Indicator

SDG

Co-op

How many members withdrew their membership in your most

Participation

8,16

1,2,3

Principle 1

recently completed fiscal year?

The answer unit for this metric is a number, with the data rolling up into an indicator that focuses on participation opportunities. The metric strongly meshes with cooperative principles P1, P2, and P3, signaling open and voluntary members, opportunities for democratic control, and member economic participation. The metric also accounts for SDGs 8 if linked with worker cooperative type and 16 as strong democratic, open, and participative organizations.

The development of cooperative-designed indicators for the SDGs  341 Metric

Indicator

SDG

How many members attended the AGM?

Participation

10,16

Co-op Principle

2

2

Transparency

The answer unit to this metric is the data contributing to the participation and transparency indicators. This metric supports a deeper understanding of P2 directly connecting to democratic member control and a better understanding of the cooperative’s impact for SDGs 10 and 16. Through the opportunity to participate democratically with decision-making and organizational governance, cooperatives can support SDG 10. They can further support effective, accountable, and transparent organizations as per SDG 16. Metric

Indicator

SDG

How was the surplus distributed at the end of the last fiscal year?

Economic equality and

1,10,11,16

Co-op Principle

3

3

equity

Metric 3’s answer unit is a dollar amount reported based on the total amount of surplus, the amount retained, the amount distributed to a member loyalty payment, retained earnings, community donations, taxes, and employee shares. If the co-op is a not-for-profit, then it is not applicable, and if there was no surplus, zero could be added. Economic equality and equity is the indicator most relevant. There is a deep connection with P3 through quantifying the member economic participation. Based on collected data, 1, 10, 11, and 16 can be reported regarding the aligned SDGs. Cooperatives can support SDG 1: no poverty by distributing the surplus to members. Metric

Indicator

SDG

What is the percentage of the co-op owned by members?

Independence

1, 16

Co-op Principle

4

3,4

Economic equality and equity

The answer to this metric is a percentage calculated from the member’s owned value over any other owners’ value. This metric intends to highlight potential external control of the cooperative by non-members. Suppose there is a significant number of shares issued to non-members. In that case, it is possible that this could harm democratic member control and economic participation since the non-members may exert control to ensure they receive their desired return on investment. This metric is aligned with SDG 1 since non-members could harm reducing poverty. The connection with SDG 16 is based on the potential weakening of the cooperative institution due to non-member control. Metric

Indicator

SDG

Co-op

16,17

4, 6

Principle 5

Does your co-op/mutual receive donated services or capital goods Independence that help its existence?

Collaboration

$ value of donated goods/services # of organizations/individuals supplying them

The answer unit for this metric is the combination of the dollar value of donated services/ goods and the number of organizations and individuals supplying these services or goods. This

342  Handbook of research on cooperatives and mutuals metric rolls up in the independence and collaboration indicators. Regarding the cooperative principles, the data reported can help measure P4 and P6, reflecting self-help, self-responsibility, and solidarity while supporting a deeper understanding of SDGs 16 and 17 through sustainable partnerships. Metric

Indicator

SDG

How many employees (FTE) in each of these categories?

Equality and equity

8,10

Co-op Principle

6

N/A

# permanent FTEs # temporary FTEs

The answer unit for this metric is the number of permanent and temporary employees. Through this metric the cooperative can report on equality and equity and SDG 8 through having decent work and workplaces and SDG 10 through reducing inequalities. This metric does not connect with any of the cooperative principles, which highlights how the cooperative principles do not reflect decent work and workplaces. Metric

Indicator

SDG

Co-op Principle

7

How many people are in each of the following diversity categories?

Equality and

Rows: # age group 15–29, age group 65-plus, women, men, gender-diverse,

equity

5,8,10,16

1,2

Indigenous, visible minority, persons with a disability Columns: # directors on the board, management, operations, members

The unit answer is a number. Metric 7 is a dynamic metric with a grid to cover the diversity of potential answers. The rows capture identity: age group 15–29, age group 65-plus, women, men, gender-diverse, indigenous, visible minority, persons with a disability; the columns capture position: directors on the board, management, operational employees and members. Clearly, people can identify in multiple ways, so may choose more than one answer. We can interpret a deeper sense of equality and equity with this information. P1 and P2 are reflected in the cooperative principles of self-help, equality, and equity. SDGs 5, 8, 10, and 16 can all be reported based on this data. SDG 5 is about improving gender equality and SDG 8 works toward providing decent work, which also connects to SDG 10 (reduced inequalities) and SDG 16 through honesty and openness. Metric

Indicator

SDG

What is the annual remuneration of the highest-paid (FTE)

Equality and equity

8,10

Co-op Principle

8

N/A

employee and the lowest paid (FTE) employee, including bonuses and other benefits? $ highest $ lowest $ mean $ average

The unit answer for this metric is a dollar amount based on the highest, lowest, mean (average), and median. The indicator links to equality and equity with SDG 8 and 10. The narrower the gap between the highest and lowest paid, the narrower the inequalities. However, we can see

The development of cooperative-designed indicators for the SDGs  343 that the cooperative principles do not speak to this through a principle related to ensuring or promoting decent workplaces. Metric

Indicator

SDG

Does your co-op provide benefits to your employees?

Decent workplaces

3, 8, 10,

Co-op Principle

9

N/A

11, 16

Y/N health benefits Y/N collective insurance Y/N retirement programs Y/N in-house athletic facilities Y/N daycare Y/N sick leave Y/N flex time other

Metric 9 offers the opportunity to answer yes or no. If yes, the cooperative is spurred to think about reporting health benefits, collective insurance, retirement programs, in-house fitness, daycare, wellness programs, sick leave, flex time, and others. Details about the reporting of this metric help to understand the indicator of decent workplaces, which is also SDG (8). Collecting information about health, wellness, and fitness will help the cooperative report on SDG 3 (good health and well-being). It also links to SDG 10 (reducing inequalities) via reporting supporting employees outside of work. There is a weaker connection to P7, which is negligible. Metric

Indicator

SDG

Co-op

How many employees and managers are recruited locally for the

Local economic

8, 11, 16

7

co-op’s major operating sites?

development and stability

Principle 10

The answer unit for this metric is a number. Reporting on this helps the cooperative to understand its role in local communities’ economic development and stability. This aligns well with SDG 8, 11, and 16, which we have seen before. Reporting on SDG 8 means understanding that decent work means being able to find employment in the employee's location without having to move and uproot. Reporting on SDG 11 means that local communities have businesses and workplaces that are able to employ people, thus supporting community life. P7 emerges here. The catch-all—P7, concern for community—is the principle where we see a melange of reporting opportunities. Metric

Indicator

SDG

Co-op

Does your co-op have a sustainable procurement policy?

Local economic

11,12

7

Y/N

development and stability

If yes,

Responsible production

What is the % based on $ value of locally sourced?

Environmental

What is the % based on $ value of certified

sustainability

Principle 11

Fair trade, organic, FSC?

Once the cooperative answers yes or no to this metric, the opportunity to provide deeper reporting on activities dollar amount opens up—for example, percentage of procurement that

344  Handbook of research on cooperatives and mutuals is locally sourced and/or certified (organic, fair trade, FSC). Clearly there is a connection to P7 in terms of local economic development and stability. P7 is also where environmental sustainability as an indicator can be embraced. In terms of SDGs, this metric can align with SDG 11 in supporting sustainable cities and communities, as well as SDG 12, responsible consumption and production, through the local procurement of goods or services. Metric

Indicator

SDG

Co-op

Does your cooperative produce goods?

Responsible

12

7

Y/N

production

Principle 12

If yes, is your coop taking measures to produce goods more sustainability? Y/N If yes, what goods are produced by your coop that are % based on $ values Made at least partially from recovered materials Made at least partially from recycled materials Recyclable Certified Fairtrade, organic, FSC Energy-efficient Other

This metric is the opposite of the previous one (Metric 11). Whereas Metric 11 asks about procuring goods and services, Metric 12 asks the cooperative to look at what and how it produces its goods and services. The unit answer of this metric again begins with a yes or no answer. Following this, if the cooperative answers yes, it will be able to report on the percentage of its goods made from at least partially recovered materials, recycled materials, or certified materials. This percentage is reported from the dollar amounts. It can also report on the goods themselves, whether recyclable, certified, energy-efficient, or other. As discussed above, this metric is linked to responsible production indicators SDG 12 and P7. Metric

Indicator

SDG

Co-op

How many co-ops does your co-op work with?

Collaboration

9,11,17

6

Principle 13

# of other co-ops Check all that apply: supplier, customer, research partner, another type of partnership, joint partnership, community project, secondment, advice, training, Creative Commons license, development, other

The unit answer is the total number of organizations. There are several options to choose from, including supplier, customer, research partner, and another type of partnership. We also ask about the nature of the partnership. Is it a joint project, community project, secondment, advice, training, creative commons license, development, or other? This collaboration indicator connects well with SDGs 9, 11, and 17. The new SDG is SDG 9, industry, innovation, and infrastructure. Cooperatives working with cooperatives can potentially be innovative or produce innovative products, services, or systems. There is a direct alignment with P6, cooperative working with cooperatives.

The development of cooperative-designed indicators for the SDGs  345 Metric

Indicator

SDG

Does your co-op share information?

Transparency

8,9,10,11,

Co-op Principle

14

5,7

12,13,16

Rows: annual report, financial report, sustainability report, integrated report, strategic report, community report, other Columns: with employees, with members, with the general public

Metric 14 is also a dynamic metric collecting data on both the type of information shared and to whom it is shared. Metric 4 links directly to the transparency indicator. Cooperatives check all that apply with each row. Each row consists of information such as the annual report, financial report, sustainability report, integrated report, strategic report, and community report; columns are the target audience, including employees, management, operational employees, community, and the general public. This metric links to a number of SDGs, including 8, 9, 10, 11, 12, 13, and 16. A new SDG is SDG 13, climate action, which stems directly from sustainability or integrated reporting opportunities. P15 and P7 both align strongly with this metric. Metric

Indicator

SDG

Co-op

Does your co-op have a Greenhouse Gas inventory?

Environmental

7,9,11,13

7

Y/N

sustainability

Principle 15

If yes, please answer the following Metric tonne baseline scope 1,2,3 emissions of CO₂e Year of baseline

Metrics 15 through 18 collect data on environmental sustainability and have a similar format. Greenhouse Gas (GHG) inventories can be complicated and time-consuming, but there are formulas designed to help businesses to be able to report on their GHG consumption. Therefore this unit answer begins with a yes or no opportunity, followed by the GHG inventory reporting based on metric tonnes. The respondent would first use the baseline, and then in subsequent years report changes from baseline. This metric directly links to the environmental sustainability indicator, including SDGs 7 (affordable and clean energy), 13 (climate action) and 9 and 11. The trend for all environmental reporting to fall into P7 continues here. Metric

Indicator

SDG

Co-op

Does your co-op work to reduce its energy consumption?

Environmental

7,9,11,13

7

Y/N

sustainability

Principle 16

If yes, please answer the following GJ/m2 Baseline energy consumption Year of baseline Energy consumption in last fiscal year Target per year

The unit answer for Metric 17 is gigajoules per square meter (GJ/m2). Once it has been determined that the cooperative works toward reducing its energy consumption (yes or no), a baseline can be reported and then, in subsequent years, the total GJ/m2 and also the target per year. The alignment to the SDGs and cooperative principles is similar to the previous metric.

346  Handbook of research on cooperatives and mutuals Metric

Indicator

SDG

Does your co-op work to reduce its water consumption?

Environmental

6, 14

Y/N

sustainability

Co-op Principle

17

7

If yes, please answer the following ML Baseline water consumption Year of baseline Water consumption in last fiscal year Target per year

The unit answer is megaliters (ML). Due to the focus on water, this metric speaks to SDG 6 (clean water and sanitation) and SDG 14 (life below water). The assumption is that through the conservation of water, cooperatives can have an effect on the global water reserves thus supporting people, animals, water bodies, and the land. P7 is the only place where cooperative principles can recognize environmental sustainability.

18

Metric

Indicator

Does your co-op work to divert its waste?

Environmental sustainability 11, 12, 15 7

SDG

Co-op Principle

Y/N If yes, please answer the following MT baseline waste going to landfill MT baseline recycling MT baseline re-use/donated MT baseline compost Year of baseline MT waste going to landfill in last fiscal year MT recycling in last fiscal year MT re-use/donated in last fiscal year MT compost in last fiscal year MT target for diverting waste per year

Metric tonnes (MT) is the unit answer for this metric. Once a baseline of waste diversion has been determined, the cooperative can report on subsequent years and the targets. Waste diversion can be reported based on landfill, recycled, re-used/donated, and composted. SDG 15 (life on land) connects well here, as does sustainable cities and communities (SDG 11) and SDG 12 regarding responsible consumption. Environmental sustainability is embraced within P7. Metric

Indicator

SDG

How much money is spent on education and training in your co-op?

Lifelong learning

4,8

Co-op Principle

19

5

% of $ amount Rows: All training, sustainability training Columns: board directors, employees, members, general public

Metric 19 is measured in terms of dollar amounts; however, this metric is dynamic based on type of education and to whom. It is differentiated down the rows between all and sustainability education and training. A percentage can be determined from the reported numbers for education and training for the board, employees, members, and the general public. This links

The development of cooperative-designed indicators for the SDGs  347 into the indicator of lifelong learning, which directly reports on P5 (education) and toward SDGs 4 (quality education) and 8 (decent work), depending on the target audience. Metric

Indicator

SDG

How much does your co-op donate to other activities that support

Sustainability

11

Co-op Principle

20

7

SDGs? $ $ and in-kind values combined

The final metric provides the opportunity to add up the cooperative’s dollar amount spent on sustainability activities. Activities could include research, partnerships, community projects, new co-op development, and so on. This metric links well with SDG 11, which reports on sustainable communities, and positions P7 to undergird concern for the community. Discussion In collaboration with cooperative practitioners, a profile framework was developed, and 20 metrics were defined and designed that report based on the SDGs and cooperatives’ principles. The framework presented provides an example of how cooperatives can measure the SDGs to reflect their cooperative difference through seven principles of cooperatives. A collaborative effort with participants who represent the diversity of the cooperative sector in Canada provided deep and meaningful insight into the development of the framework. We learned from the participants the necessity to clarify and define the indicator, metric, and unit answers. Through the iterative process, we found varying understandings of the metrics among the participants that needed attention and precision in conceptualization and wordsmithing. We also found through working with the participants that the rationale for metric inclusion and its connection to the SDGs or cooperative principles can be problematic. As a result, there is an ongoing need to assess the framework constantly. Understanding the need to embrace adaptability and flexibility with the current iteration of the framework, the following provides an analysis of the framework as a whole. Table 21. 3

Tally of SDGs

SDG#

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

Total

2

0

1

1

1

1

2

8

4

7

10

4

3

1

1

9

2

From Table 21.3, we can see that the most commonly aligned SDG is SDG 11, sustainable cities and communities, followed by SDG 16, peace, justice and strong institutions, and SDG 8, decent work and economic growth. This is not surprising given the values that are associated with cooperatives. Also, given the universal application intention of this framework and selection criteria for the participants to select metrics, it is not surprising that more specific SDGs such as SDGs 2 (zero hunger), 3, 4, 5, 6, 14, and 15 are not more present.

348  Handbook of research on cooperatives and mutuals Table 21.4

Tally of cooperative principles

Cooperative

1

2

3

4

5

6

7

2

3

3

2

2

2

9

Principles Total

Table 21.4 shows the distribution of the cooperative principles as per the alignment to the metrics. All principles can be reported on by the selected metrics, and with good coverage. P7 is the most commonly measured principle due to its generalized nature and landing spot for metrics measuring and reporting on environmental sustainability. Table 21.5

Tally of indicators

Indicator

Total

Participation

2

Transparency

2

Economic equality and equity

2

Independence

2

Collaboration

2

Social equality and equity

2

Decent workplaces

1

Local economic development

2

Responsible production

2

Environmental sustainability

5

Lifelong learning

1

Sustainability

1

Table 21.5 brings together the indicators that correspond to the metrics. This framework for cooperatives offers the opportunity to measure and report on a wide variety of indicators relating to social, economic, and environmental matters. All but one indicator has multiple metrics helping to support the measurement, with environmental sustainability having a number of metrics to measure and report. Each of the indicators also support and are supported by SDGs and cooperative principles except “decent workplaces,” which does not have a cooperative principle to correspond to. When looking at the indicator/metric framework developed with the participants, two key insights surface. Overall, there was a tendency to use principle seven, concern for community, as a catch-all category for SDGs. Because the cooperative principles do not explicitly discuss the environment, P7 became the landing place for environmental sustainability metrics. The correlation between the SDGs and cooperative principles also brought to light the deficiency in the principles around decent work and workplaces. SDG 8, decent work, is not reflected in the seven principles even when stretching our understanding of the principles. This is concerning since most cooperatives are associated with providing reasonable wages and good working conditions.

CONCLUSIONS The main purpose of this project was to develop a reporting framework that would help cooperatives differentiate themselves from IOFs by linking two dimensions: SDGs and the seven

The development of cooperative-designed indicators for the SDGs  349 principles of cooperatives. Linking the SDGs to the seven principles will enable cooperatives to better tell their story. Since most business enterprises are either reporting or will soon be reporting on various SDGs, cooperatives need to distinguish themselves from IOFs. At the outset of this project, we did not envision that all SDGs could be linked to one or more of the seven principles. However, we found it encouraging that all but three metrics could be linked to one or more of the seven principles. However, concerns were raised that three employee-related metrics (permanent/temporary, highest-paid/lowest paid, and benefits—metrics 6, 8, and 9) were not reflected in the principles. This finding should be addressed by the International Co-operative Alliance since the cooperative identity and values are often associated with providing economic benefit to its employees and, by extension, to the community. We found that principle seven was becoming a “catch-all” for various metrics that did not fit into other categories through this project. Consequently, principle seven may be too broad and another principle may be required. This research project makes several important contributions. It identifies how cooperatives can better tell their story regarding their contributions to society. In particular, it illustrates how cooperatives can link 20 key metrics to the SDGs and most of the seven principles. The research also demonstrates how the action research methodology can help the cooperative industry develop meaningful metrics in addressing their performance relative to the SDGs and the seven principles, thereby demonstrating the cooperative difference. Future work is needed in developing a web-based tool to enable cooperatives to enter their data quickly and easily. This online tool needs to be user-friendly and robust, and add value. As we move forward, it is anticipated that some of the 20 metrics will be modified while others will be removed and new metrics added. We also anticipate further changes in language, formulas, positionality, and sector needs. When a sufficient number of cooperatives have entered their data in the web tool, the data collected will enable year-over-year trend analysis and patterns that can be assessed, as well as benchmarking to baseline and targets. Finally, together with the participating cooperatives, we will need to address privacy and confidentiality concerns. There are several areas where additional research is warranted. It would be beneficial to undertake a study three to five years after cooperatives have started accumulating their performance data to evaluate whether there is expanded interest in the SDGs in the cooperative sector. It is expected that this project will form the basis of a “nudge” to encourage more cooperatives to fully embrace SDGs as well as the seven principles. Furthermore, it would be interesting to follow the ICA’s planned review of the seven principles to ascertain if and how they address the gaps highlighted in this research. Another fruitful area for further research would be to evaluate adoption and reporting of SDGs by small to medium-sized cooperatives relative to larger cooperatives. It is expected that small to medium-sized cooperatives may not have sufficient resources to implement, monitor, and measure SDG initiatives. It would also be beneficial to examine the level of support provided by cooperative industry associations, particularly with respect to providing assistance to small to medium-sized cooperatives. Finally, one of the most crucial aspects of SDG measurement is the development of industry benchmarks. The development of benchmarks will hold management to a higher level of accountability for achieving results.

350  Handbook of research on cooperatives and mutuals

NOTES 1. Many thanks to the participants who joined us on this journey to develop indicators and metrics to measure the SDGs. We would like to acknowledge the tireless work of research team members Josée Charbonneau and Eric Gosselin. We would be remiss not to acknowledge the funding of CPA Canada, Centre for Excellence in Accounting and Reporting of Cooperatives at Saint Mary’s University, and Social Science and Humanities Research Council of Canada for this project. 2. For Goal #1, No Poverty, an example of a corresponding indicator is: “1.1.1 Proportion of population below the international poverty line, by sex, age, employment status and geographical location (urban/rural).” 3. An example of a KPI for Principle 7 (Concern for Community) could be the percentage of revenue donated to the community. KPI stands for key performance indicator, a quantifiable measure of performance over time for a specific objective. KPIs provide targets for teams to shoot for, milestones to gauge progress, and insights that help people across the organization make better decisions. Source: www​.qlik​.com/​us/​kpi​#overview. 4. Tombstone-type metrics refer to basic factual information about the cooperative, such as name, address, industry, and so on, that is not evaluating performance.

REFERENCES Alves, W., Ferreira, P., & Araújo, M. (2019). Mining cooperatives: a model to establish a network for sustainability, Journal of Co-operative Organization, 7(1), 51–63. Banks, S., Herrington, T., & Carter, K. (2017). Pathways to co-impact: action research and community organising, Educational Action Research, 25(4), 541–59, DOI: 10.1080/09650792.2017.1331859 Beishenaly, N. & Eum, H. (2021). How Co-operatives Drive the Change: A SDG Framework for Co-operatives, International Co-operative Alliance. Presentation. ICA and the Centre for Cooperative Entrepreneurship of the University of Leuven. Bhowmik, M. (2021). SDGs, social responsibility, institutions and cooperatives: evidence from the handloom weaving sector in India, International Journal of Rural Management, 17(1S), 97S–114S. Bickford, N. (2020). The centrality of environmental sustainability for the co-operative movement and the world, International Journal of Co-operative Accounting and Management, 3(2), 119–38. Birchall, J. (2005). Cooperative principles ten years on, ICA General Assembly Edition, 98 (2), 45–63. Bollas-Araya, H., Polo-Garrido, F., & Segui-Mas, E. (2016). Adoption of sustainability reporting and assurance: a study among the top 300 cooperatives and mutual organizations. Journal of Co-operative Accounting and Reporting, 4(1), 59–78. Brown, L., & Hicks, E. (2007). Accounting for the social: incorporating indicators of the cooperative difference into strategic planning. CIRIEC conference. Victoria. Carini, C., & Gotz, I. (2020). Large cooperatives and SDG 8: quantifying contributions toward the goal, International Journal of Co-Operative Accounting & Management, 3(2), 43–58. Corrigan, L., & Rixon, D. (2017). A dramaturgical accounting of cooperative performance indicators, Qualitative Research in Accounting and Management, 14(1), 60–80. COPAC. (2020). Transforming our world: a cooperative 2030—cooperative contributions to SDGs, www​.ica​.coop/​en/​newsroom/​news/​last​-copac​-brief​-released​-cooperative​-contributionssdg​-17 Côté, D. (2000). Cooperatives and the new millennium: the emergence of a new paradigm. In B. Fairbairn, I. MacPherson, & N. Russell (eds), Canadian Cooperatives in the Year 2000: Memory, Mutual Aid, and the Millennium. Centre for the Study of Co-operatives, University of Saskatchewan. 250–66. Díaz de León, D., Díaz Fragoso, O., Rivera, I., & Rivera, G. (2021). Cooperatives of Mexico: their social benefits and their contribution to meeting the Sustainable Development Goals, Social Sciences, 10(5), 149. Duguid, F., & D. Balkin (2016). Talking the talk: Canadian co-operatives and sustainability reporting, Journal of Co-operative Accounting and Reporting, 4(1).

The development of cooperative-designed indicators for the SDGs  351 Eden, C., & Ackermann, F. (2018). Theory into practice, practice into theory: action research in method development. European Journal of Operational Research, 271, 1145–55. Fox, S., & Macleod, A. (2021). Localizing the SDGs in cities: reflections from an action research project in Bristol, UK, Urban Geography, DOI:​10​.1080/​02723638​.2021​.1953286 Glas, M. (2015). Cooperative social audit in cooperativa obrera. In L. Brown et al (eds), Cooperatives for Sustainable Communities: Tools to Measure Impact and Performance of Cooperatives. Centre for the Study of Co-operatives, Saskatchewan. 321–36. Goyannes Gusmão Caiado. (2018). A literature-based review on potentials and constraints in the implementation of the Sustainable Development Goals. Journal of Cleaner Production, 198(October), 1276–88. https://​doi​.org/​10​.1016/​j​.jclepro​.2018​.07​.102 Gordon Nembhard, J. (2015). Understanding and measuring the benefits and impacts of cooperatives. In L. Brown et al (eds), Cooperatives for Sustainable Communities: Tools to Measure Impact and Performance of Cooperatives. Centre for the Study of Co-operatives, Saskatchewan. 152–79. Gosselin, E. (2019). “The fuzzy feeling isn’t there”: version one of the Cooperative Performance Indicator tool misses the mark for micro coops, International Journal of Co-operative Accounting and Management, 2(1), 64–79. Guillotte, C., & Charbonneau, J. (2020). Exploring the links between the practices of forestry cooperatives and the SDGs, International Journal of Co-operative Accounting and Management, 3(2), 20–42. Herbert, Y., Foon, R., & Duguid, F. (2016). Sustainability Reporting for Cooperatives: A Guidebook |ICA [Sustainability Solutions Group]. www​.ica​.coop/​en/​media/​library/​sus​tainabilit​yreporting​ -cooperatives​-guidebook ICA (2021). Retrieved from www​.ica​.coop/​en/​co​-operatives/​co​-operative​-identity Imaz, O., & Eizagirre, A. (2020). Responsible innovation for sustainable development goals in business: an agenda for cooperative firms, Sustainability, 12(17), 6948. Kleanthous, A., Paton, R., & F. Wilson (2019). Credit unions, cooperatives, sustainability and accountability in a time of change: a case study of credit unions in Cyprus, International Journal of Social Economics, 46(2), 309–23. Macagnan, C.B., & Seibert, R.M. (2021). Sustainability indicators: information asymmetry mitigators between cooperative organizations and their primary stakeholders. Sustainability, 13(15), 8217. doi:​ 10​.3390/​su13158217 Mozas-Moral, A., Fernandez-Ucles, D., Medina-Viruel, M., & Bernal-Jurado, E. (2021). The role of the SDGs as enhancers of the performance of Spanish wine cooperatives. Technological Forecasting & Social Change, 173, 121–76. Martinez-Leon, I., Olmedo-Cifuentes, I., Martínez-Victoria, M., & Arcas-Lario, N. (2020). Leadership style and gender: a study of Spanish cooperatives. Sustainability, 12(12), 5107. McCarthy, O. (2021). Social impact measurement and reporting for Irish credit unions. International Journal of Co-operative Accounting and Reporting, 4(2), 17–25. Novkovic, S. (2006). Cooperative business: the role of cooperative principles and values. Journal of Cooperative Studies, 39(1), 515. Novkovic, S. (2020). Sustainability Indicators from the Cooperative Perspective. Prepared for the UNRISD project Sustainable Development Performance Indicators. SMU, Halifax. Passey, A. (2005). Cooperative principles as “action recipes”: what does their articulation mean for cooperative futures, Journal of Co-operative Studies, 38(1), 28–41. Recuero Virto, L. (2018). A preliminary assessment of the indicators for Sustainable Development Goal (SDG) 14 “Conserve and sustainably use the oceans, seas and marine resources for sustainable development”. Marie Policy, 98(December), 47–57. https://​doi​.org/​10​.1016/​j​.marpol​.2018​.08​.036 Rixon, D. (2013a). Are co-operative principles reflected in performance reporting: a case study of insurance co-operatives. International Journal of Co-operative Management, 6(2), 77–91. Rixon, D. (2013b). Credit Union Performance Reporting in North America. Filene Research Institute, Madison, Wisconsin. Rowlston, N., & Duguid, F. (2020). Cooperative sustainability performance measurement: the role of the Co-op Principles and UN Sustainable Development Goals in the reporting model. International Journal of Co-operative Accounting and Management, 3(2), 4–19. Sacchetti, S., & Tortia, E.C. (2020). Social responsibilities in non-investor owned organisations’ corporate governance, International Journal of Business in Society, 20(2), 343–63.

352  Handbook of research on cooperatives and mutuals Stafford-Smith, M., Griggs, D., Gaffney, O., Ullah, F., Reyers, B., Kanie, N., Stigson, B., Shrivastava, P., Leach, M., & D. O’Connell (2017). Integration: the key to implementing the Sustainable Development Goals, Sustainability Science, 12, 911–19. Sustainable Development Solutions Network. (2015). Indicators and Monitoring Framework for the Sustainable Development Goals: Launching a Data Revolution for the SDGs. Geneva: United Nations. United Nations. (n/d). Retrieved from www​.un​.org/​development/​desa/​disabilities/​about​-us/​sustainable​ -development​-goals​-sdgs​-and​-disability​.html United Nations. (2019a). About the Sustainable Development Goals. United Nations Sustainable Development Goals Knowledge Platform. Retrieved from www​.un​.org/​sus​tainablede​velopment/​ sustainable​-development​-goals/​ United Nations. (2019b). Sustainable Development Goals Knowledge Platform. Sustainable Development Goals. Retrieved from https://​su​stainabled​evelopment​.un​.org/​?menu​=​1300 Wanyama, F.O. (2014). Cooperatives and the Sustainable Development Goals: A Contribution to the Post-2015 Development Debate. A policy brief. [Publication] http://​www​.ilo​.org/​empent/​Publications/​ WCMS​_240640/​lang​-​-en/​index​.htm Yakar Pritchard, G., & Çalıyurt, K.T. (2021). Sustainability reporting in cooperatives. Risks, 9(6), 117. doi:​10​.3390/​risks9060117

APPENDIX A Table 21A.1

United Nations Sustainable Development Goals

Goal

Description

Goal

Description

1

No Poverty

10

Reduced Inequalities

2

Zero Hunger

11

Sustainable Cities and Communities

3

Good Health and Well Being

12

Responsible Consumption and Production

4

Quality Education

13

Climate Action

5

Gender Equality

14

Life Below Water

6

Clean Water and Sanitation

15

Life on Land

7

Affordable and Clean Energy

16

Peace, Justice and Strong Institutions

8

Decent Work and Economic Growth

17

Partnerships for the Goals

9

Industry Innovation and Infrastructure

 

 

Source: United Nations, n/d.

APPENDIX B The Co-operative Identity: Values, Business Model and Core Principles (ICA, n/d) 1. Voluntary and Open Membership: Cooperatives are voluntary organisations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination. 2. Democratic Member Control: Cooperatives are democratic organisations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives, members have equal voting rights (one member, one vote), and cooperatives at other levels are also organised in a democratic manner.

The development of cooperative-designed indicators for the SDGs  353 3. Member Economic Participation: Members contribute equitably to, and democratically control, the capital of their cooperative. At least part of that capital is usually the common property of the cooperative. Members usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing their cooperative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the cooperative; and supporting other activities approved by the membership. 4. Autonomy and Independence: Cooperatives are autonomous, self-help organisations controlled by their members. If they enter into agreements with other organisations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy. 5. Education, Training and Information: Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives. They inform the general public - particularly young people and opinion leaders - about the nature and benefits of cooperation. 6. Cooperation among Cooperatives: Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional and international structures. 7. Concern for Community: Cooperatives work for the sustainable development of their communities through policies approved by their members.

22. African American cooperatives: from economic survival to economic justice Jessica Gordon Nembhard

AFRICAN AMERICAN COOPERATIVES: OVERVIEW Throughout human history, among all groups of people in every region around the world, economic cooperation has been used for survival and to facilitate economic development, stabilization, and independence, often for those who have been economically marginalized. African Americans have a long but hidden history of cooperative economic thought and practice (Gordon Nembhard 2004, 2014). Black Americans have retained a sense of humanity and solidarity in economic and cooperative practices from their African ancestors, and created alternative economic activities, jointly owned and democratically governed, to provide for themselves and their families—and to strengthen their communities. This has happened in every era of US history. This history of African American cooperatives is a snapshot view because there has been very little documentation of most of the cooperatives and collective economic action. What documentation does exist is difficult to find and only gives a part of a case study (or snapshot) of a cooperative or collective economic effort at a specific point in time. We do not have good records of when most of the cooperatives started and/or ended, because most of the information comes from a news article or two or is pieced together from letters, notes and minutes in archives, and autobiographies. There are very few full national studies (aside from Du Bois 1907 and Gordon Nembhard 2014) or state-wide studies (aside from Pitts 1950), and no continuous studies of most of the cooperatives about which there is some information. The research for the book on which this chapter is based, Collective Courage (Gordon Nembhard 2014), was conducted using the snowball effect. I started by reading Du Bois on Black cooperatives, especially his 1907 study (Du Bois 1907), and followed his leads to focus on cooperatives he mentioned, checking archives and newspaper articles and checking history books for any references. I updated Du Bois’ research using archives and autobiographies of African American activists and cooperators, and articles in African American journals, magazines and newspapers in the twentieth century (using search terms such as cooperatives, cooperatives, economic cooperation). For more current cooperatives I also read websites and interviewed cooperative founders and members. I pieced together this information over 15 years. Despite the difficulty of gaining a full picture of this history, the information that I have gathered provides enough evidence that there has been a long and significant history of Black mutual aid and cooperative ownership in the US, even if specific details are not available and many of the examples are not well known. Black American cooperative experiences are examples of how cooperative ownership contributes to anti-poverty and community-building strategies, especially when market activities do not provide for the needs of a community or oppressed or marginalized families. In addition, Black cooperative experiences provide examples of cooperative economics as a tool 354

African American cooperatives: from economic survival to economic justice  355 for community-controlled economic development to achieve some level of equitable development, not just economic survival. Marginalization forces subaltern groups such as African Americans to find alternative economic solutions. Forced segregation made it imperative that African Americans join together economically, because the mainstream economy was exploitative, discriminatory, and exclusionary. Voluntary segregation was often a way to maintain economic independence and control. Self-help efforts—mutual aid societies, Maroons, communal societies, for example—provided chances to design and manage needed goods and services in culturally, racially, and geographically sensitive ways. In the early centuries in the US, enslaved as well as free African Americans pooled their money to buy their own and their family members’ freedom. “Freedmen” established mutual aid societies to pool meager resources to help cover costs of illness and death, for example. They created communities, enclaves, Black businesses, and other economic activity insulated from racial discrimination and neglect (see Gordon Nembhard 2014). Cooperatives contribute to community economic development because they anchor economic activity and recirculate money and other resources within the community/neighborhood, facilitate joint ownership and asset building, practice democratic economic participation, and provide jobs and meaningful work to community members (see Gordon Nembhard 2015 and Fairbairn, Bold, Fulton, Hammond Ketilson, and Ish 1991). As such they address market failure, marginalization and discrimination. Also, cooperatives provide education and training to members and the community, usually with some continuity, develop leadership among members, and usually promote environmental sustainability (Gordon Nembhard 2015, and 2014). Cooperatives provide a mechanism for low-resourced people with few traditional opportunities to create new economic opportunities for themselves and their co-workers and/ or neighbors (Gordon Nembhard 2015, 2014; Fairbairn et al. 1991). In many cases it was risky politically as well as economically to try a different path— especially one that was considered a way to circumvent white monopolies and to be anti-capitalistic, if not outright socialist or communist. It took courage to shop at the cooperative exchange or the cooperative store when white land owners and store owners would do anything to crush the competition and stop Blacks from excelling (Gordon Nembhard 2018). Yet African Americans did just that over and over again throughout history. Telling this Black cooperative history is also a retelling of African American civil rights history—a reconstructing of African American history and civil rights activity using as its lens the Black cooperative movement (Gordon Nembhard 2014). Many of the players are the same. Many of the great (even famous) African American thinkers, movers, and shakers were also leaders in the Black cooperative movement—including W.E.B. Du Bois, Ella Jo Baker, A. Philip Randolph, Nannie Helen Burroughs, Fannie Lou Hamer, John Lewis, and organizations such as the Student National Coordinating Committee, the Black Panther Party, The Movement for Black Lives, and at times the Nation of Islam (Gordon Nembhard 2014, 2004; Shipp 2000). That part of their history and thought, however, has been mostly left out or ignored—except for a few studies such as Du Bois (1907), Pitts (1950), and Gordon Nembhard (2014). Adding information from the Black cooperative movement revitalizes the telling of the African American experience and increases our understanding of African American agency and political economic organizing (Gordon Nembhard 2014). This entry uses information from the book Collective Courage (Gordon Nembhard 2014) to summarize what we know about African American cooperatives and the Black American cooperative movement.

356  Handbook of research on cooperatives and mutuals

EARLY AFRICAN AMERICAN MUTUAL AID AND COOPERATIVES In the search for solutions to bring long-term and meaningful economic development to urban and rural communities around the world, and to increase asset ownership and civic engagement, Black scholar W.E.B. Du Bois was one of several African Americans to view cooperative economics as a promising antidote to persistent racial economic inequality (Gordon Nembhard 2004, 2014). In 1907 W.E.B. Du Bois wrote a monograph as part of his Atlanta University series on the Negro entitled Economic Cooperation among Negro Americans (Du Bois 1907), after first exploring some of these issues in his 1898 volume Some Efforts of American Negroes for Their Own Social Betterment. Du Bois (1907) notes that the African American “spirit of revolt” used cooperation in the form of insurrection to establish “widespread organization for the rescue of fugitive slaves” (26). Blacks pooled money in order to help each other buy themselves out of enslavement. In addition, runaway slaves formed their own communities, often isolated Maroons, where they eluded and/or fought off bounty hunters, and lived a collective existence in relative isolation. Immediately after the Civil War, some Blacks organized themselves (or were organized) into intentional communities and communes, where they could live and develop under their own leadership, creating their own economy (Pease and Pease 1963; DeFilippis 2004). This in turn developed, in both the North and the South, into “various cooperative efforts toward economic emancipation and land buying”; and those efforts led to cooperative businesses, building and loan associations, and trade unions (Du Bois 1907: 26). Du Bois’ 1907 monograph is a study of cooperative activities among African Americans from the 1800s to 1907. He explains that Blacks have pooled resources through churches, mutual aid societies, fraternal organizations, and jointly owned businesses. Du Bois (1907) documented hundreds of mutual aid societies and cooperative projects through religious and benevolence institutions, beneficial and insurance societies, secret societies, schools, and financial institutions. Mutual aid societies and beneficial societies provided joint purchasing and marketing, revolving loan funds, and sickness, widow and orphan, and death benefits. They often operated informally through Black religious organizations and Black independent schools. Many were founded and headed by Black women. These were the precursors to the African American-owned legally incorporated cooperatives that were established from the 1880s on. Freedmen and enslaved alike formed mutual aid, burial, and beneficial societies—pooling their dues payments to take care of their sick, widows, and children, and to bury their dead (Berry 2005; Du Bois 1907). Their purpose was to “provide people with the basic needs of everyday life—clothing, shelter, and emotional and physical sustenance” (Jones 1985, p.127). These mutual aid societies were often organized and/or led by women, and connected to religious institutions (Weare 1993; Jones 1985). Mary Frances Berry notes that “African Americans had long been in the habit of forming mutual assistance associations, providing help when government refused to help. For African Americans, such mediating institutions historically provided the only available social assistance” (2005, p.61). Similarly, Walter Weare contends that mutual aid was a “pragmatic response to social and economic needs. In many cases autonomous Negro societies were organized only after black leaders were rebuffed when they sought to join existing white groups” (1993, p.8).

African American cooperatives: from economic survival to economic justice  357 Free African Americans also pooled their resources to purchase operating farms toward the end of and immediately after the US War Between the States in order to own land and make a living (Du Bois 1907; Jones 1985). The Combahee River colony in the South Carolina Sea Islands was one of the remote areas (Gullah/Geechee communities) where African Americans established their own settlements in the 1860s that remained relatively self-sufficient and semi-autonomous. The Combahee colony consisted of several hundred Black women whose men had gone to join the Union Army after that area of South Carolina was liberated by a Union Army raid that Harriet Tubman helped to plan. The women took over plantations that the routed white land owners abandoned. They “grew crops and cared for one another” (Jones 1985, p.52). They refused to work for whites and were proud of their handicrafts and cotton crop, as well as their independence. The community became relatively well known as an example of Black women’s independence and perseverance, as well as their collective spirit. Black Americans created organizations to support their needs and argue for their civil, social, and economic rights. Particularly once freed and after emancipation, African American organizations proliferated, from mutual aid societies, to independent churches, mutual insurance companies, agricultural cooperatives, and consumer and worker cooperatives, to political and civic organizations, independent schools, and labor unions and welfare rights organizations. Blacks also formed organizations to teach and advocate for cooperative economics. In fact, the most prolific periods for Black cooperative development were also times when there were the most Black organizations supporting cooperative education and cooperative development, such as the Colored Farmers National Alliance and Cooperative Union, National Federation of Colored Farmers, Young Negroes’ Cooperative League, North Carolina Council for Credit Unions and Associates, Brotherhood of Sleeping Car Porters Ladies Auxiliary, Black Panther Party, Federation of Southern Cooperatives/Land Assistance Fund, Movement for Black Lives, and others (see Gordon Nembhard 2014). Early labor union advocacy in the 1880s was integrated, and argued for and practiced worker control; this included development of cooperatives—especially worker cooperatives, but also consumer and producer cooperatives, such as cooperatively owned mills, factories, craft production, and retail stores. During this time, the Populist movement—which argued for political and economic rights for Black and white small farmers and laborers—was connected to the labor movement and the cooperative movement. Populist, progressive organized labor combined with farmers to demand rights for the common person and create cooperatives. The Knights of Labor’s campaigns in the 1870s and 1880s had Black and white chapters and promoted worker cooperatives and women’s rights in addition to worker’s rights. They included women leaders and rank and file campaign organizers, and used boycotts and political campaigns (Gordon Nembhard 2014). According to Curl (2009, p.4), there were 200 industrial cooperatives organized by the Knights of Labor (KoL) between 1886 and 1888. Some southern KoL chapters were all Black—by 1887 60–90,000 African Americans were members. The Black members did establish cooperatives, but there are few records of this, particularly because it was so dangerous for them. Curl records a Black cooperative cotton gin in Stewart’s Station, Alabama, and Black cooperative villages near Birmingham (Curl 2009, p.101). This cooperative activity among the KoL was very controversial—there was opposition within and outside the trade union movement, and strong opposition to these efforts by white landholders and industrialists. In the late 1880s and early 1890s, the Colored Farmers National Alliance and Cooperative Union was established as a populist political party, a labor union, and a cooperative devel-

358  Handbook of research on cooperatives and mutuals opment association for both Black farmers and farm workers. This organization grew out of the Knights of Labor experiences and was connected to the white Southern Farmers National Alliance. The Colored Farmers Alliance established cooperative stores to buy goods and supplies in bulk at reduced prices; shared equipment; created lending exchanges to secure loans to get fair mortgages or buy land for farmers and farm laborers; and engaged in cooperative marketing (Gordon Nembhard 2014). Branches established cooperative stores/exchanges in the ports of Norfolk, Charleston, Mobile, New Orleans, and Houston (Ali 2003, p.89; Holmes 1973). Members could buy goods at reduced prices and secure loans to pay off their mortgages (Ali 2003, p.89; Holmes 1973). It was the largest organization of its time, with an estimated one million members (perhaps the largest African American organization in history in terms of number of members) (Holmes 1973; Gordon Nembhard 2014). However, because of its widespread reach and effectiveness, most of the chapters had to operate under the radar or underground to protect themselves from retaliation by white competitors and white supremacist terrorism (Gordon Nembhard 2018; Holmes 1973). The first organized cooperatives were farm cooperatives and cooperative marketing boards, consumer cooperative grocery stores, cooperative schools, and credit unions. While efforts at collective economic action were often thwarted by racial discrimination and white supremacist sabotage and terrorism (see Gordon Nembhard 2018), efforts persisted throughout the centuries. Mutual insurance companies were some of the earliest official nonagricultural cooperative businesses among Blacks and whites in the US. Examples of Black-owned mutual insurance companies include the Grand United Order of the True Reformers, the Independent Order of Saint Luke, and the North Carolina Mutual Insurance Company (Gordon Nembhard 2014). Starting in the late nineteenth century on into the twentieth, African Americans organized more formal cooperative businesses that followed the European “Rochdale Principles of Cooperation” (which became the international cooperative principles of the International Cooperative Alliance) (see Hope 1940 and Gordon Nembhard 2014). Du Bois (1907) documented 154 African American-owned cooperative businesses in 1907: 14 “producer cooperatives”; 3 “transportation cooperatives”; 103 “distribution or consumer cooperatives”; and 34 “real estate and credit cooperatives.” There was no official or national study of African American cooperatives since Du Bois’ early study, until Gordon Nembhard (2014): Collective Courage documents about 162 legally incorporated cooperative enterprises owned by African Americans in rural and urban areas North and South, from the mid-1800s to the present, in addition to examples of early mutual aid societies, Black communal towns, and formal and informal solidarity economy and collective economic activity from 1780 to 2013. Two Examples of Early African American Consumer Cooperatives One of the early Black-owned cooperative grocery stores in the twentieth century about which we have some details is the Mercantile Cooperative Company, established in Ruthville, Virginia in 1901. The Odd Fellows Lodge helped to establish the Mercantile Cooperative Company, a Black-run cooperative store chartered by the state. Shares were sold at five dollars each (no one member could hold more than 20), and could be bought in installments (Craig 1987). Members bought a store outside of town and moved it to the main crossroads across from the County Training School. They raised $1,300 to buy supplies in Richmond (Craig 1987, p.135). By 1923 there were 28 shareholders of the store, and the cooperative bought trucks and hired three employees (136).

African American cooperatives: from economic survival to economic justice  359 According to Craig (1987), Charles City County Virginia, where Ruthville is located, is a relatively prosperous county for African Americans. Until Craig’s account, however, most historians “ignored the role of the area’s free black population” and “the degree to which community cooperation during the early years of the twentieth century helped move local farmers away from economic dependence on whites” (133–4). Craig highlights collective efforts in Ruthville and observes that “between 1900 and 1930 black farms achieved a level of economic independence that later aided in the struggle for political rights and racial justice” (134). Citizens’ Cooperative Stores of Memphis was established in direct response to the Negro Cooperative Guild meeting called by Du Bois in August 1918 (The Editor 1919). In February 1919, the Memphis group incorporated as the Citizens’ Cooperative Stores to operate cooperative meat markets. According to the article in Crisis Magazine (The Editor 1919), the cooperative sold double the amount of the original shares they offered (limit per person was ten shares), and members could buy shares in installments. By August 1919, five stores were in operation in Memphis, serving about 75,000 people (The Editor 1919, p.49). The members of the local guilds associated with each store met monthly to study cooperatives and discuss issues. The cooperative planned to own its own buildings and a cooperative warehouse (The Editor 1919). From the details in the Crisis article we know that the citizens of Memphis eagerly joined the project, as evidenced by the large number of participants and the over-achievement of the equity drive. The editor of Crisis Magazine (presumably Du Bois himself) who reported this notes: The good results of co-operation among colored people do not lie alone in the return of savings. They show, also, new opportunities for the earning of a livelihood and in the chance offered our colored youth to become acquainted with business methods … [They hire members of the community.] Thus, in a larger and different sense, we have another form of cooperation. Colored people are furnishing their own with work and money for services received and the recipients are handing the money back for re-distribution to the original colored sources. (The Editor 1919: 50)

This is an example of how advocacy, public education, and self-education work to promote cooperative development in the Black community that contributes to economic development and youth development.

AFRICAN AMERICAN COOPERATIVES IN THE 1930S The most prolific period of African American cooperatives was during the Great Depression in the 1930s and 1940s. Cooperatives proliferated for all groups in the US partly in reaction to severe economic crisis and partly because the Roosevelt Administration provided financial support and encouraged the development of cooperatives. For African Americans, prolific periods of cooperative development also coincide with the cooperative activism of strong Black organizations (1880s, 1930s–40s, 1960s–70s). The Young Negroes’ Cooperative League, the North Carolina Council of Cooperatives and Credit Unions, and the Ladies Auxiliary to the Brotherhood of Sleeping Car Porters, for example, promoted consumer and cooperative education, and helped to establish Black-owned cooperative businesses and credit unions nationally and locally during the 1930s and 40s. Mostly consumers’ cooperatives were established in cities such as Gary, Indiana; New York, New York; Chicago, Illinois; Buffalo,

360  Handbook of research on cooperatives and mutuals New York; Baltimore, Maryland; Washington, DC; Memphis, Tennessee; and Richmond, Virginia. Agricultural cooperatives also continued throughout the South. In addition, early on independent Black-owned grocery stores formed a marketing cooperative, the Colored Merchants Association. The Colored Merchants Association was founded by the National Negro Business League (NNBL), in Montgomery, AL, in 1927. The CMA was an association of independent grocers organized into a buying and advertising cooperative. The creation of the CMA was a way to support independent Black grocery stores with mutual support and collective marketing, in a harsh market during difficult times. Chapters were organized in cities with ten or more stores. Dues were $5 per month per store (“Business: Negro Chain” 1930). By 1930 253 stores were part of the CMA network, including 32 stores in Tulsa, OK; 25 in Dallas, TX; 25 in New York City (Manhattan); and 10 in Omaha, NB, in addition to the associations already in existence in Montgomery, Alabama and Winston-Salem, North Carolina (Tolbert 2007). The National Negro Business League also included a couple of credit unions. The Young Negroes’ Cooperative League (YNCL), a cooperative federation, was founded in December 1930 by 25–30 African American youth in response to a call by George Schuyler (Schuyler 1932; Calvin 1931). Its goal was to form a coalition of local cooperatives and buying clubs loosely affiliated in a network of affiliate councils (Ransby, 2003). The Young Negroes’ Cooperative League held its first national conference in Pittsburgh, PA, October 18, 1931. Thirty official delegates from member organizations and 600 participants attended. George Schuyler was elected President and Ella J. Baker National Director (Calvin 1931; Ransby, 2003). League leaders promoted education and the study of Rochdale consumers’ cooperation. The YNCL’s goal was to form a coalition of local cooperatives and buying clubs loosely affiliated in a network of affiliate regional councils that would be members of the League. It planned to start with 5,000 charter members, paying a $1 initiation fee (Schuyler 1932). By 1932 the League had formed councils in New York, Philadelphia, Monessen (PA), Pittsburgh, Columbus (OH), Cleveland, Cincinnati, Phoenix, New Orleans, Columbia (SC), Portsmouth (VA), and Washington, DC, with a total membership of 400 (Schuyler, 1932). The Harlem Council of the Young Negroes’ Cooperative League, headed by Ella Baker, was particularly active. The League did not achieve all its plans but did establish several cooperative stores and credit unions around the country during its three years of existence, and held two national conferences on cooperative economics (Gordon Nembhard 2014). The Eastern Carolina Council and the North Carolina Council for Credit Unions and Associates were African American state federations for the development of Black cooperatives, established by two Black independent schools (Bricks Rural Life and Tyrrell County) that taught cooperative economics to Black farm families and established farmer’s cooperatives, credit unions, buyer’s clubs, and health insurance (Pitts 1950). The principal of the Tyrrell County Training School and members of his staff, for example, held study groups on cooperative economics (Pitts 1950). By 1939 25 neighbors had established a credit union. In the first year membership increased to 187, and the credit union started a student savings account program. Members of the Tyrrell group started a cooperative store in 1940. In 1941 they established a cooperative health insurance program that guaranteed a member up to $100 for hospitalization for a membership fee of $1.00, monthly assessments of ten cents, and a 25-cent “co-payment” for each hospital visit (Pitts 1950, 27). They had plans to raise money to hire a doctor, but never proceeded with those plans. The credit union helped several families to save their farms from foreclosure and/or to purchase a farm, and financed group purchases

African American cooperatives: from economic survival to economic justice  361 of farm equipment. Buying clubs and machinery cooperatives (purchasing coops) were established through 1945 (Pitts 1950, pp.27–30). Tyrrell County School and the Bricks Rural Life School formed the Eastern Carolina Council federation of North Carolinian cooperatives, which worked with the Credit Union Division of the State Department of Agriculture and the Extension Service of the North Carolina state vocational program, to develop credit unions and cooperatives. By 1936 it had helped to establish three Black credit unions (Gordon Nembhard 2014). In 1945 the Eastern Carolina Council helped to form the North Carolina Council for Credit Unions and Associates (shortened to the North Carolina Council). By 1948 the North Carolina Council had established 98 Black-owned credit unions and 48 additional cooperative enterprises (9 consumer stores, 32 machinery cooperatives, 4 curb markets, 2 health associations, and 1 housing project) owned by African Americans in the state of North Carolina (Pitts 1950).

MORE CURRENT EXAMPLES Cooperative development continued to be a strategy for African American economic development and independence particularly in the 1960s and 1970s, again in agriculture, but also in consumers’ cooperatives, credit unions, and housing cooperatives. Black organizations started cooperatives to help address poverty, land loss, discrimination, and especially economic retaliation against civil rights activity. The major Black civil rights organizations came together to help establish the regional Federation of Southern Cooperatives. Currently the only major African American cooperative development organization is the Federation of Southern Cooperatives/Land Assistance Fund (more below), although there are a growing number of local efforts directed at African American people of color and low-income cooperative business development in rural and urban areas throughout the US. The Federation of Southern Cooperatives, a nonprofit organization of state associations to support predominantly Black cooperatives in southern states, was founded in 1967 and later merged with the Land Emergency Fund to become the Federation of Southern Cooperatives/ Land Assistance Fund. Member cooperatives engage in organic farming, marketing, agricultural processing, fishing, sewing, handicrafts, land buying, grocery cooperatives, and credit unions (Federation of Southern Cooperatives/Land Assistance Fund 2007; Gordon Nembhard 2004). The organization established six state offices and a rural training and research center. It also is an advocacy group and technical assistance provider to protect Black-owned land and maintain Black land ownership, as well as to promote sustainable family farming and cooperative development among African Americans (Oliver 2000); and provides emergency services to its members during times of natural disaster (Gordon Nembhard 2014). In its 54-year history, the organization has helped to create and/or support more than 200 cooperatives and credit unions mostly in the ten states where it operates (Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Missouri, Mississippi, South Carolina, Tennessee, Texas, and the Virgin Islands) (Oliver 2000). Examples of cooperatives in the Federation are: Freedom Quilting Bee (AL), North Bolivar County Farm Cooperative (MS), Panola Land Buyers Association Housing Development Corp. (AL), Southern Alternatives Cooperative (GA), Southwest Georgia Farmers Cooperatives (GA), Indian Springs Farmers Association Inc. (MS), Beat 4 Farms Cooperative (MS), South Plaquemine United Fisheries Cooperative (LA), South Carolina Sea Island Farmers Cooperative (SC), People’s Cooperative (SC), 359

362  Handbook of research on cooperatives and mutuals Services Cooperative (TX), Virgin Island Farmers Cooperative (Virgin Islands), Demopolils Citizens Federal Credit Union (AL), First Delta Federal Credit Union (MS), and Shriveport Federal Credit Union (MS) (Federation of Southern Cooperatives/Land Assistance Fund 2007). The Federation owns and runs a rural training and research center in Epes, AL, that showcases sustainable forestry, provides cooperative education, and helps to develop Black youth-run cooperatives (such as Sankofa Youth Cooperative) (Gordon Nembhard 2014). The FSC/LAF also engages in cooperative development in Africa and the Caribbean. The organization has an important reach throughout the South, is connected to the larger US cooperative movement, and has successfully advocated for important measures in US farm bills to support Black farmers, Black land ownership, and Black co-op development (Federation of Southern Cooperatives/Land Assistance Fund 2007; Gordon Nembhard 2014 and 2015). Its headquarters is in East Point, Georgia. The 1960s and 1970s was also a time when Black Power organizations were involved in cooperative development. The Black Panther Party practiced solidarity and cooperative economics, and the Congress of African Peoples, the Nation of Islam, the Student National Coordinating Committee, and the Poor People’s Campaign, for example, all developed cooperatives in the 1960s and 1970s. In 1965, in Jackson, Mississippi, the Poor People’s Corporation was organized by a former field worker of SNCC. Within four years they were running 13 producer cooperatives and a marketing cooperative, producing sewing, leather and wood-crafts and candles, with more than 800 members, mostly former sharecroppers (Curl 1980, p.45). The Congress of African Peoples (CAP), led by Amiri Baraka (poet and playwright, leader of the Black Arts Movement), inspired community action agencies to organize consumer cooperatives and low-income credit unions, especially in Brooklyn in the 1970s, as well as in Cleveland, Pittsburgh, Detroit, Youngstown, Chicago, Houston, Milwaukee, San Francisco and Los Angeles (see Gordon Nembhard 2014). The Black Panther Party (BPP) started in the late 1960s during a time of “Black Power” Activism, which was part of a strategy to assert Black political and economic power and more community control over politics, land, and economic activity. The Black Panther Party began in 1966 in Oakland, CA, in response to multiple killings of Blacks by police, police brutality, and disproportionate and unfair arrests and incarceration of Blacks. They established themselves as a political party and community organization against police brutality and misconduct and in support of community-controlled local economic development. Many of the Party’s initial activities were focused on the right to self-defense, which made them a target for law enforcement supporters; they exposed the need for a radical restructuring of our society to eliminate racism and exploitation. From the beginning, the BPP recognized the need to address state violence broadly to include poverty, inequality, health disparities, lack of affordable housing, mis-education, and so on. They put out a ten-point program to address all those issues and provide protection from state violence to create healthy, well educated people. Mary T. Basset (2016) notes that for the BPP, “Protection came in the form of programs, not guns” (p.1741). In most of their chapters around the country the BPP organized a host of inter-communalist “survival programs pending political revolution”—or what David Hilliard (2008), a founding member of the BPP, calls “Service to the People Programs”—based on community organizing & economic development. The Panthers organized more than 20 different community-based activities and programs mostly in Oakland, CA but also around the country, including cooperatives and collectives: clothing factories, cooperative bakeries; plumbing repair, pest control, job-finding services;

African American cooperatives: from economic survival to economic justice  363 transportation for the aged; busing family members to prisons for visiting; People’s Free Shoe Program and People’s Shoe Factory; health care (13 free health clinics around the country), the Intercommunal News Service (Panthers’ cooperative newspaper); community-built and owned housing and shared housing and land banking. Free Breakfast for School Children programs and African history lessons (Freedom Schools) were offered by 44 chapters. This system of nonprofit, collective and cooperative solidarity economics provided not just goods and services addressing immediate need, but also a model for a community-controlled cooperative economy to benefit the majority of the Black community. More recently worker cooperatives have been increasing, with the establishment of the US Federation of Worker Cooperatives in 2004 and growing municipal support for worker cooperative development (Sutton 2019). Some worker cooperatives are owned predominantly by African Americans and/or people of color, particularly Latinas and women immigrants from countries in Africa and the Caribbean. Mandela Foods Cooperative is a worker-owned and community-owned full service grocery store and nutritional education center in West Oakland, California. It is incorporated under California law as a for-profit cooperative. The cooperative started in June 2009 with a group of local activists working on food security issues in Oakland (Mandela Foods Cooperative n.d.). The store opened with eight worker-owners who operate in a non-hierarchical management structure, by committee. The cooperative partners with local farmers to increase the financial sustainability of family farms and access to fresh foods, and with its incubator Mandela Marketplace to support cooperative development in West Oakland (Mandela Foods Cooperative 2010). The cooperative targets low-income residents in the neighborhood both to provide services and to involve them in the cooperative as worker-owners (Gordon Nembhard 2014). Another example of a current predominantly people of color cooperative is New Era Windows, producing professional-grade energy-efficient windows in Chicago, Illinois. New Era opened as a worker cooperative in 2012, after Republic Windows and Doors, the former employer, fired everyone and closed down in 2008. The workers occupied the factory to protest the quick shutdown and the loss of their back pay as well as their jobs. Eventually some of the workers decided to buy the company, to keep good manufacturing jobs in their community. They had strong support from the community, from their union the United Electrical Workers Union, and from cooperative developers The Working World and the Center for Workplace Democracy. (See https://​newerawindows​.com/​Content/​our​-story​_Z03ejZ​.html.)

BLACK WOMEN’S ROLES Black women’s roles in the cooperative movement are also notable. Black women were important players first in the mutual aid movement and then in the cooperative movement. The roles of women such as Ella Jo Baker (The Young Negroes’ Cooperative League), Nannie Helen Burroughs (Cooperative Industries of Washington, DC), Halena Wilson (the Ladies Auxiliary of the Brotherhood of Sleeping Car Porters), Estelle Witherspoon (Freedom Quilting Bee), and Fannie Lou Hamer (Freedom Farm) are examples of African American women’s leadership in promoting and running various cooperatives (see Gordon Nembhard 2017 and 2014). Freedom Quilting Bee, a handicraft cooperative in Alberta, Alabama and a charter member of the Federation of Southern Cooperatives/Land Assistance Fund, was established in 1966.

364  Handbook of research on cooperatives and mutuals It was founded by women in share-cropping families looking to increase and stabilize their incomes (Gordon Nembhard 2004). The women began selling quilts to supplement their families’ farm incomes. The seed money for the cooperative came from an initial sale of 100 quilts, sold for them in New York by an Episcopalian minister (Rev. Francis Walters) who wanted to support the effort (“Freedom Quilting Bee of Alberta, Alabama” 1992). Co-founder Estelle Witherspoon was FQB’s first President. In 1968 the cooperative bought 23 acres of land. This was an important acquisition because it allowed them to build the sewing factory and to increase Black land ownership (Freedom Quilting Bee n.d.). They sold eight lots to families who had been evicted from their homes for registering to vote and/or attending a speech by Martin Luther King (Freedom Quilting Bee n.d.). The cooperative also established a day care center, an after school program, and a summer youth program since the mothers were now working in the factory and not at home (Gordon Nembhard 2014). In 1992 they were the largest employer in their town (“Freedom Quilting Bee of Alberta, Alabama” 1992). The quilters also began using other entrepreneurial strategies to increase the economic activity under their control—making pot holders and conference canvas bags, for example. Some of the quilters were highlighted in the Smithsonian Gees Bend Quilters exhibit (Gordon Nembhard 2014). Dawson Workers-Owned Cooperative was formed on October 6, 1997 by workers from the abandoned Almark Mills fabric cutting and sewing plant, with help from a local business developer (Merlo 1998b). Marcus Lemacks, President and General Manager of Almark Mills, worked with the mayor of Dawson and former employees of the Mill to create a worker-owned sewing factory. In December 1997, 70 members (former employees) started work at the old plant, now as worker-owners in a new cooperative. The majority (76 percent) of the mill’s work force was female; a third of them were single mothers; and most were Black (Merlo 1998b). Almark Mills had been the largest employer of women in Terrell County, and there were no other textile jobs within 50 miles. The worker-owners used their union fund (from years of paying union dues, now available because the union had been dissolved with the closing of Almark Mills) as their equity investment in the new cooperative. Ownership shares were also paid in installments of weekly payroll deductions of $7.16 over four years (Merlo 1998b). The cooperative was fortunate to be able to access targeted government funds. The Clinton Administration’s Community Adjustment and Investment Program (CAIP) authorized (and funded) USDA to make loans to businesses in up to 50 rural communities adversely impacted by NAFTA, through the Business and Industry loan guarantee program operated by the Rural Business Cooperative Service of the USDA. Their county qualified. This enabled the cooperative to pay off the bank debts, expand, and hire one hundred more workers (total of 169 employees). DWOC sales in 1998 were almost $5million and they expected to sell $7.5million in 1999 (Merlo 1998a, 1998b; and see Gordon Nembhard 2014). The mayor of Dawson, Robert Albritten, told Merlo (1998b, p.1) that “Persons in this community doubted that women and minorities could make this work where it hadn’t succeeded before, but we’ve made believers out of them.” Board chair Dianne Williams remarked that it changed the workers’ lives, made them more optimistic and hopeful (“the future is bright”), and changed the way business was done in the factory—jobs were now more secure and communication was now more open/transparent (Merlo 1998b: 1, 5). Ella Jo Baker Intentional Community Cooperative is a 15-unit limited equity housing cooperative and urban intentional community in the Columbia Heights neighborhood of

African American cooperatives: from economic survival to economic justice  365 Washington, DC. It was founded by five African American women including Linda Leaks and Ajowa Nzinga Ifateyo, starting in 1999. The founders wanted to create a women-led intentional community and housing cooperative where social and political activists, especially Black women, could live with likeminded people in affordable and safe housing (Gordon Nembhard 2014). Part of the motivation for the housing cooperative was in response to gentrification and in an attempt to save affordable housing in Columbia Heights. The cooperative partnered with a nonprofit developer and bought six row houses from the city. They received a mortgage to develop the 15 units. They moved into their apartments in 2003. After some challenges, they finally closed on the sale of the renovated units in 2010 (Gordon Nembhard 2014).

BLACK YOUTH AND COOPERATIVES Schools and education programs have been important to the cooperative movement in the African American community, sometimes through churches, but often in public and private high schools (see Gordon Nembhard 2014). During the 1930s and 40s some African American-run schools also experimented with cooperative business ventures and teaching cooperative economics (see Gordon Nembhard 2008). In 1933, the group that became the Consumer’s Cooperative Trading Company in Gary Indiana, for example, began offering a cooperative economics course in the high school’s evening school (Hope 1940). This course had the highest attendance of any course in the night school. In addition, the young people’s branch of Consumers’ Cooperative Trading Company operated its own ice-cream parlor and candy store in the 1930s (Hope 1940). We saw above the successes and influence on the cooperative movement of two Black independent schools in North Carolina in the 1930s and 1940s. Those schools had established cooperative economics training as well as developed cooperatives. The Commercial Department of the Bluefield Colored Institute in Bluefield, West Virginia, as another example, formed a student cooperative store probably in 1925 (Sims 1925). The store’s mission was to sell school supplies and books which the students and school needed, and to be a “commercial laboratory for the application of business theory and practice” (93). The cooperative was able to pay patronage dividends of 10% back on purchases. The student members voted to use “profits” to pay for scholarships to the Secondary School and Junior College (Sims 1925). In addition, the Young Negroes’ Cooperative League (discussed above) sponsored study groups, cooperative economics reading lists and conferences in the 1930s, particularly among Black youth. The Ladies Auxiliary to the Brotherhood of Sleeping Car Porters also circulated a reading list on cooperative economics and sponsored study groups (Chateauvert 1998; Gordon Nembhard 2014). Education in general was extremely important to all the African American cooperatives and most started with a study group on cooperative economics (see Gordon Nembhard, 2014). The “Food from the ’Hood” student cooperative began in the fall of 1992 after students from Crenshaw High School (South Central Los Angeles) revitalized the school garden to help rebuild their community after the 1992 uprising against the Rodney King verdict. They began by donating the food they grew to the homeless and then moved on to selling at a local farmer’s market. After turning a profit at the farmer’s market, they decided to go into business and developed a business plan (Food from the ’Hood 2005). They began selling salad dressing

366  Handbook of research on cooperatives and mutuals made from the produce they grew in their school garden. The students, who managed Food from the ’Hood and ran it similarly to a cooperative business, voted to save at least 50 percent of the profits to go toward scholarships to college for their graduating members. During its first ten years, more than $180,000 was awarded in college scholarships to 77 graduated student managers (Food from the ’Hood 2005).

CONCLUDING REMARKS If you look closely at African American history you will find that even when Blacks were discriminated against and oppressed at work, or couldn’t even find a job, they engaged in economic cooperation and solidarity and found alternative ways to make a living and feed their families. This helped Black Americans to be independent, to engage in resistance, and to survive economically. They created their own cooperative grocery and supply stores when the white-owned stores served Blacks overpriced and low quality goods, and/or wouldn’t let Blacks try on clothes or wouldn’t hire Blacks to work in stores. They created credit exchanges and credit unions when banks overcharged Blacks for loans and gave Blacks inferior financial services, or wouldn’t serve them. Cooperatives and solidarity economics often allowed politically active people a way to keep earning a living even when whites wouldn’t hire them because they were activists. There was often economic retaliation by whites when Blacks protested. For example, white land owners evicted share croppers from their farms and the land they rented when they became involved in civil rights activity or registered to vote. Blacks who helped others register to vote were jailed and beaten, and/or fired from their jobs. Protestors are still jailed and beaten, and can lose their jobs. The fact that many of the leaders involved in forming and promoting cooperatives in the Black community are also leaders in other important Black movements, especially the civil rights movement, suggests that people were looking for strategies for social and economic equality and justice, not just legal remedies. Cooperatives are an important community economic development strategy that helps to address market failure and economic marginalization. The history of racism in the US has produced both those phenomena when applied to African Americans so that active, thoughtful leaders would turn toward a strategy that has been used by all populations around the world. What we learn from this history is that African Americans used economic cooperation from the time of enslavement until the present, particularly starting with mutual aid societies and later developing official cooperative businesses. African American farmers and organized labor in the North, South, Midwest, and West of the USA used cooperatives to help increase access to and affordability of supplies, equipment, and financial and human services. African Americans also used cooperatives for such access and to create decent jobs. They were often hampered and limited because of their economic and educational marginalization, so they did not always have enough capital or education to run a collective business. Yet they persisted, and developed organizations to help educate and train them so that they could succeed. Collective economic action and cooperative ownership was not always successful and did not solve every problem caused by racial discrimination, but was an important strategy that was used more often than most histories recount. In addition, most of the most serious problems Blacks encountered with cooperative development were because they were challenged and thwarted by competitors and white supremacists who did not want them to succeed. Competitors and

African American cooperatives: from economic survival to economic justice  367 white supremacists used financial and other economic sabotage, as well as physical threats and violence against Black cooperators and their cooperatives (Gordon Nembhard 2018). I named my full-length book on this subject Collective Courage (Gordon Nembhard 2014) because it took personal and group courage to pursue and persist in the cooperative ventures, both because cooperatives were outside the mainstream economy and not a well-known model for economic development and because Black cooperators were retaliated against financially and with physical violence (white supremacist terrorism). This history is thus a history of courage and fortitude as well as one of economic and social grassroots organizing and cooperation among African Americans. The examples in this chapter give a sample of the ways in which African Americans have used racial solidarity and economic cooperation in the face of discrimination and marginalization to pool their resources and create their own mutually beneficial and democratic companies. Even in urban settings community was important, and families and neighbors worked together and shared resources. In addition, there were connections with indigenous and Latinx solidarity movements—but much more research is needed about that. John Curl’s book For All the People (2009) gives us some examples of Native American and Latinx cooperatives and cooperative efforts historically in the USA; however, more focus on subaltern cooperative economic development in history would be helpful. The Democracy at Work Institute and the US Federation of Worker Cooperatives in their state of the sector reports provide some current coverage of Black and Brown worker cooperatives (DAWI 2022), and Esther West (2020) provides a study of the current status of Latinx cooperatives. More such studies are needed to better understand the continuing challenges as well as the accomplishments of people of color-owned cooperatives. In addition there is increasing use of cooperative ownership with previously incarcerated people, and growing interest in replicating international models of incarcerated worker and social cooperatives. African American cooperative history illustrates the ways in which solidarity, economic democracy, collective ownership, and decision making make economic survival possible. Cooperatives also benefit and strengthen subaltern communities to create cooperative solidarity economies that help bring prosperity to the total community. More research will contribute to our understanding of these benefits and impacts.

BIBLIOGRAPHY Ali, Omar Hamid. 2003. “Black Populism in the New South, 1886–1989.” Unpublished doctoral dissertation, Columbia University, NY. Bassett, M.T. 2016. “Beyond Berets: The Black Panthers as Health Activists.” American Journal of Public Health, 106(10), 1741–3. https://​doi​.org/​10​.2105/​AJPH​.2016​.303412 Berry, Mary Frances. 2005. My Face Is Black Is True: Callie House and the Struggle for Ex-Slave Reparations. New York: Alfred A. Knopf. “Business: Negro Chain.” 1930. Time, May 12, 1930. Retrieved January 17, 2010 from www​.time​.com/​ time/​magazine/​article/​0​,9171​,752535​,00​.html. Calvin, Floyd J. 1931. “Schuyler Launches Program to Awaken Race Consciousness.” The Pittsburgh Courier 22:6 (February 7): 1 Section I. Chateauvert, Melinda. 1998. Marching Together: Women of the Brotherhood of Sleeping Car Porters. Urbana, IL: University of Illinois Press. Craig, John M. 1987. “Community Cooperation in Ruthville, Virginia, 1900–1930.” Phylon, 48(2): 132–40.

368  Handbook of research on cooperatives and mutuals Curl, John. 1980. History of Worker Cooperation in America: Worker Cooperatives or Wage Slavery; Co-ops, Unions, Collectivity, and Communalism from Early America to the Present. Toledo, Ohio: Homeward Press. Curl, John. 2009. For All the People: Uncovering the hidden history of cooperation, cooperative movements, and communalism in America. Oakland, CA: PM Press. DeFilippis, James. 2004. Unmaking Goliath: Community Control in the Face of Global Capital. New York: Routledge. Democracy at Work Institute (DAWI). 2022. 2021 Worker Cooperative State of the Sector Report. Democracy and Work Institute and the United States Federation of Worker Cooperatives, January 26. https://​institute​.coop/​resources/​2021​-worker​-cooperative​-state​-sector​-report Du Bois, W.E.B. 1898. Some Efforts of American Negroes for Their Own Social Betterment. Atlanta: Atlanta University Press. Du Bois, W.E.B. 1907. Economic Cooperation among Negro Americans. Atlanta: Atlanta University Press. Editor [W.E.B. Du Bois]. 1919. “Ruddy’s Citizen’s Cooperative Stores.” The Crisis 19:2 (December): 48–50. Fairbairn, Brett, June Bold, Murray Fulton, Lou Hammond Ketilson, Daniel Ish. 1991. Cooperatives & Community Development: Economics in Social Perspective. Saskatoon, Saskatchewan: University of Saskatchewan Center for the Study of Cooperatives, revised 1995. Federation of Southern Cooperatives/Land Assistance Fund. 2007. “Celebrating 40 Years ‘Working Together for Change’.” Annual Report 1967–2007. Green Point, GA: The Federation of Southern Cooperatives. Food from the ’Hood. 2005. “About Us” 2004–2005 (Retrieved 5-28-05 from www​.foodfromthehood​ .com.) Freedom Quilting Bee. No Date. “History, Activities, Plans.” And home page on Rural Development website. Retrieved September 30, 2002 from www​.ruraldevelopment​.org/​FQBhistory​.html and www​ .ruraldevelopment​.org/​FQB​.html. “Freedom Quilting Bee of Alberta, Alabama” 1992. “A Southern Legend” Federation of Southern Cooperatives/Land Assistance Fund 25th Anniversary Annual Report 1967–1992. East Point, GA: Federation of Southern Cooperatives/Land Assistance Fund. Gordon Nembhard, Jessica. 2004. “Cooperative Ownership and the Struggle for African American Economic Empowerment.” Humanity & Society, 28(3), 298–321. Gordon Nembhard, Jessica. 2008. “Alternative Economics: A Missing Component in the African American Studies Curriculum: Teaching Public Policy and Democratic Community Economics to Black Undergraduate Students.” Journal of Black Studies, 38(5) (May), 758–82. Gordon Nembhard, Jessica. 2014. Collective Courage: A History of African American Cooperative Economic Thought and Practice. University Park, PA: The Pennsylvania State University Press. Gordon Nembhard, Jessica. 2015. “Understanding and Measuring the Benefits and Impacts of Cooperatives.” In L. Brown et al (eds). Cooperatives for Sustainable Communities: Tools to Measure Cooperative Impact and Performance, pp.152–79. Cooperatives and Mutuals Canada and Centre for the Study of Cooperatives (University of Saskatchewan). Altona, MB: Friesens. www​.c​ooperative​ difference​.coop/​tools/​ Gordon Nembhard, Jessica. 2017. “Black Women, Cooperatives, and Community.” The Journal of Design Strategies, 9(1), 18–32. Gordon Nembhard, Jessica. 2018. “African American Cooperatives and Sabotage: The Case for Reparations.” The Journal of African American History, 103(1–2), 65–90. Hilliard, David. 2008. The Black Panther Party: Service to the People Programs. Albuquerque: University of New Mexico Press. Hine, Darlene Clark, William C. Hine, and Stanley Harrold. 2010. The African-American Odyssey. Upper Saddle River, MJ: Pearson Prentice Hall. Holmes, William F. 1973. “The Laflore County Massacre and the Demise of the Colored Farmers’ Alliance.” Phylon, 34(3) (Third Quarter), 247–67. Hope, John, II. 1940. “Rochdale Cooperation among Negroes.” Phylon, 1(1) (first quarter), 39–52. Jones, Jacqueline. 1985. Labor of Love, Labor of Sorrow: Black Women, Work, and the Family from Slavery to the Present. New York: Basic Books.

African American cooperatives: from economic survival to economic justice  369 Mandela Foods Cooperative. No Date. “About Mandela Foods.” Retrieved from www​.mandelafoods​ .com/​. Mandela Foods Cooperative. 2010. “African American Economic Development in Oakland Tour” in connection with the US Federation of Worker Cooperatives conference, Berkeley, CA, Presentation and discussion at Mandela Foods Cooperative store, August 8, 2010. Merlo, Catherine. 1998a. “A Few Good Women.” RBS Rural Cooperative Magazine (March/April 1998 Issue). Retrieved from www​.rurdev​.usda​.gov/​rbs/​pub/​mar98/​contents​.htm. Merlo, Catherine. 1998b. “The Triumph of Dawson's Textile Workers.” RBS Rural Cooperative Magazine (March/April 1998 Issue). Retrieved from www​.rurdev​.usda​.gov/​rbs/​pub/​mar98/​contents​ .htm. Oliver, Melvin J. 2000. “A Tribute to the Federation of Southern Cooperatives/Land Assistance Fund.” Journal of Cooperative Development, 2(2), 1–3. Pease, William H., and Jane H. Pease. 1963. Black Utopia: Negro Communal Experiments in America. Madison: The State Historical Society of Wisconsin. Pitts, Nathan Alvin. 1950. The Cooperative Movement in Negro Communities of North Carolina (dissertation). Studies in Sociology, Volume No. 33. Washington, DC: The Catholic University of America Press. Ransby, Barbara. 2003. “Harlem During the 1930s.” In Ella Baker and the Black Freedom Movement, pp.64–104. Chapel Hill, NC: University of North Carolina Press. Reynolds, Bruce J. 2002. Black Farmers in America, 1865–2000: The Pursuit of Independent Farming and the Role of Cooperatives. Rural Business—Cooperative Service RBS Research Report 194 (October). Washington DC: US Department of Agriculture [Reprinted October 2003]. Retrieved from: www​.rurdev​.usda​.gov/​rbs/​pub/​RR194​.pdf. Schuyler, George S. 1932. “The Young Negro Cooperative League.” The Crisis 41:1 (January): 456, 472. Shipp, Sigmund C. 1996. “The Road Not Taken: Alternative Strategies for Black Economic Development in the United States.” Journal of Economic Issues, 30(1), 79–95. Shipp, Sigmund. 2000. “Worker-owned Firms in Inner-city Neighborhoods: An Empirical Study.” Review of International Co-operation, 92–93 (March): 42–6. Sims, R.P. 1925. “Cooperation at Bluefield.” The Crisis 31:2 (December): 92–3. Sutton, Stacey A. 2019. “Cooperative Cities: Municipal Support for Worker Cooperatives in the United States.” Journal of Urban Affairs (May 14), 1–22. https://​doi​.org/​10​.1080/​07352166​.2019​.1584531 Tolbert, Lisa. 2007. “Challenging the Chain Stores.” Tar Heel Junior Historian 46:2 (spring). North Carolina Museum of History Office of Archives and History, N.C. Department of Cultural Resources. www​.ncmuseumofhistory​.org/​collateral/​articles/​S07​.challenging​.the​.chain​.stores​.pdf. Weare, Walter B. 1993. Black Business in the New South: A Social History of the North Carolina Mutual Life Insurance Company. Durham: Duke University Press. West, Esther. 2020. Latinx Cooperative Power in the USA. University of Wisconsin Center for Cooperatives, July. https://​uwcc​.wisc​.edu/​research/​latinx​-cooperative​-research/​ Woods, Clyde. 1998. Development Arrested: The Blues and Plantation Power in the Mississippi Delta. London: Verso Press.

PART VI REGIONAL AND CULTURAL FEATURES

23. Recent developments among dairy cooperatives in the European Union Julia Höhler and Jos Bijman

DEVELOPMENTS IN THE EUROPEAN DAIRY MARKET The European dairy industry is characterized by constant change. In 2012 the European Union (EU) launched the so-called milk package, a series of measures to strengthen the position of dairy farmers in the food supply chain (European Commission, 2016; Wijnands et al., 2017). One of the measures permits dairy farmers to negotiate contract terms collectively via recognized producer organizations. After abolishing the milk quota in 2015, the prices have remained volatile, the number of dairy farms has further reduced, and the average farm size has increased. At the same time, farm sizes, farm types, and dairy yields vary widely within and across member states (European Parliamentary Research Service, 2018), leaving dairy enterprises with a heterogeneous supplier base (Höhler and Kühl, 2018). Next to these trends, several other developments are impacting the sector. The sector is driven by strong demand for sustainability from NGOs, national governments, the European Commission (2020b), retailers, and consumers. An increasing number of European dairies use bonus payments for farmer participation in sustainability programs and special milk flows, such as GMO-free, organic, or outdoor grazing milk (ZuivelNL, 2020). Even though EU regulations prohibit using dairy terms for their marketing, plant-based milk alternatives have emerged as a competing product and are gaining importance (Leialohilani and de Boer, 2020). The 2019 EU Green Deal and the Farm to Fork Strategy aim at making Europe the first climate-neutral continent by 2050. At the same time, concentration trends along the food supply chain are accompanied by increased public awareness of unfair trading practices and market power (Bijman and Hanisch, 2018; Di Marcantonio et al., 2020; Grau et al., 2018). The Covid-19 pandemic has disrupted marketing channels and altered consumer preferences (Höhler and Oude Lansink, 2021). Dairy enterprises took different actions to respond to the outlined challenges, ranging from focusing on brand policy to mergers and capacity expansions (Höhler and Kühl, 2019). The 2012 EU-wide study “Support for farmers’ cooperatives” has provided important insights into the status and development of agricultural cooperatives in the EU (Bijman and Iliopoulos, 2014). Cooperative experts from member states of the EU contributed their knowledge to 27 country reports and eight sector reports. The authors for the dairy sector estimated a market share of 57 percent for cooperatives in the EU-27 (Hanisch et al., 2012). Their report shows that the milk price in an EU member state is positively related to the combined market share of dairy cooperatives in that country, even if dairy cooperatives often pay prices below investor-owned firms (IOFs). The latter is often explained by the risk premium IOFs need to pay to attract milk suppliers (Liang and Hendrikse, 2016). A decade of new research and structural developments has passed since the 2012 study. Our objective is threefold: First, to provide an overview of the relative importance of dairy 371

372  Handbook of research on cooperatives and mutuals Table 23.1 Enterprise Lactalis

Top 10 dairy enterprises in Europe 2020 Country France

Cooperative No

Placement

Placement

Europe

world

1

1

Dairy turnover 2020 USD

EURO

billion

billion

23.0

20.2

Nestlé

Switzerland

No

2

2

20.8

18.2

Danone

France

No

3

4

17.3

15.2

FrieslandCampina

Netherlands

Yes

4

7

12.7

11.1

Arla Foods

Denmark/ Sweden

Yes

5

8

12.1

10.6

Unilever

Netherlands/ UK

No

6

11

6.6

5.8

DMK

Germany

Yes

7

12

6.4

5.6

Savencia

France

No

8

14

5.9

5.2

Sodiaal

France

Yes

9

17

5.5

4.8

Müller

Germany

No

10

20

5.1

4.5

Source: Rabobank (2021).

cooperatives in the EU and the different member states; second, to outline trends and gaps in research on European dairy cooperatives taking into account the developments on the EU dairy market described above; third, to give an up-to-date overview of dairy cooperatives and their main differences to IOFs. While the 2012 study relied heavily on national data and expert judgments, we used accounting data from the ORBIS database1 (Bureau van Dijk, 2021). By synthesizing developments in research and the real world, we can outline research gaps.

THE RELATIVE IMPORTANCE OF COOPERATIVES In 2020, around 500,000 dairy farms in the EU produced 160 million metric tonnes2 of milk. The majority of the milk (150 million tonnes) was delivered to dairies, which processed it into whey (55 million tonnes), drinking milk (24 million tonnes), cheese (10 million tonnes), milk powder (3 million tonnes), butter (2.3 million tonnes), and other products. The main producing countries in the EU-27 are Germany, France, and the Netherlands, followed by Italy, Poland, and Ireland (Eurostat 2018, 2021a, 2021b). With a combined annual dairy turnover of 115.4 billion USD (101.2 billion euro) in 2020, the ten largest EU dairy enterprises range among the largest dairy enterprises in the world (Rabobank, 2021). Table 23.1 shows a ranking of the top ten dairy enterprises in Europe, their placement in the world ranking, and dairy turnover for 2020 in billion USD and euro. Four cooperatives—FrieslandCampina, Arla Foods, DMK, and Sodiaal—rank among the top ten. In 2015, cooperatives handled about 58 percent of all EU cow’s milk deliveries (see Figure 23.1). Cooperatives have high market shares of 70 percent or more in Northern Europe (Sweden, Finland, Denmark, Ireland), and in countries such as Austria, Malta, Slovakia, Slovenia, the Netherlands, Luxemburg, and Poland. Market shares between 40 percent and 70 percent have been reported in parts of Portugal, Italy, Germany, Belgium, the Czech Republic, Estonia, and France. Dairy cooperatives in other parts of Southern Europe (Greece, Spain) and a large part of Eastern Europe (Hungary, Latvia, Lithuania, Romania, Croatia) have low market shares. While these market shares are measured on the domestic market, some EU dairy cooperatives have become international or even multinational enterprises. Although export had been an internationalization strategy since the nineteenth century, several large

Recent developments among dairy cooperatives in the European Union  373

Source: Adapted from European Commission (2016).

Figure 23.1

Share of cow milk deliveries by type of contractual arrangement (2015)

dairy cooperatives now have milk-processing facilities in multiple EU countries (such as Arla Foods, with facilities in Denmark, Sweden, UK, Germany, Belgium, and the Netherlands) and some even produce dairy products in other parts of the world (such as FrieslandCampina). Whatever its internationalization strategy, no EU dairy cooperative has members beyond Europe (Bijman et al., 2014). Most dairy cooperatives in the EU are processing cooperatives (Höhler and Kühl, 2014). However, some cooperatives only function as bargaining cooperatives, selling the milk of their members to IOFs. One of the main objectives of cooperatives (both bargaining and processing) is strengthening the position of the farmers in the value chain and thus supporting farmers in earning a decent living. As Figure 23.1 shows, not all EU member states have a large market share for cooperatives, often resulting in a weak bargaining position for dairy farmers. In 2013 the European Commission introduced new legislation (the Milk Package) to strengthen the position of the farmer in the dairy value chain, by encouraging dairy farmers to establish a producer organization (PO) (European Commission, 2016; Fałkowski and Chlebicka, 2021; Wijnands et al., 2017). Member states were given the option to make written contracts between milk producers and processors compulsory. Farmers obtained the right to collectively negotiate contract terms such as price and delivery conditions via a registered PO. One of the key advantages of a registered PO is that it can negotiate about prices on behalf of

374  Handbook of research on cooperatives and mutuals its members without having formal ownership of the product (under competition rules, this would not be allowed). Farmers are particularly encouraged to set up a bargaining PO in the situation where they sell to an IOF dairy. The European Commission wanted to strengthen the farmers’ position in the dairy chain, particularly in those countries where cooperatives have a minor market share (such as Southern member states) or were almost absent (Eastern member states). The EU PO model was built on the tradition of the Erzeugergemeinschaft in Germany, a farmer-owned bargaining association. EU legislation does not prescribe a particular legal form for the PO. In the many EU member states, a PO has the legal form of a cooperative, but it can also be an association or a limited liability company. As legal forms differ across Europe, the European Commission delegated the decision on the legal form to the member states. To prevent a PO from becoming a monopolist, the volume of milk that one PO can negotiate is limited to 3.5 percent of the total EU production and 33 percent of the national production of the member state involved. Individual POs can become a member of an Association of Producer Organizations (APO), which then negotiates on behalf of all members collectively (for the APO the same competition rules apply). As of December 2019, the EU had 355 registered dairy POs and APOs (European Commission, 2020a), with three countries representing more than 90 percent of all POs: 172 in Germany, 81 in France, and 52 in Italy. Some 150 of these POs already existed before the new PO legislation was introduced, mainly in Germany, France, and Italy. These existing milk bargaining associations obtained legal recognition as a PO. In terms of the volume of milk negotiated by POs, Germany has been by far the largest: More than 46 percent of 2019 milk deliveries in Germany were traded through POs, with the largest APO in Germany negotiating delivery contracts on behalf of 137 POs, amounting to 5.8 billion kg of raw milk (Bayern MEG, 2021). The annual marketable production of the 355 POs recognized for dairy was 17.5 percent of total EU milk deliveries in 2019 (European Commission, 2020a). For dairy farmers, the milk price is one of the main determinants of their income. Farmers are members of dairy cooperatives because of the economic benefits membership delivers. Therefore, farmers expect their cooperative to pay out a high milk price. While cooperatives strive to generate the best milk price for their members, they face limitations in achieving a high milk price. First, milk prices are determined in an international and very competitive market. Prices for dairy products are volatile. Second, cooperatives usually are not able to pay a price that is higher than the price paid by their IOF competitors. IOFs can pay a higher price because they can make their supply chains as efficient as possible by cherry-picking the large farmers. In addition, IOFs have to pay a higher price because they offer short-term contracts. The higher price includes a risk premium for the farmer (for the risk that the IOF does not continue buying the milk after the contract period). Cooperatives do not have the freedom to choose their members or to enter short-term contracts. There are quite some differences among cooperatives, even those located in the same region. To compare milk prices among cooperatives and between cooperatives and IOFs, data on milk prices are needed. An EU-wide registration of milk prices paid per (cooperative or IOF) dairy is lacking. The Dutch dairy sector organization regularly publishes the monthly LTO international comparison of producer prices for milk (ZuivelNL, 2020). The 2019 report does not allow any clear conclusions to be drawn about differences in producer prices between leading cooperatives and IOFs. The highest payout price, 39.24 euro per 100 kilogram,3 was paid by the

Recent developments among dairy cooperatives in the European Union  375 Italian dairy Granarolo, which is 80 percent owned by the Granlatte cooperative. The lowest price (30.76 euro per 100 kilogram) was paid by the Irish dairy Glanbia Plc, which is one-third owned by Glanbia Co-operative Society.4 As a comparison, the average USA class III milk price in 2019 was 38.16 euro per 100 kilogram, and thus above the EU average of 34 euro. Milk payout prices to members of dairy cooperatives are often not finally determined until after delivery. Investigations by the German Federal Cartel Office (2017) indicated that when setting prices, IOFs usually follow the prices of cooperative dairies. The report also notes that cooperative dairies generally produce basic dairy products, such as fresh milk, butter, or milk powder, while IOFs tend to produce branded products. Several authors have explored the reasons for cooperatives focusing more on commodities and less on branded products. One explanation is the limited availability of equity capital for risky investments in product development (Van der Krogt et al., 2007). Another explanation is past EU market protection, which made it very attractive for cooperatives to focus on efficiency and thus on the production of commodities (Bijman, 2018). A third explanation is the self-selection of low-quality producers into cooperatives (Grashuis, 2017).

RESEARCH ON EU DAIRY COOPERATIVES Reviewing the most recent literature (2011–215) on dairy cooperatives in Europe reveals that some countries, for example the Netherlands, are more frequently the subject of research than others, for example Estonia (Iliopoulos et al., 2019). On the one hand, these differences could reflect the differing national importance of the dairy sector in general and of cooperatives in particular, for example in terms of membership numbers, turnover, or market share. Different research focuses in the countries could also be an explanation, since the papers were written in particular by researchers in Germany, the Netherlands, and Belgium. On the other hand, the low coverage of Eastern European dairy cooperatives could be related to problems of agricultural cooperatives in post-socialist transition economies, namely farmers’ associations of cooperatives with socialist collectivized agriculture, a lack of trust among farmers, and a lack of understanding of the benefits that cooperation can bring (Hagedorn, 2014; Imami et al., 2021). Bijman and Iliopoulos (2014) acknowledge that there is also a lack of a “good overview of the number and types of other farmer-owned businesses” in Central and Eastern Europe. While most papers focus on one country, there are a number of cross-national studies (Bruszt and Karas, 2020; Hanisch et al., 2013; Müller et al., 2018; Soboh et al., 2011, 2012, 2014). This coincides with a lack of Europe-wide statistics, partly due to the lack of a uniform legal form of cooperative (Bijman and Iliopoulos, 2014). Different topics are covered in the mostly empirical papers. We have identified several research strands and subtopics. We begin with current trends and strategies that are impacting dairy cooperatives on different dimensions. For example, not only is the political framework changing; the demands of consumers are too. As a result of these trends, the relationship with members is also being challenged, with some members leaving the cooperative and joining new forms of cooperation. All these developments also affect the financials and performance of cooperatives. In the following subsections, we briefly reflect on the most important findings.

376  Handbook of research on cooperatives and mutuals Recent Trends and Strategies The research strand with the largest number of publications deals with trends in the dairy sector and the strategies cooperatives apply in dealing with those trends. Examples of major developments in the dairy industry are the 2015 abolishment of the EU milk quota (Alavoine-Mornas et al., 2015; Boland and Cook, 2013; Bošková, 2013; Bruszt and Karas, 2020; Charlebois, 2016), increasing consumer demand for sustainability (Candemir et al., 2021; Fiore et al., 2020; Westerholz and Höhler, 2021; Zuba-Ciszewska et al., 2019), increasing market power of retailers (Bijman, 2018) and the changing structure of the national farm sector (Polacenko and Bugina, 2014). Two case studies provide insights into the impact of emerging trends on individual small mountain cooperatives. In a case study of two French mountain cooperatives, Alavoine-Mornas et al. (2015) conclude that small, regionally active cooperatives are particularly hit by structural changes in the farming sector and the decreasing number of dairy producers. In contrast to these negative impacts, in a case study of an Italian mountain cooperative Charlebois (2016) emphasizes the advantages of a more homogeneous member base and fewer small members. However, he also highlights the need to find a balance between production orientation and market orientation, which may require a deviation from the traditional cooperative model. The traditional model is characterized by ownership rights limited to members; non-transferable, nonappreciable, and redeemable residual return rights; and a distribution of benefits in proportion to patronage of members (Chaddad and Cook, 2004). The extent to which the results for small mountain cooperatives can be applied to larger dairy cooperatives remains unclear. The abolishment of the quota gave dairy farmers an incentive to increase milk production. In several member states, cooperatives were faced with a substantial and unexpected increase in milk supply. As cooperatives were obliged to take all milk, they had to rapidly expand their processing capacity. This expansion led to extra costs for the cooperatives, while members were not necessarily willing to provide additional equity capital. The unwillingness or inability of members to provide additional equity is a recurrent pattern in cooperatives (Chaddad and Cook, 2004; Cook, 1995). This lack of access to additional equity capital, in combination with the risk-averse nature of cooperatives, has led to the preference for mergers over acquisitions as the dominant growth strategy (Van der Krogt et al., 2007). As early as the 1980s and 1990s, the unwillingness or inability of members to provide additional equity capital was a reason for the (partial) demutualization of Irish dairy cooperatives (Boland and Cook, 2013; Harte, 1997; McCarthy and Ward, 2014). Based on a case study of seven Czech milk producer organizations, Bošková (2013) concludes that their strategies do not match the market outlook as none of the examined cooperatives pursues a value-added strategy. Significant investments would be needed to do so. Bruszt and Karas (2020) contrast strategies in the Hungarian and the Polish dairy sectors. The Polish cooperative sector has strong ties with the government that helped the sector in increasing value-added and competitiveness. In contrast, Hungary’s strategy of privatization and integrating farmers into multinational corporations is not seen as successful by the authors. In their literature review, Candemir et al. (2021) stress the importance of cooperatives in enhancing sustainability at the farm level. They argue for more research on the role of cooperatives in the adoption of sustainable farm practices, especially in the realm of environmental and social sustainability. Westerholz and Höhler (2021) compare the corporate social responsibility (CSR) reporting of investor-owned and cooperatives dairies. Their results indicate that

Recent developments among dairy cooperatives in the European Union  377 cooperatives report more information, particularly on environmental and social sustainability. Fiore et al. (2020) conducted a case study of three Polish cooperatives to define a sustainable business model and explore stakeholder contribution to innovation processes. They find that multiple stakeholders, such as local communities, employees, and funding agencies, contribute to the adoption of sustainable business models and the creation of social, environmental, and economic value. Zuba-Ciszewska et al. (2019) use secondary data to review the development of the organic milk market in Poland. In recent years, dairy cooperatives have increased their share in the market. However, according to these authors’ analysis, further market growth is impeded by a lack of collaboration and coordination between dairies and local farmers. Bijman (2018), in a review of historical literature, explores the paradox of high market shares and decreasing numbers of cooperatives in the Netherlands. He describes the sustained importance of cooperatives as a result of the pertaining uncertainty in the milk market and the increased concentration among cooperatives as a reaction first to technological developments that generated economies of scale, and second to the increasingly concentrated retail sector. The trend of increasing scale among EU dairy cooperatives in the twentieth century has been described by Nilsson and Van Dijk (1997). Polacenko and Bugina (2014) analyze the development of cooperation in the Latvian dairy sector. Compared to other EU member states, the market share of cooperatives is relatively low here (26.5 percent). The authors see cooperatives as an answer to the fragmented dairy sector with many small, unproductive farms. Using secondary data, they also show an increase in the amount of milk processed by dairy cooperatives. Farmer Members and Their Behavior The second strand of research focuses on member behavior, including the stay or exit behavior of members and their alternatives to milk delivery (De Herde et al., 2019; Nilsson et al., 2017; Torquati et al., 2015; Viergutz et al., 2020), as well as the relationships of cooperatives with their members and the involvement of other stakeholders (Alho, 2015; Di Marcantonio et al., 2020; Pachoud et al., 2020). Torquati et al. (2015) describe the increasing use of vending machines by Italian farmers as a result of low milk prices paid by regional cooperatives. De Herde et al. (2019) use a qualitative case study to examine the alternatives of Belgian dairy farmers delivering to a cooperative. They identify a number of lock-in effects that keep farmers from pursuing different ways of marketing their milk. Nilsson et al. (2017) surveyed 131 Swedish dairy farmers to identify push and pull factors for considering staying in the cooperative or exploring alternative sales options. In two logistic regressions, the membership role, expressed by aspects of member satisfaction and view on cooperative values, and the perceived need for restructuring the farm business were identified as major push factors. Dissatisfaction with the existing cooperative increased the odds of exiting and exploring alternatives. Viergutz et al. (2020) investigate the switching behavior of German dairy farmers by using a spatial panel model and data of 2,004 switching decisions provided by a German dairy cooperative. They find that prices, cooperative member density, and the processing volume of competitors have an impact on switching rates. Moreover, they find a spatial interdependence in the switching behavior of dairy farmers. The authors emphasize the crucial role of elected local member representatives in the communication between cooperative and local member groups.

378  Handbook of research on cooperatives and mutuals Alho (2015) has surveyed 682 Finnish milk and meat producers to investigate the value of cooperative membership. The results of her multivariate ordered probit analysis confirm the importance of market access. She further shows that the perceived value of cooperative membership increases with farm size. Pachoud et al. (2020) conducted a social network analysis of 45 members of an Italian dairy cooperative. While they find high levels of reciprocity, community and trust between members, they also describe a conflict arising from members’ different views on intensifying their production. Di Marcantonio et al. (2020) survey 1,248 French, German, Polish, and Spanish dairy farmers to examine unfair trading practices in the EU dairy sector. The results of their Poisson regression indicate that members of cooperatives are more likely to report unfair trading practices in contract content or contract execution. At the same time, membership of a cooperative can mitigate negative effects of contract incompleteness. The authors stress the importance of taking specific characteristics of cooperatives into account, which may interact and offset each other in their effects. An example of such a characteristic is whether contracts are concluded individually or collectively. New Forms of Cooperation Another focus is newly formed cooperatives and alternative forms of organizations, such as producer and bargaining associations, as well as their interaction with established cooperatives (Bijman and Hanisch, 2018; De Herde et al., 2020; Hakelius et al., 2013; Szabó, 2015). Bijman and Hanisch (2018) argue that the promotion of POs by the European Commission may pose extra competition for incumbent cooperatives. Farmers may leave the cooperative because they consider the milk price too low or fear having to provide additional equity capital because of management failures of the cooperative enterprise. These farmers will establish a PO and start bargaining on prices and delivery conditions with IOFs but also with cooperatives (who want to achieve full capacity at their processing facilities). De Herde et al. (2020) describe the emergence of three new dairy cooperatives in the Belgian Walloon region as substitutes or complements to established cooperatives in the region. The new dairy cooperatives aim at providing value-added products and higher farmer revenues. The authors see them as possibilities to overcome lock-in effects and reconfigure the dairy landscape. Hakelius et al. (2013) introduce the phenomenon of cooperative beehiving using the example of one Swedish dairy and one beef cooperative. Cooperative beehiving describes a situation in which existing members de-associate from the cooperative and form smaller cooperatives. The authors identify the failure of existing cooperatives to capture opportunities for product differentiation as a driver for entrepreneurial, risk-taking farmers to exit. Challenges for the newly formed cooperatives include investment in branding and the high unit costs associated with low production volumes. Outsourcing production capacity and start-up assistance can be helpful in overcoming these challenges. Szabó (2015) takes an anthropological perspective on the (re)establishment of a cooperative dairy in Hungary, which had previously existed until 1946. He concludes that the enterprise must create niches in the market, taking into account the background of its members and their experience, knowledge, and expectations.

Recent developments among dairy cooperatives in the European Union  379 Financials and Performance Other research publications deal with financial indicators and the performance of and prices paid by dairy cooperatives. Soboh et al. (2011) use data from 170 EU dairy enterprises in a logistic regression to analyze financial ratios. Cooperatives outperform IOFs in their efficiency and financial position but underperform in their average profitability. They also find that cooperatives pay higher milk prices. Based on the analysis of secondary data and financial ratios, Grau et al. (2015) find that the revenue per kilogram of milk of cooperatives is lower than that of IOFs. They also note that dairy cooperatives have gained market shares in Germany and attribute this development primarily to mergers. The authors conclude that the focus on cost leadership and economies of scale has hindered cooperatives from diversifying their portfolios. Another observation is that many dairies have separated their operational businesses into non-cooperative subsidiaries. Soboh et al. (2012, 2014) investigate the technical efficiency of dairy processing enterprises in six EU countries. In their 2012 paper they find that IOFs outperform cooperatives in input-oriented models, but perform similarly when accounting for the use of materials and output. They attribute their findings to the different objective functions of the two types of enterprises. In the 2014 paper the separate production frontiers for cooperatives and IOFs reveal that dairy cooperatives are slightly less efficient while having more productive technology. Differences occur across countries and are explained by differences in the cooperatives themselves as well as in market conditions. Based on their results, the authors conclude that the scale of operation is too large for some cooperatives. Hanisch et al. (2013) study the effect of high cooperative market shares on dairy prices on a country level. Using a panel model and data on national farm-gate prices in the EU-27, they show a positive effect of cooperative market share on prices. As a consequence, all farmers in a country benefit from the presence of cooperatives, indicating their pro-competitive effect in dairy markets. Müller et al. (2018) estimate a panel model with data on national farm-gate prices from 27 EU member states and show how higher market shares of cooperatives result in a lower milk price volatility at the country level. Summary of Main Research Lines The above overview shows the diversity of research on dairy cooperatives, ranging from strategic issues such as responding to consumption trends and market liberalization to internal issues related to member governance and membership heterogeneity. Figure 23.2 presents the four lines of research that we have identified. These strands are related to each other. One strand deals with changes in the competitive environment and the strategies dairy cooperatives have developed in response to those changes. This literature deals with market structure, growth, mergers, and internationalization. Also, cooperative responses to changes in policies, such as the abolition of the EU milk quota system, are part of this body of literature. More recently, this literature deals with sustainability and how cooperatives can or should respond to the challenge of making dairy farming and the whole dairy chain more sustainable. The second line of literature deals with the relationship between members and cooperatives. What influences member behavior? What determines member loyalty? How and to what extent are members involved in the decision-making process? As farms are changing into larger and larger entities, their relationship with the cooperative changes because large

380  Handbook of research on cooperatives and mutuals farms have more options for selling their milk. This changing relationship has implications for member commitment and member loyalty. Also, the financial situation of large farms makes them more critical towards their cooperatives. Finally, the changes in member relations have implications for member participation in decision-making. Partly related to the changing relationship between (large) dairy farmers and their cooperative is the rise of new producer organizations. Particularly in Germany, dairy farmers have left the cooperative to become members of the producer organization. In other countries, new producer organizations are strengthening the bargaining position of farmers selling to IOF dairies. These farmers do not necessarily want to set up a cooperative but do want to gain the bargaining power that joint sales bring. This rise of POs is also supported by EU legislation. The fourth and last line of research deals with the financial performance of dairy cooperatives. Studies on performance are related to research on strategy. In a more liberalized dairy market, the strategy of the cooperative can make a difference to the milk price members receive. However, strategies also come with risks. More information on financial performance is important for members, but also for comparing cooperatives and IOFs. Cooperatives and IOFs in the EU In the following, the literature review will be supplemented by an overview of the number of dairy cooperatives and IOFs per EU country. Our dataset from the ORBIS database (Bureau van Dijk, 2021) comprises active enterprises in the EU-27 with the NACE Rev. 2 code 105 (Manufacture of dairy products) and the latest year of accounts between 2011 and 2020. NACE Rev. 2 is the statistical classification of economic activities in the European Community (Eurostat, 2008). In total, 10,886 enterprises were found. We cleaned the data by removing all enterprises without information on legal form (one exception is Arla Foods, which is known to be a cooperative). We further cleaned the data so that only the NACE Rev. 2 codes 1050 and 1051, Manufacture of dairy products and Operation of dairies and cheese making remained. Hence, we excluded dairy processors operating under the codes 1052, Manufacturing of ice cream, 1011, Processing and preserving of meat, and 1042, Manufacture of margarine and similar edible fats. We further removed all cases with no available data on turnover. In total, 15,502 entries remain. The year with the highest number of observations, 2019, contains 5,421 dairy enterprises, of which 761 can be clearly identified as cooperatives. Eurostat (2021) indicates the provisional number of enterprises in 2018 in the EU-27 as 6,025. The majority of the dairies mentioned in the market report of the Dutch dairy sector organization (ZuivelNL, 2021) are included in the dataset. However, some enterprises, such as Bel Leerdammer and Hochwald, are missing. This is because they are subsidiaries of, respectively, a French and a German dairy enterprise. Based on these two checks, we assume satisfactory coverage of the EU dairy sector. We coded the legal forms 1 if cooperative, 0 if otherwise, according to the national legal forms. The legal forms were searched based on the names and abbreviations provided by the European Central Bank (2021). As already described, there is no uniform legal definition of the cooperative in all EU countries. In order to paint as accurate a picture as possible, we have chosen various approaches. Where possible, new generation cooperatives were coded as cooperatives. For example, the Finnish dairy Valio is a limited liability enterprise, but is owned by cooperatives. In addition, we have coded subsidiaries of cooperatives as cooperatives—for example, the German DMK GmbH, and all subsidiaries of Arla Foods and FrieslandCampina.

Recent developments among dairy cooperatives in the European Union  381

Source: Authors.

Figure 23.2

Research strands on EU dairy cooperatives and subtopics 2011–21

Enterprise websites and Google Translate were used to determine if a dairy enterprise was a cooperative. As a result, the Estonian enterprise Valio and E-Piim, originally listed as public limited companies, were coded as cooperatives.6 Figure 23.3 shows the number of cooperatives and IOFs per country as retrieved from our dataset. Italy has the highest number of dairy companies and dairy cooperatives. High shares of cooperatives in the total number of dairy enterprises can also be seen in Poland and Germany. However, the figures could be misleading if used to infer the importance of cooperatives. In some countries, a small amount of cooperatives account for most of the turnover of domestic dairy enterprises, for example in Denmark and the Netherlands. The database does not provide information for all EU countries, which could be due to national disclosure requirements or the small size of the dairies.

382  Handbook of research on cooperatives and mutuals

Source: Authors.

Figure 23.3

Number of cooperatives and IOFs per country in 2019 in the dataset

Figure 23.4 shows that the number of dairy enterprises in the EU-27 reported in the database increased from 2011 to 2019, while the number of cooperatives remained relatively stable. We explore possible reasons for this development in the discussion.

Source: Authors.

Figure 23.4

Total number of dairy enterprises and number of dairy cooperatives in the EU-27, 2011–19 (based on the data set)

Recent developments among dairy cooperatives in the European Union  383 Discussion Our objectives in this chapter were threefold: first, to present the relative importance of dairy cooperatives in the EU; second, to outline trends and gaps in research on EU dairy cooperatives; third, to highlight recent developments in the number of dairy cooperatives and IOFs. The relative importance of dairy cooperatives, measured by their market share, varies by EU country and is generally higher in major milk-production countries such as Germany, the Netherlands, France, Denmark and Ireland. The EU features a broad variety of dairy cooperatives, which differ in size (small versus large), strategy (cost leadership versus differentiation), products (conventional versus organic), or function (bargaining versus processing). The literature review shows differences in the coverage of different EU countries and a lack of cross-country comparisons on a EU level. The low coverage of Eastern EU dairy cooperatives may reflect problems of agricultural cooperatives in post-socialist transition economies. Cross-country studies are needed to get a better understanding of trends among dairy cooperatives and their responses to various challenges. Likewise, replication studies in different EU countries could strengthen the empirical evidence and robustness of existing findings. However, these types of study require an EU-wide understanding of the relevant organizational forms as well as their institutional environments. Local expertise can help identify these organizational forms. We have identified four different research strands, of which “market trends and enterprise strategies” resulted in the highest number of studies. Although the literature is often based on case studies from specific countries, cooperatives from different countries face similar problems. Structural changes in the farming sector have changed the membership base. In addition, an increase in the volume of milk, competitive pressures, and attempts to satisfy consumer demand have required investment, some of which was only possible by changing the ownership structure (that is, allowing external investors) or merging with other cooperatives. The research strand on sustainability is relatively new and still limited to case studies of specialty cooperatives that sell in niche markets. While cooperatives increasingly pay their members for specific sustainability performance, research on this development is scarce. Given the special relationship that cooperatives have with their member-farmers, research on the sustainability impact of this relationship would be justified. While research on the environmental impact of cooperatives has so far mainly focused on the processing facilities, future studies should cover the whole dairy chain to gain a better understanding of the joint effort of members and cooperatives in achieving sustainability. The increase in specialty milk streams also raises important questions about member–cooperative relations. Will the heterogeneity of the membership further increase? If so, how will cooperatives react to these developments? Research on member behavior reveals several factors that influence members to stay or exit. While more quantitative approaches appeared in this strand, the empirical evidence is mostly limited to individual countries and cooperatives. Moreover, the factors studied vary widely. A test of the different influencing factors could help to develop a theory of member behavior. In addition to existing empirical results, hypotheses about other factors should be taken into account. For instance, Höhler (2019) hypothesized that perceptions of fairness and identification with the cooperative drive exit behavior. Likewise, the literature on new forms of cooperation, such as in dairy producer organizations, consists of case studies from different countries and could benefit from a more systematic approach.

384  Handbook of research on cooperatives and mutuals Data from the ORBIS database suggest that the number of dairy enterprises has increased. Various drivers might explain this. Market trends, such as regionality or sustainability, are increasing the membership heterogeneity and create space for new niches. Technological advances enable profitable processing of milk even on a small scale. As a result, more farmers act as entrepreneurs and establish individual or small group dairies. In addition, political support is leading to an increase in producer organizations. A systematic approach would be helpful to explore drivers and success factors for newly established dairy cooperatives and other forms of cooperation. The results could also provide valuable insights into the cooperative life cycle. All in all, we expect to see a larger number and greater variety of dairy cooperatives and dairy producer organizations. Research on financial performance does not allow a clear picture of whether cooperatives or investor-owned firms fare better. It seems to depend on which indicators are used. However, several authors conclude that cooperatives may be too large, leading to member alienation. In addition, country differences have repeatedly been identified, which are reflected in different characteristics of cooperatives and market environments. However, two EU-wide studies show that cooperatives have an overall positive impact on milk prices in a country (Hanisch et al., 2013) and have the potential to reduce price volatility (Müller et al., 2018). Our presentation of EU dairy cooperatives represents an attempt to provide an EU-wide comparison. It is limited by the lack of data on some enterprises in the ORBIS database. Another limitation lies in the fact that we have categorized cooperatives based on their legal forms. The broad variation among cooperatives requires further attention in research. The development of the number of cooperatives and IOFs shows a stable trend in the number of cooperatives and an increase in the number of IOFs. Because foreign subsidiaries are not run as cooperatives, the growth and internationalization of cooperatives may even partly explain the rise in IOFs. Startups could be another reason for the increase in numbers. Previous studies have often focused on large, established enterprises. The study of young enterprises could provide new insights into the internal processes of dairy cooperatives and their relationship with their environment. What kind of cooperatives were newly founded and how do they differ from existing dairy cooperatives? More research is needed to explain the observed patterns.

CONCLUSION The purpose of this chapter was to review recent developments in EU dairy cooperatives. We have approached this aim with an overview of recent research publications and developments in the number of enterprises. We have been able to identify important strategic developments, such as increasing competitive pressures, changing consumer preferences, and the overall societal demand for higher levels of sustainability throughout the dairy chain. While some of these developments have been extensively explored and discussed in the literature, other trends have not received sufficient attention. One example of this underexposure is the impact of sustainability on member–cooperative relationships. Another topic that could receive more attention from scholars is digitalization. What does digitalization imply for dairy cooperatives, and particularly what does it imply for the relationship between members and cooperative enterprise? Data is playing an increasingly important role in agriculture, and cooperatives could take a central role in guaranteeing that farm data is

Recent developments among dairy cooperatives in the European Union  385 used to the benefit of the members. An interesting development here is the establishment, in several countries, of a joint data cooperative by agricultural cooperatives. Another trend that will impact cooperatives is the further differentiation in the market for dairy products. Consumers in the EU increasingly value specialty products, including regional products. The rise of new cooperatives is mainly in those specialty products. The combination of higher levels of farmer entrepreneurship, consumer preferences for regional specialties and advances in technology that allow efficient small-scale milk processing will lead to an increase in organizational heterogeneity in the dairy sector. The trend of further market differentiation and membership heterogeneity presents challenges to large incumbent cooperatives. However, large cooperatives continue to have the benefit of bargaining power in contracting with supermarkets. Future research will need to better describe these diverging trends among dairy cooperatives in the EU and analyze the impacts on members, cooperative enterprise, and society at large.

NOTES 1. ORBIS is a resource for financial data with information on close to 400 million companies and entities from around the world. Website: https://​orbis​.bvdinfo​.com. 2. 1 tonne is 1,000 kg (approximately 2,200 pounds). 3. Standard milk with 4.2 percent fat, 3.4 percent protein. 1 kilogram is equal to 2.2 pounds. 4. Glanbia Annual Report and Financial Statements 2020, Glanbia (2021). 5. Web of Science search for the keywords “dairy cooperative” OR “dairy cooperatives” on 19/04/2021. Supplemented by manual search for peer-reviewed journal articles and discussion papers on (“dairy cooperative” and country name) on Google Scholar. 6. Milk suppliers in other countries are not always members of the cooperative and operations are profit-driven. We recognize that it is therefore questionable whether they should be counted as part of the cooperatives.

REFERENCES Alavoine-Mornas, F., & Madelrieux, S. (2015). Dairy cooperatives: what factors contribute to maintaining mountain dairy farming? Journal of Alpine Research|Revue de géographie alpine, 103-1. https://​ doi​.org/​10​.4000/​rga​.2718 Alho, E. (2015). Farmers’ self-reported value of cooperative membership: evidence from heterogeneous business and organization structures. Agricultural and Food Economics, 3(1), 1–22. Bayern MEG (2021). Home. www​.bayern​-meg​.de/​ Bijman, J., & Iliopoulos, C. (2014). Farmers’ cooperatives in the EU: policies, strategies, and organization. Annals of Public and Cooperative Economics, 85(4), 497–508. Bijman, J., Pyykkönen, P., & Ollila, P. (2014). Transnationalization of agricultural cooperatives in Europe. The Dovenschmidt Quarterly, 4, 168–78. http://​edepot​.wur​.nl/​345357 Bijman, J. (2018). Exploring the sustainability of the cooperative model in dairy: the case of the Nether lands. Sustainability, 10(7), 2498. Bijman, J., & Hanisch, M. (2018). Living apart together: how are member-cooperative relationships changing within European dairy cooperatives? www​.agrar​.hu​-berlin​.de/​de/​institut/​departments/​daoe/​ koopwiss/​ifg/​forschung/​diss/​bijman​-hanisch​-living​-apart​-together​-30​-october​-2018​-2​-edit​-jos2​.pdf Boland, M., & Cook, M.L. (2013). The Irish dairy industry and evolution of Glanbia. In Proceedings of the International Conferences on Economics and Management of Networks (EMNet) Agadir, Morocco.

386  Handbook of research on cooperatives and mutuals Bošková, I. (2013). Collaboration in the Czech dairy chain. Agris on-line Papers in Economics and Informatics, 5(665-2016-44973), 35–45. Bruszt, L., & Karas, D. (2020). Diverging developmental strategies beyond “lead sectors” in the EU’s periphery: the politics of developmental alliances in the Hungarian and Polish dairy sectors. Review of International Political Economy, 27(5), 1020–40. Bureau van Dijk (2021). Orbis database. https://​orbis​.bvdinfo​.com Candemir, A., Duvaleix, S., & Latruffe, L. (2021). Agricultural cooperatives and farm sustainability: a literature review. Journal of Economic Surveys, 35(4), 1118–44. Chaddad, F.R., & Cook, M.L. (2004). Understanding new cooperative models: an ownership-control rights typology. Review of Agricultural Economics, 26(3), 348–60. Charlebois, S. (2016). Policy-change triggered environmental uncertainty in a dairy cooperative: the case of Mila in South Tyrol. International Journal on Food System Dynamics, 7(3), 258–70. Cook, M.L. (1995). The future of US agricultural cooperatives: a neo-institutional approach. American Journal of Agricultural Economics, 77(5), 1153–9. De Herde, V., Maréchal, K., & Baret, P. V. (2019). Lock-ins and agency: towards an embedded approach of individual pathways in the Walloon dairy sector. Sustainability, 11(16), 4405. De Herde, V., Baret, P.V., & Maréchal, K. (2020). Coexistence of cooperative models as structural answer to lock-ins in diversification pathways: the case of the Walloon dairy sector. Frontiers in Sustainable Food Systems, 4, 224. Di Marcantonio, F., Ciaian, P., & Fałkowski, J. (2020). Contracting and farmers’ perception of unfair trading practices in the EU dairy sector. Journal of Agricultural Economics, 71(3), 877–903. European Central Bank (2021). List of legal forms. www​ .ecb​ .europa​ .eu/​ stats/​ money/​ aggregates/​ anacredit/​shared/​pdf/​List​_of​_legal​_forms​.xlsx European Commission (2016). Development of the dairy market situation and the operation of the “Milk Package” provisions. https://​eur​-lex​.europa​.eu/​legal​-content/​EN/​TXT/​HTML/​?uri​=​CELEX:​ 52016DC0724​&​from​=​EN European Commission (2020a). Milk Package Implementation Notifications Reg. 511/2012 for year 2019. Update May 2020 (DG Agricultural and Rural Development). PPT Presentation accessed on 1 December 2021, on: https://​ec​.europa​.eu/​info/​sites/​default/​files/​food​-farming​-fisheries/​animals​_and​ _animal​_products/​documents/​milk​-package​-implementation​_en​.pdf European Commission (2020b). A Farm to Fork Strategy for a fair, healthy and environmentally-friendly food system. Brussels, Belgium. Online: https://​eur​-lex​.europa​.eu/​resource​.html​?uri​=​cellar:​ea0f9f73​ -9ab2​-11ea​-9d2d​-01aa75ed71a1​.0001​.02/​DOC​_1​&​format​=​PDF European Parliamentary Research Service (2018). Briefing. The EU dairy sector. Main features, challenges and prospects. www​.europarl​.europa​.eu/​RegData/​etudes/​BRIE/​2018/​630345/​EPRS​ _BRI(2018)630345​_EN​.pdf Eurostat (2008). NACE Rev. 2. Statistical classification of economic activities in the European Community. https://​ec​.europa​.eu/​eurostat/​documents/​3859598/​5902521/​KS​-RA​-07​-015​-EN​.PDF​ .pdf/​dd5443f5​-b886​-40e4​-920d​-9df03590ff91​?t​=​1414781457000 Eurostat (2018). Farms and farmland in the European Union—statistics. https://​ec​.europa​.eu/​eurostat/​ statistics​-explained/​index​.php​?title​=​Farms​_and​_farmland​_in​_the​_European​_Union​_​-​_statistics​ #Farms​_in​_2016 Eurostat (2021a). Milk and milk product statistics. https://​ec​.europa​.eu/​eurostat/​statistics​-explained/​ index​.php​?title​=​Milk​_and​_milk​_product​_statistics​#Milk​_production Eurostat (2021b). Milk treated—distribution of enterprises by volume of annual production. http://​ appsso​.eurostat​.ec​.europa​.eu/​nui/​show​.do​?dataset​=​apro​_mk​_strmt​&​lan Fałkowski, J., & Chlebicka, A. (2021). What product mix do they offer and what marketing channels do they use? Exploring agricultural producer organisations’ heterogeneity. Journal of Rural Studies, 85, 1–12. Fiore, M., Galati, A., Gołębiewski, J., & Drejerska, N. (2020). Stakeholders’ involvement in establishing sustainable business models. British Food Journal, 122(5), 1671–91. German Federal Cartel Office (2017). Interim report on conditions for the supply of raw milk. www​ .bundeskartellamt​.de/​SharedDocs/​Meldung/​EN/​Pressemitteilungen/​2017/​13​_03​_2017​_Milch​.html Glanbia (2021). Annual report. www​.glanbia​.com/​sites/​glanbia/​files/​glanbia/​investors/​annual​-report/​ 2021/​Glanbia​-Annual​-Report​-20​.pdf

Recent developments among dairy cooperatives in the European Union  387 Grashuis, N.J. (2017). Branding by US farmer cooperatives: an empirical study of trademark ownership. Journal of Co-operative Organization and Management, 5(2), 57–64. Grau, A., Hockmann, H., & Levkovych, I. (2015). Dairy cooperatives at the crossroads. British Food Journal, 117(10), 2515–31. Hagedorn, K. (2014). Post-socialist farmers’ cooperatives in Central and Eastern Europe. Annals of Public and Cooperative Economics, 85(4), 555–77. Hakelius, K., Karantininis, K., & Feng, L. (2013). The resilience of the cooperative form: cooperative beehiving by Swedish cooperatives. In: Ehrmann, T., Windsperger, J., Cliquet, G., & G. Hendrikse (eds), Network Governance (pp.127–47). Berlin, Heidelberg: Physica. Hanisch, M., Rommel, J., & Müller, M. (2013). The cooperative yardstick revisited: panel evidence from the European dairy sectors. Journal of Agricultural & Food Industrial Organization, 11(1), 151–62. Hanisch, M., Müller, M., & Rommel, J. (2012). Support for Farmers’ Cooperatives; Sector Report Dairy. Wageningen: Wageningen UR. Harte, L.N. (1997). Creeping privatisation of Irish co-operatives: a transaction cost explanation. In: J. Nilsson, & G. v. Dijk (eds), Strategies and Structures in the Agro-food Industries (pp.31–53). Assen: Van Gorcum. Höhler, J., & Kühl, R. (2014). Position and performance of farmer cooperatives in the food supply chain of the EU‐27. Annals of Public and Cooperative Economics, 85(4), 57995. Höhler, J., & Kühl, R. (2018). Dimensions of member heterogeneity in cooperatives and their impact on organization—a literature review. Annals of Public and Cooperative Economics, 89(4), 697–712. Höhler, J., & Kühl, R. (2019). What strategies do dairy companies realize? Using content analysis to examine strategies in the German dairy market. International Food and Agribusiness Management Review, 22, 635–50. Höhler, J. (2019). Member heterogeneity and exit. In: Windsperger, J., Cliquet, G., Hendrikse, G., & M., Srećković (eds), Design and Management of Interfirm Networks (pp.197–215). Cham: Springer. Höhler, J., & Oude Lansink, A. (2021). Measuring the impact of COVID‐19 on stock prices and profits in the food supply chain. Agribusiness, 37(1), 171–86. Iliopoulos, C., Värnik, R., Filippi, M., Võlli, L., & Laaneväli-Vinokurov, K. (2019). Organizational design in Estonian agricultural cooperatives. Journal of Co-operative Organization and Management, 7(2), 100093. Imami, D., Valentinov, V., & Skreli, E. (2021). Food safety and value chain coordination in the context of a transition economy: the role of agricultural cooperatives. International Journal of the Commons, 15(1), 21–34. Leialohilani, A., & de Boer, A. (2020). EU food legislation impacts innovation in the area of plant-based dairy alternatives. Trends in Food Science & Technology, 104, 262–7. Liang, Q., & Hendrikse, G. (2016). Pooling and the yardstick effect of cooperatives. Agricultural Systems, 143, 97–105. McCarthy, O., & Ward, M. (2014). Irish agricultural co-operative modelling and remodelling: responding to a dynamic business and policy environment. In: Mazzarol, T., Reboud, S., Limnios, E.M., & Clark, D.N. (eds), Research Handbook on Sustainable Co-operative Enterprise (pp.67–81). Cheltenham: Edward Elgar Publishing. Müller, M., Hanisch, M., Malvido, A., Rommel, J., & Sagebiel, J. (2018). The structural effect of cooperatives on price volatility in the European dairy sector. Applied Economics Letters, 25(8), 576–9. Nilsson, J., & G. v. Dijk (Eds.) (1997). Strategies and Structures in the Agro-food Industries. Assen: Van Gorcum. Nilsson, L., Hansson, H., & Lagerkvist, C.J. (2017). Motivational factors for remaining in or exiting a cooperative. Agribusiness, 33(2), 209–25. Pachoud, C., Delay, E., Da Re, R., Ramanzin, M., & Sturaro, E. (2020). A relational approach to studying collective action in dairy cooperatives producing mountain cheeses in the Alps: the case of the primiero cooperative in the Eastern Italians Alps. Sustainability, 12(11), 45–96. Polacenko, K., & Bugina, V. (2014, April). Development of cooperation in dairy farming. In Economic Science for Rural Development Conference Proceedings (No. 34). Rabobank (2021). Global Dairy Top 20. RaboResearch report. https://​research​.rabobank​.com/​far/​en/​ sectors/​dairy/​dairy​_top​_20​_2021​.html

388  Handbook of research on cooperatives and mutuals Soboh, R.A.M.E., Oude Lansink, A., & van Dijk, G. (2011). Distinguishing dairy cooperatives from investor‐owned firms in Europe using financial indicators. Agribusiness, 27(1), 34–46. Soboh, R., Lansink, A.O., & Van Dijk, G. (2012). Efficiency of cooperatives and investor owned firms revisited. Journal of Agricultural Economics, 63(1), 142–57. Soboh, R.A., Lansink, A.O., & Van Dijk, G. (2014). Efficiency of European dairy processing firms. NJAS-Wageningen Journal of Life Sciences, 70, 53–9. Szabó, Á.T. (2015). A dairy cooperative in the making: history, ethnicity and local culture in an economic enterprise. Erdélyi Társadalom, 13(3), 47–65. Torquati, B., Taglioni, C., & Cavicchi, A. (2015). Evaluating the CO2 emission of the milk supply chain in Italy: an exploratory study. Sustainability, 7(6), 7245–60. Van der Krogt, D., Nilsson, J., & Høst, V. (2007). The impact of cooperatives’ risk aversion and equity capital constraints on their inter‐firm consolidation and collaboration strategies—with an empirical study of the European dairy industry. Agribusiness: An International Journal, 23(4), 453–72. Viergutz, T., Zubek, N., & Schulze-Ehlers, B. (2020). The spatial variation of switching rates in large cooperative membership bases: empirical evidence from the dairy sector. European Review of Agricultural Economics, 47(4), 1438–72. Westerholz, H.K., & Höhler, J. (2021). Corporate social responsibility reporting in the food industry— Comparison of co‐operatives and investor‐owned dairies.  Corporate Social Responsibility and Environmental Management, 29(1), 211–22. Wijnands, J.H., Bijman, J., & Tramnitzke, T. (2017). Analyses of the Functioning of Milk Package Provisions as regards Producer Organisations and Collective Negotiations. European Union: Luxembourg. Zuba-Ciszewska, M., Kowalska, A., Manning, L., & Brodziak, A. (2019). Organic milk supply in Poland: market and policy developments. British Food Journal, 121(12), 3396–3412. ZuivelNL (2020). LTO International comparison of producer prices for milk 2019. www​.zuivelnl​.org/​ uploads/​images/​Melkprijsonderzoek/​MPV​-REPORT​-2019​.pdf ZuivelNL (2021). Dutch dairy in figures. www​.zuivelnl​.org/​uploads/​images/​Publicaties/​Dutch​-Dairy​-in​ -Figures​-2020​-spread​.pdf

24. Social relations and cooperative development in rural China1 Qian Wan, Eric Micheels, and Murray Fulton

CHINESE COOPERATIVE DEVELOPMENT AND DEPARTURE FROM THE WESTERN COOPERATIVE MODEL Agricultural cooperatives in China have developed rapidly since the Farmers’ Specialized Cooperative (FSC) law was established in 2007. However, Zhao and Yuan (2014) suggest that the cooperative model in China deviates significantly from the rest of the world. While both traditional cooperatives and new models of cooperatives in the West protect individual member’s control rights (new models of cooperatives may relax the restriction on residual claim rights), Chen (2017) states that within Chinese cooperatives, members vary in their level of power and ordinary farmer members possess few decision rights regarding production and profit distribution. Instead, a small group of core members dominates the governance process by initiating and controlling the cooperatives (Lin & Huang, 2007; Zhao & He, 2012). The core members of Chinese cooperatives are typically rural elites, village cadres, and agribusiness companies or businesspeople. Rural elites are a group of people in the rural communities who are “likely to have a better educational background and better access to modern technologies, as well as more market and relationship networks” (Zhao & Develtere, 2010, pp.43–4). Village cadres are the managers of village affairs and the collective village assets. Agribusiness companies or businesspeople include input providers, midstream processors, downstream retailers, brokers, and the like (Jia, Huang & Xu, 2012). According to Wu and Xu (2013), shareholding cooperatives are common models for Chinese cooperatives. Share-ownership is usually “concentrated in the hands of the founding members, with the chairman the largest shareholder” (Bijman & Hu, 2011, p.109). The important roles taken by core members in cooperative development are partially allowed by the FSC law. The law explicitly allows non-farmers to be members of farmers’ cooperatives. The law also imposes fewer restrictions on core members’ decision rights (a small group of members could hold additional votes up to 20 percent of total votes) and income rights (up to 40 percent of the total profit could be allocated based on investments). Bernardi and Miani (2014, pp.8–9) suggest that although the FSC law was “purposefully introduced to improve the economic initiative and participation of members,” it allocated “too much power to higher-level cooperatives and organizations.” Even so, Xiong (2009, p.3) points out that the institutional arrangement of Chinese cooperatives has significantly deviated from what the law regulates, and enforcing the regulations does not seem to be a priority for regulators. There are numerous cases worldwide of “elite capture,” where corrupted powerful elites use cooperatives’ public resources, such as support from governments or NGOs, to gain individual benefits (see, for example, Platteau (2004)). Although “elite capture” is also a concern in China (Mattingly, 2016), core members’ dominance in Chinese cooperatives originates more 389

390  Handbook of research on cooperatives and mutuals from their financial and human resource contribution to the cooperatives. Zhao and Fu (2015) state that different groups of stakeholders, with different resource endowments and economic, political and social status, have heterogenous motivations and capabilities in cooperative developments. More capable, risk-tolerant, motivated, and well-equipped individuals with more financial and human resources may have a greater ability to contribute to the cooperative and thus become core members.2 Conversely, smallholder farmers become ordinary members, many of whom hope to benefit from the resources and capabilities of the core members. Core members, with more capability and contributions, “naturally and logically” control the cooperatives along with the residual claim rights (Lin & Huang, 2007). The concentration of power with core members is also caused by the institutional environment, including inadequate enforcement of the Cooperative Law (Xiong, 2009) and a lack of government policies and regulations (Hu et al., 2013) on democratic governance; and ordinary members’ lack of interest in cooperative governance due to their lack of knowledge of cooperatives and members’ role, rights, and responsibilities (Hu et al., 2013). For example, Wang (2010) suggests that managers and major shareholders have taken advantage of members’ indifference and the lack of cooperative ideology to gain control of cooperatives and exploit members. However, questions remain around why cooperatives with “the poor adoption of the one-person, one-vote rule” that the law requires (Ma & Zhu, 2020, pp.1015–16) are allowed to operate and are supported by the government. Further, why are farmers, knowing they do not have decision rights in the cooperatives, willing to participate in these cooperatives and voluntarily support the core members? Alternatively, why would core members who control the cooperatives (in many cooperatives, if not all) be willing to share benefits with ordinary members (Ma & Zhu, 2020) even though it seems unnecessary? With more cooperatives initiated and more farmers joining cooperatives, combined with significant government support to cooperatives, core members’ control over cooperatives appears to be acceptable to various stakeholders. Zhao and Fu (2015) use a patron-client relationship framework to examine the relationship between core and ordinary members in the cooperatives. Patron-client relationships are ongoing, stable, dyadic, and mutually supportive relationships between the patron, who has access to certain key resources, and the client, who does not have access to such resources (Boissevain 1969, p.379). A patron in a community enjoys higher economic and social status and power and provides the resources to their client as a favor or protection. The client is expected to reciprocate to reward the patron in their ongoing interactions. The patron-client relationship can be traced to ancient agricultural societies between landlords and tenants. A major objective of patron-client relationships is to manage social and economic uncertainties through security and mutual support. Zhao and Fu (2015) state that, due to stakeholders’ different interests and resource endowments (governments, business entities, rural elites, and ordinary farmers), these stakeholders cooperate in cooperative development through two layers of patron-client relationships. The first layer is between the local government (the patron) and the potential cooperative initiators (that is, businesspersons or rural elites). The second layer is between the core members that initiate and control the cooperatives and the ordinary members who join the cooperatives. Therefore, cooperatives are built on relational structures that are socially and economically exclusive to internal members.

Social relations and cooperative development in rural China  391 In this chapter, we will discuss the unique social context of rural China for cooperative development and use qualitative data collected from a field study in Chinese rural communities to explore stakeholders’ motivation, interactions, and relations in cooperative development.

THE ROLE OF SOCIAL RELATIONS IN RURAL CHINA Chinese rural society is a typical “guanxi” (Peng, 2004), “relation-based” (ren qing she hui) (Huang & Xu, 2006) or “acquaintance society” (Zhu & Wang, 2008). Peng (2004, pp.1048–9) states that “linkage networks are a distinctive and prominent feature of Chinese village life.” The network is linked through ties of different strength, within which “blood ties (xue yuan) are defined as the strongest ties” and social ties extend “from the family (the core) to relatives, friends, and so on.” Similarly, Zhu and Wang (2008) suggest that interactions within Chinese rural societies are built on “blood bond” and “geographical bond”; rural people are conservative and tend to trust and interact more with kin or acquaintances, while at the same time they tend to repel others. The village is “a basic identity and action unit” (Xu, 2014, p.81). Still, within the village, there may be factions (within which members regard each other as “own buddies”) bonded based on “kinship” and “friendship.” Such social relationships shape a “cooperative culture” within groups as “strong ties provide the bonds and obligations” and “cultural identity generalizes bilateral bonds and obligations into group loyalty” (Peng, 2004, p.1051). In rural China, the role of social relations is critical, as formal institutions, such as contracts, tend to be only supplementary to informal institutions that enforce transactions in rural China (Zhu & Wang, 2008).3 In rural China, cooperatives are initiated and developed from rural relationships (Huang & Xu, 2006). Gao and Kong (2015) state that the success of cooperative initiation and early development often relies on the interpersonal relationships and the level of social capital the cooperative initiator has developed within their rural community. In addition, an important foundation for cooperative development is the “community supporting network” built on “identity commitment,” “sense of community,” and “acquaintance.” The reason is that a “community” (a small society with shared resources, norms, traditions, and values) is shaped through long-term continuous interactions. Therefore, it is easy to achieve trust in these exclusive networks necessary for cooperative development. Similarly, Huang and Xu (2006) believe that interpersonal relations or networks build trust to reduce transaction costs and facilitate cooperation. Beyond the economic role, the social embeddedness of cooperatives gives cooperatives both prosocial purposes and social restraints, which influences the governance of cooperatives and the behaviors of cooperative leaders or core members. As Huang and Xu (2006, p.66) state, the governance in rural cooperatives is “largely built on interpersonal relationships or affections rather than formal institutions or the agreement on cooperative philosophy,” and these relationships can effectively constrain the actions of core members. It is believed that kinship is essential in Chinese cooperatives as it acts as the “lubricant” working together with other factors like loyalty and capability in cooperative governance (Huang & Xu, 2006). The critical role of social relations, like the heterogeneity among stakeholders, is a unique context of rural China that may potentially explain Chinese cooperatives’ deviation from western cooperatives and investor-owned firms (IOFs). As Gao and Kong (2015, p.9) explain,

392  Handbook of research on cooperatives and mutuals “the relationship among cooperative members is not a purely economic relationship, and purely economic reasons cannot explain the trust, mutual support, and interactions.”

QUALITATIVE FIELD STUDY IN TAI’AN CITY Research Method As China’s rural societies are large and diverse, the research aims not to generalize but to choose a purposely selected area in order to gain a deep understanding of the cooperative development practice. We use a qualitative research approach that enables us to research the cooperative in context (the rural community), allowing us to have the conversation and observation in a natural setting. It also allows us to collect and interpret data of detailed descriptions and explanations (the meaning of people’s words and behaviors). Moreover, as rural residents can be defensive and conservative, a prolonged process to build trust with farmers in their familiar environment is a key step to getting authentic information. In addition, many farmers (even members and initiators of the cooperatives) are not familiar with cooperative-related terminologies or knowledge. Given that limitation, a qualitative research approach allows for flexibility. The researcher can explore different ways to phrase the questions, explain and clarify questions and responses, and seek different communication strategies depending on the situation and people involved. Between February to May 2018, one of the authors interviewed 27 core members in Tai’an city.4 The core members (on their own or with their companies or village committees) initiated 32 cooperatives in total. We also interviewed 15 farmers and 8 government officials who work on rural development and have knowledge about cooperative development. To increase the diversity of the samples, we selected cooperatives in three ways: asking for recommendations from government officials, contacting acquaintances scattered in different townships to discuss cooperatives with which they are familiar, and driving randomly along country roads to seek out potential interviewees. The cooperatives gathered using this approach were diverse in size, industry, and stakeholders. Social Relations in Chinese Rural Cooperatives Data from the field study shows that social relations play a significant role in most cooperatives. Social relations may dictate where cooperative initiators locate their cooperatives and select members. Unlike western cooperatives that have open membership or membership upon collective approval from existing members, we find that in the Chinese cooperatives we studied, the founding members have the power to select additional members. Further, the tendency was to utilize their social relations to select people who can “get along well with them” and “share similar idea or ideology (li nian).” Sorted by social relationship within the cooperative, the cooperatives we visited in the field study can be put into the following three types. Cooperatives initiated by rural elites The first type of cooperative is initiated by rural elites (that is, experts in growing or marketing specific crops) and joined by willing members they selected, such as friends, relatives, neighbors, or people within the village. Although most of these cooperatives are small, built upon

Social relations and cooperative development in rural China  393 the initiators’ networks, they account for a sizable portion of all cooperatives and play critical roles in local economies. We will describe two representative cases of cooperatives. The first example is the cooperatives in Qi Village. Like many Chinese rural communities, farmers in Qi Village grow more than one crop. The village leader described cooperatives as vehicles of villagers’ specializations and mutually supportive interactions built upon social relationships—friends, relatives, and neighbors. The farmers who are more capable with one crop may initiate a cooperative targeting this product to help other farmers in their network while joining other cooperatives initiated by other farmers targeting a different crop. Qi Village is an excellent example that the network of cooperatives depicts the interpersonal network in the community (displayed in Figure 24.1).5 Villagers may participate in more than one cooperative. However, as cooperatives are based on social relationships, the scale of the cooperation is often limited (for example, there are three nursery cooperatives and two kiwi cooperatives in Qi Village).

Source: Authors.

Figure 24.1

Cooperatives in Qi Village

The Brightspring Tea Cooperative is another example of a cooperative initiated and expanded through social relations. Brightspring was initiated in 2010 by a tea grower in the area who local government officials describe as a “very smart, visionary and social person.” Through the cooperative, the initiator allowed eight friends and neighbors to sell tea leaves through his contract with a local tea-processing firm as the processing firm would not “accept those eight people’s tea in their names”. Later, the initiator developed their own tea-processing and packaging facilities. The cooperative further expanded through the network of the eight initial members: each one “brought into the cooperative 10–20 members whom they were familiar

394  Handbook of research on cooperatives and mutuals with.” The process is shown in Figure 24.2. The Brightspring Tea Cooperative is built on the networks (of the eight initial members) of a network (centered on the cooperative leader). The cooperative leader, the core of the core members, is the major decision-maker and consults with the eight core members in the decision-making process. The eight core members are responsible for their members from their network. Cooperatives initiated by village committees The second type involves cooperatives that the village committee initiates. The village committee and leaders are often very influential in the local community due to their administrative power in village affairs, personal capability and reputation, and access to external government support and business resources. These village-based cooperatives are open only to local villagers for two reasons. First, relationships between the village committee and local villagers make it easy for village leaders to coordinate and monitor members for potential free-riding, product quality, and holdup issues. Second, these cooperatives often have limited capital or other resources, and their villagers are prioritized to benefit from these cooperatives. The Riverside Tea Cooperative is a typical example of a village-initiated cooperative. Riverside Village was the first village to adopt tea production in the city and initiated the first tea cooperative in the region more than 20 years ago. Since then, tea production has been widely adopted in the region, but the Riverside Tea cooperative still only operates at the village level and only serves its villagers. Cooperatives initiated by external businesspeople through rural partners’ networks The third type involves cooperatives initiated by businesspeople who are originally non-rural residents, who partner with selected rural people as local managers or coordinators. The local manager then selects the farmers from within their network to be the cooperative members. The businesspeople may be input providers, brokers, or processors who seek to use rural cooperatives to leverage opportunities in the agriculture industry. However, outsiders do not have the requisite local information and social influence to coordinate and enforce member cooperation through informal mechanisms. Formal institutions, like contracts, are not typically effective (Zhu & Wang, 2008). Therefore, to build good relationships with farmers to reduce transaction costs, non-rural initiators commonly require local partners, often influential and well connected with farmers in the community, to provide legitimacy and help with coordination. From the interviews, it is seen that the business initiators partner with either local villagers or village committees to initiate the cooperative. Businesspeople hire, give shares to, or share benefits with these rural partners in exchange for their help in managing the cooperative and building trust and cooperation with local farmers. Two government officials in separate interviews gave good explanations of such partnership with rural elites and village committees, respectively: Chinese rural society is still a society of relations and a society of favors and rewards (ren qing). There could be contracts in the cooperation, but the relations, favors, and benefit-sharing norms (you qian yi qi zhuan) play major roles. Therefore, some local elites who have good economic performance, local influence, and reputation are the ideal partners for the companies out of the rural communities, who worry about the difficulty in dealing with farmers and enforcing the contracts. There might be so many potential conflicts between the outside initiators and the villagers such as road and facility building, water and electricity using, land using, traffic, security, and noise. Therefore,

Social relations and cooperative development in rural China  395 inviting the village committee as a coordinator, shareholder and decision-maker could bundle up the mutual benefits and address the conflicts between outside business owners and the villagers.

An example of a cooperative initiated by business people is the Sunshine Tea Cooperative. Sunshine Tea was formed by a leading regional tea-processing and trading company (holding 98 percent of the shares) and 261 other rural farming elites (holding 2 percent of the shares in total) as partners. Each rural elite is the manager in their village(s), responsible for organizing local tea farmers for the company. These rural partners coordinate and build trust between the company and farmers by providing services, exchanging information, and purchasing tea leaves. The farmers or ordinary members believe that their rural agents in their community will give them a reasonable offer and quality service; therefore, they are willing to cooperate. Because tea leaves are perishable (that is, fresh tea leaves must be picked up every day and stir-baked on the same day) and the planting area is large, mountainous, and hard to reach, the company requires local agents in different villages to acquire tea leaves from the farmers, supervise the quality, and perform initial processing.

Source: Authors.

Figure 24.2

Brightspring Tea Cooperative and Sunshine Tea Cooperative

396  Handbook of research on cooperatives and mutuals Prosocial Motivation Given the importance of personal networks in the agricultural cooperatives, psychological and economic motivations may contribute to the initiation and development of these ventures. One such factor is the prosocial motivation of core members who want to develop a cooperative. Grant and Sumanth (2009, p.928) define prosocial motivation as “the desire to expend effort to benefit other people.” In addition to the economic motivation, prosocial motivation is seen as an important reason for cooperative initiators as they want to help those they care about in their network. When the initiators’ resources are limited, they prefer to help farmers who give them the most prosocial utility gains. Therefore, the factor of prosocial motivation may influence the cooperative’s location, the members they select to participate, and the overall governance mechanisms used to operate the cooperative. When initiating and developing the cooperatives, different initiating stakeholders give prioritized attention to different people depending on their social network. A township government official commented that “the cooperatives initiated by the village committees often put the villagers’ benefits on the top, and some rural elites are also sincerely willing to help their neighbors, relatives, and friends in the rural communities.” Non-rural business initiators who get support from stakeholders such as government and rural partners will also need to consider the benefits of the people these stakeholders care for the most. Based on the interviews, all village leaders emphasize that they initiated the cooperatives for the villagers’ benefit. For example, the initiator of the South Mountain Walnut Cooperative is its village leader, who gave up his career in a city and came back to the village when the village asked him to come back to lead them. “They trust me because of my experience in business management and agronomic expertise. I also thought that as a member of the community, I should take this social responsibility for the village’s prosperity.” Similarly, the initiator of the Peace Village Vegetable Cooperative used to be a wealthy businessperson but quit his business, returned to his village to serve as the village leader, donated his wealth, and developed the cooperative in the village. He said that after reaching a certain age, he began to feel guilty and uncomfortable that the people in his community were still poor. The rural elites also initiated cooperatives partially or mostly for prosocial reasons. For example, the initiator of the All Happy Nursery Cooperative is a horticulture agronomist who came back to his community and initiated this cooperative after a successful career. He accepted five households who were friends and neighbors into this cooperative, teaching them planting skills and marketing products. He said he used the name “All Happy” because he wanted to make all the members, not just himself, happy and rich. His assistance to the members is free (a small brokerage fee is charged for assistance to non-members). He said: we commonly say “give and take” […] as long as you “give,” people will be willing to help you when you need to “take.” As we are all close neighbors, I don’t overthink about my temporary benefits. You never know when you will need help from the community […] I wish I could retire, but I cannot because nobody could replace me for this position.

The statements above echo findings in other areas on prosocial motivations in entrepreneurship and business development (Yu, Ye, & Ma, 2020). Our interviews found that many core members have high levels of prosocial motivation that contributes to the desire to initiate a cooperative that can benefit others within their network.

Social relations and cooperative development in rural China  397 Social Relations to Exert Social Pressure to Build Trust Social relations also provide informal mechanisms to constrain people’s behavior through social pressure.6 People are expected to act in a mutually beneficial way or risk social repercussions. As such, the role of social relations may be critical in enforcing cooperation and building trust between parties in rural China, as formal contracts are not very effective. As a government official commented, “Even though contracts are available in some cases, the role of contracts themselves is mainly to clarify the details of the cooperation but with a questionable enforcing and monitoring power.” The interviews show that for both farmers and initiators, opportunistic behavior is a major worry (and initiators’ worries are a bigger concern arising from the interviews, as they need to invest in more transaction-specific assets). The field study found that initiators utilized direct or indirect relationships with farmers to find the farmers they trust and to gain trust. Specifically, farmers may forego other business opportunities by participating in the cooperatives and believe initiators could help them achieve economic success. In such conditions, farmers are vulnerable to opportunism from initiators. Ongoing social relationships are a big reason why farmers trust these initiators and join the cooperatives. These initiators are often reputable, respected, and well-known people in their network. Initiators are under social pressure within the cooperative because if they act opportunistically, they will sacrifice their reputation and break their relationships with peers. When the core members initiate cooperatives, they may need to invest in transaction-specific assets and include free support as part of the service in exchange for farmers’ support in the cooperative business. For example, the core members of the New Special Vegetable Cooperative invest in the production base and land preparation for organic vegetable plantation. The initiator of the Mountain Peak Tea Cooperative provides free agronomic guidance and organic fertilizer and pesticides to help farmers increase the quality of their tea leaves. Under these conditions, the cooperative initiators can be vulnerable to opportunism from ordinary members. A typical example is that farmers enjoy the benefits from core members’ specific investment and free support; however, they will sell (or buy) products to (from) the cooperatives’ competitors as long as they offer a slightly better price. In instances where there is greater competition, social pressure that ensures reciprocal behaviors of ordinary members becomes crucial. According to our interviews, to limit the potential for opportunistic behaviors by ordinary members, core members often select farmers they know to be grateful, loyal, and reciprocal. These farmers are often the initiators’ close friends, relatives, and neighbors (for rural elite initiators) or peer villagers (for the village committee initiators). Due to these close ties, these ordinary members are under social pressure to act reciprocally because any opportunistic behavior would break the mutually supportive norm, damage their reputation, and weaken the relationship with the core members. For example, a member of the Sunshine Tea Cooperative said in the interview that he sells his tea leaves only to the local agent of the Sunshine Cooperative. Although he has the absolute freedom to sell the tea leaves to any business, he explained: That person (one of the core members) and we (ordinary) members know each other very well and he is very trustworthy […] when the market is down, and other buyers refuse to acquire tea leaves, he still acquires the tea leaves from his members at a fair price. Most of the time, the price will be very similar. Even though other buyers offer a slightly better price, it is “losing face” (diu mian zi)

398  Handbook of research on cooperatives and mutuals to switch to other buyers just for this small benefit (ying tou xiao li), as you and he knows each other well, and he always helps you in your difficult time.

The village committee initiated the Ruilin Fruit Cooperative to market the fruits grown by the villagers as a united group (for a small fee) to increase the bargaining power and eliminate price competition among farmers. When asked how to make sure all farmers will participate, the leader said, “farmers know it is good for them, and besides, you will feel uncomfortable not to participate if others do.” The village and cooperative leader said “someone has to do something,” and “we (the committee) would be the only possible party to legitimately and effectively organize farmers as a united group thanks to the committee’s influence.” Similarly, the village committee initiated the Harvest Walnut Cooperative and required farmers to give 5 percent of the output to the village “as the reward to the village.” As the cooperative leader said, “all the preparation and initial investments are arranged by the village (committee) including the seedlings, wells, roads, electricity, and water.” When asked what happens if farmers do not pay this 5 percent, the leader said, “it is doubtful: farmers are all neighbors and peers in the community, and it will be a shame if they do not do so.” Farmers are also facing social pressure in terms of guaranteeing product quality. For example, the initiator of Brightspring emphasized the role of social pressure to maintain quality control: The use of fertilizer and pesticide is under watch. Our members’ farms are close to my place. I could see how much and what kind of pesticide they use and when. Before we control this, the overuse of pesticides is a problem because farmers often sell to buyers outside (along the main road near the farms), and those buyers cannot control the quality. In our cooperative, we have two ways to monitor: first, as I said, I could go and monitor by myself; second, neighbors know each other, and their farms are next to each other so that there is almost no secret in terms of quality control. I could get the information at home from others, so there is the effect of peer pressure on quality control […] Almost every day, they come to sell their tea leaves to me (the cooperative), and we could see each other and communicate every day. Then people may feel shame if they lie to me and overuse the pesticide.

Similarly, the Rivergate Tea Cooperative leader, a committee-initiated cooperative, said the cooperative only accepts products from farmers within the village. The reasoning is that peers and Party members monitor farmers in the village. Therefore, the farmers know not to risk their reputation to violate the quality standard by overusing fertilizer and pesticides: Our cooperative does not accept tea from outside of our village, as we cannot guarantee its quality. The village committee organizes some Party Members to monitor the growing practice. Every Party Member of this group will be assigned to an area to watch the use of pesticides and chemical fertilizer and exchange information related to marketing and technology between cooperative and the farmers. If the farmers overuse the pesticide, we will not buy their tea […] The farmer is unwilling to take the risk because nobody would want to buy their tea around the community if their unethical behavior is known, which means all their hard work is wasted. The within-community self-monitoring is the most efficient way to control the quality. Party-members are extremely responsible and hard-working because they know if they do not watch carefully, the reputation of their village’s tea may be threatened, and the whole community’s welfare could be damaged.

Sometimes, a relationship such as coming from the same village is not enough to exert social pressure on farmers, and therefore initiators use additional screening to choose reliable members. For example, all of Mountain Peak Tea Cooperative’s 170 member households

Social relations and cooperative development in rural China  399 are from the same village and were well known to the initiator before the initiation of the cooperative. However, there are still “some selfish and short-sighted households who do not understand mutual-benefit,” the cooperative leader said: I provide them with organic pesticides, organic fertilizer, and agronomic guidance for free and I signed the contract with farmers regulating that they could only sell tea leaves to me […] But for some farmers, the contract is just a piece of wasted paper. They will sell their tea leaves to others even though their price is slightly higher occasionally because I cannot watch the competitor’s price all the time […] have kicked out 20 households and only members who share the value of mutual benefits could stay.

The interviews may explain why the core members only include the ordinary members that “are grateful,” “share the same value and goal,” and “get along well” with them. Therefore, most of the cooperatives we talked with are small. Governance Consistent with the literature, data from the field study shows that cooperatives in China are controlled and de facto (although, on paper, collectively) owned by the core member(s). The core members are, in most cases, the initiators and largest individual shareholders in the cooperative. One exception seen from the field study is that a businessperson bought an existing cooperative (the Lucky Pig cooperative) from the initiator who had to move to another province–further indicating private ownership. In the field interviews, when farmers mentioned cooperatives, they used the term “ge ren de” (individual’s or private) cooperatives to describe the cooperatives initiated by individual elites or companies. They use the term “cun li de” (village’s) cooperatives to describe the cooperatives initiated by the village committee, rather than “our” cooperatives or “their” cooperatives. Their reactions show that the farmers do not naturally think the cooperative is owned or controlled by ordinary members. The interviews show the core members’ control over cooperatives is accepted by both core and ordinary members. There are two reasons for this. First, core members believe that they initiate cooperatives through their efforts and resources, including social and financial capital. For many core members, the initiation of cooperatives results from their prosocial efforts to bring their success to others. As a result, they believe they deserve their status as leaders, and the other members should respect their voice. Core members can decide who can join the cooperative and what services and benefits the members can receive. As discussed earlier, they only want to include easy-going, reciprocal, trustworthy, and grateful members in the cooperative. When core members think ordinary members violate the cooperative’s principles, values, or rules, core members can deprive these ordinary members of membership. Second, ordinary members do not have any intention or interest to participate in the governance of the cooperative. When asked: “do farmers want to participate in the decision making” and “is there anything like a General Assembly or members’ meeting,” the farmer laughed and said, “who would want to participate in any meetings? […] farmers are busy and do not want to waste any time in this […] cooperatives are like initiators’ private business, and it is so rare that there is a farmer truly know what a cooperative is.” Another farmer, when talking about their village’s discussion on developing a cooperative, said: “it is wrong to ask farmers to put their time and resources into the cooperative; you just let farmers do their stuff. If some people do great in some area, they can lead us and help us,

400  Handbook of research on cooperatives and mutuals and we learn from them and follow them; my ideal cooperative should be like this rather than bothering everyone.” These statements seem to reflect the sentiment shared by many farmers: “if two men ride a horse, one must ride behind.” The norm, the social relationship, and the resource heterogeneity influence the perception of roles, decision rights, and the relationship among members in cooperatives. Thus, the relationship between ordinary and core members is not perfectly captured through principle-agent relationships. Indeed, members do not elect core members or managers or monitor their activities. Rather, members are selected by these core members (summarized in Figure 24.3). However, the relationship is not reflected as a pure market buyer–seller relationship either. The core members are not purely profit-oriented. Instead, the governance structure of Chinese rural cooperatives is unique from the traditional cooperative model and the investor-owned firm model due to embedded social relationships that include trust, reciprocation, and community enforcement.

Source: Authors.

Figure 24.3

Governance of cooperatives in rural China

Social relations and cooperative development in rural China  401

CONCLUSION AND DISCUSSION Cooperatives from a Social Relationship Perspective Our qualitative study found that social relations play an important role in cooperative development in rural China. Almost all rural cooperative initiators interviewed developed cooperatives utilizing their social relations or network, while many non-rural initiators found rural partners and utilized their network to develop cooperatives. The important role of social relations can be explained by cooperative initiators’ prosocial motivation to help the people in their network and the ease in which core members can coordinate and build trust with the people they know well. Social relationships are important, especially when contracts are less effective, and monitoring and enforcement are easier due to prior relationships, cultural norms, and community enforcement. From our conversations with cooperative leaders in Tai’an city, it seems that cooperatives do not create a new social group, rather they are built on existing social relations. The relationship between the ordinary members and the core members is more akin to a patron-client relationship. Here, the cooperative is initiated by core members who have access to certain economic resources that can be shared with ordinary members (the clients) in their network who have no access to the resources and must rely on the core members (the patrons). The relationship is dyadic, ongoing, stable, and reciprocal, and the power belongs to the core members instead of the ordinary members. The Nature of Chinese Cooperatives Our findings may raise further questions regarding the nature of Chinese cooperatives. Are Chinese cooperatives not authentic cooperatives? For example, should we not consider them cooperatives because their governance structure is different from the western cooperative model, and they do not perfectly mirror cooperative definitions and principles? We suggest that the “Chinese cooperative” does not mean “western cooperative.” This does not make Chinese cooperatives somehow inferior – it just simply means that many of the ideas that have been used to discuss cooperatives do not apply to the Chinese case. The absence of democracy in the cooperatives does not mean that farmers will not benefit from the cooperatives because the mutually beneficial norm and social relationships play a role in maintaining balance and helping parties reach consensus. For example, some cooperatives naturally formed through interpersonal relationships in the rural community even before the leader registered the cooperative. The leaders were often knowledgeable and able to access valuable resources, and were trusted by their friends, neighbors, and fellow villagers, who regularly asked for help with their farm business. After the Cooperative Law was passed in 2007, initiators may have registered the cooperative under that framework to have legal status. However, registered cooperatives seem to be a title for the villagers’ ongoing economic interactions built on rural relations. There is a reasonable concern as to whether a greater share of the benefits should be distributed to farmers than is currently the case. However, this study finds that stakeholders acknowledge the benefits of the cooperatives in promoting the local economy, facilitating the adoption of agronomic skills and technology, reducing transaction costs along the supply chain, and generating economic benefits for the members. Thus, for farmers specifically, eco-

402  Handbook of research on cooperatives and mutuals nomic participation in the cooperative provides benefits. Nevertheless, farmers can choose not to join the cooperative even though they may need the core members’ approval to participate. The Rationale behind the Chinese Cooperative Model Although many see the core-member-controlled cooperatives in China as problematic, we think the issue is more complex. We suggest the cooperative development path in China is a consequence of the heterogeneity between core members and other farmers, the importance of social norms and social relations in coordination and building trust, and the different roles and power status in rural relationships. From the study, it could be seen that many stakeholders’ (including the government officials’) understanding of the cooperatives (nature, purpose, and governance) is different from the cooperatives in the west and even the articles of the Chinese Cooperative Law regarding governance and benefit-sharing. All stakeholders, including the farmers and local government officials, seem to tolerate this departure. Such consensus gives resource-holding elites more convenience and more motivation to initiate cooperatives. The dominance of the core members in the cooperatives gives them the full autonomy to make the strategic and operational directions in the cooperative development. Therefore, it seems to be an easier process to initiate cooperatives in rural China than in the West, where cooperative development requires feasibility, business planning, strategy formulation, investment from the community, incorporation of a steering committee, and so on. Thus, the ease of initiation may be one of the reasons behind the rapid growth of cooperatives in rural China. With the dominance of the core members, Chinese cooperatives experience lower costs of ownership than western cooperatives due to free-riding, control problems, horizon problems, portfolio problems, and so on (Cook, 2018; Hansmann, 1999). The advantages of Chinese cooperatives appear to be similar to those of western cooperatives in that the cooperative can reduce transaction costs in the market caused by information asymmetry, asset-specificity, and unequal market power. However, the Chinese cooperative model seems to reduce transaction costs through close relationships and trust with the core members, not by adjusting residual rights or changing the allocation of control rights. Therefore, the current cooperative model dominated by core members may be an effective path to facilitate cooperation and develop the rural economy in the Chinese rural context despite the dissimilarities with western cooperatives. Challenges for Chinese Cooperative Development The Chinese cooperative model may have problems long-term due to scale and scope efficiencies. For example, although there are a few cases, cooperatives can grow to be a regional industry leader, most cooperatives tend to be small. This study indicates four potential reasons behind this phenomenon. First, core members would like to control their cooperative solely and not consider sharing the control with others in a potential united cooperative. Second, when the farmer members accumulate more economic and human resources, their opportunity cost of participating in the current cooperative increases, and they may seek to initiate their own cooperatives. Third, as prosocial motivation is a key motivation to initiate the cooperative, core members, with limited resources, prefer to include only farmers they care most about, which limits cooperatives’ coverage. And fourth, as the core members use personal

Social relations and cooperative development in rural China  403 relationships (and social pressure) to monitor and coordinate within the cooperatives, they may lack the capacity to manage a large cooperative with members beyond their network. Implications for Future Research Future research could build upon our view that Chinese rural cooperatives are shaped by social relationships and norms. First, as China is a large and diverse country, future studies could explore whether and how cooperative development is influenced by diverse social relationships, norms, and informal institutions in different parts of China. It is also worth exploring the role of social, religious, and cultural factors in cooperative development in other developing countries. Second, quantitative studies could explore the statistical relationship between selected attributes of informal institutions, relationships, trust, and so on and the attributes of cooperative development such as cooperative size, member commitment, governance, and performance. For example, social network analysis provides a methodology to measure a social network through attributes such as closeness, network density, centrality, and betweenness. Other studies could examine if the trust and commitment of ordinary members is influenced by the nature of the initiator (village committee, rural elite, and so on). Third, as was discussed, the current social, economic, and cultural context makes it hard for Chinese cooperatives to resemble the western cooperative model. Future work could explore whether Chinese cooperatives will evolve to be more like western cooperatives in the future. Our research implied two areas of Chinese rural context to watch. Will the role and effectiveness of formal institutions (for example, law and contracts) advance so that the role of social relationship in providing trust can diminish? Will the heterogeneity between core members and ordinary members decrease, to weaken the ordinary members’ reliance on core members? These two questions lead to more relevant topics to explore the evolution of the Chinese rural context and its ongoing impact on cooperative development. One example is researching the effect of Chinese urbanization and industrialization on cooperative development. These economic trends draw the rural workforce into cities, driving specialization and heterogeneity in rural communities, and creating opportunities for full-time farming experts. Another potential direction involves the evolution of the Chinese Cooperative Law and its enforcement to see whether the Cooperative Law, as a formal institution, can counteract the effect of informal institutions in building the democratically controlled cooperatives. It may also be interesting to examine whether market competition can drive core members of the cooperatives to break the boundary of their social network to jointly form larger-scale cooperatives. In addition, will ordinary farmers, after having gained experience from participating in the cooperative business, show greater interest in investing in cooperatives and participating in the decision making? Can such interest, if any, be accepted or welcomed by the core members of the cooperatives? Fourth, the lifecycle of Chinese cooperatives needs to be explored given the importance of social relationships in cooperative development and governance, providing an interesting comparison with the lifecycle of western cooperatives (Cook, 2018). For example, when it comes to transition within the cooperative, one question is whether the cooperative will come to an end when the core members retire, as the cooperatives are built on the basis of their relationship with ordinary members. Or will new core members, such as previous core

404  Handbook of research on cooperatives and mutuals members’ children, relatives, and close friends, inherit the resource and capability to manage the cooperative and the relationships with ordinary members?

NOTES 1. The authors wish to thank the editors and anonymous reviewers for helpful comments and suggestions. 2. Zhao and Fu (2015) explain that the migration, employment diversification, and land transfer (liu zhuan) after the 1980s stimulated increasing heterogeneity in rural China. He (2011) summarizes five classes of farmers and says that among the classes, the rural professionals (such as village cadres, teachers, businessmen, technicians), whose income comes from both agriculture and their professional skills, are the elites in rural societies and capture most of the benefits from rural development. The rural elites also have “cognitive advantages,” being more sensitive to government policies and related opportunities compared to their rural peers (Zhao & Wang, 2013). 3. The role of social relations can be viewed as social capital, social norms, and informal institutions that can change stakeholders’ behaviors. Liang (2015, p.98) summarizes that “social capital is complementary to formal institution and the necessity of social capital is decreasing with a more functioning formal institution.” 4. The first reason to choose Tai’an is that Tai’an is relatively representative in agricultural development with diverse agricultural products and good geographic location to access domestic and international market. The second reason to choose Tai’an is that it is one author’s hometown so it is an efficient opportunity for him to engage in prolonged fieldwork and get immersed in the rural communities. 5. The data was collected from the online business registration database and the pattern indicated from the data was verified and further explained by the village leader in the interview. 6. The effect of social pressure on individuals relates to the normative goal of a person (to do things following the norm) in psychology economics. Departure from the rule or norm or what other people expect will cause a person psychological discomfort (Lindenberg, 2001; Lindenberg & Steg, 2007; Osterloh & Frey, 2012). From an “identity” perspective (Akerlof & Kranton, 2005), when people put themselves in a social category there are certain expectations of what they should do, and failing to act in line with those expectations causes a utility loss.

REFERENCES Akerlof, G.A., & Kranton, R.E. (2005). American Economic Association identity and the economics of organizations. The Journal of Economic Perspectives, 19(1), 9–32. www​.jstor​.org/​stable/​4134990 Bernardi, A., & Miani, M. (2014). The long march of Chinese cooperatives: towards market economy, participation and sustainable development. Asia Pacific Business Review, 20(3), 330–55. Bijman, J., & Hu, D. (2011). The rise of new farmer cooperatives in China: evidence from Hubei Province. Journal of Rural Cooperation, 39(2), 99–113. Boissevain, J. (1969). Patrons as brokers. Sociologische Gids, 16(6), 379–86. Chen, Yiyuan. (2017). Are large-scale cooperatives the primary form of cooperative development? Journal of Nanjing Agricultural University: social science edition, 17(2), 30–41. (Chinese) Cook, M.L. (2018). A life cycle explanation of cooperative longevity. Sustainability (Switzerland), 10(5). https://​doi​.org/​10​.3390/​su10051586 Gao, Qiang, & Kong, Xiangzhi. (2015). A study on the relationship between dependency logic and interaction between farmers, professional cooperatives and village communities. Agricultural Economics and Management, 5, 7–14. (Chinese) Grant, A.M., & Sumanth, J.J. (2009). Mission possible? The performance of prosocially motivated employees depends on manager trustworthiness. Journal of Applied Psychology, 94(4), 927.

Social relations and cooperative development in rural China  405 He, Xuefeng. (2011). Rural strata after the abolition of agricultural taxes and their analysis. Social Sciences, 3, 70–9. (Chinese) Hansmann, H. (1999). Cooperative firms in theory and practice. LTA, 48(4), 387–403. Hu, Zhenhua, Huang, Jinming, & Luo, Jianli. (2013). Analysis on the governance of farmers’ professional cooperatives based on principal–agent relationship. Journal of Guangxi University: philosophy and social sciences edition, 35(3), 93–9. (Chinese) Huang, S., & Xu, X. (2006). The cooperative governance based on capabilities and relations. Zhejiang Social Sciences, 1, 60–66. (Chinese) Jia, X., Huang, J., & Xu, Z. (2012). Marketing of farmer professional cooperatives in the wave of transformed agrofood market in China. China Economic Review. https://​doi​.org/​10​.1016/​j​.chieco​.2010​.07​ .001 Liang Qiao. (2015). Based on the literature of domestic and foreign cooperatives from 2012 to 2014. Problems of Agricultural Economics, 11(97), 105. (Chinese) Lin, Jian, & Huang, Shengzhong. (2007). Membership heterogeneity and ownership analysis of farmers’ professional cooperatives. Problems of Agricultural Economics, 10, 12–17. (Chinese) Lindenberg, S. (2001). Intrinsic motivation in a new light. Kyklos, 54(2–3), 317–42. Lindenberg, S., & Steg, L. (2007). Normative, gain and hedonic goal frames guiding environmental behavior. Journal of Social Issues, 63(1), 117. Ma, M., & Zhu, H. (2020). Efficiency of decisions under membership heterogeneity and government regulations: insights from farmer cooperatives in China. Economic Development and Cultural Change, 68(3), 1009–40. Mattingly, D.C. (2016). Elite capture: how decentralization and informal institutions weaken property rights in China. World Politics, 68(3), 383–412. Osterloh, M., & Frey, B.S. (2012). Motivation Governance. https://​doi​.org/​10​.2139/​ssrn​.2347549 Peng, Y. (2004). Kinship networks and entrepreneurs in China’s transitional economy. American Journal of Sociology, 109(5), 1045–74. Platteau, J.-P. (2004). Monitoring elite capture in community-driven development. Development and Change, 35(2), 223–46. Wang, Jun. (2010). Cooperative governance: a literature review. China Rural Observation, 2, 71–7. (Chinese) Wu, Bin, & Xu, Xuchu. (2013). Cooperative governance structure: a new analytical framework. The Economist, 10(10), 79–88. (Chinese) Xiong, Wansheng. (2009). Cooperatives: unintended consequences as an institutionalization process. Sociological Research, 5, 83–109. (Chinese) Xu, Mingyi. (2014). Chinese Farmers Cooperative Organization Research (Doctoral dissertation, Aichi University). (Chinese) Yu, C., Ye, B., & Ma, S. (2020). Creating for others: linking prosocial motivation and social entrepreneurship intentions. Management Decision, 59(11), 2755–73. Yusheng, P. (2004). China’s Transitional Economy. American Journal of Sociology, 109(5), 1045–74. Zhao, L., & Develtere, P. (2010). New co‐operatives in China: why they break away from orthodox co‐operatives. Social Enterprise Journal, 6(1), 35–48. https://​doi​.org/​10​.1108/​17508611011043048 Zhao, L., & Yuan, P. (2014). Rural cooperative in China. Chinese Economy. https://​doi​.org/​10​.2753/​ CES1097​-1475470402 Zhao, Xiaofeng, & Fu, Shaoping. (2015). Pluralistic subjects, shelter relationship and cooperative system change: a case study of the practice of farmers’ professional cooperatives in Fucheng County. China Rural Watch, 2, 2–12. (Chinese) Zhao, Xiaofeng, & He, Huili. (2012). Mechanism analysis of the impact of rural social class differentiation on the development of farmers’ professional cooperatives. Problems of Agricultural Economics, 12, 38–43. (Chinese) Zhao, Xiaofeng, & Wang, Yixuan. (2013). Class differentiation, factional competition and the development of village cooperatives: a survey based on the development practice of new farmers’ cooperatives in Pioneer Village, Henan Province. China Rural Observation, 3, 72–9. (Chinese) Zhu, Qizhen, & Wang, Nian. (2008). On the basis and conditions for the emergence of farmers’ professional cooperatives. Journal of South China Agricultural University: social science edition, 7(3), 16–19. (Chinese)

25. Farmer cooperatives in China: frontiers in development and research1 Qiao Liang and Ziming Han

INTRODUCTION China has the largest rural population globally and has a significant agricultural sector. According to the demographic census in 2020, 509.79 million people live in rural China, of which around two-thirds are engaged in agriculture.2 The agricultural gross output value accounted for 7.06 percent of total GDP in 2020.3 Smallholder farmers are a feature of Chinese agriculture due to limited farmland and the large rural population. With the implementation of the Household Contract Responsibility System (HCRS) at the end of 1970s, Chinese farmers gained initial use rights over farmlands and ownership rights over the outputs.4 Since then, farmers have faced challenges in agricultural technology, operating costs, and market access. Farmer cooperatives in China have a unique position in addressing problems faced by farmers. Cooperatives maximize members’ economic and non-economic benefits (Feng & Hendrikse, 2012). Specifically, farmers establish cooperatives to gain access to technology training and to form a countervailing power during transactions with other parties. The presence of cooperatives in markets can drive their counterparts to provide higher prices for farmers and therefore increase the farm gate price of the whole sector, known as the “competitive yardstick effect” (Liang & Hendrikse, 2016; Liang & Wang, 2020). Moreover, cooperatives can generate social welfare for the local community, such as infrastructure and employment (Song et al., 2014). It is worth noting that farmer cooperatives in China have distinctive features seen in Western countries, such as small membership size, both top-down and bottom-up (that is, grassroots) formation, and extensive governmental intervention. This chapter maps the governance features of Chinese cooperatives, focusing on the distinction of core and common members. Second, we provide an overview of farmer cooperatives’ evolution and current status in China regarding their numbers, membership size, and governmental support. Third, we offer a systematic review of Chinese literature on farmer cooperatives in recent years. Last, we summarize the future development trends for farmer cooperatives in China.

GOVERNANCE FEATURES OF COOPERATIVES IN CHINA Principles of Farmer Cooperatives The first national cooperative law, “Law of The People’s Republic of China on Farmer Specialized Cooperatives” (Cooperative Law or Law hereinafter), was passed in 2006 and became effective on July 1, 2007. In the law, a farmer cooperative is defined as a mutual aid economic organization voluntarily united and democratically managed by the producers and 406

Farmer cooperatives in China: frontiers in development and research  407 operators of agricultural products or the providers and users of agricultural production and operation services. The Cooperative Law was amended in 2017 to better reflect the development of cooperatives, for example with the inclusion of specifications about cooperative unions. The principles specified in the Cooperative Law in China are slightly different from those of the ICA (International Cooperation Alliance), which number seven: (1) voluntary and open membership; (2) democratic member control; (3) member economic participation; (4) autonomy and independence; (5) education, training, and information; (6) cooperation among cooperatives; (7) concern for community.5 There are five principles in the Cooperative Law in China: (1) members are mainly farmers;6 (2) to serve members and to seek the common interests of all the members; (3) voluntary to join and free to exit; (4) democratic member control; (5) benefiting members mainly based on transactions with the cooperative. We can see that the two principles are naturally the same, except that ICA principles emphasize the cooperation between cooperatives and cooperatives’ role in the community. Core and Common Members While collective ownership, democratic control, and member benefits are emphasized in the Chinese Cooperative Law, many cooperatives distinguish core and common members. Most core members are rural elites and farmer entrepreneurs who are the initiators of cooperatives and generally are good at marketing and management (Liang & Hendrikse, 2013). In contrast, the other members, that is, common members, focus on farming but are rarely involved in decision-making (Liang et al., 2015). Control rights (decision rights) and income rights in farmer cooperatives in China mainly lie with core members.7 According to the Cooperative Law, the general assembly meeting is the ultimate decision-making body. However, it is common in practice that core members, rather than the whole membership, are dominant in decision making (Lin & Huang, 2007; Huang & Xu, 2008; Xiong & Zheng, 2008). For instance, the management personnel of the cooperative, including the chairman, directors, supervisors, and managers, are often elected from among core members. Most decisions are made through board meetings among core members, while general meetings are primarily held for technical training. Core members also reap a majority of the profit of a cooperative. Some cooperatives limit common members’ equity capital by setting a maximum number of shares that each common member can buy, contributing to the skewed distribution of equity capital (Liang et al., 2015). For example, in a vegetable cooperative studied by Liang et al. (2019), all the common members held 5.5 percent of the capital shares of the cooperative. Therefore, common members received minimal extra profit returns at the end of the year. However, the common member farmers still chose to stay in the cooperative because they benefited from preferential prices of inputs, accessible technology training, rights for product delivery, and some price premium due to the branding of the cooperative. The Cooperative Law specifies that at least 60 percent of distributable profits are returned based on patronage to balance the interests between core and common members. In contrast, at most, 40 percent are allocated based on equity capital. Core members would like to share part of the benefits with common members because they need the participation of common members to obtain economies of scale in production and branding and form collective bargaining power in markets. However, core members rely on equity capital to obtain high income, motivating

408  Handbook of research on cooperatives and mutuals entrepreneurial farmers to establish and run cooperatives as core members. Small farmers can also receive economic benefits and gain various services provided by cooperatives. Government Intervention and Governance Features of Farmer Cooperatives China is one of the countries in which cooperatives are imposed as an intensive governmental intervention (Liang & Hendrikse, 2013). The Chinese government attaches great importance to the development of farmers’ cooperatives, but the requirements for the registration of cooperatives stipulated in cooperative law are low, which leads some local governments and officials to establish excessive amounts of cooperatives in order to claim political achievements. Such intervention creates the existence of cooperatives that do not have the conditions for production and operation rather than just increasing the number of common members. Further, the government encourages village cadres to chair cooperatives to allocate village resources effectively. However, many village cadres are very busy and have no experience in managing cooperatives, and thus have little positive effect on the cooperative performance. Governments at different administrative levels can substantially impact the development of cooperatives through tangible forces, such as direct financial subsidies, and intangible forces, such as supervision and inspection of some administrative departments (Xu, 2014; Wang et al., 2020). Many scholars and practitioners think that the formation of governance features, that is, dominant control and benefits by a few core members, is associated with governmental intervention (Deng et al., 2010; Huang et al., 2015). Many cooperatives in China were initiated top-down by the government rather than bottom-up by farmers, to be compatible with the objectives of providing farmers with access to markets and the social strategy of China’s government. As a result, the competitiveness of farmer cooperatives in markets remains low (Liang & Wang, 2020). For example, the government’s improper promotion of cooperatives, such as through direct subsidies for starting a cooperative, causes opportunistic behavior by some entrepreneurial farmers and an absolute dominant position of these farmers in cooperatives. Dominant farmers in cooperatives were prevalent in the first decade of the development of farmer cooperatives after 2007. Later, in 2017, the Chinese government began to emphasize the quality enhancement of farmer cooperatives to reduce government support and intervention with farmer cooperatives. As a result, the government now seldom intervenes in the internal management of farmer cooperatives.8 The government supports farmer cooperatives through methods such as training for management, programs for product quality and logistics improvements, and so on. Government support for farmer cooperatives is elaborated below.

DEVELOPMENT OF FARMER COOPERATIVES IN CHINA Farmer cooperatives began to emerge in China in the late 1980s to serve farmers with technology instructions and to provide market information. Nowadays, they play essential roles in linking smallholder farmers to modern agriculture in multiple ways. Mainly, they help farmers to reduce input costs, obtain higher prices, and create value-added products (Liang & Wang, 2020); enhance innovation and technical efficiency (Ma et al., 2018; Yang et al., 2014); and improve quality safety or risk control practices (Ji et al., 2019; Zhong et al., 2018).

Farmer cooperatives in China: frontiers in development and research  409 Population of Farmer Cooperatives The development of cooperatives gained momentum after 2007 in response to the promulgation of the national Cooperative Law. The population of farmer cooperatives and member farmers during the period 2007–19 is displayed in Figure 25.1. Both the number of cooperatives and the total membership size had been continuously increasing. For example, the population of farmer cooperatives rose from 74,219 in 2007 to 1,935,273 in 2019. The growth rate of the cooperative population has been experiencing a slight but stable decline since 2012, while the increase in membership size accelerated in 2012. After a decade of fast population growth, farmer cooperatives in China are moving toward quality enhancement and organization competitiveness (Huang & Liang, 2018).

Source: China Rural Operation Management Statistical Yearbook (2014–18), China Rural Cooperative Economy Statistical Yearbook (2019), and Yearly Report from China’s Ministry of Agriculture and Rural Affairs.

Figure 25.1

Cooperative population and membership size (2007–19)

Figure 25.2 shows the number of cooperatives in various product sectors. The population of crop cooperatives is the largest, followed by animal husbandry cooperatives. The number of service and forest cooperatives is increasing rapidly, while fishery cooperatives exhibit relatively slow growth due to resource endowment. Service cooperatives mainly provide agricultural machinery, breeding, pest control, or product stocking and transportation services. Membership Size of Farmer Cooperatives Figure 25.3 reports the variance of membership size in different sectors during the period 2014–19. The average number of cooperative members is 15, which is very small compared with most cooperatives in western countries. In 2019, cooperatives with less than ten members

410  Handbook of research on cooperatives and mutuals

Source: China Rural Operation Management Statistical Yearbook (2014–18), China Rural Cooperative Economy Statistical Yearbook (2019), and Yearly Report from China’s Ministry of Agriculture and Rural Affairs.

Figure 25.2

Number of cooperatives in main agricultural sectors in China (2007–2019)

accounted for 82.70 percent of the population. A few reasons can potentially explain the small membership size. First, many farmer cooperatives in China are still at the initial stage of development and have not yet grown in size. Second, expansion of cooperative size is constrained due to financing and human resource restrictions. Chinese cooperatives mostly have member CEOs rather than external professional managers, while the reverse holds for cooperatives in western countries (Peng et al., 2020). Though member CEOs have relatively more physical capital, marketing, social relations, and so on than other members, they are not well educated in operating business or organizing members. Third, many “zombie” cooperatives were legally registered as cooperatives but were not in operation (Yuan et al., 2019). The Chinese government adopted various measures to support the forming of cooperatives in the first decade, starting in 2007, which resulted in rapid growth of the cooperative population. Improper support measures, such as direct funding for formation, incentivized some to form cooperatives in order to obtain these funds, but not actively run the cooperatives. Service cooperatives have the largest membership size, followed by fishery and forest cooperatives. Differences in membership size between different sectors are shrinking. In 2019, the average membership size of farmer cooperatives across multiple product sectors was between 13 and 16. See Figure 25.3.

Farmer cooperatives in China: frontiers in development and research  411

Source: China Academy for Rural Development—Qiyan China Agri-research Database (CCAD), Zhejiang University.

Figure 25.3

Membership size of cooperatives in various sectors (2014–19)

Revenue of Farmer Cooperatives The revenue of Chinese cooperatives is limited; for example, the average income per cooperative in 2019 was 43.42 thousand RMB (approximately 6,834 USD). Figure 25.4 reports total and average revenues of farmer cooperatives from 2007 to 2019. Total revenue has been steadily increasing, while average revenue per cooperative gradually decreased after the peak in 2009. One of the potential reasons for the low level of average income is the existence of many “zombie” cooperatives. Governmental Supports for Farmer Cooperatives The Chinese government provides various supports to promote the development of farmer cooperatives, such as tax deduction and exemption, financial subsidies, finance support, talent, and technology training. For example, a nationwide vocational training system is established for cooperative members to help them master technology skills, adapt to the market economy, and form new values and behaviors. Financial support for cooperatives initially grew since 2008, then exhibited a downward trend in growth after 2013, shown in Figure 25.5. Specifically, the financial support for cooperatives increased from 230,276 thousand RMB in 2007 to 549,739 thousand RMB in 2013, with an annual growth rate of more than 20 percent. However, the amount of funding was relatively lower in 2015 and 2016 and reached a new peak in 2017. The proportion of cooperatives gaining financial support was 18.18 percent in 2007; after slight growth in 2008 it continually decreased over time to 1.98 percent in 2019, displayed in Figure 25.6. The reason for the reduction of the coverage rate is that the population of cooper-

412  Handbook of research on cooperatives and mutuals

Source: China Rural Operation Management Statistical Yearbook (2014–18), China Rural Cooperative Economy Statistical Yearbook (2019), and Yearly Report from China’s Ministry of Agriculture and Rural Affairs.

Figure 25.4

Total revenue and average revenue of cooperatives (2007–19)

atives increased faster than the total funding for cooperatives. Currently, the Chinese government supports well-performing cooperatives, that is, demonstration cooperatives.9 Compared

Source: China Rural Operation Management Statistical Yearbook (2014–18), China Rural Cooperative Economy Statistical Yearbook (2019), and Yearly Report from China’s Ministry of Agriculture and Rural Affairs.

Figure 25.5

Financial support for cooperatives (2007–19)

Farmer cooperatives in China: frontiers in development and research  413

Source: China Rural Operation Management Statistical Yearbook (2014–18), China Rural Cooperative Economy Statistical Yearbook (2019), and Yearly Report from China’s Ministry of Agriculture and Rural Affairs.

Figure 25.6

Cooperatives benefiting from financial support (2007–19)

with the increase in the population of cooperatives, the government attaches more and more importance to the quality enhancement of cooperatives. When we focus only on those cooperatives that received financial support from the government, the trend of the average amount received is similar to that of the total amount of financial support. It grew from 2008 and reached a peak of 171.39 thousand yuan per cooperative, in 2012. Later, it showed a downward tendency until 2015 and then began to grow again.

A REVIEW OF CHINESE LITERATURE ON FARMER COOPERATIVES Farmer cooperatives have always been one of the focuses of agricultural economists in China. In the past decade, the Chinese literature has mainly focused on discussions on cooperatives’ governance structure and performance and the role of cooperatives in increasing farmers’ income and poverty alleviation. With the change in economic, social, and technological environments and the development of cooperatives, research topics concerning cooperatives are also developing. Justification for Farmer Cooperatives in China Many Chinese scholars criticize cooperatives due to the presence of “empty-shell” cooperatives in China. Basically, “empty-shell” cooperatives refer to two types of cooperatives (Wang, 2019): first, the cooperatives that deviate from the cooperative principles specified

414  Handbook of research on cooperatives and mutuals by either ICA or the Cooperative Law; second, cooperatives that are legally registered but undertake no business activities (Yu, 2019). The authenticity of farmer cooperatives in China Unlike international scholars’ studies on the variance and evolution of governance, Chinese scholars focus on the “authentic” and “fake” cooperatives in China. There are two contrary standpoints on the authenticity of Chinese farmer cooperatives. Some scholars insist that cooperative cooperatives should comply unconditionally with the core principles of patron-ownership and benefits (Ma, 2013; Deng & Wang, 2014). Deng and Wang (2014) believe that the vast majority of cooperatives in China do not abide by the core principles of cooperatives, and are naturally investor-owned companies or contract farming based on “company plus farmers.” In these cooperatives, the decision and income rights lie with a few core members rather than all the members. In contrast, other scholars emphasize the importance of localization of cooperative governance. They argue that we should not use international and traditional principles to judge the authenticity of cooperatives in China (Li, 2017). Instead, more attention should be paid to the rationality of the governance features and the functions of cooperatives. Liu and Xu (2017) raise the point about the co-existence of cooperatives’ factor and production contracts. They argue that the distinction between core and common members is due to their alternative endowments in factors (for example, financial capital and technology) and production. The critical reason resulting in the dominant rights of core members is the considerable heterogeneity of farmers in China. The small operational scale of farmers and the significant heterogeneity in the membership make it difficult for cooperatives to have advantages in reducing transaction costs and obtaining economies of scale (Deng et al., 2016). Qin (2014) also argues that cooperatives in China are heterogeneous in terms of their identity, that is, members comprise entrepreneurs and small farmers, which may make cooperatives lose the essential advantages of collective action. “Zombie” cooperatives The other cause of debate as to the justification of Chinese cooperatives is the existence of large quantities of “zombie” cooperatives—legally registered but without business activities (Yu, 2019). Some scholars suggest the reasons for the formation of “zombie” cooperatives include the relatively loose legal environment, the profit-seeking nature of local governments, and the opportunistic behaviors of farmers (Zhao & Fu, 2015; Zhang & Sun, 2020). For example, the registration threshold for cooperatives was relatively low; that is, five members can register a cooperative, which makes it easy for some farmers to set up cooperatives for opportunistic purposes (Lv, 2021; Yuan et al., 2019). Most scholars also mention the improper guidance of the government as one of the main reasons causing the fast growth of population and the large quantities of “zombie” cooperatives (Cui & Liu, 2013). The number of newly founded farmer cooperatives used to be regarded as the political performance of local government, which provided various supports to promote the foundation of farmer cooperatives for political goals. Many entrepreneurs established farmer cooperatives to reap the benefits of the support provided by local government. Local government colludes with entrepreneurs to fund cooperatives to achieve political goals. The monitoring costs for recognizing and activating “zombie” cooperatives are high. Therefore, government would turn a blind eye to the existence of “zombie” cooperatives (Li

Farmer cooperatives in China: frontiers in development and research  415 & Wang, 2017; Yuan et al., 2019). In addition, the heterogeneity of members leads to a lack of internal monitoring of cooperatives (Liu et al., 2016). Many scholars argue that, with the development of farmer cooperatives and the practical demand for high-quality cooperatives, it is time to determine the nature of these “zombie” cooperatives and either activate or nullify them. Functions and Performance of Farmer Cooperatives in China Agricultural production in China is characterized by a large number of smallholder farmers. Various services provided by cooperatives for farmers are essential to facilitate entry into modern agriculture (Xu & Wu, 2018). Services have multiple facets, including production, marketing, and financial services, to lower costs and ensure the quality of products (Zhu et al., 2016; Zheng et al., 2018). Farmer cooperatives in many places have replaced agricultural technology extension agencies to a certain extent. They are responsible for providing farmers and members training in advanced production and information technology to improve agricultural efficiency. Training in information technology is essential given the rapid development of the digitalization of agriculture in China. Marketing services can be value-added, exploring potential marketing channels and buyers, buying products from farmers, and selling to downstream buyers. Some cooperatives have mutual credit cooperation within cooperatives or between cooperatives in a cooperative union (Chen et al., 2017; Nie & Wang, 2017; Li & Zhou, 2018). The functions of cooperatives are reflected and measured by improving farmers’ technical efficiency (Ma et al., 2018), promoting land transfer (Liu et al., 2017), and adopting environmentally friendly production inputs (Ma et al., 2018). The achievement of cooperatives’ service functions relies on the cooperatives’ self-capability and the external support of the government (Wang, 2017). Many scholars confirm cooperatives’ role in generating economic benefits to farmers in China. The economic function of cooperatives is mainly reflected in its advantages in economies of scale and farmers’ increased income. The economic benefits are the most critical factor in farmers’ choice to join cooperatives (Wan & Geng, 2015). Farmers’ increasing income is related to the closeness between farmers and cooperatives (Yang & Liu, 2017; Zhong et al., 2017). The closer the relationship between farmers and cooperatives, the greater the benefits obtained by farmers. However, the overall low level of commitment of farmer members to cooperatives in China may restrict the economic advantages (Cai et al., 2015). Studies on the performance of cooperatives in terms of product quality and safety have been increasing in recent years (Chen & Tan, 2013; Wang et al., 2013; Cai, 2017). Others evaluate the effects of cooperative membership on associated farmers’ quality and safety risk control. However, cooperatives’ advantage in product quality depends on the management strategies and their relationships with farmers (Zhong et al., 2016). Role of Cooperatives in Poverty Alleviation As China began to carry out its large-scale poverty alleviation campaign in 2015, farmer cooperatives received more attention for their natural function of benefiting the poor (Wu & Xu, 2009; Liu, 2017; Yang & Liu, 2017; Zhao & Xing, 2016). The body of literature on the

416  Handbook of research on cooperatives and mutuals role of farmer cooperatives in poverty alleviation mainly focuses on three aspects of benefit to farmers: income improvement, capability enhancement, and rights empowerment. Increasing income There is a rich body of empirical analysis on the effect of cooperatives on increasing income in China (Zhang et al., 2012; Su & Chen, 2014; Hu, 2014; Liu et al., 2017). Multiple modes of connections between cooperatives and the poor are observed (Zhang et al., 2019; Zhang & Gao, 2017; Ning et al., 2019). First, cooperatives can provide production services for poor households free of charge or based on cost and help farmers sell agricultural products at higher prices, which increases farming income (Su & Chen, 2014; Zhao & Xing, 2016). Second, some cooperatives provide temporary and seasonal employment opportunities for the local poor because of the demand for a labor force for purchasing, packing, marketing, and so on (Sun & Zheng, 2017). Third, farmers obtain rental and dividends on shares by transferring their farmlands or pooling financial capital assets into cooperatives (Ning et al., 2019). These functions of farmer cooperatives are commonly observed in China. Capability enhance In addition to the direct economic benefits, participating in cooperatives can enhance members’ self-confidence and work skills, reflected through improved social status, reduced disputes with neighbors, and increased mutual assistance (Pan, 2008). Some researchers point out that by providing training in agricultural technology and marketing, cooperatives help to improve farmers’ abilities in social adaptability and competitiveness. Mou & Liu (2013) believe that cooperatives play a significant role in solving poor farmers’ information and technology needs and forming a new governance structure of rural society. Zhao (2017) stresses the paramount importance of farmer cooperatives to resist disaster, provide access to markets, and reduce poverty. Rights empowerment The lack of development opportunities and rights to participate in various policy decisions is one of the main causes of farmers’ poverty. Farmer cooperatives are a bridge between the poor and the government. They build a communication platform for decentralized farmers and the government via not only delivering the ideas and needs of the poor but also releasing the government’s poverty alleviation resources and policies to farmers. In this manner, cooperatives help to realize the empowerment of the poor and the optimization of the allocation of poverty alleviation resources. Qin et al. (2019) propose that the measurement dimensions of performance of cooperatives in anti-poverty include whether poor farmers have the opportunity to join the cooperative, whether cooperative members have the right to vote and be elected, and whether profits are distributed according to the Cooperative Law.

FUTURE RESEARCH RECOMMENDATIONS Based on the analyses on farmer cooperatives in China regarding principles and governance features, population evolution, membership size, financial support, and a systematic review of the Chinese literature, we now summarize future research areas.

Farmer cooperatives in China: frontiers in development and research  417 First, more discussion on the governance of farmer cooperatives in China is needed to achieve democratic control and economic efficiency, especially under the goal of common prosperity described by the Chinese government in 2021. The primary cooperative principles specified in the Cooperative Law in China are the same as ICA cooperative principles. Yet, practically, many cooperatives feature a distinction of core and common members in farmer cooperatives in China due to the heterogeneity of farmers in financial capital and human resources. The tradeoff between democratic control and capital dominant control rights is one of the key dimensions of cooperative governance. Member and non-member farmers with lower education and production technology levels or weak bargaining power are squeezed out from participating in decision-making and obtaining economic benefits. Studies on the distributional effect of farmer cooperatives on different types of farmers are desirable. Second, studies on market competitiveness and performance deserve more emphasis. The development of farmer cooperatives in China has transferred from quantity growth to market power enhancement since 2015. Population growth rates have declined since 2014, and the size of the population shrank in 2020. However, membership size remains very small, and cooperatives’ average revenue is low. In addition, the existence of large quantities of “zombie” cooperatives can distort resource allocation and damage a cooperative’s reputation, which sequentially negatively influences the market competitiveness and performance of farmer cooperatives. Therefore, studies on enhancing cooperative competitiveness and performance are needed. Third, more empirical research is needed to explore efficient ways to support the development of farmer cooperatives by the government. Farmer cooperatives in China are gaining autonomy and becoming more independent from the interventions and support of the government. The number of cooperatives that benefited from financial support has an upward trend, yet coverage has decreased. From 2007 to 2019, financial subsidies for cooperatives increased threefold, while the number of cooperatives increased by a factor of 26. The central government and some provincial governments stopped promoting the forming of cooperatives. Instead, they proposed the objective of enlarging the membership size and enhancing the competitiveness of cooperatives in recent years. To achieve this goal, the government began to provide cooperatives with alternative supports, such as education for management and programs for product quality certification. The effectiveness of these supports and policies has yet to be evaluated empirically.

NOTES 1. 2. 3.

The authors wish to thank an anonymous reviewer for helpful comments and suggestions. Data source: 7th Demographic Census of China, 2020. Data source: official website of the National Bureau of Statistics, https://​data​.stats​.gov​.cn/​easyquery​ .htm​?cn​=​C01. 4. During the 1960s and 1970s, farmlands were collectively owned and operated by the communes. Farmers worked for the communes and received wages, without use rights over farmlands or ownership rights over outputs of farmlands. Agricultural production materials in rural China were collectively owned, farmers needed to participate in collective labor, and everyone accepted the equal distribution of agricultural products. Therefore, the HCRS not only gave farmers the right to operate independently, but also led to the fragmentation of farmland in China. 5. Cooperative identity, values and principles: www​.ica​.coop/​en/​cooperatives/​cooperative​-identity. 6. Specifically, at least 80 percent of members have to be farmers.

418  Handbook of research on cooperatives and mutuals 7.

Please refer to the details about core and common members in Liang & Hendrikse (2013) and Liang et al. (2015). 8. The governments play different roles in developing farmer cooperatives than village economic shareholding cooperatives. A village economic shareholding cooperative is community-based or owned collectively by all the villagers and is established to manage and operate collective assets. This chapter’s focus is only on farmer cooperatives. 9. In 2009, the Ministry of Agriculture officially launched a program to construct national-level demonstration cooperatives. Following that, programs for developing demonstration cooperatives at various levels, that is, province, prefecture, and county levels, were carried out.

REFERENCES Cai, R. (2017). Cooperative agricultural product quality supply: influencing factors and policy implications. Finance and Trade Research 1, 37–47. Cai, R., Guo, X.D., & Ma, W.L. (2015). An empirical analysis of cooperative members’ trust behavior— based on a survey of 672 Apple professional cooperative members in Shandong and Shaanxi Provinces. Agricultural Technology and Economy 10, 69–80. Chen, D.P., Zhang, L., & Gao, M.Z. (2017). Research on the governance of credit cooperative contracts in interconnected transactions and stock cooperative professional cooperatives—taking Wangzhuang Fruit Cooperative as an example. Agricultural Economic Issues 5, 28–35 and 110. Chen, X.J., & Tan, Y.W. (2013). The service function and influencing factors of farmers’ professional cooperatives based on food safety—taking Guangdong fruit production cooperatives as an example. Agricultural Technology and Economy 1, 120–8. Cui, B.Y., & Liu, F. (2013). Cooperative government regulation and improvement under the choice of rapid development strategy. Agricultural Economic Issues 2, 49–55 and 111. Deng, H.S., & Wang, W.L. (2014). Essence of cooperatives and examination of the reality—does China have real farmer cooperatives? China Rural Economy 7, 15–26 and 38. Deng, H.S., Xu, Z.G., & Liu, H.Y. (2010). Analysis of the status quo and restrictive factors of the development of professional cooperative economic organizations for farmers in China based on a large sample survey of 760 villages in 7 provinces across the country. Modern Economic Research 8, 55–9. Deng, H.S., Xu, Z.G., Ying, R.Y., & Liao, X.J. (2016). Why is it hard to find a real professional farmer cooperative in China? A framework explanation and empirical facts. China Rural Observation 4, 72–83 and 96–7. Feng, L., & Hendrikse, G.W.J. (2012). Chain interdependencies, measurement problems, and efficient governance structure: cooperatives versus publicly listed firms. European Review of Agricultural Economics 39(2), 241–55. Hu, L. (2014). Income growth of farmers’ professional cooperatives and farmers in poverty-stricken areas: an empirical analysis based on the double-difference method. Science of Finance and Economics 12, 117–26. Huang, S.Z., & Xu, X.C. (2008). Analysis of member heterogeneity and the organizational structure of farmers’ professional cooperatives. Journal of Nanjing Agricultural University (Social Science Edition) 3, 1–7 and 43. Huang, Z.H., Vyas, V., & Liang, Q. (2015). Farmer organizations in China and India. China Agricultural Economic Review 7(4), 601–15. Huang, Z., & Liang, Q. (2018). Agricultural organizations and the role of farmer cooperatives in China since 1978: past and future. China Agricultural Economic Review 10, 48–64. Ji, C., Jin, S., Wang, H., & Ye, C. (2019). Estimating effects of cooperative membership on farmers’ safe production behaviors: evidence from pig sector in China. Food Policy 83, 231–45. Li, L.L. (2017). The realistic picture of my country’s local cooperatives-reflection and discussion on the “system variation theory” of cooperatives. Agricultural Economic Issues 7, 24–32 and 110. Li, M.X. & Zhou, R. (2018). Social trust, relationship network and cooperative fund mutual aid behavior-based on a typical case study. Agricultural Economic Issues 5, 103–13.

Farmer cooperatives in China: frontiers in development and research  419 Li, Y.X., & Wang, X.X. (2017). Distorted behavior of farmers’ professional cooperatives and its explanation. Agricultural Economic Issues 4, 14–22 and 110. Liang, Q., & Hendrikse, G. (2013). Core and common members in the genesis of farmer cooperatives in China. Managerial and Decision Economics 34, 244–57. Liang, Q., & Hendrikse, G. (2016). Pooling and the yardstick effect of cooperatives. Agricultural Systems 143, 97–105. Liang, Q., & Wang, X.X. (2020). Cooperatives as competitive yardstick in the hog industry: evidence from China. Agribusiness 36, 127–45. Liang, Q., Hendrikse, G., Huang, Z.H., & Xu, X.C. (2015). Governance structure of Chinese farmer cooperatives: evidence from Zhejiang province. Agribusiness 31(2), 198–214. Liang, Q., Hu, W.B., & Fu, J. (2019). A hybrid form of agricultural organization: the case of the BZJ vegetable cooperative in China. International Food and Agribusiness Management Review 22(2): 283–93. Lin, J., & Huang, S.Z. (2007). Member heterogeneity and ownership analysis of farmers’ professional cooperatives. Agricultural Economic Issues 10, 12–17 and 110. Liu, J.W. (2017). The impact of farmers’ professional cooperatives on the income and stability of poor farmers: taking Shandong and Guizhou as examples. China Rural Economy 2, 44–55. Liu, X.C., & Xu, J.K. (2017). Re-discussion on “Are there any real farmer cooperatives in China”—— Comment on the article “The Essential Regulations and Reality Review of Cooperatives.” China Rural Economy 7, 72–84. Liu, Y.X., Li, H., & Guo, X.Y. (2016). Game analysis of the lack of internal supervision of agricultural machinery cooperatives from the perspective of heterogeneity: taking Heilongjiang Province as an example. Agricultural Economic Issues 12, 31–8 and 110–11. Liu, Z., Rommel, J., Feng, S., & Hanisch, M. (2017). Can land transfer through land cooperatives foster off-farm employment in China? China Economic Review 45, 35–44. Lv, D.W. (2021). The formation mechanism and correction path of “empty shell” cooperative. People Forum 7, 62–4. Ma, W.L., Renwick, A., Yuan, P., & Ratna, N. (2018). Agricultural cooperative membership and technical efficiency of apple farmers in China: an analysis accounting for selectivity bias. Food Policy 81, 122–32. Ma, Y.L. (2013). Discussions on the identification and judgment of Chinese farmers’ professional cooperatives. China Rural Observation 3, 65–71 and 92. Mou, Y.F., & Liu, J. (2013). Research on the cooperative mechanism of poor farmers: the perspective of cooperative poverty governance structure. Journal of Hebei Normal University (Philosophy and Social Sciences Edition) 4, 140–3. Nie, Z.L., & Wang, C.J. (2017). Professional cooperative credit mutual assistance: a pilot study in Shandong. Agricultural Economic Issues 11, 23–30 and 110. Ning, J., Yin, H.D., Wang, S.G., & Liu, M.Y. (2019). The impact mechanism and effect of industrial poverty alleviation on farmers’ income: a quasi-experimental study based on industrial poverty alleviation pilot projects in Wumengshan and Liupanshan areas. Journal of Central South University of Economics and Law 4, 58–66 and 88 and 159–60. Pan, J. (2008). Women’s participation in cooperative governance: status quo, problems and countermeasures: summary of the International Symposium on “Women’s Role in Cooperative Governance.” China Rural Economy 2, 76–80. Peng, X., Liang, Q., Deng, W.D., & Hendrikse, G. (2020). CEOs versus members’ evaluation of cooperative performance: evidence from China. The Social Science Journal 57, 219–29. Qin, D.Z., He, M.D., & Shao, H.M. (2019). Research on the anti-poverty performance of farmer cooperatives. Contemporary Economic Management 4, 52–6. Qin, Y. (2014). Analysis of the basic system of agricultural cooperatives from the perspective of organizational cost. Agricultural Economic Issues 8, 45–56 and 111. Song, Y., Qi, G., Zhang, Y., & Vernooy, R. (2014). Farmer cooperatives in China: diverse pathways to sustainable rural development. International Journal of Agricultural Sustainability 12(2), 95–108. Su, Q., & Chen, J. (2014). Analysis of the effect of farmers’ professional cooperatives on rice farmers’ income increase: taking the rice cooperatives in Haian County, Jiangsu Province as an example. Agricultural Technology and Economics 8, 93–9.

420  Handbook of research on cooperatives and mutuals Sun, G.F., & Zheng, Y.Y. (2017). Research on the sustainability of end-of-poverty governance in rural areas under targeted poverty alleviation. Theory and Reform 3, 122–9. Wan, J.H., & Geng, Y.F. (2015). Research on the interpersonal trust and system trust of cooperatives. Agricultural Economic Issues 7, 80–7 and 111–12. Wang, F., Wang, N., Sui, M.J., & Qian, Y.Z. (2013). Cooperative implementation of agricultural standardization analysis—based on investigations in Hebei, Jilin, Shaanxi and Zhejiang. Agricultural Technology and Economy 9, 67–75. Wang, T.Z. (2017). Viability, external support and service functions of farmer cooperatives. Agricultural Economic Issues 5, 14–27 and 110. Wang, W., Ma, X.L., & Shi. X.P. (2020). Analysis of the government’s role analysis in the development of rural collective assets—based on Suzhou and Foshan’s case comparison. Agricultural Economic Issues 3, 62–70. Wang, Z.L. (2019). Promoting the standardization of peasant professional cooperatives. Agricultural Economics and Management 4, 5–9. Wu, B., & Xu, X.C. (2009). The pro-poor nature of farmers’ professional cooperatives and its mechanism. Rural Economy 3, 115–17. Xiong, J.L., & Zheng, Y.G. (2008). Analysis of agency costs of farmers’ professional cooperatives controlled by a few people. Agricultural Economics 11, 76–8. Xu, X.C. (2014). The development of government behavior of farmers’ cooperatives: based on the perspective of empower theory. Agricultural Economic Issues 1, 19–29 and 110. Xu, X.C., & Wu, B. (2018). Are cooperatives an ideal carrier for the organic connection between small farmers and modern agriculture? China Rural Economy 11, 80–95. Yang, D., & Liu, Z.M. (2017). Farmer household specific investment, farm cooperative relationship and cooperative income increase effect. China Rural Economy 5, 45–57. Yang, H., Klerkx, L., & Leeuwis, C. (2014). Functions and limitations of farmer cooperatives as innovation intermediaries: findings from China. Agricultural Systems 127, 115–25. Yu, Z.H. (2019). Thoughts on “empty-shell” cooperative cleaning. Chinese Farmers’ Cooperatives 9, 52–3. Yuan, P., Cao, B., & Cui, H.Z. (2019). The formation reasons, negative effects and countermeasures of “empty-shell” farmers’ professional cooperatives. China Cooperative Economy 5, 7–13. Zhang, C., & Gao, Q. (2017). On the poverty alleviation effect of new agricultural business entities on poor households. Journal of Northwest A&F University (Social Science Edition) 2, 73–9. Zhang, J.H., Feng, K.W., & Huang, Y.W. (2012). An empirical study on the income increase performance of farmers’ professional cooperatives. China Rural Economy 9, 4–12. Zhang, M., Wang, X., & Yan, H. (2019). Research on the path choice of poverty alleviation by farmer cooperatives and its impact on the income of poor households. Journal of Agricultural and Forestry Economic Management 4, 530–8. Zhang, Y.F., & Sun, Y.X. (2020). Research on the formation of “empty-shell” cooperatives and the mechanism and correction of cooperative alienation. Agricultural Economic Issues 8, 103–14. Zhao, C.Y. (2017). Land transfer in poverty-stricken areas and the development of collective economic organizations in poverty alleviation: exploration of poverty alleviation practices in Yuhua Township, Shanxi Province. Agricultural Economic Issues 8, 11–16. Zhao, X.F., & Fu, S.P. (2015). Multi-subjects, asylum relations and changes in the cooperative system: taking the practice of farmers’ professional cooperatives in Fucheng County as an example. China Rural Observation 2, 2–12 and 94. Zhao, X.F. & Xing, C.J. (2016). Construction of a cooperative development mechanism for farmer cooperatives and precision poverty alleviation: theoretical logic and practical paths. Agricultural Economic Issues 4, 23–9 and 110. Zheng, S., Chen, Q.M., & Wang, Z.G. (2018). Land scale, cooperative participation and plant protection drone technology cognition and adoption: taking Jilin Province as an example. Agricultural Technology and Economy 6, 92–105. Zhong, Z., Mu, N.N., & Qi, J.L. (2016). The influence of internal trust on the quality and safety control effect of farmer cooperatives—based on the case analysis of three dairy farmer cooperatives. China Rural Economy 1, 40–52.

Farmer cooperatives in China: frontiers in development and research  421 Zhong, Z., Zhang, C., Jia, F., & Bijman, Jos. (2018). Vertical coordination and cooperative member benefits. Journal of Cleaner Production 172, 2266–77. Zhong, Z., Zhang, C., & Zhang, Y.Y. (2017). The impact of the degree of vertical collaboration on the income and distribution mechanism of cooperatives: an empirical analysis based on 4 cases. China Rural Economy 6, 16–29. Zhu, Z.Y., Deng, H.S., & Ying, R.Y. (2016). Price negotiation, quality control and farmer’s professional cooperatives purchasing agricultural materials. China Rural Economy 7, 48–58.

26. Agricultural cooperatives in Latin America: the case of dairy1 Alejandro Galetto and Gustavo Rossini

INTRODUCTION In Latin America the cooperative movement was promoted by European immigrants in the late nineteenth century, and it began to develop gradually during the early twentieth century (Mora, 2012). Cooperatives have been part of the historical development of most regions, operating in all sectors of the economy, and this continues today. However, cooperatives have developed to a greater degree in some countries than in others. In the agricultural industry the first wave of cooperatives arose at the beginning of the twentieth century, primarily due to market failures. Early cooperatives generally followed a defensive strategy to countervail market power. Cooperatives were formed for farmers to sell their products, obtain better prices and increase producer incomes. They followed Rochdale principles before the approval of any specific cooperative legislation.2 In some countries, such as Argentina and Brazil, a second wave came about in the mid-twentieth century, primarily because of public policy incentives (Depetris de Guiguet and Rossini, 2006). In the agricultural sector, Cook (1995) proposes two important reasons for forming cooperatives: (1) individual farmers need some institutional mechanisms to bring economic balance under their control and address meager prices due to an excess of supply; and (2) individual producers need institutional mechanisms when they face problems related to market failures. However, the evolution and performance of cooperatives in the agricultural sector in Latin America has had characteristics that are specific to this region. Economic and institutional aspects influenced and determined the success or failure of agricultural cooperatives. Specifically, cooperatives were susceptible to government policy and regulatory system fluctuations, and in many Latin American countries these fluctuations have been frequent. Thus, to continue in business, cooperatives must have the ability to adapt to a highly complex institutional environment (Vásquez-León, 2010). Moreover, the advance of globalization has generated intense pressure on competitiveness and efficiency, both in the domestic and international markets. The strategies that dairy cooperatives can implement are often constrained by cooperative principles, producing disadvantages compared to the non-cooperative organizations with which they compete (Zylbersztajn, 2002). The main objective of this chapter is to describe the current situation of the cooperative sector in Latin America, focusing on dairy cooperatives. The following section presents the main characteristics of the dairy sector in the region and the importance of dairy cooperatives in the dairy sector. The chapter then describes the evolution and current situation of dairy cooperatives in different countries or groups of countries. Finally, we present our conclusions and suggestions for future research.

422

Agricultural cooperatives in Latin America: the case of dairy  423

THE DAIRY SECTOR AND DAIRY COOPERATIVES IN LATIN AMERICA Latin America accounted for 11.3 percent of global milk production in 2019, following a peak in 2011 at 12.7 percent,3 showing less dynamic behavior than other regions in the world. Regarding foreign trade in dairy products, the region is a net importer, with imports and exports increasing compared to local production. Still, the region has progressively opened to trade and intensified competition (Acosta et al., 2022). In Latin America there are nearly 3.3 million dairy producers, supplying an average of 70 liters per day. However, these numbers can be misleading because there are countries in the southern cone (Argentina, Uruguay, and Chile) where dairy farms produce, on average, 2800, 1800, and 1500 liters of milk per day, respectively. Moreover, in other countries where the average size is much smaller, the average may not represent the size distribution of the population of dairy farms, which is better described as bimodal. For example, in Mexico or Brazil many tiny producers, almost of the subsistence type, coexists with a group of much larger farms (Acosta et al., 2022). The dairy processing sector in Latin America has two distinctive characteristics. First, companies’ average size is small compared to global competitors. For example, the 20 largest dairy firms in Latin America process 17 million tons of milk per year (0.85 million tons each). In contrast, the 20 largest global dairy companies process 211 million tons of milk per year (10.6 million tons each), and they are ten times larger than their Latin American competitors (Acosta et al., 2022). Another characteristic of the dairy processing sector is the heterogeneity in all countries of Latin America, with a few (relatively) big dairy companies competing with many small-sized firms, mainly in the informal4 sector, particularly in the cheese manufacturing business. There is an enormous diversity of cooperatives in the dairy sector, which have had significant participation in dairy development in many countries. Cooperatives offer the producer a stable marketing channel and provide the necessary services for production, especially to small producers. Figure 26.1 shows the relative importance of dairy cooperatives in the dairy chain of a group of 16 Latin American countries. The data was obtained from an unpublished survey conducted by the Pan-American Dairy Federation (FEPALE) among its members. The countries can be divided into three groups. Countries where cooperatives play a dominant role in the dairy economy are Paraguay, Costa Rica, and Uruguay. A sub-group of countries exists where cooperatives are key players in the dairy chain but do not have a dominant position (for example, Brazil, Colombia, Chile, and Nicaragua). The third group includes countries where cooperatives have a 5 percent or lower market share.

DAIRY COOPERATIVES IN BRAZIL There are 1223 agricultural cooperatives in Brazil (Sistema OCB, 2019), accounting for 13.5 percent of total agribusiness turnover. They have 992.1 thousand members, generating 207,000 jobs. In all, 50.7 percent of the agricultural cooperatives are in the southern and southeastern regions. In the case of Brazil, the identification of a “dairy cooperative” is more difficult than in other countries because it is typical for many of them (particularly in the southern region)

424  Handbook of research on cooperatives and mutuals

Source: Unpublished data from the Pan-American Dairy Federation (FEPALE).

Figure 26.1

Participation of dairy cooperatives in milk marketing and processing in several Latin American countries

Table 26.1

Brazil dairy cooperatives

Milk intake (mill. lt/yr)

Number of cooperatives

Share of milk intake (%)

Less than 7

97

4.4

Between 7 and 21

93

11.8

More than 21

98

83.8

Source: Nogueira Netto et al. (2004).

to have operations in activities other than dairy, such as poultry and swine marketing and processing, or grain marketing. In 2002 the Brazilian Confederation of Dairy Cooperatives (CBCL) conducted a survey (Nogueira Netto et al., 2016) in which it identified 288 dairy cooperatives, of which 155 (53.8% percent) were centralized, most of them small, and the other 133 (46.2%) were federated. In the 2002 survey, total milk production for Brazil was 21.643 million liters, of which 13.219 million liters was milk produced under the federal inspection regime (meeting minimum quality standards). The total intake of the dairy cooperatives was 5.254 million liters (24.3 percent of total milk production and 39.7 percent of milk produced under federal inspection). According to the authors, in the 1980s the proportion of milk collection handled by cooperatives was higher, at about 60 percent. Historical analysis is presented by Lopes de Freitas et al. (2016), who adapted a paper written by Chaddad (2007) using the life-cycle approach (Cook, 1995; Illiopoulos and Cook, 1999; Cook and Illiopoulos, 2000) to describe the evolution of dairy cooperatives in Brazil. The first dairy cooperatives were formed in the 1910s and 1920s, with names such as “Cooperativa de Laticinios Uniao Colonial” (currently the Santa Clara cooperative), formed in 1912 to produce

Agricultural cooperatives in Latin America: the case of dairy  425 butter and cheese. Also, in the south, in the state of Paraná, the dairy cooperative Frisia was created in 1920 to manufacture butter and cheese. Likewise, in 1920 Sociedade Uniao dos Vaqueiros, in Sao Paulo, was formed to supply fluid milk to the city. In the three decades from the 1930s to the 1950s several federated dairy cooperatives were formed (Lopes de Freitas et al., 2016), such as Cooperativa Central de Leite or CCL in Sao Paulo (1933), Cooperativa Central de Productores de Leite or CCPL in Río de Janeiro (1946), Cooperativa Central de Produtores Rurais or CCPR in Minas Geraes (1948), and Cooperativa Central Leitera do Paraná or CCLP in Paraná (1954). Later, in the 1970s, a new wave of federated cooperatives was formed, such as Cooperativa Central Gaucha de Leite or CCGL in Río Grande do Sul, Cooperativa Central Agrovale in Santa Catarina, and Cooperativa Central de Goías. In 1966 and 1971 Brazil introduced the first major legislation regarding cooperatives, which created a degree of (indirect) government participation in cooperative governance. The legislation was mostly directed toward supporting economic development. At the same time, there was a massive flow of capital resources (Lopes de Freitas et al., 2016), basically in the form of cheap and abundant credit, to agriculture in general, including agricultural cooperatives. An important institutional landmark of this period was the creation of the Organizaçao das Cooperativas Brasileiras or OCB, which became a powerful body within the Brazilian political arena. The 1970s and 1980s was a period of growth for the Brazilian dairy cooperatives, with the consolidation of very strong brands, such as Paulista (CCL), Elege (CCGL), Batavo, and Itambé (CCPR). Consolidation occurred with government intervention in the dairy market, particularly through price controls, which lasted for approximately 40 years from 1950 to 1990. Various authors (Chaddad, 2007; Lopes de Freitas et al., 2016; Beber et al., 2018) point out that the late 1980s to the early 2000s was challenging for dairy cooperatives in Brazil. A new constitution drove the challenges that reduced government support for cooperatives and led to eliminating retail price controls, which intensified competition, particularly with recently arrived foreign companies with powerful brands and competition between dairy manufacturers and retailers. At the end of the 1990s several dairy cooperatives were transformed. For example, the central cooperative of Rio Grande do Sul (CCGL) sold its brand and entered into a business venture with the private firm Avipal (1996); the Paulista brand, from the central dairy cooperative of Sao Paulo, was sold to Danone (2000); and the cooperatives from the state of Paraná sold their brand (Batavo) to Parmalat. It currently belongs to Lactalis, the largest dairy company in Brazil. All these changes in the competitive environment and within the agri-food supply chains (not only in dairy) prompted new initiatives to foster the development of agricultural cooperatives. In the past 20 years, several key developments in the area of dairy cooperatives in Brazil can be mentioned: (a) The highest growth area for milk production was the southern states of Paraná, Santa Catarina, and the Rio Grande do Sul, characterized by the presence of small and medium-size farmers. This area in Brazil has the highest concentration of dairy cooperatives, whose members are small and medium-sized producers (Beber et al., 2018).

426  Handbook of research on cooperatives and mutuals (b) Dairy cooperatives were more dynamic in these three southern states (the combination of growing production and small farmers eases competition by cooperatives). As a result of these changes, dairy cooperatives have somewhat recovered their participation in milk marketing and processing, with 7 cooperatives among the 15 largest dairy companies in Brazil, 5 of them from the three southern states (Lopes de Freitas et al., 2016). Also, it is worth mentioning that some dairy cooperatives in the southern region are outside the national rankings, but have very strong business positions (Santa Clara, Pia, Cosuel). Also, it is worth mentioning that, contrary to the past, when the traditional central dairy cooperatives only had milk-processing and marketing activities, today most dairy cooperatives, particularly in the southern states, also have strong operations in other supply chains, such as poultry and swine.

DAIRY COOPERATIVES IN ARGENTINA The dairy industry in Argentina developed since the early 1900s in concentric areas around major cities for fluid milk supply. The dairy industry had minor participation of cooperatives, such as Cotar, La Suipachense, and Milkaut. In the 1930s, the second wave of dairy development began, mostly in the provinces of Córdoba and Santa Fe. The development resulted in milk production replacing the cultivation of crops (mostly wheat and linseed) severely affected by the depression in world agricultural markets and the drought cycle that started in the early 1930s. This new dairy development was different from the early development in several ways. First, it took place in areas far away from the main cities, and therefore the dairy industry supplied industrial products (butter and casein) rather than fluid milk. Second, the organization of the chain was different, with a network of creameries supplying cream to a few industrial facilities for further processing. Several of these creameries belonged to the same dairy companies that owned the industrial facilities, and other creameries were organized as local (single) cooperatives (Ferrero and Cravero, 2017). The emblematic case was SanCor Cooperativas Unidas Ltda, which was the largest dairy company in Argentina for many years, and also the largest dairy cooperative in Latin America. Currently, SanCor is going through a process of adjustment which has reduced its size to 15 percent of what it was 15 years ago. SanCor was formed in 1938 as an association of 16 local cooperatives located in the nearby region of Santa Fe and Córdoba (the name SanCor comes from the first letters of the two names). Milk production in the region was already important, particularly in the production of butter and casein for the export market. The economic justification for the creation of SanCor was to counter the market power of a few buyers for the cream produced by the local creameries (Olivera, 2011). Thus, SanCor is a defensive type of cooperative.5 It may be argued that the formation and growth of SanCor also had an economic justification due to a “missing markets” problem, since the cooperative filled the gap by developing technical capacities that helped the local creameries with their mechanical and industrial difficulties, due to the economic isolation of the country during World War II and after. Between 1938 and 1970, SanCor developed five facilities for butter manufacturing and a casein mill. SanCor grew to become the largest dairy company in Argentina during this

Agricultural cooperatives in Latin America: the case of dairy  427 stage, peaking at 25.3 percent of national output in the 1986–7 fiscal year (Galetto, 2018). The membership base also increased significantly. From the original 16 local cooperatives of 1938, there were 155 in 1947, 234 in 1952, and a peak of 411 in 1971. Sancor had approximately 10,000 farmer members in 1971 (roughly 30 percent of the dairy farms of Argentina), and it was mainly a marketer of commodities oriented toward the foreign market in this period (López and Vaudagna, 2017). In the dairy sector, until the 1970s the cooperatives had a dominant position, with an estimated share of 40 percent of the total milk intake in the country. However, from the 1990s on the picture began to change, with several cooperatives diminishing in size or simply disappearing. In 2020 the cooperative dairy sector only had a market share of 6–7 percent of the total manufacture of milk and dairy products (Figure 26.2).

Source: Elaborated by the authors, based on Blousson (1994) and unpublished industry data.

Figure 26.2

Share of dairy cooperatives in milk manufacturing in Argentina, 1994–2020

The loss in cooperatives’ share of milk industrialization may have been the result of two developments. The main one was the progressive reduction of milk intake of SanCor, from a peak of 5–6 million liters per day in 1999 to the current situation, with 0.5 million. The other factor was the transformation of the second largest cooperative, Milkaut, which was sold to private investors in 2011. In the case of SanCor, the main factor explaining its difficulties could be the constraints of the cooperative organizational structure, particularly the federated model, which in the 1990s and beyond had a sort of difunctional operation, where the company had difficulties in the management of key variables such as milk prices received by members and milk intake because of interference of the locals, impairing its relative competitiveness against investor-owned firms.

428  Handbook of research on cooperatives and mutuals Another important dairy cooperative, which no longer exists as a cooperative, was the Asociación Union Tamberos (AUT), whose commercial brand was named Milkaut. The cooperative was created in 1925, and it had a sustained growth in milk delivered by associated producers. In the 1990s important investments in its processing plants resulted in the incorporation of products with greater added value, as well as expansion in the domestic and foreign markets. During this period AUT had 1356 milk producers who delivered 1.2 million liters of milk daily, ranking third in the country, second among cooperatives. The expansion during this period made it necessary to incorporate capital. The method adopted was the creation in 1995 of Milkaut SA (private company), with the idea of opening its capital to private investors in the future. In 2000, with the opening of the shareholding package of Milkaut SA, two investment funds were incorporated as minority partners. In 2006 the previous partners retired and Groupe Soparind Bongrain was incorporated as a minority shareholder, and 2011 AUT sold the remaining shares in Milkaut to the French group due to debt problems. The case of AUT (Milkaut) is the only one that shows an attempt to make profound structural changes to respond to growth and internationalization strategies. Unfortunately, the economic conditions in Argentina were adverse, with a country-wide crisis in which all economic rules were abruptly changed. Moreover, a lack of experience with the governance structure and agency problems also could have had relevance (Depetris, 2020). Argentine dairy cooperatives seem to have followed a similar evolutionary path to associations in other parts of the world. However, we hypothesize that they face a restricted set of options because of the legal framework (Cook, 1995; Illiopoulos and Cook, 1999; Cook and Illiopoulos, 2000). Argentine cooperatives were formed and governed by national law6 from 1973 on. This law was inspired by traditional principles, whose provisions were adopted at a very different time from the present. When competition must occur with invested own firms in highly concentrated market structures, and capital is a critical resource, the traditional cooperative structure does not favor it. This law also can determine certain characteristics that generate problems in the cooperative structure (Depetris, 2000). Transaction costs have become important and vaguely defined property rights have led to conflicts over residual claims and decision control, creating losses in efficiency because the decision-maker no longer bears the full impact of choices. In addition to internal organizational and governance problems, the political and economic context in the recent decades, to which dairy cooperatives have been exposed, has been incredibly challenging in Argentina. These environmental changes have affected the performance of dairy cooperatives. From 1991, trade openness, foreign and domestic trade deregulation, fixing the exchange rate, and low inflation levels characterized the macroeconomic context. From 2002 the macroeconomic policy adopted changed radically, with a political axis of a variable exchange rate, devaluation of the currency, and more state intervention in the economy. A final comment which can be made about cooperatives in Argentina (not only agricultural cooperatives) is that although the current cooperative law was approved in 1973, the formation, development, and political views on cooperatives have also been very much guided by the Rochdale principles, where often, particularly in the policy debate, cooperatives are seen more as social entities7 than as business organizations, generating additional constraints, particularly on the public policy front.

Agricultural cooperatives in Latin America: the case of dairy  429

COUNTRIES WITH ONE LARGE, DOMINANT COOPERATIVE Four countries share one characteristic: one large, dominant dairy cooperative and a few smaller ones. These four countries are Uruguay, Chile, Colombia, and Costa Rica, described in the next subsections. Uruguay The dairy manufacturing sector of Uruguay has been dominated by one cooperative, CONAPROLE (Cooperativa Nacional de Productores de Leche or National Cooperative of Milk Producers), which was created in 1935. The formation of CONAPROLE resulted from two factors—one of them “defensive” in nature, which was to improve dairy farmers’ bargaining power, and the other more “demand-driven,” which was the need to supply quality milk for the city of Montevideo throughout the year. The main difference with other cooperatives in the region was the role of government in the creation of CONAPROLE. CONAPROLE was created by law (No 9526) with state funding which allowed the purchase of several independent bottling plants located in Montevideo, and it was granted monopoly rights to supply fluid milk to the city. The board was composed of ten farmer members, with semi-proportional voting rights,8 plus one external controller from the state bank, BROU9 (Martí, 2013). Over the years, the cooperative changed its governance system. In 1946, law 10707 increased its board by two additional members: one from the national government and the other from the Montevideo city council. In addition, the law allowed monopoly rights to supply fluid milk in all Uruguay, gave it more state help, and established that 30 percent of profits should be allocated to the cooperative employees. In 1982 and 1984, under the military government, the monopoly rights were eliminated. Again, in the year 2000, by law 17243, the cooperative was put entirely under private control (no state presence on the board). The law also eliminated the required distribution of part of the profits to employees (Martí, 2013). By the end of the 1990s, although CONAPROLE still enjoyed a clear dominant position in the Uruguayan dairy market, the cooperative was experiencing severe financial stress (problems with agri-food markets at the global level). As a result, it considered selling part or all its assets to a foreign firm or a domestic investment fund.10 However, a sale never materialized and CONAPROLE continues as a dairy cooperative, with more than 1718 dairy producers. In 2021 the cooperative processed 1542 million liters (72 percent of the total milk production in Uruguay)—7.7 percent higher than 2020—and a total income for sales of 784 million dollars.11 Chile Milk production and processing in Chile has been historically concentrated in three southern regions (Araucania, Los Ríos, and Los Lagos), and all dairy cooperatives which functioned in Chile were established in this region of the country. The first one was Cooperativa Lechera de Osorno (later Cooperativa Agrícola y Lechera de Osorno, CALO), created in 1930. Initially CALO was only a vehicle to market its members’ milk initially. It worked in partnership with Swiss multinational Nestlé (1935) and with a domestic dairy company, Soprole (1949). Other dairy cooperatives were created in neighbor towns of southern Chile, such as Cooperativa

430  Handbook of research on cooperatives and mutuals Agrícola Frutillar or Cafra (1936), and Cooperativa Agrícola y Lechera de La Unión or Colun (1949). Another dairy cooperative in the region was Chilolac (Ríos Nuñez et al., 2018). In the 1980s, the largest dairy cooperative was CALO. The cooperatives were adversely affected by the banking crisis of 1982–3, and most disappeared or were sold. The Colun cooperative survived and today is the largest dairy company in Chile, with 700 farmer members and a 30 percent share in milk intake and manufacturing. Colun has an organizational model based on a centralized governance system, with a very homogeneous and geographically concentrated membership, which may be a key factor explaining its business success. Colombia The Colombian dairy market is characterized by the presence of a large cooperative, Colanta. Colanta is headquartered in the Antioquía department (Medellin city). Additionally, a medium-size cooperative, Coolechera, operates on the Caribbean coast with headquarters in Barranquilla, and a much smaller cooperative named Colácteos is in the southern department of Nariño, on the border with Ecuador. There are also numerous very small cooperatives and producer associations operating in the dairy sector, mostly in the first stage of the production and marketing chain, collecting and cooling the milk from their associates and selling it to other companies for further processing. The origin of Colanta can be traced to the 1950s, when 65 small farmers organized to sell milk into the Medellin market (the city is the capital of Antioquía department). The first name of the cooperative was Coolechera (Cooperativa Lechera de Antioquía), created in 1964. However, the newly formed cooperative had continuous problems, with three defaults on its debt. In 1973 Colanta was born from the last reorganization of Coolechera. The formation and growth of Colanta is associated with Jenaro Pérez, former Minister of Agriculture of the Antioquía department, and cooperative leader until his retirement in 2017. Today, Colanta is the largest dairy company in Colombia and processes about 2.6 million liters of milk per day, with 7200 suppliers—3557 members producing an average of 500 liters per day and 3649 non-members, producing an average of 166 liters per day. In many cases, the smaller (non-member) farms are serviced by collective cooling tanks provided by the Colanta cooperative. Further, Colanta has a diversified business structure, with important operations in pork and beef processing, input supplies (52 stores), and retail (72 shops), and a loan and savings subsidiary. Costa Rica There is a strong association between Costa Rica’s dairy sector and the Dos Pinos dairy cooperative, which was created in 1947 with 25 members and today is the largest private company in the country with 1400 members, manufacturing 85 percent of the milk that goes into the so-called industrial or formal circuit. The development of Dos Pinos occurred in parallel with a highly protected domestic market, with tariff barriers greater than 100 percent during the 1990s. However, other dairy companies could not benefit from the same competitive environment, and today Dos Pinos is the only dairy company with national reach. There are other cooperatives in milk processing in Costa Rica, such as Coopebrisas and Coopeleche, but their market share is small. The case of Coopeleche is interesting since it went

Agricultural cooperatives in Latin America: the case of dairy  431 into an association with Lala, a big Mexican dairy company. However, after a few years of operation the company left the country, and Coopeleche and the 30,000 liters per day produced by its 70 members had to be rescued by Dos Pinos. As mentioned above, Dos Pinos is the dominant company in the industrial or formal circuit, with industrial operations in other countries of the region, such as Panama (where it owns Nevada), Nicaragua (La Completa), and the Dominican Republic. In addition to its dairy operations, the cooperative also has a sizeable operation in inputs processing and marketing, livestock processing, and non-dairy products (beverages, teas, and so on). The dairy sector in Costa Rica produces in two separated areas: the highlands, with specialized and larger dairy herds, and the lowlands, with a majority of double-purpose (milk and beef) and smaller herds. The membership of Dos Pinos is mostly concentrated in the larger farms of the highlands, while the majority of the smaller farms of the lowlands operate in local and informal markets, with on-farm or artisan milk processing (Orozco-Barrantes and Barboza-Arias, 2018, citing Abarca, 2015).

OTHER CASES OF DAIRY COOPERATIVES AND FARMER-OWNED COMPANIES IN LATIN AMERICA Paraguay Paraguay has an important agricultural sector, with beef and soybean as the main products. It also produces about one billion liters of milk per year, with about 80 percent going into formal processing channels (Capainlac, 2018). Four vertically integrated dairy cooperatives, also the largest dairy companies, are responsible for 86 percent of all milk processing in the country. They are La Holanda (47 percent share of milk processing), Chortitzer (27 percent), Colonias Unidas (7 percent), and Fernheim-Neuland (5 percent). The remaining 14 percent is processed by four smaller companies, one foreign (Parmalat) and the other three nationally owned. The development of agricultural cooperatives in Paraguay (including dairy cooperatives) is closely related to the Mennonite migration into the country. As shown in Table 26.2, each cooperative was formed by different colonies and migratory waves. The (approximate) year when the colonies arrived in Paraguay and when dairy operations started, their main brands, and the geographical region where their milk production basin is located (commercially they operate nationwide) are presented in Table 26.2. Cooperative farmers in Paraguay have grown much larger than the majority of the country’s small farms, and political tensions have arisen as a result. As a strategy to mitigate these problems, the dairy cooperatives have created a network of peasant colonies with small farms (between 20 and 80 liters of milk per day) integrated within their supply chain, with the help of collective cooling tanks and technical support. This network of dairy cooperatives and “campesinos” is a successful example of a small dairy farm development strategy through their integration into commercial value chains (Galetto and Cook, 2012). Ecuador Milk production in Ecuador is mostly concentrated (about 75 percent) in the central region, located in the Andes mountains, where farming occurs 3000 meters above sea level. There are

432  Handbook of research on cooperatives and mutuals Table 26.2

The formation of dairy cooperatives in Paraguay Dairy

Cooperative

Colonies

Origin

Year

operations

Brand

Area of operation

start La Holanda Chortitzer

Sommerfeld

Canada

– Berghtal

(Mennonites)

Menno

Canada

1948

1979

Lactolanda

Eastern Paraguay

1927

1951

Trébol

Western Paraguay

1950s

Co-op

Western Paraguay

(Mennonites)

(Chaco)

Fernheim

Fernheim

Russia

Fernheim

– Neuland

– Neuland

(Mennonites)

(1931)

(Chaco)

Neuland (1947) Colonias Unidas Hohenau – Obligado

Germany, southern 1920s

1952

El Colono

Southeast Paraguay

Brazil

Source: Elaboration by the authors, based on unpublished industry data.

about 300,000 milk producers in the country, two thirds of them with less than 20 hectares and producing an average of 10–12 liters of milk per day (Centro de la Industria Láctea del Ecuador, 2015). Although there are no cooperatives within the group of the largest dairy companies in Ecuador, two cases are worth mentioning. One is the cooperative “El Salinerito,” in the Salinas parish in the highlands of Ecuador, which began its operations in 1978 out of the efforts of Italian missionaries with the help of a Swiss cheesemaker, working in an impoverished region of the country. One of the distinctive characteristics of this initiative was the early emphasis they put on the marketing of their product and the creation of a successful brand (Salinerito). Cheese production expanded to other sites within the parish. It was replicated in other provinces of Ecuador, forming several regional “consorcios,” with about 70 local cheese manufacturers—most of them using the Salinerito brand—manufacturing about 30,000 liters of milk per day. The Salinerito cheeses are sold locally in Ecuador’s largest cities (mostly Quito and Cuenca). The distinctive characteristic of El Salinerito is the “offensive” strategy the cooperative has taken (through brand creation and positioning and process quality control), which has led to a relatively strong competitive position in the cheese market of Ecuador (Martínez-Hernández et al., 2007). The other cooperative of interest in Ecuador is El Ordeño, which is not a typical cooperative but a business owned by farmers. El Ordeño (the English translation is “the milking”) was born as a strategic alliance between groups of very small dairy farmers in the highlands near Quito and Asociación de Ganaderos de la Sierra y el Oriente or AGSO. The origin of El Ordeño is traced to the political upheaval of the 1990s, when the modern peasant protests changed the country’s political landscape. One of the reactions to this new policy environment was an initiative from a group of medium and large-sized agricultural produces (AGSO), in order to improve the situation of the smallest dairy farmers of the highlands through the development of modern milk production practices and extension services for them; after a few years, in 2003, AGSO became involved in the manufacturing stage of the dairy chain, building a powder-plant operation which today processes about 100 thousand liters per day. As mentioned, Salinerity and El Ordeño are not typical cooperatives and may be characterized as multiple-stakeholder cooperatives (Mero Villamar et al., 2019). Several authors (Münkner, 2004; Lund, 2012) have described these organizations in Europe and the United

Agricultural cooperatives in Latin America: the case of dairy  433 Table 26.3

Dairy cooperatives in Nicaragua

Cooperative

Milk intake (lt/day)

Members

Milk collection centers

Region

Products

Masiguito (Campoapan)

100,000

900

4

Boaco

Cheeses, raw milk

Nicacentro

55,000

830

12

Matagalpa

Raw milk

San Francisco de Asis

50,000

400

3

Boaco

Cheeses, raw milk

Chontalac

40,000

200

n.a.

Chontales

Cheeses (*)

Santo Tomás

40,000

350

n.a.

Chontales

Cheeses (*)

San Felipe

30,000

400

n.a.

Boaco

Cheeses (*)

Cooproleche (El Triunfo)

22,000

435

17

Nueva Guinea

Cheeses (*)

Coopa (Acoyapa)

15,000

100

n.a.

Chontales

Cheeses (*)

Total

352,000

3,615

Source: Elaboration by the authors, mostly based on journalistic sources and industry websites, reflects the situation around the years 2018–2020. (*) Most of these cooperatives also sell raw milk to other national dairy companies as a marketing mechanism.

States as combinations of an association and a cooperative, characterized by a shared ownership and governance structure. Particularly in the case of El Ordeño (Salinerito is closer to a traditional cooperative structure), ownership is in the hands of a group of AGSO members (not all of them) organized as a limited liability company, and the relationship between them and the peasants is through a group of local associations, a few of which are organized as cooperatives. In addition, El Ordeño has had close links with the central government, through its participation in school milk programs and other initiatives. Nicaragua Nicaragua produces almost 600 million liters of milk per year, and about 44 percent (average 2018–20) of this amount is exported. The country is the largest exporter of dairy products in the Central American region (the other is Costa Rica), with a 52 percent share in the three years from 2018 to 2020 (www​.fao​.org/​faostat). The main export products of Nicaragua is cheeses, and El Salvador is the main destination. There are about 97,000 dairy farmers in the country, with a daily production average of fewer than 20 liters per farm (Cárcamo Gaitán, 2015). The main producing areas are located in the departments of Chontales and Boaco (55 percent) and Matagalpa (16 percent). It is difficult to find published information based on statistical data for the dairy sector of Nicaragua. Therefore, in Table 26.3, the authors have compiled an overview of dairy cooperatives, based on several sources from personal communications, newspapers, and online sites. There are eight main dairy cooperatives in the country which qualify as medium-sized dairy companies. The cooperative sector collects 128 million liters of milk per year, thus representing 21–22 percent of the dairy sector (in milk collection). According to Table 26.3 there are 3615 cooperative dairy farmers, with a daily production average of about 100 liters, five times the national average. Given this evidence, we may argue that dairy cooperatives in Nicaragua have been mostly a mechanism used by medium-sized farmers and not the peasant (campesinos) type of farm.12 Most dairy cooperatives in Nicaragua operate cheese-processing plants. The largest, Masiguito, is also the main cheese exporter to the United States (Seppänen et al., 2013). The second largest—Nicacentro, located in Matagalpa department—is organized exclusively as

434  Handbook of research on cooperatives and mutuals a marketing cooperative (it does not have manufacturing facilities), selling milk to larger dairy companies. In other cases, the sale of raw milk is more a short-term manufacturing or marketing strategy but not an organizational characteristic as in the case of Nicacentro (Galetto and Cook, 2012). Mexico Mexico is the second largest dairy market in Latin America, after Brazil, with a steady growth trend in production in the last 20 years. Mexico produces 12 billion liters of milk per year. At the primary level, there are three types of dairy-production system: (a) large commercial holdings, with intensive specialized farms mainly in the northern states of Durango and Coahuila and also in Queretaro, closer to the capital; (b) semi-specialized smallholder farms, which are numerous in the central region (particularly in Jalisco, the main producing state); and (c) double-purpose production systems, in the southern states (Veracruz, Puebla, and so on), which have 75 percent of the cows but only a 30 percent share of production (Dobson and Jeese, 2009). The dairy manufacturing sector includes more than 300 registered firms processing 75 percent of the milk, plus more than 2000 artisan cheesemakers, most of them producing and selling through informal channels (Wijnands, 2010). Within the formal sector there are several global dairy companies, among them two companies that were cooperatives but today are organized as limited liability companies: Lala and Alpura. Today, Lala, the largest dairy company in Mexico and Latin America, has foreign operations in the US, Brazil, and a few Central American countries. It started as a cooperative in the 1950s but today is organized as a limited liability company under Mexican law (it recently asked Mexico’s Stock Exchange to become a non-listed company), including sizeable investments outside the dairy sector (for example, Lala owns part of Aeroméxico, an aviation company), so that it can be characterized as a “holding company,” which also includes participation in different links in the milk chain, from input supply to the production of raw material, then to its transformation, industrialization, commercialization, marketing, and distribution domestically and abroad (García et al., 1999). The other dairy firm of interest is Alpura, the second largest dairy company in Mexico. Like Lala, the company is supplied primarily by large commercial farms, with 142 suppliers producing three million liters of milk per day. Alpura is also organized as a limited liability company, with 254 shareholders;13 other companies work together with the parent company, with different supply chain links (distribution, input provision, technical services, and credit). Given the scarce evidence found, the ownership of Alpura appears more diluted than the case of Lala, and thus it may be characterized as a “farmer-owned” dairy company. Although Lala and Alpura do not qualify as traditional cooperatives, there are cases of this type of organization in other segments of the Mexican dairy sector. For example, in Jalisco, which is the largest dairy producer, the presence of small dairy cooperatives has been well documented (Vazquez-Valencia and Aguilar-Benitez, 2010; Romero Paz, 2016). There is a “cooperative ecosystem,” embracing mostly small to medium-size dairy farmers. Some cooperatives manufacture local cheese brands, others sell milk to national and regional dairy companies, and others supply inputs and services to farmers.

Agricultural cooperatives in Latin America: the case of dairy  435

CONCLUSIONS AND SUGGESTIONS FOR FURTHER RESEARCH The relative position of cooperative dairy companies is very different within the Latin America region, ranging from shares of 70–90 percent of milk marketing and processing in countries such as Paraguay, Costa Rica, and Uruguay to the cases of two important dairy producers, Mexico and Argentina, where cooperatives market and process 5 percent or less of the total country production. The weighted aggregate share of cooperatives in Latin America is 25 percent of all milk produced and manufactured within the formal sector. The creation of dairy cooperatives in the region was contemporary with the development of milk production in each country, with those in Argentina and Uruguay being the oldest (the 1920s and 1930s), followed by Brazil and Chile (1930s and 1940s), then Costa Rica and Colombia. The case of Brazil is unique in that the process of formation of new dairy cooperatives spans more than 60 years (from the 1930s to the 1990s). The development of cooperatives parallels the pattern of geographical development of milk production in the country (beginning in the state of Sao Paulo, then Minas Gerais, and in the past three decades with new cooperatives being created or reoriented towards dairy manufacturing in the southern states of Paraná, Santa Catarina, and the Río Grande do Sul). Most dairy cooperatives in Latin America were organized as vertically integrated manufacturing companies. Only in the past two decades have some small dairy cooperatives been created or transformed to market raw milk to other manufacturing companies, as is the case in Argentina, Brazil, Nicaragua, and Mexico. However, cooperatives’ market share as a pure marketing firm is very small. In the countries where milk production was geographically dispersed, with cooperatives formed in the 1930s and 1940s and with the absence of modern cooling technologies, the predominant organizational model was the “federated” type (local–central, as in Brazil, or first degree–second degree, as in Argentina). In countries where milk production was more concentrated (smaller countries, such as Costa Rica or Uruguay, or larger countries where cooperatives developed regionally, such as Colombia or Chile), the chosen organizational model was more “centralized.” The empirical evidence is rather clear that the federated model (whether in Brazil or Argentina) has had deep competitive problems, with examples such as the central cooperatives of Sao Paulo and Minas Gerais in Brazil or the case of SanCor in Argentina. Alternatively, the centralized models of Uruguay, Paraguay, Chile, Colombia, or Costa Rica, plus the newly formed dairy cooperatives of southern Brazil, have shown their ability to thrive in a very competitive market. This discussion of the relative strengths and weaknesses of the federated and centralized organizational models is beyond the scope of our chapter. Still, a set of initial hypotheses to be evaluated should include (i) the difficulties of the federated model to adequately transmit market signals, (ii) principal-agent organizational conflicts (Guiguet et al., 2019), and (iii) the general issues of “vaguely defined property rights” (Cook, 1995). Research should also examine the changes in cooperatives because of transaction costs from asset specificity. For example, the early development of the federated model was based on locals producing cream and whey, which were further processed by the central cooperative, at least in Argentina. At the time, the milk produced at the farm and the products from the creameries were highly asset-specific. Thus the “contract” between the farmer and the local and between the local and the federated cooperative was costly to breach. As technical change occurred (particularly in cooling and transport), the degree of asset specificity decreased. Thus

436  Handbook of research on cooperatives and mutuals farmers and locals could move milk more easily across longer distances, decreasing the need for cooperative organization, mostly upon the federated model. Another perspective to explain the difficulties of dairy cooperatives in some countries, such as Argentina and Brazil, is the issue of “homogeneity,” particularly regarding the membership characteristics (Cook and Iliopulos, 2016). Brazil, in particular, has a diverse member makeup. For example, the older centralized cooperatives’ membership became more heterogeneous with time, with some farmers growing larger than others. In contrast, the membership of the newly formed dairy cooperatives is mostly composed of smaller farmers. Membership of dairy cooperatives in the region is mostly characterized by medium or even larger than average farms. Dairy cooperatives are not peasant organizations, and their membership is formed by commercially oriented farmers, who see themselves as participants in a (sometimes imperfect) capitalistic market economy. On the other hand, most literature on Latin America dairy cooperatives (for example, Vazquez-Leon, 2010; Burke and Piekielek, 2011; King et al., 2013) concentrates more on the socio-political dimension of cooperatives as instruments for peasants or less well-off farmers to overcome the perceived inequalities generated by the capitalistic system. Most of the literature generated in the region (perhaps Brazil could be an exception) also considers cooperatives as social entities, with business considerations (including efficiency and profit) being of secondary importance. For most Latin American countries, more research on agricultural cooperatives with a business-oriented perspective would be welcome, which could be based on the numerous examples from the modern bibliography grounded on the new institutional economic and modern microeconomics approaches (the economics of organizations, contracts, and so on).

NOTES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

The authors wish to thank the two anonymous reviewers for their suggestions. For example, in Argentina, the first specific cooperative legislation was created in 1926. Data obtained from www​.fao​.org/​faostat/​. The informal sector includes all those companies which do not comply totally with legislation on quality, labor standards, and taxation. In the central region of Santa Fe, the main buyer of the cream produced by the local cooperatives was a foreign-owned company, the River Plate Dairy Company. The local coops were exposed to its monopsony power and the exercise of market power (Ferrero and Cravero, 2017). National law No. 20.337. For example, the government cooperative regulator’s name is “National Institute for Association and Social Economy” (Instituto Nacional de Asociativismo y Economía Social—INAES). Less than 400 liters per day, one vote; between 400 and 700 liters per day, two votes; more than 700 liters per day, three votes. Banco de la Republica Oriental del Uruguay (BROU). www​.lanacion​.com​.ar/​economia/​conaprole​-se​-hace​-esperar​-nid137231/​ www​.conaprole​.uy/​conaprole​_memoria​_anual​_2021​_es/​#page/​24 Many of the 97,000 producing units counted as dairy farmers are small peasants, with 2–3 cows, who do not own any land. www​.merca20​.com/​que​-hay​-detras​-de​-alpura

Agricultural cooperatives in Latin America: the case of dairy  437

REFERENCES Acosta, A., A. Galetto, A. Valdés and A. Londinsky (2022). Más allá de la finca lechera – Enmarcando el diálogo de política lechera en América Latina. Romedas, FAO and FEPALE. https://​doi​.org/​10​ .4060/​cc2188es Anuario leite (OCB) (2021). Embrapa. Edição Digital at www​.embrapa​.br/​en/​busca​-de​-publicacoes/​-/​ publicacao/​1132875/​anuario​-leite​-2021​-saude​-unica​-e​-total. Beber, C., L. Theuvsen and V. Otter (2018). “Organizational structures and the evolution of dairy cooperatives in Southern Brazil: a life cycle analysis.” Journal of Co-operative Organization and Management, 6(2): 64–77. Blousson, R. (1994) “Situación actual y futuro de la lechería en Argentina.” Buenos Aires: Bureau de Producción Animal. Burke, B. and J. Piekielek (2011). “Cooperatives, politics, and development in rural Paraguay.” Human Organization, 70(4): 355–65. Capainlac (2018). www​.capainlac​.com​.py/​estadísticas. Cárcamo Gaitán, W. (2015) “La cadena de mercadeo del queso de la Cooperativa Agroindustrial Masiguito R.L.” Revista Electrónica de Investigaciones en Ciencias Económicas, Facultad de Ciencias Económicas, UNAM—Managua, 3(6). Centro de la Industria Láctea del Ecuador (2015) La leche del Ecuador. Historia de la lechería ecuatoriana. http://​sitp​.pichincha​.gob​.ec/​repositorio/​diseno​_paginas/​archivos/​La​%20Leche​%20del​ %20Ecuador​.pdf Chaddad, F. (2007). The evolution of Brazilian dairy cooperatives: a life-cycle approach. Paper presented at the XLV Meeting of the Brazilian Society of Economics, Management and Rural Sociology, Londrina (PR), 22–25 July. Cook, M. (1995). “The future of U.S. cooperatives: a neoinstitutional approach.” American Journal of Agricultural Economics, 77: 1153–9. Cook, M. and C. Iliopoulos (1999). “Beginning to inform the theory of the cooperative firm: emergence of the new generation cooperative.” Finnish Journal of Business Economics, 99: 525–35. Cook, M. and C. Iliopoulos (2000). Ill-defined property rights in collective actions: the case of U.S. agricultural cooperatives. In: Institutions, Contracts, and Organization: Perspectives from New Institutional Economics (C. Ménard, ed). Edward Elgar Publishing: 335–48. Cook, M.L. and C. Iliopoulos (2016). Generic solutions to coordination and organizational costs: informing cooperative longevity. Journal on Chain and Network Science, 16, 19–27. Depetris Guiguet, E. (2020). Cooperativas de Industrialización de Leche y Problemas de Agencia: cambios y Situación al finalizar la segunda década del milenio. Editorial: Universidad Nacional del Litoral, Santa Fe. Depetris de Guiguet, E. and G. Rossini (2006). “Evolution of Argentine grain marketing cooperatives in the 90’s and some legal constraints.” Unpublished Document. Facultad de Ciencias Económicas. Universidad Nacional del Litoral. Dobson, W. and E. Jeese (2009). “The dairy sector in México: a country study.” University of Wisconsin-Madison, Babcock Institute Discussion Paper 2009-2. Ferrero, R. and B.F. Cravero (2017). “Historia económica de la lechería Argentina.” Córdoba: Ediciones del Corredor Austral. Galetto, A. (2018). “A life cycle approach to the case of SanCor dairy cooperative.” Presentation at the GICL Workshop, Practical lessons from GICL’s Life Cycle Framework, Nov. 18–20, University of Missouri. Galetto, A. and M. Cook (2006). “Environmental and organizational challenges for dairy cooperatives in LA and the US: comparative cases.” Paper presented at the IAMA 16th Annual World Forum and Symposium, Buenos Aires, June 2006. Galetto, A. and M. Cook (2012). “Patterns of vertical integration and market orientation in small family dairy farms in Latin America: three case studies in Nicaragua, Ecuador, and Paraguay.” Paper presented at the 22nd Congress of IFAMA (International Food and Agribusiness Management Association), Shanghai, China, June 2012.

438  Handbook of research on cooperatives and mutuals García, L.A., E. Martinez and H. Salas (1999). “The role of national and transnational corporations in the globalization of dairying in La Laguna, Mexico.” International Journal of Sociology of Agriculture and Food, 8: 52–70. Iliopoulos, C. and M. Cook (1999). “The internal organization of the cooperative firm: An extension of a new institutional digest.” Journal of Cooperatives, 14: 77–85. King, R., M. Adler and M. Grieves (2013). “Cooperatives as sustainable livelihood strategies in rural Mexico.” Bulletin of Latin American Research, 32(2): 164–77. Lopes de Freitas, M., P. Rodrígues Alves, J. Prieto Flavio, P. Dias do Nascimento and C. Pedroso Maffia (2016). “A contribuçao do cooperativismo para o desemvolvimento da pecuaria de leite.” In: Pecuaria de Leite no Brasil: Cenarios e avanços tecnológicos (D. Vilela, R. Ferrerira, E. Nogueira Fernandes and F. Viera Juntolli, eds). Empresa Brasileira de Pesquisa Agropecuaria—EMBRAPA. López, R. and L. Vaudagna (2017). “Evolución de cooperativas argentinas: Los casos de SanCor y COTAR.” In: Cambios Estructurales y Problemas de Agencia en las Cooperativas de Industrialización de Leche (E. Depetris de Guiguet, ed.) IECAL, Facultad de Ciencias Económicas: 143–67. Lund, M. (2012). “Multi-stakeholder co-operatives: engines of innovation for building a healthier local food system and a healthier economy.” Journal of Co-operative Studies, 45(1): 32–45. Martí, J.P. (2013). “Cooperativa nacional de productores de leche de Uruguay. Su creación analizada desde las políticas públicas.” América Latina en la Historia Económica, 20(3): 90–113. Martínez-Hernández, R., G. Thomas, L. Kluwe Aguiar and F. González-Díaz (2007). “The Salinas Cheese Factories: factors affecting the competitive strategy in Ecuador.” Paper presented at the 17th Annual Forum & Symposium IAMA Conference, Parma, Italy. Mero Villamar, I., M. Herrera Valdivieso and M. Vera Banegas (2019). “La introducción del cooperativismo múltiples partes interesadas MSC’s en Salinerito de Guaranda y su impacto socioeconómico.” Revista Caribeña de Ciencias Sociales (January 2019). www​.eumed​.net/​rev/​caribe/​2019/​01/​ cooperativismo​-impacto​-socioeconomico​.html Mora, A. (2012). :Visión histórica del movimiento cooperative en América Latina.” In: El cooperativismo en América Latina: Una diversidad de contribuciones al desarrollo sostenible (R. Mogrovejo, A. Mora and P. Vanhuynegem, eds). Oficina de la OIT para los Países Andinos. Münkner, H. (2004). “Multi-stakeholder co-operatives and their legal framework.” In: Trends and Challenges for Co-operatives and Social Enterprises in Developed and Transition Countries (C. Borzaga and R. Spear, eds). Edizioni 31. Nogueira Netto, V., M. Barroso, L. Ponchio and P. do Carmo Martins (2016). “Perfil da cooperative de leite brasileira.” In: O futuro do cooperativismo de leite (P. Carmo Martins, J. Gontijo Alvarez, G. Sant’Ana de Carmargo Barros, V. Nogueira Netto and M. Barroso eds). Embrapa Gado de Leite. Olivera, G. (2011). “Agroindustria láctea, regulación estatal y cooperativismo: 1930–1955.” Mundo Agrario, 11(22). Orozco-Barrantes, J. and L. Barrantes-Arias (2018) “Innovación y crecimiento inclusivo en Costa Rica: el caso del sector lechero.” Revista de Política Económica y Desarrollo Sostenible, 4(1): 1–20. Ríos Nuñez, S., G. Delamaza Escobar, J. Goldsmith Weil and R. Mardones Barraza (2018). “Asociatividad del sector lácteo en la región de Los Lagos. Una alternativa para la competitividad y el desarrollo del capital social regional.” Centro de Estudios del Desarrollo Regional y Políticas Públicas—CEDER. Universidad de Los Lagos. Romero Paz, R. (2016). “Farmer cooperatives in Mexico: Case studies in Jalisco.” Massey University, Master of AgriCommerce Thesis. Palmerston North, New Zealand. Seppänen, M., L. Eriksson, B. Aguilar, K. Boman and T. Pijnenburg (2013). “Evaluation of Rural Sector Cooperativon between Nicaragua and Finland.” Final Evaluation Report, Integrated Rural Development Programme (PIDR) and Livestock Development Programme (PRODEGA), Impact Consulting Oy Ltd. Sistema OCB (2019). Anuario del Cooperativismo Brasileño. Available in: https://​somoscooperativismo​ .coop​.br/​publicacao/​53/​anuario​-do​-cooperativismo​-brasileiro​-2019 Vazquez-Valencia, R. and I. Aguilar-Benitez (2010). “Organizaciones lecheras en los Altos Sur de Jalisco: un análisis de las interacciones productivas.” Región y Sociedad, 22(48), 113–44. Vásquez-León, M. (2010). “Walking the Tightrope: Latin American Agricultural Cooperatives and Small-Farmer Participation in Global Markets.” Latin American Perspectives, 37(6): 3–11.

Agricultural cooperatives in Latin America: the case of dairy  439 Wijnands, J., B. Armenta Gutiérrez, J. Poelarends and O. van der Valk (2010). “Business opportunities in the Mexican dairy market.” Wageningen UR Livestock Research Report No 397. Zylbersztajn, D. (2002). Quatro estratégias fundamentais para cooperativas agrícolas. Estudo preparado para o XIV Seminário de Política Econômica: Cooperativismo e Agronegócio. Universidade Federal de Viçosa.

27. Unique features of agricultural cooperatives in sub-Saharan Africa1 Nicola Francesconi, Fleur Wouterse, Michael L. Cook and Gashaw T. Abate

INTRODUCTION Agricultural cooperatives and other farmer-owned organizations are widespread across sub-Saharan Africa (Borzaga et al. 2014; Wanyama et al. 2008, 2014; World Bank 2007). The scant available data suggests that every other rural village in Africa houses a cooperative organization of some sort (Bernard et al. 2013, 2010, 2008a; Hill et al. 2008). The literature suggests that when farm-households join these organizations, they derive benefits from mutual support—for weeding, harvesting, and other labor-intensive activities, but also financing funerals, weddings, medical treatments, and so on—and they also gain access to subsidized agricultural inputs and services provided by the government and non-governmental agencies. These benefits are attributable to the social capital enhancing effect of cooperatives, and translate into significantly more efficient farms and more resilient households (Abate et al. 2014a, 2014b; Balineau 2013; Bernard et al. 2013, 2008a; Francesconi and Ruben 2012; Francesconi and Wouterse 2011; ISSER 2012). The role played by agricultural cooperatives in sub-Saharan Africa appears to be different from that played by similar organizations operating in Europe and North America. In particular, agricultural cooperatives serve a more commercial or market-oriented function within Europe and the United States compared to those in countries below the Sahara. According to Bijman and Iliopoulos (2014), cooperatives in much of the developed world are primarily geared toward strengthening the economic position of farmers by engaging them in collective bargaining with sellers of farm inputs and buyers of agricultural produce. In recent decades, the concentration of food retailers has reinforced the need for farmers to build such countervailing power. Another main function of cooperatives in many European countries and the United States relates to the reduction of transaction costs in the commercial relationships between farmers and their clients. The limited market orientation of agricultural cooperatives in sub-Saharan Africa can be explained on the basis of the seminal theory of Douglass North (1989), who concluded that the fundamental difference between developed and developing countries is the way they define property rights. Such a difference is particularly evident when considering the definition of property rights of farmland in sub-Saharan Africa compared to the EU or US. In countries in Africa south of the Sahara, property rights tend to be vaguely defined, resulting in missing or fragmented markets for farmland, which is typically transferred through inheritance (AfDB 2016; Arezki et al. 2015; Holden and Otsuka 2014; Jayne et al. 2014; Toulmin 2009). Due to rapid population growth and a limited capacity of urban centers to absorb rural youngsters, this system of inheritance has inevitably led to progressive farmland fragmentation (O’Sullivan 2017). In sharp contrast, populations in much of the developed world have been growing at 440

Unique features of agricultural cooperatives in sub-Saharan Africa  441 a slower pace and in the presence of well-defined property rights, witnessing a general progression toward farmland consolidation (Clough et al. 2020). The growing number and falling size of farms have often created a disincentive for sub-Saharan cooperatives to aggregate and commercialize members’ agricultural surplus. This context-specific disincentive has induced the proliferation of cooperatives with semi-subsistent member-farmers who engage in farming mostly to satisfy the food consumption needs of their households and who sell their relatively small agricultural surplus directly to farmgate traders or neighboring consumers, rather than through their cooperatives (Bernard et al. 2008b, 2013; Bruhn et al. 2010, 2013; Francesconi and Heerink 2010; Francesconi and Ruben 2014; Francesconi and Wouterse 2015a). The tendency of their members to embrace autarky or side-selling has undermined the capacity of cooperatives to generate income and employment, or managerial capital (as defined by Bernard et al. 2010, 2013; Francesconi and Wouterse 2019, 2021a). Missing managerial capital explains the provision of extensive and protracted (inter)national aid and subsidies to sub-Saharan cooperatives, which tend to emerge and subside with support programs initiated by governments or NGOs. These programs are said to have contributed to the exacerbation of elite-capture or rent-extraction by cooperative leaders (Francesconi and Wouterse 2015a; Platteau 2007). Despite the unique challenges faced by sub-Saharan cooperatives, governments and donors have systematically used subsidies and aid to shape the governance structure of these cooperatives on the basis of off-the-shelf models from other parts of the world (Francesconi and Wouterse 2021b; Ostrom 1990). Therefore, alternative and more suitable models are necessary to unleash the income and employment generating potential of cooperatives in sub-Saharan Africa. In particular, this chapter proposes and discusses the LSC model and similar models that can already be occasionally observed in Africa and are generally associated with greater levels of managerial capital. To promote the rise and consolidation of LSCs across rural Africa, we propose a strategy that combines research-driven education and training with cooperative governance decentralization and farmland devolution. In what follows, we elaborate and substantiate these arguments using a historical review of rural cooperation in sub-Saharan Africa; relevant theory derived from the Cooperative Life Cycle Framework; data from 569 agricultural cooperatives from Uganda, Malawi, Madagascar, Rwanda, Kenya, and South Sudan; and success stories based on observations from the field and references from the literature.

HISTORY This section provides a synopsis of the history of rural cooperation in sub-Saharan Africa. Although important details are inevitably lost when writing about poorly documented events that occurred over centuries and across such a vast and diverse territory, our objective is to provide a general overview in an attempt to tease-out key patterns and challenges that have been underlining the evolution of agri cooperatives. This section concludes by emphasizing the different historical justifications that led to the development of agricultural cooperatives in Europe and the United States. Since the onset of sedentary agriculture in the Rift Valley and Nile Basin, farmers have supported each other in carrying out labor-intensive and time-sensitive tasks, such as weeding and harvesting, as well as in coping with idiosyncratic shocks that affected food production and consumption (Ehret 1979; Harari 2011; Mazoyer and Roudart 2006). Across the vast

442  Handbook of research on cooperatives and mutuals and remote rural areas of sub-Saharan Africa, cooperation among farmers was progressively institutionalized over time, giving rise to a plethora of mutual-support and community-based associations. In pre-colonial times, these associations institutionalized rotating or revolving schemes to ensure exchange of labor, food, and other resources among farm-households. Pre-colonial associations were typically defined and governed on the basis of community norms and customs based on kinship. Many pre-colonial associations continue to exist today, such as Nnoboa and Susu in Ghana, Idir and Iqub in Ethiopia, La Tontine and Les Greniers Villageois in the Sahel, and so on—serving mostly to mutualize support among smallholding farmers in times of need (deGraft-Johnson 1958; Onumah et al. 2007). With the advent of colonialism, many of these mutual support and community-based associations were converted or expanded into cooperatives modeled according to Rochdale cooperative principles from the nineteenth-century United Kingdom (Wanyama et al. 2008). It is important to note that the rise of colonial cooperatives can be explained by the economic interests of European governments rather than those of local farmers. Colonial authorities imposed the cooperative structure as a means to boost the production, bulking, and export of agricultural commodities such as tea, coffee, cocoa, cotton, and rubber (Hussi et al. 1993). To maximize the export of these commodities towards European markets, strong incentives were introduced for rural elites to pool (or even coerce) farmers into cooperatives (Wanyama et al. 2008). While cooperatives were considered as a means to centralize management over agricultural production and commercialization without tearing the social fabric of rural Africa (Strickland 1933), they became known as an instrument of colonial exploitation. The downfall of colonialism did not lead to the collapse of cooperatives. In line with their foreign rulers, many new and independent African states recognized and endorsed cooperatives as key agricultural institutions. Many African governments became directly involved in establishing and managing cooperatives and in ensuring their integration into in- and output markets (Onumah et al. 2007). Hence, post-independence cooperatives were often converted into full-fledged parastatals and preferential channels for the distribution of publicly subsidized credit and inputs (Debrah and Nederlof 2002; Hussi et al. 1993; Wanyama et al. 2008). In other words, membership in parastatal cooperatives became an essential prerequisite for farmers to obtain subsidized credit and inputs from the government (Holmen 1990). In many cases, public subsidies were even provided to cooperatives in exchange for nothing more than their members’ political endorsement. As a result, inefficiency and corruption became rampant among post-independence cooperatives (Wanyama et al. 2008). In the 1980s, most sub-Saharan governments began to embrace structural adjustment reforms geared towards the liberalization and globalization of domestic markets, which also involved the withdrawal of the state from cooperative governance (Hussi et al. 1993; Onumah et al. 2007). The withdrawal of the state was expected to transform cooperatives from rent-seeking into income and employment generating organizations (Hussi et al. 1993). However, the transition toward farmer-controlled and market-oriented cooperatives was tentative at best and remains still largely incomplete. Despite a few, scattered and sector-specific, success stories— for example, in cocoa in Ghana, coffee in Ethiopia, dairy in Kenya, palm oil in Uganda, and horticulture in Senegal—a gap remains between farmers and markets contributing to the multiplication of aid and assistance programs across rural Africa (Tadesse et al. 2018; Francesconi and Wouterse 2015a). The marginalization of rural smallholders from emerging markets and value chains justified a large flow of international capital into sub-Saharan Africa over the past three decades, thus creating a dependency syndrome, especially among the vast majority

Unique features of agricultural cooperatives in sub-Saharan Africa  443 of multipurpose cooperatives that nowadays serve mostly as passive channels for aid and assistance (Tadesse et al. 2018; Francesconi and Wouterse 2015a). To summarize, we can generally describe the history of rural cooperation in sub-Saharan Africa as a long, tough and unfinished struggle toward the advancement of income and employment organizations that are fully owned and controlled by farmers. In some European countries—such as Denmark, the Netherlands, and the United Kingdom— as well as in the United States, the emergence of cooperatives in the late nineteenth century is explained by a so-called spontaneous liberal logic of the market requiring farmers to generate economies of scale to gain bargaining power and lower transaction costs. The origins of agricultural cooperation in the United Kingdom are associated with the history of the Rochdale pioneers and the development of consumer cooperatives. In 1867 the first agricultural cooperative was founded and functioned as a supply cooperative and followed the standard models of consumer cooperatives. Due to opposition by landowners, the development of agricultural cooperatives was slower compared to consumers’ or workers’ cooperatives, but the farming slump at the turn of the century created a more suitable atmosphere for agricultural cooperation (Morales Gutierrez 2005). For Spain, the existence of collectively used resources, especially common land, is said to also have contributed to the emergence of cooperatives in the early twentieth century (Beltrán Tapia 2012). In the United States, the environmental destruction associated with the Dust Bowl of the 1930s is said to have been so high due to the prevalence of small farmers that cultivated more of their land and thus did not have the economies of scale to invest in erosion control, as did the adjacent farms. Drifting sand from unprotected fields then damaged neighboring farms that may have invested in erosion control. Collective action among farmers was thus necessary to address wind erosion. The Soil Conservation Districts, established by the US government after 1937, helped coordinate erosion control. This “unitized” solution for collective action is similar to that used in other natural resource/ environmental settings (Hansen and Libecap 2004). For other European countries, such as France, Belgium, Italy, and Portugal, a more ideological utopian logic—that is, the interest to promote the initiatives of the various social groups in favor of their development—is said to explain the rise of cooperatives (Morales Guttierrez 2005).

THEORY In this section we present and discuss the cooperative life-cycle framework as conceptualized by Cook (2018) on the basis of prolonged research and outreach efforts in support of agricultural cooperatives in the US and other developed regions, and as subsequently adapted to the African context by Francesconi and Wouterse (2021b, 2019, 2015b) and Francesconi and Ruben (2008). In particular, we use this theoretical framework to link our previous historical review to our main hypothesis that missing managerial capital is a prevalent and distinguishing feature of agricultural cooperatives in sub-Saharan Africa. Overall, this cooperative life-cycle framework postulates that agricultural cooperatives evolve in consecutive and multiple life cycles, justified by shifting but path-dependent objective functions. While investor-owned firms are usually established with the explicit purpose to generate income over the short run; member-owned cooperatives typically emerge to ensure members’ mutual support and progressively embrace rent-seeking in an attempt to consequently pursue income generation

444  Handbook of research on cooperatives and mutuals functions over the longer run. As the purpose of a cooperative evolves over time so does its governance structure, as depicted in Figure 27.1.

Source: Authors.

Figure 27.1

The cyclical but path-dependent evolution of agricultural cooperatives

In Figure 27.1, cooperatives are depicted as associative structures that progressively seek external support to develop and integrate business structures. We assume that an associative structure includes members who are farmers and patrons, typically categorized into ordinary and board members or into members and elected (or appointed) leaders. In contrast, a business structure includes employees, such as managers and technicians who can be either recruited and paid by external entities (for example, governments, donors, or investors) or directly by the members of the associative structure. The full integration of associative and business structures is expected to unleash the potential of cooperatives in addressing both the social and economic needs of their members. This framework further postulates that the rise of income and employment generating cooperatives and their ability to maintain that status over time is undermined by intrinsic and degenerative forces. As managerial capital grows, heterogeneity in members’ preferences (concerning the services they expect from their cooperative) increases. In the presence of ill-defined property rights, diverging preferences give rise to internal friction that tends to divide membership into opposing factions, eventually leading to members’ apathy or drift, collective action failure, and organizational degeneration. To regenerate and sustain collective action, a cooperative needs to create economic incentives and organizational arrangements that allow the simultaneous consolidation of members’ preferences and property rights. As discussed in the introductory section, property rights are most likely to be ill-defined in the context of developing countries and especially for farmland in sub-Saharan Africa. Ill-defined property rights over farmland are associated with falling farm size and subsistence

Unique features of agricultural cooperatives in sub-Saharan Africa  445 farming practices. As a result, cooperatives tend to cater for farmers that produce a wide range of agricultural commodities to satisfy the diverse consumption needs of their households. The diversification and fragmentation of farming systems in turn gives rise to heterogeneous membership and multipurpose cooperatives, whose collective resources become diluted across many different services, undermining the pursuit of income and employment creation. Although governments and donors tend to put in place economic incentives to consolidate farmers preferences and sustain collective action, these externalities also tend to provide a rationale for cooperatives to maintain the status quo instead of embarking on difficult and sensitive, but necessary, efforts to re-arrange property rights. As an example, Tadesse et al. (2018) empirically tested whether the economic performance of agricultural cooperatives in Ethiopia can be explained by the type and range of services they provide. Their analysis confirms that cooperatives focusing on the provision of a limited range of services to committed members are more competitive in the marketplace. These results imply that cooperatives should consolidate their “organizational boundaries,” that is, balance the number of services provided with their managerial capacity, for two main reasons: to better exploit economies of scale and to reduce the “free-rider” problem. These conclusions corroborate the seemingly better performance of specialized cooperatives (coffee, dairy, cocoa, and so on) compared to multipurpose cooperatives across Ethiopia. Tadesse et al. (2018) also find evidence suggesting that a considerable number of agricultural cooperatives in Ethiopia are engaged in markets where they do not have a competitive advantage and that this is associated with excessive interference of governmental and non-governmental organizations in their operations.

DATA DESCRIPTIVES To substantiate our theory, we collected primary data through structured surveys with the leaders (or board members) of 569 agricultural cooperatives from Uganda, Malawi, Madagascar, Rwanda, Kenya, and South Sudan. The sampling strategy involved a standardized selection process that focused on primary or grass-root organizations registered with national farmer federations and various government institutions. As described in Table 27.1, sampled cooperatives cover 89 percent of the sub-regions and 58 percent of the districts (counties or provinces) in the six countries.2 Table 27.2 and Figure 27.2 describe the level of managerial capital available in sampled cooperatives on the basis of two indicators: first, the income generation indicator, which measures the revenue generated per member by a coopTable 27.1

Sample of agricultural cooperatives from sub-Saharan Africa

Country (survey date)

Sub-Regions

Districts/Counties/Provinces

No. of sampled coops

Uganda (2016)

100%

50%

96

Malawi (2016)

100%

86%

92

Madagascar (2017)

100%

35%

105

Rwanda (2018)

100%

90%

97

Kenya (2019)

100%

57%

56

South Sudan (2021)

33%

30%

123

All

89%

58%

569

Source: Authors.

446  Handbook of research on cooperatives and mutuals erative during the 12 months preceding the survey, through the aggregation and commercialization of agricultural produce; second, the employment generation indicator, which measures the percentage of cooperatives that employed a manager (or CEO) and paid him/her a monthly salary of 500 USD or more.3 Table 27.2

Annual income generated per member by cooperatives, through agricultural commercialization

Country

Obs.

Mean (Std. Dev.) (USD/member/year)

Min / Max

Uganda

96

64.3 (178.1)

0 / 1,167

Malawi

92

54.7 (143.1)

0 / 1,087

Madagascar

105

75.9 (164.4)

0 / 809

Rwanda

97

215.2 (303.5)

0 / 1,208

Kenya

56

200.9 (369.9)

0 / 1,920

South Sudan

123

44.4 (98.9)

0 / 691

Source: Authors.

In particular, Table 27.2 shows that the income generated by the average cooperative member is consistently less than 365 USD per year, or less than 1 USD per day, in all six countries. Although income generation varies significantly among and within countries, the best performing cooperative (from Kenya) generates 1,920 USD a year or slightly more than 5 USD a day for its average member. Table 27.2 thus confirms our hypothesis that income generation is modest at best among sub-Saharan cooperatives. In contrast, a 2009 study on 2,535 farmer cooperatives in the US shows that revenue generated per member per year was almost 5,000 USD (Deller et al. 2009). Studies have also revealed that Ethiopian cooperatives commercialize less than 10 percent of the country’s agricultural surplus (Bernard et al. 2008a, 2008b; Francesconi and Ruben 2008; Rashid et al. 2013). This appears to be in sharp contrast with the situation in the EU and US, where it is estimated that almost 50 percent of domestic agricultural production is sold through cooperatives on a year-to-year basis (Bijman and Iliopoulos 2014). Figure 27.2 shows that employment-generating cooperatives are rare in all six countries. This is especially true for Madagascar, Malawi, South Sudan, and Uganda, where cooperatives are also less likely to generate income. Even in Kenya and Rwanda, only 18 and 8 percent of sampled cooperatives respectively declared paying a monthly salary of 500 USD or more to their managers. In sharp contrast with these findings, European and North American cooperatives are often criticized for creating more employment opportunities than benefits for their members and for their tendency to shift internal control or decision power from members towards professional managers. According to Bijman et al. (2014), over the past decades agricultural cooperatives in Europe have attracted a growing number of professional managers. This gradual change in the governance structure of European cooperatives was generally motivated by their need to enhance market orientation and competitiveness vis-à-vis investor-owned firms.

Unique features of agricultural cooperatives in sub-Saharan Africa  447

Source: Authors.

Figure 27.2

Percentage of employment creating generating cooperatives (≥500 USD/ manager/month)

SUCCESS STORIES Looking again at our data, we see that cooperatives in Rwanda are the most performant in terms of income generation. Our multi-stakeholder consultations held in Kigali emphasized, in line with available literature (Mukarugwiza 2010), that rural cooperation has indeed gained considerable momentum in Rwanda over the past two decades. Rwanda’s post-genocide government has consistently and actively engaged rural communities in defining formal land titles for farm-households. Rural communities have also been mobilized and empowered to engage in collective farmland management. This process, which is locally known as Umuganda and is intended to reconcile and reunite communities after the genocide, led to the rise of a new generation of cooperatives geared towards the consolidation and centralized management of member-owned farmland. In this way the cooperative movement of Rwanda has not only created economies of scale for commercial agriculture, but has also helped communities gain direct control over their own food production and natural resources. As revealed by our data, Kenyan cooperatives are the most performant in terms of employment creation. Multi-stakeholder consultations held in Nairobi further emphasized that employment creation is particularly important for women and youth who are less likely to own and manage farmland and therefore tend to be excluded from cooperative membership and leadership. Although the literature emphasizes the prevalence of older and male members and leaders within sub-Saharan cooperatives (Ampaire et al. 2013), little attention has so far been paid to the employment opportunities that these organizations can create to maximize the inclusion of rural women and youth. As in Rwanda, the success stories that emerged from Kenya were generally associated with farmland consolidating cooperatives, such as cooperative ranches, or beef and dairy cooperatives that centrally managed member-owned pastureland and livestock.

448  Handbook of research on cooperatives and mutuals Field work carried out by the author on Kalangala island in Lake Victoria, in the context of a project led by IFAD, revealed the existence of a particularly successful land-consolidating cooperative in Uganda. This cooperative was established to convert state-owned farm and grass land into member shares. This strategy gave rise to a member-owned but collectively managed palm oil plantation that employs a highly skilled manager and 25 technicians, generating 9,000 USD per member, for a total of 1,770 member-households. The members of this cooperative could considerably reduce their on-farm work load, thanks to the extension services provided by the cooperative, and gained the necessary capital and time to invest in off-farm business opportunities. Less time and cash-constrained members had also become increasingly active in the preservation of the island’s pristine forests and coastal buffer zones to prevent encroaching by oil palm gardens and seepage of fertilizer into the lake. Other success stories of this kind can sporadically be found also in the literature. For instance, Francesconi and Wouterse (2021b) report that Senegal’s flourishing horticultural sector comprises almost 400 water-user groups, cooperative organizations that centrally manage member-owned gardens within irrigated perimeters. Tadesse et al. (2018), Bernard et al. (2010, 2013), and Salifu et al. (2010) emphasize that plantation-style cooperatives for coffee in Ethiopia and for cocoa in Ghana have historically generated more income and employment compared to multipurpose cooperatives dealing with a large variety of crops. An important lesson that emerges from these rather scattered but inspiring stories is that, in the absence of rural land markets, cooperatives can serve as a means to set up land consolidation schemes that have the potential to generate income and employment. Similar lessons seem to arise from other developing and emerging countries outside Africa, and especially from China. In rural China—where farmland is rarely exchanged through the market, is highly fragmented, and is increasingly threatened by grabbing, much like in sub-Saharan Africa—Land Shareholding Cooperatives are officially recognized and endorsed by the Chinese Ministry of Agriculture. The Jiangsu province alone has already registered about 1,800 LSCs and many other provinces are also witnessing the proliferation of this cooperative model. By joining an LSC, farmers convert their plots into shares, allowing the cooperative to re-collectivize or centralize management over fragmented farmland without having to make any formal land transfer. In other words, the conversion of individual plots into shares allows cooperatives to rent-in and thus consolidate members’ plots without challenging existing land tenure systems and without requiring formal land transfers. In this way, farmland can be consolidated in the absence of land markets while farmers can retain and better secure ownership of their plots, given that the issuing of land-shares (for example, in the form of certificates) also contributes to secure land rights. This is a particularly convenient solution when land transfers are risky and costly or not possible due to the prevalence of ill-defined property rights. At the end of the fiscal year, LSC members receive dividends that are set in proportion to the number of shares they hold and the profit made by their LSC through collective marketing. The establishment of LSCs is often led by local government officials that are able to involve communities in the sensitive process of converting members’ plots into shares. Local government officers usually incentivize this process by granting cooperatives the right to use public land that is locally available. Land devolution incentives of this kind provide these cooperatives with the opportunity to scale up land consolidation schemes and maximize members’ dividends. In conclusion, LSCs promote and facilitate land consolidation and thus create the conditions for smallholders to realize economies of scale, engage in collective or aggregated commercialization of agricultural produce, and extract additional value from fragmented farmland. In addition to

Unique features of agricultural cooperatives in sub-Saharan Africa  449 this, LSCs have the potential to help communities directly engage in landscape planning and management in such a way as to centralize and better address the food security, environmental and infrastructural needs of their members. In China, LSCs appear to have boosted agricultural commercialization, rural employment, and food security, contributing also to the promotion and facilitation of landscape planning and natural resources management. In particular, the LSC model has the potential to enable communities to preserve and regenerate forests, pastures, and water reserves that otherwise tend to be inefficiently managed by the public sector or captured and exploited for commercial gains by the private sector (Chen 2015; Francesconi and Wouterse 2021b; Meinzen-Dick and Di Gregorio 2004; Ostrom 1990; Pairault 2017; Po 2008; Ren et al. 2017).

CONCLUSIONS AND IMPLICATIONS Cooperation is said to be instrumental for a society to achieve peace and prosperity (Harari 2011). If this is true, cooperation can be expected to present an important opportunity for rural societies in sub-Saharan Africa to overcome their constraints and prosper. The history, theory, and data discussed in this study have emphasized that the development of agricultural cooperatives in sub-Saharan Africa has been widely hindered by missing managerial capital or by the inability of cooperatives to generate income and employment. In fact, many cooperatives have failed to react to structural adjustments associated with market liberalization and globalization because they did not manage to complete the transition from parastatal or donor-driven to income and employment creating organizations. We explain this failure on the basis of a context-specific trend: farmland fragmentation. So far, cooperatives in sub-Saharan Africa appear to have been unable to overcome farmland fragmentation and link farm-households to markets. In contrast, most European and US cooperative models have evolved in a radically different context characterized by progressive farmland consolidation and are able to create sizeable incomes and employment for their members. Instead, in countries across sub-Saharan Africa, large-scale land acquisitions by public and private entities have emerged as the only viable strategy to mobilize investments in commercial agriculture and create much needed employment for rural and landless women and youth (Francesconi and Wouterse 2021b). Land grabs by government elites and foreign investors have, however, created civil unrest as well as violent struggles, migration towards urban hub areas, and the excessive exploitation of community-based natural resources for commercial interests (AfDB, 2016; Arezki et al. 2015; Holden and Otsuka 2014; Jayne et al. 2014). These problems have in turn justified the provision of extensive and protracted financial and in-kind support to cooperatives, most of which appear to emerge and subside in line with development programs and projects (Francesconi and Wouterse 2015a). Governmental and non-governmental support has resulted in a rural dependency syndrome or the undermining of the autonomy of cooperatives and the forced adoption of off-the-shelf organizational models from the EU and US (Francesconi and Wouterse 2021b; Ostrom 1990). In this study we have proposed alternative models of rural cooperation that could promote peace and enhance prosperity among rural communities in sub-Saharan Africa. In particular, Land Shareholding Cooperatives and other cooperative models that are specifically conceived to establish farmland consolidation schemes appear to build managerial capital and generate

450  Handbook of research on cooperatives and mutuals income and employment opportunities for members. The adoption of Land Shareholding Cooperatives and similar models appears to increase in the presence of decentralized cooperative governance and farmland devolution (as opposed to privatization or nationalization) policies, as is also confirmed by cases from Europe and the United States. Francesconi and Wouterse (2019) have demonstrated that training and educational curricula based on the data collected and analysis conducted for this study can be used to build the capacity of current and future rural leaders to trigger the reinvention of sub-Saharan cooperatives into income and employment creating organizations.

NOTES 1. The author wishes to thank the editors of this book and the two anonymous reviewers of this chapter. 2. Due to insecurity in South Sudan we were only able to survey the Western, Central, and Eastern Equatoria counties within the Equatoria region. The sample size is significantly smaller in Kenya than in the other five countries because 42 of the cooperatives surveyed in rural Kenya turned out to be saving and credit (instead of agricultural) cooperatives, and were therefore dropped from this analysis. 3. We selected the 500 USD cutoff based on salary data from the six countries. A monthly salary of 500 USD constitutes the lower end of the salary scale for a professional manager.

REFERENCES Abate, G.T., Francesconi, G.N. and Getnek, K. (2014a). The impact of agricultural cooperatives on smallholders’ technical efficiency: empirical evidence from Ethiopia. Annals of Public and Cooperative Economics 85(2): 257–86. DOI: 10.1111/apce.12035. Abate, G.T., Borzaga, C. and Getnek, K. (2014b). Cost-efficiency and outreach of microfinance institutions: tradeoffs and the role of ownership. Journal of International Development 26(6): 923–32. DOI: 10.1002/jid.2981. AfDB (2016). Land Tenure Regularization in Rwanda: Good Practices in Land Reform. Abidjan African Natural Resources Center and African Development Bank. Ampaire, E., Machete, C. and Birachi, E. (2013). Rural producer organizations and poverty reduction in Uganda: are there gender disparities in the distribution of membership benefits? Journal of Rural Cooperation 41(1): 1–21. Arezki, R., Deininger, K. and Selod, H. (2015). What drives the global “land rush”? The World Bank Economic Review 29(2): 207–33. Balineau, G. (2013). Disentangling the effects of fair trade on the quality of Malian cotton. World Development 44: 241–55, DOI: 10.1016/j.worlddev.2012.12.005. Beltrán Tapia, F.J. (2012). Commons, social capital, and the emergence of agricultural cooperatives in early twentieth century Spain. European Review of Economic History 16(4): 511–28. Bernard, T., Collion, M.H., De Janvry, A. and Rondot, P. (2008a). Do village organizations make a difference in African rural development? A study for Senegal and Burkina Faso. World Development 36, 2188–2204. Bernard, T., Taffesse, A. S. and Gabre-Madhin, E. Z. (2008b). The impact of cooperatives on smallholders’ commercialization behaviour: Evidence from Ethiopia. Agricultural Economics 39, 147–161. Bernard, T., Spielman, D.J., Tafesse, A.S., Gabre-Madhin, E.Z. (2010). Cooperatives for staple crop marketing: evidence from Ethiopia. IFPRI Research Monograph 164. DOI: 10.2499/9780896291751RR164. Bernard, T. Abate, G.T. and Lemma, S. (2013). Agricultural cooperatives in Ethiopia: results of the 2012 ATA Baseline Survey. REAP, IFPRI, ATA.

Unique features of agricultural cooperatives in sub-Saharan Africa  451 Bijman J. and Iliopoulos, C. (2014). Farmers’ cooperatives in the EU: Policies, Strategies and Organization. Annals of Public and Cooperative Economics 85: 4. Bijman, J., Hanisch, M. and Van Der Sangen, G. (2014). Shifting control? The changes of internal governance in agricultural cooperatives in the EU. Annals of Public and Cooperative Economics 85: 641–61. Borzaga, C., Galera, G., Bodini, R., Abate, G.T., Dossa, Z., Francesconi, G.N. and Ochanda, R.M. (2014). The potential of the social economy for local development in Africa: An exploratory report. Directorate General for External Policies, European Parliament, EU. Bruhn, M., Karlan, D. and Schoar, A. (2010). What capital is missing in developing countries? American Economic Review 100: 629–33. Bruhn, M., Karlan, D. and Schoar, A. (2013). The impact of consulting services on small and medium enterprises. Evidence from a randomized trial in Mexico. Policy Research Working Paper No. 6508. Washington DC, World Bank. Chen, A. (2015). The politics of the shareholding collective economy in China’s rural villages. Journal of Peasant Studies 43: 1–22. Clough, Y., S. Kirchweger and J. Kantelhardt (2020). Field sizes and the future of farmland biodiversity in European landscapes. Conservation Letters. DOI: 10.1111/conl.12752 Cook, M.L. (2018). A life cycle explanation of cooperative longevity. Sustainability 10: 1586. doi:​10​ .3390/​su10051586. Debrah, S.K. and Nederlof, E.S. (2002). Empowering farmers for effective participation in decision-making. IFDC. DeGraft-Johnson, J.C. (1958). African experiment: cooperative agriculture and banking in British West Africa. London: C.A. Watts. Deller, S., Hoyt, A., Hueth, B. and Sundaram-Stukel, R. (2009). Research on the economic impact of cooperatives. University of Wisconsin Center for Cooperatives 231(2209): 232–3. Ehret, C. (1979). On the antiquity of agriculture in Ethiopia. Journal of African History 20: 161–77. http://​dx​.doi​.org/​10​.1017/​S002185370001700X Francesconi, G.N. and Heerink, N. (2010). Ethiopian agricultural cooperatives in an era of global commodity exchange: does organizational form matter? Journal of African Economies 20: 153–72. Francesconi, G.N. and Ruben, R. (2008). The life cycle of agricultural cooperatives: implications for management and governance in Ethiopia. Journal of Rural Cooperation 36(2): 115–30. Francesconi, G.N. and Ruben, R. (2012). The hidden impact of cooperative membership on quality management: a case study from the dairy belt of Addis Ababa. Journal of Entrepreneurial and Organizational Diversity (JEOD), 1(1): 85–103. Francesconi, G.N. and Ruben, R. (2014). Fair Trade’s theory of change: an evaluation based on the cooperative life cycle framework and mixed methods. Journal of Development Effectiveness 6: 268–83. Francesconi, G.N. and Wouterse, F. (2011). The renewed case for farmers’ cooperatives: diagnostics and implications from Ghana. IFPRI Discussion Paper 01129, Washington DC. Francesconi, G.N. and Wouterse, F. (2015a). Promoting the role of farmer-based organizations for value chain integration: the tension between a program’s targeting and an organization’s investment strategy. Agricultural Economics 46, 527–36. Francesconi, G.N. and Wouterse, F. (2015b). The health of farmer-based organizations in Ghana: organizational diagnostics and policy implications. Journal of Development Studies 51: 262–73. Francesconi, G.N. and Wouterse, F. (2019). Building the managerial capital of agricultural cooperatives in Africa. Annals of Public and Cooperative Economics 90(1): 141–59. Francesconi, G.N. and Wouterse, F. (2021a). Agricultural cooperatives and COVID-19 in Southeast Africa: the role of managerial capital for rural resilience. Sustainability 13(3): 1046. DOI: 10.3390/ su13031046. Francesconi, G.N. and Wouterse, F. (2021b). The potential of land shareholding cooperatives for inclusive agribusiness development in Africa. Annals of Public and Cooperative Economics: 1–16. DOI: 10.1111/apce.12314. Hansen, Z.K. and Libecap, G.D. (2004). Small farms, externalities, and the Dust Bowl of the 1930s. Journal of Political Economy, 112(3): 665–94. Harari, Y.N. (2011). Sapiens: a brief history of humankind. Penguin Random House, UK.

452  Handbook of research on cooperatives and mutuals Hill, R., Bernard, T. and Dewina, R. (2008). Cooperative behaviour in rural Uganda: evidence from the Uganda National Household Survey 2005. IFPRI-USSP Background paper 2, Washington DC: IFPRI. Holden, T. and Otsuka, K. (2014). The roles of land tenure reforms and land markets in the context of population growth and land use intensification in Africa. Food Policy 48: 88–97. Holmen, H. (1990). State Cooperatives and Development in Africa. Research report (Nordiska Afrikainstitutet) no. 86. Uppsala: Scandinavian Institute of African Studies, pp.78–87. ISBN: 9171063005. Hussi, P., Murphy, J. Lindberg, O. and Brenneman, L. (1993). The development of cooperatives and other rural organizations: the role of the World Bank. Washington DC: World Bank. Jayne, T.S., Chamberlin, J. and Headey, D. (2014). Land pressures, the evolution of farming systems and development strategies in Africa: a synthesis. Food Policy 48: 1–17. https://​doi​.org/​10​.1016/​j​.foodpol​ .2014​.05​.014. Mazoyer, M. and Roudart, L. (2006). A history of world agriculture. New York: Monthly Review Press. Meinzen-Dick, R.S. and Di Gregorio, M. (2004). Collective action and property rights for sustainable development. 2020 Vision Focus, International Food Policy Research Institute (IFPRI), Washington DC. Morales Gutierrez, A.C. (2005). A comparative synthesis of 20th century agricultural cooperative movements in Europe. Journal of Rural Cooperation 33: 47–65. Mukarugwiza, E. (2010). The hope for rural transformation: a rejuvenating cooperative movement in Rwanda. Coop AFRICA Working Paper No.12. Dar es Salaam, International Labour Organisation. North, D.C. (1989). Institutions and economic growth: an historical introduction. World Development 17(9): 1319–32. doi:​10​.1016/​0305​-750X(89)90075​-2. ISSER (2012). An impact evaluation of the MiDA FBO training. Institute of Statistical, Social and Economic Research, MiDA report, Accra, Ghana. Onumah, G.E., Davis, J.R., Kleih, U., and Proctor, F.J. (2007). Empowering smallholder farmers in markets: changing agricultural marketing systems and innovative responses by producer organizations. ESFIM Working Paper 2. IFAD, CTA, AGRICORD. www​.esfim​.org/​esfim/​documents/​. Ostrom, E. (1990). Governing the commons: the evolution of institutions for collective action. Cambridge: Cambridge University Press. O’Sullivan, M. (2017). Gender and property rights in Sub-Saharan Africa: a review of constraints and effective interventions. Policy Research Working Paper, N. 8250. World Bank, Washington DC. Pairault, T. (2017). S’affranchir de la pauvreté en arrêtant de travailler: Une expérience chinoise. In C. Bekolo, G. Etoundi and T. Montalieu (eds), La microfinance contemporaine. Presses Universitaires de Rouen et du Havre. Platteau, J.P. (2007). Is culture an obstacle to African economic development? Paper presented at IERC Conference, University of Southern California, Los Angeles. Po, L. (2008). Redefining rural collectives in China: land conversion and the emergence of rural shareholding co-operatives. Urban Studies 45: 1603–23. Ren, Y., Bian, Y. and He, T. (2017). Characterizing the land shareholding cooperative: a case study of Shanglin Village in Jiangsu, China. Sustainability 9(7): 1–6. Salifu, A, Francesconi, G.N. and Kolavalli, S. (2010). A review of farmer-based organizations in Ghana, IFPRI discussion paper n.00998. Strickland, C.F. (1933). Cooperation for Africa. Africa 6(1): 15–26, DOI: https://​doi​.org/​10​.2307/​ 1155698 Tadesse, G., Abate, G.T. and Ergano, K. (2018). The boundary of smallholder producers’ cooperatives: a conceptual and empirical analysis. Journal of Agricultural Economics 70(2): 529–49. Toulmin, C. (2009). Securing land and property rights in sub-Saharan Africa: the role of local institutions. Land Use Policy. DOI: 10.1016/j.landusepol.2008.07.006 Wanyama, F., Develtere, P. and Pollet, I. (2008). Reinventing the wheel? African cooperatives in a liberalized economic environment. Coop Africa Working Paper 1. Dar es Salaam: International Labour Organization (ILO). Wanyama, F., Poulton, C., Markelova, H., Dutilly, C., Bjiman, J., Francesconi, G. N., Bernard, T., Cook, M., Badiane, O. and Wouterse, F. (2014). Collective action among African smallholders: trends and lessons for future development strategies. IFPRI WCAO Thematic Research Note No. 5, Washington DC: IFPRI. World Bank. (2007). World Development Report 2008: agriculture for development. Washington DC: World Bank.

PART VII SPECIAL SECTORS AND TOPICS

28. Consumer cooperatives: purpose and possibilities1 Zoë T. Plakias and Jason S. Entsminger

INTRODUCTION Consumer cooperatives have long existed as a business model to allow consumers to more easily access the goods and services they want. This chapter provides an overview of their prevalence, history, and function, a summary of existing research on consumer cooperatives, and a discussion of research gaps found. We draw from the literature on consumer cooperatives globally and from peer-reviewed and “gray” literature (such as dissertations and theses, government reports, and publications produced by cooperatives and other entities). Our review is limited to English-language literature and is not comprehensive but rather is intended to provide an overview of knowledge to date, citing examples of relevant work. While consumer cooperatives can be found globally and have a relatively long history, we find they are under-studied in the academic literature, particularly in applied economics. We encourage additional research in this space to help inform current consumer cooperative development efforts and make this business model more accessible to contemporary consumers looking for an alternative to investor-owned models and opportunities for economic justice and empowerment.

THE BASICS What Is a Consumer Cooperative? A consumer or user cooperative is an organization whose member-owners obtain final-stage goods and services through cooperative patronage. Generally, the goal of these cooperatives at the time of formation is to allow consumers to purchase things they would not otherwise be able to purchase, or to access these goods and services at prices lower than they could from other sellers. In this way, they are similar to supply cooperatives. The difference is that member-owners purchase goods or services through consumer cooperatives intended for the final consumption stage, with no transformation into other products. Supply cooperatives, in contrast, provide intermediate goods or services, which serve as inputs to further production. Why Start a Consumer Cooperative? Historically, consumer cooperatives have formed to provide things in locations and to consumers that investor-owned firms do not view as risk-worthy or profitable. Nilsson (1985) highlighted that they are consumer welfare organizations, existing to correct for market failures disadvantaging particular consumers by making them the owners of the means of pro454

Consumer cooperatives: purpose and possibilities  455 duction or procurement and customers. The Rochdale Society of Equitable Pioneers—often recognized as a model for modern cooperatives—was in part a consumer cooperative, as highlighted by Fairbairn (1994). Well known contemporary consumer cooperatives in the US include REI (an outdoor retailer), and numerous local consumer-owned utility cooperatives, credit unions, and food cooperatives. Access to desirable goods and services is not the only reason consumers form cooperatives. They also do so to form communities around shared goals and build equity. For example, in many countries, concerns about food quality and what is in food (potential contaminants) or how it is produced (with pesticides and herbicides) prompted consumers to form consumer cooperatives that would allow access to food from trusted sources. Many of these cooperatives still exist and continue to form for similar reasons. How Common Are Consumer Cooperatives? It is challenging to provide reliable estimates of key consumer cooperative statistics because of inconsistent approaches to classifying cooperative forms and aggregating (or disaggregating) data. Different researchers approach data collection and reporting from different perspectives: some track by sector and industry, treating consumer-driven and non-consumer cooperatives as the same; others define consumer cooperatives narrowly and focus on the largest or those in certain geographic regions. Globally, there were an estimated 954 million consumer cooperative members worldwide as of 2014 (Eum, 2017). In 2019, more than half of the 300 largest cooperatives in the world (as measured by turnover or revenue) were consumer-focused cooperatives; 86 of these (28.7 percent) were insurance mutuals, and 76 (or 25.3 percent) were other consumer or user cooperatives (International Cooperative Alliance, 2021). In the United States, there were an estimated 26,884 consumer cooperatives with nearly 344 million members in 2009. Since people can be members of multiple cooperatives, this does not represent 344 million individual people but rather memberships. These US consumer cooperatives held nearly $2 trillion in assets, paid $19 billion in wages, and had the highest total revenue of any cooperative sector (Deller et al., 2009). These numbers make consumer cooperatives the most prevalent type of cooperative business by the number of firms and members (Deller et al., 2009). In fact, for the largest consumer cooperatives, consumers may not even realize that they have an ownership stake in the cooperative. Table 28.1 shows the approximate number of organizations and memberships in US consumer cooperatives by sector. The numbers in this table are from 2009. More recent estimates are available (Pencavel, 2020). However, we are unaware of a comprehensive, cross-sectoral census of consumer cooperatives more recent than Deller (2009). Furthermore, estimates vary widely for the same sector, perhaps due to differing methodologies or definitions. For example, the National Cooperative Business Association/Cooperative League of the USA (NCBA CLUSA) reports more than 5,000 food cooperatives in the US. In contrast, the Grocery Story website, which claims to have “the most up-to-date and comprehensive food co-op directory on the planet,” counts only 331 (NCBA CLUSA, 2022; Steinman, 2021). What Types of Consumer Cooperatives Exist Today? Consumer cooperatives exist in various industries, facing challenges and opportunities common to their organizational forms and considerable differences across geography and

456  Handbook of research on cooperatives and mutuals Table 28.1

Consumer cooperatives in the United States (2009)*+

Type of cooperative

Number of firms (total) Number of firms (reporting) Number of memberships (reporting firms

Food and grocery

290

only) 101

487,000

Other retail and services

282

125

3,075,000

Healthcare

305

192

961,220

Childcare

1,096

563

Not reported

Housing

9,471

None

Not reported

Education

390

121

14,800

Credit unions

8,334

8,334

91,537,000 232,969,000

Mutual insurance

1,497

148

Rural electric distribution

864++

853

15,798,000

Rural telephone

255

158

964,000

Water

3,352 26,136

923 11,518

2,066,000 347,872,020

Total+++

Notes: *Sector numbers from Deller et al. (2009), the most recent comprehensive census of US cooperative businesses. + Some may be worker-owned cooperatives, multi-stakeholder cooperatives, supply/purchasing cooperatives, or may be incorporated as nonprofit organizations with significant patron control. Deller et al.’s analysis distinguishes cooperatives by the activity, not ownership structure. Thus, the numbers reported are likely higher than the total number of consumer cooperatives but provide a sense of the consumer cooperative sector’s scale. ++ Based on authors’ calculations using numbers presented in the original table. A suspected typographical error in the Deller et al. report listed the figure as 846. +++ Divergence from totals reported in Deller et al. (2009), as authors here base calculations on sector data publicly available in the report, not raw data.

sectors. Comparison across sector types is often limited due to a lack of comparable data, making it difficult to identify the number of organizations and memberships or identify differences in practices, structures, and outcomes. Studies of individual cases or specific contexts help inform our understanding of the types of consumer cooperatives. It is also important for some of these types to distinguish cooperatives—where members hold a claim on equity of the organization and the right to control through democratic governance—from public or private firms that have “memberships” to access services, such as Costco or Amazon Prime. Food and grocery retail Food retail or grocery cooperatives sell food products and serve as an alternative to privately-owned and investor-owned grocery stores. There are estimated to be between 300 and 350 food cooperatives in the US (Deller et al., 2009). They often specifically sell foods that consumers perceive to be of higher quality, more healthful, or produced more sustainably or fairly than food available through conventional retailers. Food cooperatives can range in size and scope from small specialty food stores to large, full-line grocery stores, sometimes with multiple locations. They may also engage in vertical coordination (warehousing, distribution, and so on). Around half of the food cooperatives in the United States (149) are members of National Cooperative Grocers. National Cooperative Grocers is a business services cooperative that allows member cooperatives to collectively purchase certain items and access marketing and operations services, such as experts in-store design, human resources, and branded marketing and promotion tools (NCG, 2021). There were an estimated 81,437 food and grocery cooperatives worldwide, with nearly 100 million owners in 2014 (Dave Grace and Associates, 2014).

Consumer cooperatives: purpose and possibilities  457 Substantial literature exists on the topic of food cooperatives. Some focus on describing food cooperatives and how they function, including factors in cooperative success (Cotterill, 1983; Öz & Aksoy, 2019; Schiferl & Boynton, 1983; Tremblay et al., 2019). Other literature discusses competition with traditional grocery stores (Sommer & Hohn, 1983); motivations for cooperative formation other than profit, including self-help, autonomy, religion, and philosophy (Pak & Kim, 2016; Phillips, 2012; Robinson-Bertoni, 2017; Sarang & Vena, 2018); motivations of consumers and farmers in engaging with the cooperatives (Jaklin et al., 2015; Sommer, 1998); and models for improved functioning (Fikar & Leithner, 2020; Tavella & Papadopoulos, 2017). Some research describes food cooperatives and their relation to activism and counterculture (Chalofsky, 2019; Dee Povitz, 2020); others focus on food cooperatives in the context of so-called alternative food networks (Feenstra & Hardesty, 2016; Fonte & Cucco, 2017; Little et al., 2010; Mestres & Lien, 2017; Saulters et al., 2018) and on food co-op shoppers as quintessential local and organic food consumers (Carolan, 2017; Nie & Zepeda, 2011). Food cooperatives also serve as a laboratory in which to explore ideas and pose questions that are not specifically about food cooperatives, such as the tensions between idealism and pragmatism, the role of symbolic values, and limits to control within food systems (Ashforth & Reingen, 2014; Hale & Carolan, 2018; Sarmiento, 2015). Manufactured goods retail Retail cooperatives for general consumer goods are common (sometimes in conjunction with a food/grocery cooperative), particularly outside the US (Birchall, 2000; Juga & Juntunen, 2018). In the United States, Recreational Equipment, Inc, or REI, is perhaps the most well-known consumer retail cooperative. Founded in 1938 in Seattle, Washington, REI sells manufactured goods for a broad range of outdoor recreation activities. In recent years it has expanded into offering both tourism and educational services relevant to its focus on recreation. Larger retail cooperatives tend to create value for members mostly through providing goods. Many allow non-members to patronize their retail outlets—both features are unsurprising, given that this is the common interest of a broader, heterogeneous set of consumers. However, small retail cooperatives may focus on social values as an organizing principle. There is minimal English-language research about manufactured goods consumer cooperatives or non-food elements. The lack of research may be due to these cooperatives taking multi-stakeholder or multi-activity organizational forms. Housing In modern contexts, housing cooperatives are a means to address affordable housing needs, especially for marginalized populations. These cooperatives are positioned as a mechanism to combat gentrification (Huron, 2018), improve gender equity in the face of affordable housing crises (Andrew & Milroy, 2011), or provide culturally appropriate spaces for living among indigenous and aboriginal populations (Craig & Hamilton, 2014). Historically, housing cooperatives were organized by ethnic minority groups, labor unions, and government entities to ensure housing access (Sazama, 1996; Sazama, 2000). Lang and Roessl (2013) note that user-owned approaches extend benefits beyond the well-being of residents, playing roles in community governance and providing spill-over effects through incentives that limit housing price growth and improve quality. However, there is also evidence that they may not achieve these goals. The deference often given to cooperative organizations for self-governance and self-management may perpetuate housing discrimination (Maldonado & Rose, 1995).

458  Handbook of research on cooperatives and mutuals It is important not to confuse housing cooperatives with condominium (“condo”) associations, as ownership, practices, statutory treatment, and governance differ between the two. Housing cooperatives are also an older organizational form. In the US, condo associations began to displace housing cooperatives in the 1960s, although the latter has maintained prominence, especially in New York, Chicago, and Washington, DC (Maldonado & Rose, 1995; Sazama, 1996; Lawton, 2014). In other nations, housing cooperatives have been a prevalent means of organizing multi-unit housing concerns (Ganapati, 2010; Lang & Roessl, 2013; Avilla-Royo et al., 2021). Utilities Utility consumers often form cooperatives to secure access to vital supplies of electricity (Zeuli et al., 2004; Jang, 2020), drinking water and sewage treatment (Ruiz-Mier & van Ginneken, 2006), heating services or fuels such as centralized thermal heat production or heating oil and delivery (Klagge & Meister, 2018; Furnace Compare, 2019), and high-speed “broadband” internet services (Zeuli et al., 2004; Zager, 2013; Sadowski, 2017). Utility cooperatives are not the same as public utilities, owned by or heavily regulated by local governments but not conferring an ownership stake for individual users. Utility cooperatives may engage directly in production activities (electrical generation, water extraction, purification, or wastewater treatment) or act as collective buying agents to secure lower prices and stable supply (Jang, 2020). Nearly all utility cooperatives provide transmission or delivery services, thus collectivizing the otherwise high costs of physical infrastructure and management. The collectivization of asset costs spreads the cost of provision over members. It ensures access to services that would be too costly for member-owners to procure as individuals or would not be profitable enough to attract other firms. Thus, utility cooperatives are especially prevalent in rural and remote areas, where low population density and landscape mean that provision via other means is difficult. Recent changes in some technologies, especially in the electric sector through distributed energy resources, may change the utility cooperatives, allowing users to become user-producers buying services from the cooperative in some moments and selling back to the cooperative in others. Childcare and eldercare Coontz and Esper (2003) describe a variety of cooperative models for childcare, including the Parent (consumer/user type), Employee, Consortium, Family Day Care Home, and Babysitting Cooperative models. They also note the prevalence of multi-stakeholder cooperatives. Democratic member control is an important aspect of childcare cooperatives. Interestingly, of the five types, the consumer cooperative approach in the Parent model is both popular among those consuming childcare services (Coontz & Esper, 2003; Vamstad, 2016) and is supported by research which shows that parent involvement, like that demanded under cooperative governance approaches (Ellingsæter & Gulbrandsen, 2007), is associated with more positive child outcomes (Coontz & Esper, 2003). That said, scant literature specifically deals with the operations, governance, and impact of care services cooperatives generally and those which are user-owned specifically. However, Coontz and Esper (2003) note major challenges and impediments to cooperative approaches to care services, including financial constraints on start-up capital and perceptions and misunderstandings of legal requirements. Further, as many nations face looming eldercare needs as the Baby Boomer generation ages, a substantial

Consumer cooperatives: purpose and possibilities  459 opportunity exists to expand cooperative models to provide these services (Firman, 1985; Restakis, 2008; University of Georgia, 2017). Other types of consumer cooperatives Consumer cooperatives for the provision of financial services—such as insurance, banking, and lending—represent the largest economic share of the organizational form, as highlighted in Table 28.1. Credit unions and insurance mutuals are discussed in greater detail in other chapters of this book, and thus our discussion here is brief. It is important to note that credit unions and mutuals are consumer cooperatives that serve as member-owned alternatives to commercial banks, corporate insurance companies, and private lenders. The cooperative allows user-members to access preferred rates, share in the risk and reward of financial markets, and exert more democratic control of financial products. Consumer cooperatives are also present in the healthcare sector. While some cooperatives in this sector are purchasing cooperatives with organizations as members (Wicks & Hall, 2000), there have also been calls for an increase in the use of cooperatives among patients—consumers of insurance, healthcare services, medications, and supplies (Firman, 1985; Starr, 1993; Sundaram-Stukel & Deller, 2009; Edelman & Dunn, 2009). Despite these calls, we found surprisingly little work that seeks to understand them in practice or context. An emerging area of consumer cooperative growth is the cannabis industry. These groups often identify as clubs, collectives, or user groups; some are organized as cooperatives, but many are not incorporated under cooperative laws, despite espousing many cooperative principles. What’s the History of Consumer Cooperatives? Although the Rochdale Equitable Pioneers Society, founded in England in 1844, receives attention as a pivotal organization in the consumer cooperative movement and cooperative movement more broadly in the Western hemisphere (see, for example, Thompson (1994)), many countries around the globe have a history of collective action. Even on the island of Great Britain, the first recorded consumer cooperative is now understood to be the Fenwick Society of Weavers in Scotland, which was started in the 1760s (Bamfield, 1998; Hibberd, 1968). That said, it seems largely agreed upon in the literature that the modern consumer cooperative emerged as a global model in the mid-1800s. In the United States and Canada, Fairbairn (2004) cites five periods of economic development that coincide with cooperative formation: pre-1860 (Eastern colonization and early industrial development); 1860–1920s (westward expansion and maturation of industrial development); 1920s–50s (new organizational forms); 1950s–70s (rise of urbanization, consumerism, and consolidation); 1970s–2000s (rise of the service economy and information technology, beginning of post-industrialization and postmodernism). Cribben (1937) tracks the first consumer cooperative in the United States to Boston in 1845, when a set of 12 consumer cooperative “divisions” formed the Workingmen’s Protective Union. It grew to hundreds of stores before folding later in the 1800s. Other countries and cooperative sectors can track similar “waves” of cooperation. For example, the history of Polish consumer cooperatives dates back to at least the mid-1800s. Bilewicz (2020) cites the role of these cooperatives in Polish independence in the early part of the twentieth century but notes they were largely forgotten because they were co-opted by the Communist Party which took power (although ironically Communism was antithetical to the

460  Handbook of research on cooperatives and mutuals more organic grassroots cooperation that preceded it due to its top-down structure). However, following the collapse of the Soviet Union in the early 1990s, consumer cooperatives again began to emerge in Poland (Bilewicz & Śpiewak, 2015). There are numerous texts, articles, and reports that document the history of consumer cooperatives in different times and places, including (but not limited to) Britain (Robertson, 2016), East and South Asia (for example, Defourny & Kim, 2011; Rajasekhar et al., 2020), Japan (Morris-Suzuki, 2017; Kondo, 2021), Nordic countries (for example, Hilson, 2011), Russia (Kalinin, 2017), South Africa (Mushonga et al., 2019), and globally (Battilani & Schröter, 2012; Patmore & Balnave, 2018). The history of consumer cooperatives is also intertwined with the history of social movements and economic development across time and space. For example, Gessler (2017) chronicles how New Orleans housewives used cooperative societies as a way to support purchasing and consumption of southern products and reduce reliance on northern and western agriculture during the early twentieth century in the US. Kimura (2012) highlights the role of women’s food cooperatives in developing innovative, consumer-driven systems for assuring food safety in Japan (a country which experienced several highly publicized food safety incidents in the mid-twentieth century). Both of these cooperatives serve women; historically and today, in many cultures the household is run by women, making consumer cooperatives a powerful tool for women’s economic empowerment. What Are Some of the Key Challenges with Consumer Cooperatives? As with many other cooperative users, consumers’ needs change over time. For example, when many US consumer-owned food retail cooperatives first formed, consumers shared an interest in purchasing foods they could not find elsewhere (such as, foods with less processing and unique ingredients not common in American cuisine). Since these cooperatives formed and opened, other retailers, including specialty retailers such as Whole Foods Market (now owned by Amazon) and mainstream grocers and superstores (for example, Kroger and Wal-Mart), have begun to sell many of these types of goods. Thus, the provision of these specific goods is no longer a need, and cooperatives must look to other shared values for their members to maintain their membership and economic sustainability. This member heterogeneity may yield challenges with goal setting and organizational identity formation, and these identification-commitment problems are one potential cause of what Vierheller (1994) termed “member apathy,” a low level of participation in organizational governance that may lead to cyclical problems with identity formation and cause diffuse organizations. Getting people to actively participate in the democratic process of the cooperative can be a challenge, particularly for large cooperatives where member-owners feel disconnected from cooperative governance. Low participation/engagement can also lead to “questionable representativeness of elected officials and accentuation of managerial power” (Tuominen et al., 2009, p.22). Some cooperatives may even dissolve or shift their structure entirely as shared values change. But there are several barriers to forming consumer cooperatives in the first place. First, many people are not aware of cooperatives. Among many possible reasons, characteristics other than ownership structure are front-of-mind for consumers. In addition, cooperatives are not emphasized as a viable business model and are sometimes omitted from economics and business school curricula (Kalmi, 2006). In cultures that pride themselves on convenience, more involvement with a retailer (through voting, volunteering, and so on) may be seen as

Consumer cooperatives: purpose and possibilities  461 a burden and not a desirable feature of the store, or simply something people do not have time to participate in. Another perception of some consumer cooperatives (for example, consumer-owned food cooperatives) is that they are elitist and expensive, excluding people with their prices or making them feel excluded. Hence, some never see the prices in the first place. Some older research on consumer cooperatives notes that membership numbers are often constrained by economic issues, such as membership fee structures and pricing policies (Anderson et al., 1979; Sandler & Tschirhart, 1981; Sexton, 1983). Interestingly, very little recent research has explored why people shop at cooperatives relative to other retailers. One exception is Juga and Juntunen’s (2018) examination of the antecedents of retail cooperative purchases by consumers in Finland. They find that awareness of communications by the cooperative about being a cooperative is relatively low but does have a significant impact on retail patronage. In 2015, outdoor gear retail cooperative REI began re-emphasizing its cooperative identity in their communications, launching an “REI Co-op” brand for gear designed in-house and adding the term “co-op” to its logo (Michelson, 2015). For many consumers, REI may just be another outdoor gear retailer. Still, this rebranding helps the cooperative re-emphasize the unique aspects of its cooperative identity, setting it apart from other retailers in that way. Another challenge to consumer cooperatives is related to labor. While volunteerism is seen as core to the cooperative model by some (Hibbert et al., 2003), this model can raise equity concerns or even be a violation of the law (Rakopoulos, 2019; Levinson & Eisenback, 2020). Who Are the “Consumers” in Consumer Co-operatives? Consumers in consumer cooperatives are often underserved in some way prior to cooperative formation. The need to access a good or service brings consumers together. This need generally exists because an investor-owned firm does not find it profitable to provide consumers with the good or service they desire, so consumers take it into their own hands. This is both the strength and the weakness of the consumer cooperative model. For example, there is also a long history of cooperatives among underserved populations due to racial discrimination or other forms of discrimination. In her book Collective Courage and her related chapter in this handbook, Jessica Gordon-Nembhard highlights the history of African American cooperatives in the United States as a source of goods and services not provided through predominately white retailers and cooperatives, as well as for community and economic empowerment and justice. However, those who purchase from consumer cooperatives are not necessarily consumer-owners. Many consumer cooperatives allow non-owner consumers to shop with them but confer special benefits on consumer-owners. In considering consumer cooperatives as a tool of economic empowerment, the word “consumer” should not be forgotten. For consumer cooperatives to operate successfully, consumer-owners must have adequate means to purchase a share in the cooperative and regularly purchase from the cooperative. It is thus no surprise that we often see consumer cooperatives operating in higher-income areas where consumers have the means to support the cooperative. Indeed, low purchase volumes and community buy-in can be challenges to the success of this model (Engler-Stringer et al., 2019; Halliday & Foster, 2020).

462  Handbook of research on cooperatives and mutuals

STRUCTURE OF CONSUMER COOPERATIVES How Are Consumer Cooperatives Governed? As with other cooperatives, consumer cooperatives are owned by patrons of the organization, accessing the goods and services their partial ownership stake helps provide. Although democratic consumer-owner participation is core to cooperative governance, specifics may vary due to cooperative laws worldwide. In the United States, a board of directors is elected by the members of the cooperative. Generally, this board of directors is composed of consumer-owners, but sometimes retail cooperatives will also reserve seats for others who are not consumer-owners (for example, a worker representative). The activities of the board of directors are governed by the articles of incorporation and bylaws of the cooperative, which are official and legally binding documents of the organization. Usually, the board of directors hires a Chief Executive Officer or General Manager with retail management experience to manage the day-to-day operations of the cooperative. There are various models for how the board of directors and executives interact, ranging from more directive to more delegating. The executive generally serves as an ex officio or non-voting member. This governance structure is not unlike that of investor-owned firms (IOFs); the main difference is that consumer cooperative directors are elected by their fellow consumer-owners, bringing the consumer’s perspective directly into the boardroom. Tuominen et al. (2009) provide the most comprehensive and recent overview of the facets and challenges of consumer cooperative governance. Fulton and Pohler (2015) focus specifically on the relationship between the board and management. Unlike consumers of IOFs, consumer-members in cooperatives can exercise control over the organization through the market, exit behaviors, and direct mechanisms of voice. However, these avenues of control may be diminished based on factors in the environment (that is, the persistent lack of alternative suppliers to which to defect), within the organization (that is, membership size and heterogeneity), or personally based (that is, an intrinsic motivation to be loyal to the cooperative or a lack of desire to engage in governance). These features may influence the adoption of additional structures or policies within consumer cooperatives. They may make finding competent leaders and administering operations more difficult, creating a risk of the cooperative becoming captured by its manager. What Are the Benefits and Costs of Consumer Cooperative Ownership? Talonen et al. (2016) characterize the types of values that a cooperative model allows consumers to pursue within four dimensions: economic; functional; emotional and experiential; and symbolic and social. Understanding the benefits to consumer-owners is important for understanding the identity formation of the organization and the identification of consumer-members with it. We will discuss several benefits which intersect with the values described above. The first major benefit to consumer-members is democratic member control. Consumer-owners generally have the right to vote for boards of directors, attend board meetings, and do things like circulate petitions. Consumer-owners can also run for the board and more actively work to set the organization’s direction. Consumer-owners have a stake in retailing service provision and the retail environment, not just products. The centering of the consumer perspective in these cooperatives and the one-member-one-vote principle inherent in cooperative governance

Consumer cooperatives: purpose and possibilities  463 models also have important implications for pricing and capturing surplus through patronage and ownership (Enke, 1945). The second benefit to consumer-members is financial. As with other cooperatives, one common form of financial benefit is the patronage refund. This is profit returned to the members at the end of the year once the cooperative has covered its expenses and held back any additional needed funds for operations. Generally, the patronage refund given to each consumer is proportional to that consumer’s level of patronage (for example, it might be a percentage of a consumer’s expenditures at the cooperative that year). In lieu of a patronage refund, some cooperatives will offer a lower price for consumer-owners (or alternatively charge a surcharge to non-owner consumers). However, this can be confusing for consumers who expect the prices they see on the shelf to be reflected at the register, as is common in non-cooperative retail establishments. Another common form of financial benefit is discounts. Consumer cooperatives may offer special consumer-owner sales or discount days to enhance consumer-owner benefits and loyalty. A third, less tangible benefit is consumer-owners’ shared interests and values. Many cooperatives are formed based on shared interests or values, which may be as simple as “we all need this product” and as complex as “we want to buy products that are better for the earth and our community.” Thus, another benefit consumer-owners get is knowing they are part of a community that shares their values and interests. They support those values and interests when they shop. As with other cooperatives, consumers must purchase a share in the cooperative to become a consumer-owner. In some cooperatives, this may come as a one-time fee; in others, an annual membership fee is paid by consumers until they are “fully vested” (essentially a zero-interest payment plan for their share). If consumer-owners no longer wish to be consumer-owners, they can divest from the cooperative by selling their share back to the cooperative. Some consumer cooperatives now have another form of share called “preferred shares,” which allow consumers to invest more money in the cooperative and use it as a method of building financial equity for the cooperative and earning returns themselves (Jarvi, 2020). These are generally non-voting shares and are called “preferred” shares because if the cooperative liquidates, these shares will be refunded before those of other consumer-owners.

IMPACTS OF CONSUMER COOPERATIVES The impacts of consumer cooperatives on societal outcomes have been explored through foundational, theoretical inquiry and applied social scientific data gathering. Topics investigated include the effect on consumer-owners’ economic well-being; the effect of consumer cooperatives on market structures, prices, and innovation; the ways in which consumer cooperatives are a tool of social movements and reactions to societal change; and the role of consumer cooperatives in building livable, thriving communities. Efficiency of Markets, Pricing, and Welfare Consumer cooperatives are often identified as an organizational form expected to achieve economic efficiency through the nature of their incentive structures. Enke (1945), for example, contends that consumer-based organizations could be expected to achieve both business (finan-

464  Handbook of research on cooperatives and mutuals cial profits) and economic (resource allocation) efficiency. By making operators and consumers one and the same, social welfare would be maximized—just so long as consumer-owners have sufficient control of the organization to assert their true self-interests. In a closed consumer cooperative, where owners are the only consumers, the organization prices goods at the point where tradeoffs between consumer and operator surplus are equivalent (that is, where the marginal cost to the cooperative is equal to the marginal price of consumer-owner demand), as this is where consumer-owner surplus is maximized (Enke, 1945). However, opening the cooperative to non-owner consumers may lead to pricing similar to that of a non-cooperative profit-seeking firm. In this open cooperative, consumer-owners receive the same benefits from their own consumption while also capturing income generated by non-owner consumer sales via their patronage benefits, and non-owner consumers can benefit from lower prices (Anderson et al., 1979). As additional assumptions are relaxed and factors such as dividend distribution policies, membership fees, surplus taxes, and non-rivalry among owners are included, models begin to predict economically inefficient consumption decisions by consumer-owners (Ireland & Law, 1983; Sexton, 1983), leading to practices which leave potential gains from economies of scale on the table (Sexton, 1983). However, transactions with cooperatives may provide some consumers with intangible benefits to which they assign a premium and upend early theoretical models which held that consumer co-ops should or will price below IOFs. Findings reported by Sagebiel et al. (2014), for example, indicate that consumers are willing to pay more for electricity supplied by a consumer utility cooperative over an investor-owned firm. The ability for consumer cooperatives to be pro-social (Muñoz, Kimmitt, & Dimov, 2020) itself has implications for the potential efficiency of consumer cooperatives. A case in point is provision of water utilities via a consumer cooperative. Such an organizational model is likely to be more efficient than an IOF because the cooperative makes consumers, the primary bearers of the costs to society (externalities), the owners and governors of the firm. This better enables these externalities to be internalized, enhancing efficiency and social benefit (Morse, 2000). Consumer cooperatives can also be a powerful tool to address market failures. Mikami (2003) highlights how consumer cooperatives can help address market inefficiencies caused by firm concentration among IOFs. This result echoes earlier literature, such as Cotterill (1983), which considered the opportunity for consumer grocery cooperatives amid increasing consolidation (and decreasing competition) in the grocery sector. Moreover, cooperative firms put more control in the hands of consumers, which can help address the structure of information in the market (Mikami, 2003, 2007). When IOFs withhold critical information from consumers, this can cause market failures and reduce consumer welfare. Innovation The choice of organizational form is itself an act of innovation that creates entrepreneurial rents (Casson, 2005; Sorescu et al., 2011). Thus, selecting a cooperative approach to provisioning consumer goods is a form of entrepreneurial innovation. Research also shows that once this choice is made, other innovations may be spurred by the very nature of the consumer cooperative. For example, Drivas and Giannakas (2010) point out that cooperatives seeking to maximize the welfare of their user-owners can drive product differentiation and increase quality provision (and lower prices!) through owner-driven innovation. The drive

Consumer cooperatives: purpose and possibilities  465 to create innovations in product attributes, distribution modes, or production practices that originates from consumer-owned organizations is not unlike the innovation activity driven by other forms of cooperative organizations (Giannakas & Fulton, 2005; Muñoz et al., 2020). Consumer cooperatives also drive innovation through technology adoption. Bauwens (2013) and Bauwens et al. (2016) highlight this in the context of electric utility cooperatives promoting the diffusion of distributed, decentralized approaches to energy generation. Social and Political Impacts Welfare impacts resulting from increased efficiency and reduced prices are only a part of the consumer cooperative story. These organizations have impacts in social and political realms as well. They provide a tool for social groups to assert influence, enhance buying power, advocate for the provision of goods and services that meet their needs, respond to the pressures and excesses of modern capitalism (Juga & Juntunen, 2018), and form interest groups that can pressure regulators and public officials to change policies. They can also become a space for fostering community social ties and building resiliency into economic and community systems. Consider as one example the food distribution sector, which includes grocery retail. In many post-industrial nations, various social movements have arisen seeking alternatives to the distended supply chains and large-scale production practices which came to be conventional (Weber et al., 2008; Entsminger, 2020; Kondo, 2021). Consumer cooperatives have played a central role in these social movements. These grocery cooperatives have provided a space for co-creating community ties and establishing norms surrounding these alternatives (Birchall & Ketilson, 2009). Food co-ops have also provided a tool for autonomous community development by empowering “economic self-help” (Phillips, 2012) via various activities, including cooking classes and nutrition education, and they can strengthen the resiliency of communities and food supply chains in the face of shocks. Examples from other sectors abound as to the role consumer cooperatives can play in addressing social and political questions communities. Consumer cooperatives have been considered as tools for community development (Majee & Hoyt, 2011; Zeuli et al., 2004), battling gentrification (Sullivan, 2006; Huron, 2018), ensuring parental control of children’s education (Vamstad, 2016), demanding production of energy using renewable methods (Bauwens et al., 2016; Klagge & Meister, 2018), empowering women and creating feminist economies (Kondo, 2021; Moon, 2021), and much more.

WHAT DID WE LEARN AND WHAT’S NEXT FOR CONSUMER-DRIVEN ENTERPRISE? In this chapter we have provided a summary overview of consumer cooperatives. Our high-level view shows that while these organizations hold promise to address social and economic challenges consumers face with regard to goods and services, there is still much students and scholars of cooperatives can do to understand them better. Consumer cooperatives are widespread across regions of the world and within many sectors of the global economy. Still, the dearth of recent English-language peer-reviewed literature leaves many contemporary questions unanswered. Non-academic “gray” literature, written by people interested in, reflecting on, or during cooperative development, provides some illumination and offers

466  Handbook of research on cooperatives and mutuals a starting point for investigating researchable questions. Thus, there is a substantial opportunity for scholars in this space, and we highlight several possible avenues for this work. Cooperatives and Their Boundaries The boundaries used to classify organizations as consumer cooperatives are often inconsistent. These inconsistencies in classification make data collection and comparative analysis difficult. Developing a clear and consistent system of classifying these cooperatives would aid scholars and policymakers in developing a common understanding of the key features of a cooperative, comparing and contrasting the features of cooperatives, and recognizing the role of cooperatives in the economy and their presence across economic industries and sectors. Such a classificatory system may also help to ensure smaller cooperatives are captured in the data. However, some of the classification challenges are due to different approaches to consumer cooperation, not inconsistency in reporting about cooperatives. These inconsistencies may be due to desired differences in structure or to differences in cooperative laws (for example, in the United States, laws that govern cooperative business vary by state), and suggest that analysis of consumer cooperative laws and their impacts of those laws on cooperative outcomes could be a valuable tool for policymakers. Knowledge Of and Identification With the Cooperative Form among Consumers Indeed, the cooperative business model is not well known among consumers. For example, despite them being a legitimate organizational form, many business school curricula focus only on IOFs. They may not expose students to the knowledge needed to pursue cooperative models for their ventures or seek management positions within cooperatives. This omission is odd and suggests an opportunity to develop new courses (and not just those focused on food and agricultural cooperatives, although these are valuable where they exist). Additionally, research on consumer cooperatives does not always grapple well with these organizations’ non-owner consumer aspects, despite differences in the prevalence of patronage and economic effects between user-owners and non-owner users. For example, we do not know if common models in organizational management of adherent identification with and commitment to the organization hold the same between large- and small-scale cooperatives, across sectors, or between consumer-owners and those who are non-owner consumers. Inquiry on this subject alone may help consumer cooperative scholars and managers better identify management practices that can positively impact these organizations. Collecting Data and Documenting Consumer Cooperative Populations There is also no systematically collected, reliable data set on consumer cooperatives. Existing data, such as the annually collected World Cooperative Monitor, does not provide sufficiently disaggregated data on consumer cooperatives to provide a valuable global or national perspective on this cooperative type. Even researchers working on behalf of the United Nations (Dave Grace and Associates, 2014) encountered this problem, noting that common co-mingling based on sectors creates challenges to accurate reporting in consumer cooperatives. The problem here is that data collection or reporting is often done by sector type, without identifying the type of user-owners being engaged. It can also be that reporting is primarily being conducted

Consumer cooperatives: purpose and possibilities  467 in a policy and planning context, where economic sectors are more important to data users. For organizational scholars, the type of organization has critical importance. Thus, researchers can build a scholarship of consumer cooperatives by performing the simple scientific task of detailed data collection and documentation. Cooperatives and the Cultural Zeitgeist Cooperative formation is often a product of and a contributor to the cultural zeitgeist in a particular region and period. In the current time and geography of the authors (the United States in the year 2022), several topics come to mind that could be of interest to scholars. First, the idea of resilience—particularly economic resilience—has been a topic of recent discussion due to the economic challenges induced by the COVID-19 pandemic. How do cooperatives contribute to resilience? Are they able to adapt more easily to consumer needs in times of crisis without the burden of meeting non-user shareholder expectations? These would be valuable questions to answer. Another topic of discussion in this period and place of writing is whether large multinational corporations (for example, Amazon, Facebook, Bayer, and so on) have too much power (political, economic, and so on). As democratically controlled, member-owned businesses, cooperatives offer an alternative to now ubiquitous multinational businesses. Is there evidence that they may offer an alternative that addresses the critiques of these firms waged by consumers? Other current issues are the widespread awakening by white people in the US and elsewhere to systemic racism and tensions between democracy and authoritarianism worldwide. Consumer cooperatives are considering how they relate to these current cultural phenomena. Need for a Developed Scholarship of Consumer Cooperative Studies In preparing this chapter, it became clear that cooperative studies lacks a distinct, identifiable body of literature that is focused on the unique issues and challenges of cooperative organizations for consumers, particularly the economic, management, and organizational behavior element of them. In other words, we lack a dedicated scholarship of consumer cooperatives. In part, this may be due to issues in consumer cooperatives research spanning multiple fields (for example, industrial organization and consumer economics). Much of the work that has been completed on these organizations is done in a narrow context (for example, case studies or ethnographic studies of particular cooperatives during particular periods). While this work is important, comparisons across space and industries are needed. Consumer cooperatives literature lacks comparisons of consumer-based models across contexts, both in terms of geography and of industry. Scholarship in cooperative studies, especially in the United States, often focuses on producer or supply cooperatives, too, leaving the unique challenges of consumer cooperatives unaddressed. This lack of dedicated scholarly work may contribute to the recurrence of the issues faced by consumer cooperatives identified in this chapter in terms of both policy and practice.

468  Handbook of research on cooperatives and mutuals

NOTES 1. The authors wish to thank two anonymous reviewers, the handbook editors, and handbook workshop participants for helpful comments and suggestions. Dr Entsminger’s contributions to this chapter were supported in part by award #2020-51150-31870 under USDA’s National Institute of Food and Agriculture (NIFA) core funding for the NERCRD. Dr Plakias’ contributions to this chapter were supported in part by NIFA Hatch Project number OHO01427-MRF. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the US Department of Agriculture.

REFERENCES Anderson, R.K., Porter, P.K., & Maurice, S.C. (1979). The Economics of Consumer-Managed Firms. Southern Economic Journal, 46(1), 119–30. https://​doi​.org/​10​.2307/​1057007 Andrew, C., & Milroy, B.M. (2011). Life Spaces: Gender, Household, Employment. UBC Press. Ashforth, B.E., & Reingen, P. H. (2014). Functions of Dysfunction: Managing the Dynamics of an Organizational Duality in a Natural Food Cooperative. Administrative Science Quarterly, 59(3), 474–516. https://​doi​.org/​10​.1177/​0001839214537811 Avilla-Royo, R., Jacoby, S., & Bilbao, I. (2021). The Building as a Home: Housing Cooperatives in Barcelona. Buildings, 11(4), 137. https://​doi​.org/​10​.3390/​buildings11040137 Bamfield, J. (1998). Consumer-Owned Community Flour and Bread Societies in the Eighteenth and Early Nineteenth Centuries. Business History, 40(4), 16–36. https://​doi​.org/​10​.1080/​00076799800000336 Battilani, P., & Schröter, H.G. (eds). (2012). The Cooperative Business Movement, 1950 to the Present. Cambridge University Press. Bauwens, T. (2013). What Roles for Energy Cooperatives in the Diffusion of Distributed Generation Technologies? (SSRN Scholarly Paper ID 2382596). Social Science Research Network. https://​doi​ .org/​10​.2139/​ssrn​.2382596 Bauwens, T., Gotchev, B., & Holstenkamp, L. (2016). What drives the development of community energy in Europe? The case of wind power cooperatives. Energy Research & Social Science, 13, 136–147. https://​doi​.org/​10​.1016/​j​.erss​.2015​.12​.016 Bilewicz, A. (2020). The forgotten role of the consumer cooperative movement in the process of regaining Poland’s independence. In G. Chimiak & B. Cierlik (eds), Polish and Irish Struggles for Self-Determination: Living Near Dragons (p.162). Cambridge Scholars Publishing. Bilewicz, A., & Śpiewak, R. (2015). Enclaves of activism and taste: consumer cooperatives in Poland as alternative food networks. Socio.Hu, special issue 3, 145–66. https://​doi​.org/​10​.18030/​socio​.hu​ .2015en​.145 Birchall, J. (2000). Some Theoretical and Practical Implications of the Attempted Takeover of a Consumer Cooperative Society. Annals of Public and Cooperative Economics, 71(1), 29–53. https://​ doi​.org/​10​.1111/​1467​-8292​.00132 Birchall, J., & Ketilson, L.H. (2009). Resilience of the Cooperative Business Model in Times of Crisis. International Labour Organisation. http://​dspace​.stir​.ac​.uk/​handle/​1893/​3255 Carolan, M. (2017). More-than-Active Food Citizens: A Longitudinal and Comparative Study of Alternative and Conventional Eaters: More-than-Active Food Citizens. Rural Sociology, 82(2), 197–225. https://​doi​.org/​10​.1111/​ruso​.12120 Casson, M. (2005). Entrepreneurship and the Theory of the Firm. Journal of Economic Behavior & Organization, 58(2), 327–48. https://​doi​.org/​10​.1016/​j​.jebo​.2004​.05​.007 Chalofsky, N.E. (2019). Social Entrepreneurship and Social Movement Learning: A Reflective Account of the History of the TPSS Food Cooperative. Advances in Developing Human Resources, 21(2), 193–204. https://​doi​.org/​10​.1177/​1523422319827921 Coontz, E.K., & Esper, E. (2003). Cooperative Child Care for Rural Residents: The Experience from California. Journal of Rural Cooperation. www​.semanticscholar​.org/​paper/​Cooperative​-Child​-Care​ -for​-Rural​-Residents​%3A​-The​-Coontz​-Esper/​9d3763eaac​eb2604fb47​d2e33381e10afcc29667

Consumer cooperatives: purpose and possibilities  469 Cotterill, R. (1983). Retail Food Cooperatives: Testing the “Small Is Beautiful” Hypothesis. American Journal of Agricultural Economics, 65(1), 125–30. https://​doi​.org/​10​.2307/​1240347 Craig, T., & Hamilton, B. (2014). In Search of Mino Bimaadiziwin: A Study of Urban Aboriginal Housing Cooperatives in Canada. SEED Winnipeg: Manitoba Research Alliance. Cribben, L. (1937). The Consumer Cooperative Movement in the United States [Doctoral dissertation]. New York University. Dave Grace and Associates. (2014). Measuring the Size and Scope of the Cooperative Economy: Results of the 2014 Global Census on Co-operatives. United Nations Secretariat, Department of Economic and Social Affairs, Division for Social Policy and Development. www​.un​.org/​esa/​socdev/​documents/​ 2014/​coopsegm/​grace​.pdf Dee Povitz, L. (2020). Nourishing Progressive Ideals in Dark Ages: Boycotts at the Park Slope Food Coop in the 1970s. Histoire Sociale/Social History, 53(108), 373–98. https://​doi​.org/​10​.1353/​his​.2020​ .0018 Defourny, J., & Kim, S. (2011). Emerging Models of Social Enterprise in Eastern Asia: A Cross‐country Analysis. Social Enterprise Journal, 7(1), 86–111. https://​doi​.org/​10​.1108/​17508611111130176 Deller, S., Hoyt, A., Hueth, B., & Sundaram-Stukel, R. (2009). Research on the Economic Impact of Cooperatives. University of Wisconsin Center for Cooperatives. Drivas, K., & Giannakas, K. (2010). The Effect of Cooperatives on Quality-Enhancing Innovation. Journal of Agricultural Economics, 61(2), 295–317. https://​doi​.org/​10​.1111/​j​.1477​-9552​.2009​.00236​ .x Edelman, M.A., & Dunn, J.R. (2009). Cooperatives: A Competitive Yardstick for Health Care (Working Paper No. 09028; Department of Economics Working Papers). Iowa State University. https://​dr​.lib​ .iastate​.edu/​handle/​20​.500​.12876/​22371 Ellingsæter, A.L., & Gulbrandsen, L. (2007). Closing the Childcare Gap: The Interaction of Childcare Provision and Mothers’ Agency in Norway. Journal of Social Policy, 36(4), 649–69. https://​doi​.org/​ 10​.1017/​S0047279407001225 Engler-Stringer, R., Fuller, D., Abeykoon, A.M.H., Olauson, C., & Muhajarine, N. (2019). An Examination of Failed Grocery Store Interventions in Former Food Deserts. Health Education & Behavior, 46(5), 749–54. https://​doi​.org/​10​.1177/​1090198119853009 Enke, S. (1945). Consumer Coöperatives and Economic Efficiency. The American Economic Review, 35(1), 148–55. Entsminger, J.S. (2020). The Ecology of Organizational Forms in Local and Regional Food Systems: Exploring the Scaling-up Challenge via a Species Concept [Dissertation, University of Missouri]. https://​mospace​.umsystem​.edu/​xmlui/​handle/​10355/​81532 Eum, H.-S. (2017). Cooperatives and Employment: Second Global Report. International Cooperative Alliance. www​.ica​.coop/​sites/​default/​files/​publication​-files/​cooperatives​-and​-employment​-second​ -global​-report​-625518825​.pdf Fairbairn, B. (1994). The Meaning of Rochdale: The Rochdale Pioneers and the Co-operative Principles (Occassional Paper Series No. 31778). Centre for the Study of Cooperatives, University of Saskatchewan. Feenstra, G., & Hardesty, S. (2016). Values-Based Supply Chains as a Strategy for Supporting Small and Mid-Scale Producers in the United States. Agriculture, 6(3), 39. https://​doi​.org/​10​.3390/​ agriculture6030039 Fikar, C., & Leithner, M. (2020). A decision support system to facilitate collaborative supply of food cooperatives. Production Planning & Control, 1–12. https://​doi​.org/​10​.1080/​09537287​.2020​.1796135 Firman, J.P. (1985). Health Care Cooperatives: Innovations for Older People. Health Affairs, 4(4), 50–61. https://​doi​.org/​10​.1377/​hlthaff​.4​.4​.50 Fonte, M., & Cucco, I. (2017). Cooperatives and Alternative Food Networks in Italy: The Long Road towards a Social Economy in Agriculture. Journal of Rural Studies, 53, 291–302. https://​doi​.org/​10​ .1016/​j​.jrurstud​.2017​.01​.019 Fulton, M., & Pohler, D. (2015). Governance and Managerial Effort in Consumer-owned Enterprises. European Review of Agricultural Economics, 42(5), 713–37. https://​doi​.org/​10​.1093/​erae/​jbv026 Furnace Compare. (2019, September 13). Everything you need to know about Fuel Coops. Furnace Compare. www​.furnacecompare​.com/​blog/​resources/​everything​-you​-need​-to​-know​-fuel​-coops/​

470  Handbook of research on cooperatives and mutuals Ganapati, S. (2010). Enabling Housing Cooperatives: Policy Lessons from Sweden, India and the United States. International Journal of Urban and Regional Research, 34(2), 365–80. https://​doi​.org/​10​ .1111/​j​.1468​-2427​.2010​.00906​.x Gessler, A.M. (2017). Warriors for Lower Prices: The New Orleans Housewives’ League and the Consumer Cooperative Movement, 1913–1921. Journal of Southern History, 83(3), 573–616. https://​ doi​.org/​10​.1353/​soh​.2017​.0163 Giannakas, K., & Fulton, M. (2005). Process Innovation Activity in a Mixed Oligopoly: The Role of Cooperatives. American Journal of Agricultural Economics, 87(2), 406–22. https://​doi​.org/​10​.1111/​j​ .1467​-8276​.2005​.00731​.x Hale, J., & Carolan, M. (2018). Framing Cooperative Development: The Bridging Role of Cultural and Symbolic Value between Human and Material Resources. Community Development, 49(4), 360–79. https://​doi​.org/​10​.1080/​15575330​.2018​.1491614 Halliday, L., & Foster, M. (2020). A Tale of Two Cooperatives in Two Cities. Journal of Agriculture, Food Systems, and Community Development, 1–16. https://​doi​.org/​10​.5304/​jafscd​.2020​.092​.005 Hibberd, P. (1968). The Rochdale Tradition in Co-operative History: Is It Justified? Annals of Public and Cooperative Economy, 39(4), 531–57. Hibbert, S., Piacentini, M., & Dajani, H.A. (2003). Understanding Volunteer Motivation for Participation in a Community-Based Food Cooperative. International Journal of Nonprofit and Voluntary Sector Marketing, 8(1), 30–42. https://​doi​.org/​10​.1002/​nvsm​.199 Hilson, M. (2011). A Consumers’ International? The International Cooperative Alliance and Cooperative Internationalism, 1918–1939: A Nordic Perspective. International Review of Social History, 56(2), 203–33. https://​doi​.org/​10​.1017/​S0020859011000150 Huron, A. (2018). Carving Out the Commons: Tenant Organizing and Housing Cooperatives in Washington, D.C. University of Minnesota Press. International Cooperative Alliance. (2021). World Cooperative Monitor 2021: Exploring the cooperative economy. https://​monitor​.coop/​sites/​default/​files/​2021​-11/​WCM​_2021​%20spread​%20FINAL​.pdf Ireland, N.J., & Law, P.J. (1983). A Cournot-Nash Model of the Consumer Cooperative. Southern Economic Journal, 49(3), 706. https://​doi​.org/​10​.2307/​1058711 Jaklin, U., Kummer, S., & Milestad, R. (2015). Why Do Farmers Collaborate with a Food Cooperative? Reasons for Participation in a Civic Food Network in Vienna, Austria. International Journal of Sociology of Agriculture and Food, 22(1), 41–61. Jang, H. (2020). Ownership, Pricing, and Productivity: The Case of Electric Distribution Cooperatives. Empirical Economics, 59(2), 977–1001. https://​doi​.org/​10​.1007/​s00181​-019​-01658​-9 Jarvi, M. (2020). Innovations in Cooperative and Small Grocery [Regional Sustainable Development Partnership Report]. University of Minnesota Extension. Juga, J., & Juntunen, J. (2018). Antecedents of Retail Patronage in Cooperative Retail Context. Journal of Co-Operative Organization and Management, 6(2), 94–99. https://​doi​.org/​10​.1016/​j​.jcom​.2018​.08​ .001 Kalinin, A.V. (2017). Russian Consumer Cooperation History and Current State: Legislation Problems and Solutions [Technical report]. Consumer Societies Union “RUS.” Kalmi, P. (2006). The Disappearance of Cooperatives from Economics Textbooks. Cambridge Journal of Economics, 31(4), 625–47. https://​doi​.org/​10​.1093/​cje/​bem005 Kimura, A.H. (2012). Feminist Heuristics: Transforming the Foundation of Food Quality and Safety Assurance Systems. Rural Sociology, 77(2), 203–24. https://​doi​.org/​10​.1111/​j​.1549​-0831​.2012​.00075​ .x Klagge, B., & Meister, T. (2018). Energy Cooperatives in Germany—An Example of Successful Alternative Economies? Local Environment, 23(7), 697–716. https://​doi​.org/​10​.1080/​13549839​.2018​ .1436045 Kondo, C. (2021). Re-energizing Japan’s teikei movement: understanding intergenerational transitions of diverse economies. Journal of Agriculture, Food Systems, and Community Development, 103–21. https://​doi​.org/​10​.5304/​jafscd​.2021​.104​.031 Lang, R., & Roessl, D. (2013). The Governance of Co-operative Housing: Current Challenges and Future Perspectives. The International Journal of Co-Operative Management, 6, 8–12. Lawton, J.D. (2014). Unraveling the Legal Hybrid of Housing Cooperatives. UMKC Law Review, 83(1), 117–60.

Consumer cooperatives: purpose and possibilities  471 Levinson, A.R., & Eisenback, C. (2020). Cooperative Principles and Fair Labor Standards: Volunteering for Food Cooperatives. Michigan State Law Review, 189, 189–231. Little, R., Maye, D., & Ilbery, B. (2010). Collective Purchase: Moving Local and Organic Foods beyond the Niche Market. Environment and Planning A: Economy and Space, 42(8), 1797–1813. https://​doi​ .org/​10​.1068/​a4262 Majee, W., & Hoyt, A. (2011). Cooperatives and Community Development: A Perspective on the Use of Cooperatives in Development. Journal of Community Practice, 19(1), 48–61. https://​doi​.org/​10​.1080/​ 10705422​.2011​.550260 Maldonado, R., & Rose, R.D. (1995). The Application of Civil Rights Laws to Housing Cooperatives: Are Cooperatives Bastions of Discriminatory Exclusion or Self-selecting Models of Community-based Living. Fordham Urban Law Journal, 23(4), 1245–82. Mestres, S.G., & Lien, M.E. (2017). Recovering Food Commons in Post Industrial Europe: Cooperation Networks in Organic Food Provisioning in Catalonia and Norway. Journal of Agricultural and Environmental Ethics, 30(5), 625–43. https://​doi​.org/​10​.1007/​s10806​-017​-9691​-6 Michelson, M. (2015, September 25). REI Co-Op Brand Gets an Overhaul. www​.rei​.com/​blog/​camp/​rei​ -co​-op​-brand​-gets​-an​-overhaul Mikami, K. (2003). Market Power and the Form of Enterprise: Capitalist Firms, Worker-owned Firms and Consumer Cooperatives. Journal of Economic Behavior & Organization, 52(4), 533–52. https://​ doi​.org/​10​.1016/​S0167​-2681(03)00089​-1 Mikami, K. (2007). Asymmetric Information and the Form of Enterprise: Capitalist Firms and Consumer Cooperatives. Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift Für Die Gesamte Staatswissenschaft, 163(2), 297–312. Moon, S. (2021). Women’s Food Work, Food Citizenship, & Transnational Consumer Capitalism: A Case Study of a Feminist Food Cooperative in South Korea. Food, Culture & Society, 1–19. https://​ doi​.org/​10​.1080/​15528014​.2021​.1892255 Morris-Suzuki, T. (2017). Cooperatives and Grassroots Developments. In S. Saaler & C.W. A. Szpilman (eds), Routledge Handbook of Modern Japanese History (1st ed., pp.310–23). Routledge. https://​doi​ .org/​10​.4324/​9781315746678​-22 Morse, L. B. (2000). A Case for Water Utilities as Cooperatives and the UK Experience. Annals of Public and Cooperative Economics, 71(3), 467–95. https://​doi​.org/​10​.1111/​1467​-8292​.00149 Muñoz, P., Kimmitt, J., & Dimov, D. (2020). Packs, Troops and Herds: Prosocial Cooperatives and Innovation in the New Normal. Journal of Management Studies, 57(3), 470–504. https://​doi​.org/​10​ .1111/​joms​.12542 Mushonga, M., Arun, T.G., & Marwa, N.W. (2019). The Cooperative Movement in South Africa: Can Financial Cooperatives become Sustainable Enterprises? Strategic Change, 28(4), 259–71. https://​doi​ .org/​10​.1002/​jsc​.2268 NCBA CLUSA. (2022). Food and Grocery Cooperatives. https://​ncbaclusa​.coop/​resources/​co​-op​ -sectors/​food​-and​-grocery​-cooperatives/​ NCG [National Cooperative Grocers] (2021). About Us. https://​www​.ncg​.coop/​about​-us. Nie, C., & Zepeda, L. (2011). Lifestyle Segmentation of US Food Shoppers to Examine Organic and Local Food Consumption. Appetite, 57(1), 28–37. https://​doi​.org/​10​.1016/​j​.appet​.2011​.03​.012 Nilsson, J. (1985). Consumer Cooperatives as Consumer Welfare Organizations. Journal of Consumer Policy, 8(3), 287–301. https://​doi​.org/​10​.1007/​BF00380386 Öz, Ö., & Aksoy, Z. (2019). Challenges of building alternatives: The experience of a consumer food co-operative in Istanbul. Food, Culture & Society, 22(3), 299–315. https://​doi​.org/​10​.1080/​15528014​ .2019​.1596529 Pak, M.S., & Kim, J. (2016). Ecophilosophy in Modern East Asia: The Case of Hansalim in South Korea. Problems of Sustainable Development, 11(1), 15–22. Patmore, G., & Balnave, N. (2018). A Global History of Co-operative Business (1st ed.). Routledge. Pencavel, J. (2020). The Performance of Consumers’ Cooperatives in America. IZA Institute of Labor Economics 59. Phillips, R. (2012). Food Cooperatives as Community-level Self-help and Development. International Journal of Self Help and Self Care, 6(2), 189–203. https://​doi​.org/​10​.2190/​SH​.6​.2​.f

472  Handbook of research on cooperatives and mutuals Rajasekhar, D., Manjula, R., & Paranjothi, T. (eds). (2020). Cooperatives and Social Innovation: Experiences from the Asia Pacific Region. Springer Singapore. https://​doi​.org/​10​.1007/​978​-981​-15​ -8880​-8 Rakopoulos, T. (2019). Seventy Percent Zapatista? Solidarity “Ecosystems” and the Troubles of Valuing Labor in Food Cooperatives. In V. Siniscalchi & K. Harper (eds), Food Values in Europe. Bloomsbury Academic. https://​doi​.org/​10​.5040/​9781350084803 Restakis, J. (2008). Co-op Elder Care in Canada: A Call to Action National Task Force on Co-op Elder Care. British Columbia Co-operative Association. https://​bcca​.coop/​files/​Co​-op​%20Elder​%20Care​ %20Reportv2​.pdf Robertson, N. (2016). The Co-operative Movement and Communities in Britain, 1914–1960: Minding Their Own Business. Routledge. Robinson-Bertoni, S. (2017). Re-territorializing Religiosity in Wholesome Muslim Praxis. Religions, 8(7), 132. https://​doi​.org/​10​.3390/​rel8070132 Ruiz-Mier, F., & van Ginneken, M. (2006). Consumer Cooperatives: An Alternative Institutional Model for Delivery of Urban Water Supply and Sanitation Services? (Note No. 5 (35547); Water Supply & Sanitation Working Notes, p.31). World Bank. Sadowski, B.M. (2017). Consumer Cooperatives as an Alternative Form of Governance: The Case of the Broadband Industry. Economic Systems, 41(1), 86–97. https://​doi​.org/​10​.1016/​j​.ecosys​.2016​.04​.004 Sagebiel, J., Müller, J.R., & Rommel, J. (2014). Are Consumers Willing to Pay More for Electricity from Cooperatives? Results from an Online Choice Experiment in Germany. Energy Research & Social Science, 2, 90–101. https://​doi​.org/​10​.1016/​j​.erss​.2014​.04​.003 Sandler, T., & Tschirhart, J. (1981). On the Number and Membership Size of Consumer Managed Firms. Southern Economic Journal, 47(4), 1086–91. https://​doi​.org/​10​.2307/​1058166 Sarang, S., & Vena, N. (2018). Forging Food Justice through Cooperatives in New York City. Fordham Urban Law Journal, 45, 909–50. Sarmiento, E. (2015). Umwelt, Food, and the Limits of Control. Emotion, Space and Society, 14, 74–83. https://​doi​.org/​10​.1016/​j​.emospa​.2013​.08​.008 Saulters, M.M., Hendrickson, M.K., & Chaddad, F. (2018). Fairness in Alternative Food Networks: An Exploration with Midwestern Social Entrepreneurs. Agriculture and Human Values, 35(3), 611–21. https://​doi​.org/​10​.1007/​s10460​-018​-9852​-x Sazama, G. (1996). A Brief History of Affordable Housing Cooperatives in the United States. Economics Working Papers. https://​opencommons​.uconn​.edu/​econ​_wpapers/​199609 Sazama, G.W. (2000). Lessons from the History of Affordable Housing Cooperatives in the United States: A Case Study in American Affordable Housing Policy. American Journal of Economics and Sociology, 59(4), 573–608. https://​doi​.org/​10​.1111/​1536​-7150​.00045 Schiferl, E.A., & Boynton, R.D. (1983). A Comparative Performance Analysis of New Wave Food Cooperatives and Private Food Stores. Journal of Consumer Affairs, 17(2), 336–55. Sexton, R.J. (1983). Economic Considerations in Forming Consumer Cooperatives and Establishing Pricing and Financing Policies. Journal of Consumer Affairs, 17(2), 290–314. https://​doi​.org/​10​.1111/​ j​.1745​-6606​.1983​.tb00305​.x Sommer, R. (1998). Shopping at the Co-op. Journal of Environmental Psychology, 18(1), 45–53. https://​ doi​.org/​10​.1006/​jevp​.1997​.0063 Sommer, R., & Hohn, W. (1983). Prices in Large and Small Cooperatives. Journal of Consumer Studies and Home Economics, 7(1), 7–16. https://​doi​.org/​10​.1111/​j​.1470​-6431​.1983​.tb00083​.x Sorescu, A., Frambach, R.T., Singh, J., Rangaswamy, A., & Bridges, C. (2011). Innovations in Retail Business Models. Journal of Retailing, 87, S3–S16. https://​doi​.org/​10​.1016/​j​.jretai​.2011​.04​.005 Starr, P. (1993). Perspectives: Design of Health Insurance Purchasing Cooperatives. Health Affairs, 12(suppl 1), 58–64. https://​doi​.org/​10​.1377/​hlthaff​.12​.Suppl​_1​.58 Steinman, J. (2021). Food Co-op Directory. Grocery Story. https://​grocerystory​.coop/​food​-co​-op​ -directory Sullivan, D.M. (2006). Assessing Residents’ Opinions on Changes in a Gentrifying Neighborhood: A Case Study of the Alberta Neighborhood in Portland, Oregon. Housing Policy Debate, 17(3), 595–624. https://​doi​.org/​10​.1080/​10511482​.2006​.9521583 Sundaram-Stukel, R., & Deller, S. (2009). Farmer Health Insurance Cooperatives: An Innovative Solution for Other Americans? Choices, 24(4). www​.jstor​.org/​stable/​choices​.24​.4​.11

Consumer cooperatives: purpose and possibilities  473 Talonen, A., Jussila, I., Saarijärvi, H., & Rintamäki, T. (2016). Consumer Cooperatives: Uncovering the Value Potential of Customer Ownership. AMS Review, 6(3–4), 142–56. https://​doi​.org/​10​.1007/​ s13162​-016​-0083​-2 Tavella, E., & Papadopoulos, T. (2017). Applying OR to Problem Situations within Community Organisations: A Case in a Danish Non-profit, Member-driven Food Cooperative. European Journal of Operational Research, 258(2), 726–42. https://​doi​.org/​10​.1016/​j​.ejor​.2016​.08​.065 Thompson, D.J. (1994). Weavers of Dreams: Founders of the Modern Cooperative Movement (150th Anniversary Edition). Regents of the University of California. Tremblay, E., Hupper, A., & Waring, T.M. (2019). Co-operatives Exhibit Greater Behavioral Cooperation than Comparable Businesses: Experimental Evidence. Journal of Co-Operative Organization and Management, 7(2), 100092. https://​doi​.org/​10​.1016/​j​.jcom​.2019​.100092 Tuominen, P., Jussila, I., & Kojonen, S. (2009). Overcoming Challenges to Governance in Consumer Co-operatives: Analysing Reports of Key Representatives. International Journal of Co-operative Management, 4(2), 14. University of Georgia. (2017, January 5). Worker-owned cooperatives may help address elder care deficit. ScienceDaily. www​.sciencedaily​.com/​releases/​2017/​01/​170105144449​.htm Vamstad, J. (2016). Bottom-up Childcare in a Top-Down Welfare State: Explaining Cooperative Organization among Swedish Parents. International Review of Sociology, 26(1), 69–81. https://​doi​ .org/​10​.1080/​03906701​.2016​.1148345 Vierheller, R. (1994). Oligarchy in co-operatives. In International Handbook of Co-operative Organizations (pp.647–51). Weber, K., Heinze, K.L., & DeSoucey, M. (2008). Forage for Thought: Mobilizing Codes in the Movement for Grass-fed Meat and Dairy Products. Administrative Science Quarterly, 53(3), 529–67. https://​doi​.org/​10​.2189/​asqu​.53​.3​.529 Wicks, E.K., & Hall, M.A. (2000). Purchasing Cooperatives for Small Employers: Performance and Prospects. The Milbank Quarterly, 78(4), 511–46. https://​doi​.org/​10​.1111/​1468​-0009​.00184 Zager, M. (2013). Electric Cooperatives Build FTTH Networks. Broadband Communities, March/April, 18–25. Zeuli, K., Freshwater, D., Markley, D., & Barkley, D. (2004). Cooperatives in Rural Community Development: A New Framework for Analysis. Community Development Society. Journal, 35(2), 17–35. https://​doi​.org/​10​.1080/​15575330409490130

GLOSSARY Consumer-owner

A consumer-owner is a consumer who has an ownership share in a consumer cooperative

Consumer cooperative

A consumer cooperative is an organization whose consumer-owners are those who obtain final-stage goods and services through their patronage of the cooperative

29. Product innovation and promotion of value-added products via marketing cooperatives1 Kristin Kiesel, Sean Kiely, and Rachael E. Goodhue

INTRODUCTION This chapter argues that marketing cooperatives (MCs) can explore unique marketing opportunities when producing and marketing value-added foods with credence quality dimensions. Credence qualities, defined by information provision about product attributes not easily verified even after purchase and consumption (for example, nutrition content; organic and local production), have fundamentally changed consumer demands. As a result, manufactures and retailers continue to explore branding opportunities to supply products that meet belief-based consumer preferences. The organizational structure and commonly agreed-upon cooperative principles can give product-specific marketing messages communicated by cooperatives greater credibility and authenticity than claims made by investor-owned firms (IOFs) in this context. Cooperatives are user-owned, user-controlled, and user-benefiting organizations that can pursue a richer set of objectives than the profit-maximizing principle that guides IOFs. They can create economies of scale and cost savings through collective marketing efforts, and their cooperative identity can create brand recognition and brand loyalty among consumers. MCs are prevalent especially in agricultural markets. Yet, many primarily operate in commodity markets and first-stage food manufacturing. Relatively few currently sell well-recognized consumer brands. Those that successfully do—such as Sun-Maid (raisins), Land O’ Lakes (butter), Organic Valley (milk), Ocean Spray (cranberry products), and Blue Diamond (almonds)—operate in commodity markets or industries also served by marketing orders (MOs). Once approved, MOs are regulated producer organizations funded by mandatory contributions from entire industries in specified geographical areas. They can provide similar services as MCs and refine unique marketing and branding opportunities for cooperatives that offer healthier, more sustainable, and locally produced foods to consumers. The existing literature on cooperatives provides a detailed discussion of vertical integration as a critical factor for success (for example, Sexton and Iskow, 1988). The literature also discusses potential tradeoffs between increased commodity or product category demand and reduced possibilities for product differentiation and branding within industries that historically benefitted from the existence of MOs (for example, Crespi and Marette, 2002). We review these two strands of literature and move the discussion of the economic functions of cooperatives and marketing opportunities squarely into modern markets characterized by complex consumer preferences for a multitude of credence quality dimensions. Our emphasis is on US agricultural cooperatives and food production. However, the concepts discussed in this chapter apply to other regions and markets. Consistent with the existing 474

Product innovation and promotion of value-added products  475 literature and available statistics, we define an MC as a cooperative for which the majority of its business volume can be traced back to the sale of its members’ commodities (see Cropp and Ingalsbe, 1989; USDA, 2019). Modern agricultural cooperatives vary significantly in their activities. Few can be classified as strictly bargaining or processing cooperatives. Thus, our definition of MCs includes cooperatives that also engage in bargaining and processing activities.2 Half of the 1,779 agricultural cooperatives reported in 2019 by USDA were classified as MCs, and they accounted for 73 percent of the dollar sales of agricultural cooperatives (Figure 29.1). Supply and service cooperatives generated the remaining 27 percent of dollar sales.

Source: USDA Rural Development, Agricultural Cooperative Statistics 2019.

Figure 29.1

Number and total sales of agricultural cooperatives by type (2019)

The majority of MCs (85 percent) operate in one state and focus on first-seller commodity markets, although MCs are diverse in terms of the scale of production, size of geographic markets, and marketing channels. Our discussion of unique marketing opportunities is most applicable to regionally organized marketing cooperatives with the general purpose of increasing margins and avoiding market power by buyers and sellers (Sapiro II cooperatives; see Cook, 1995). These types of MCs are moving beyond first-seller commodity markets, and are exploring opportunities to sell their specialty crops in retail markets that are much larger or removed from the geographic area of their operation or membership base. Applied research on cooperatives as marketers of branded products is limited, and we are not aware of any studies that systematically evaluate branding opportunities for MCs. We argue that MCs will be most successful when they utilize production and market research provided by MOs and pursue product innovations that provide health benefits, invest in environmental

476  Handbook of research on cooperatives and mutuals stewardship, and positively impact the communities in which they operate. They can benefit from primarily informative advertising provided by MOs that reduces consumer search costs for these type of credence qualities and raise consumer awareness of their cooperative identity to more credibly and authentically communicate added value along these dimensions than their IOF competitors. To accentuate our hypothesis, we discuss the case of Blue Diamond (a large, centralized marketing cooperative representing California almond growers) and the Almond Board of California (a federal marketing order). It illustrates that coordinated research and complementary advertising enabled Blue Diamond’s long-term growth and success. The remainder of the chapter is organized as follows. The next section briefly defines MCs and MOs and discusses significant changes in the structure of modern agricultural markets. The theoretical foundations of our discussion of marketing opportunities for MCs and complementary functions MOs can provide are then introduced. We develop MCs’ possible competitive advantage when positioning their products in modern agricultural markets before we discuss the services provided by the Almond Board of California and strategies pursued by Blue Diamond as an illustrative case study. The chapter concludes with a discussion of remaining challenges and future research directions.

MARKETING ORDERS AND MARKETING COOPERATIVES IN MODERN AGRICULTURAL MARKETS Both MOs and MCs develop out of necessity, providing producers with an organizational structure to collectively address production and marketing problems. Visualizing the US agro-food system as a river with farm operations at its center, raw materials flow as inputs into the production of commodities by farmers. Commodities are then processed and packaged, distributed, and ultimately sold to the consumer by retailers (see Figure 29.2). MCs can be viewed as an endogenous (within-market) institutional or organizational response to missing markets (Hueth, 2014) or as customers entering a market to beneficially affect market performance (Sexton and Sexton, 1987). MCs allow farmers to horizontally coordinate and use economies of scale to increase their bargaining power in contracts with companies located upstream or downstream. They can also vertically integrate into stages of the supply chain where existing market power limits their economic opportunities. Here, we focus on MCs’ ability to integrate downstream and their provision of marketing functions that promote consumer products.3 MCs process their members’ commodities, produce and package consumer products, and sell them to wholesalers and distributors at more favorable prices. Some also distribute their products to retailers or directly to consumers (Figure 29.3). Capturing and decreasing intermediaries’ margins or increasing the price consumers are willing to pay for cooperatives’ value-added products allows them to improve their members’ farmgate prices received. In contrast, MOs result from regulatory action supported by federal or state law. Formed when most farmers and handlers (by number or volume) in an industry vote to establish a MO, membership becomes mandatory for all producers of a specific commodity in a particular geographic region. They have been a mainstay in US agricultural policy since the 1930s, and are often described as a necessary regulatory tool to address the free-rider problem in collective action and investments that result in benefits that are non-excludable. For example, most individual producers are not incentivized to fund research and promotion activities in competitive

Product innovation and promotion of value-added products  477

Source: Adopted from Sexton and Iskow (1988).

Figure 29.2

Market flow of agricultural products in the food industry

commodity markets that develop value-added products or branding. However, if one producer does invest in such activities, all other producers would benefit from this effort despite not bearing the costs. When there is an MO that mandates investments from all producers in an industry, though, all producers receive the collective benefits and share the cost proportional to their production. Per-unit assessments on sales are collected to fund the functions MOs provide to producers in the industry in which they operate. Specific activities pursued by each marketing order are defined by federal or state regulation or by MO-specific laws under which they operate. These activities include promotion and advertising, production and market research, data collection and information provision, pack and container regulation, inspections, grade and quality standards, and volume controls. Once in operation, both MOs and MCs need to effectively serve their members to remain relevant and continue to exist. Even though membership in MOs is mandatory, a member referendum can result in their termination (see Plakias et al., 2020b). Both producer organizations are established to support the economic viability of their members’ operations, but their marketing functions differ in scope and execution (see Table 29.1). While some marketing orders can engage in volume controls under their authorizing regulation or law, many have

478  Handbook of research on cooperatives and mutuals Table 29.1

Marketing functions provided by marketing orders and cooperatives to producers in an industry

Functions provided by marketing orders to all producers in an

Functions provided by marketing cooperatives to select

industry

producers in an industry

● Investment in production and market research

● Cooperative education

● Data collection and information provision

● Receiving, pooling and storing of commodities

● Development of grade and quality standards

● Processing and packaging of value-added products

● Advancement of pack and container regulation

● Bargaining and negotiation of contracts

● Enforcement of regulations via inspections

● Product innovation and differentiation

● Commodity promotion and generic advertising

● Marketing and brand-specific advertising

● Establishment of volume controls

Source: Generated by Authors.

not exercised or have even suspended their volume controls in recent years in favor of a larger emphasis on marketing efforts (Goodhue and Kaiser, 2020). Modern Agricultural Markets Mandatory check-off programs and fee assessments established by MOs continue to be the subject of much dispute and legal action, pointing to the changing nature of markets. Agricultural markets have evolved from commodity-based markets selling large quantities of homogenous crops to differentiated-product markets with increasing concentration in manufacturing and retail (Grunert, 2005; Sexton, 2013; Saitone and Sexton, 2017). The development of new and improved agricultural production practices and post-harvest technologies is driven by increasingly complex consumer demands over a myriad of quality dimensions. Producers must engage in continuous product innovation to stay relevant. The United States Department of Agriculture (USDA) defines “value-added products as foods [processed] in a way that increases the value and those that were physically altered (for example, strawberries made into jam)” (USDA, 2021a). Importantly, not all processing increases consumers’ willingness to pay. Canned and frozen fruits and vegetables are commonly viewed as lower-quality substitutes to fresh fruits and vegetables. Processing can simply convert a highly perishable high-value crop (for example, fresh tomatoes) into a highly storable good that is cheaper to transport (for example, tomato paste), while further processing of tomato paste into pasta sauce and salsas with unique flavor profiles can add value and offer branding opportunities. Consumers have limited first-hand knowledge about agricultural production processes. Only 1 percent of the US labor force worked in farming in 2020, compared to 30 percent when MOs and MCs such as Blue Diamond were first formed (USDA, 2021d).4 Whether new production and processing methods provide agricultural producers with the means to increase revenue will critically depend on identity-preserving marketing systems and the ability to disclose information in compelling and easily accessible ways that meet consumer expectations and align with their belief-based preferences. For instance, consumers increasingly value organic and locally produced foods that are indistinguishable from conventionally produced foods if not labeled as such. The food and beverage sector recognizes the role of labels in attracting consumers. In 2020, USDA reported that 20,341 new food and beverage products were introduced (see Figure

Product innovation and promotion of value-added products  479 29.3), with more than 90,512 claims made on their packages. A number of the claims had not been previously recorded, regulated, or certified (USDA, 2021c).

Note: Consumer packaged goods are defined as products used daily by average consumers that require routine replacement or replenishment, such as food, beverages, clothes, personal care items, and household products. Source: USDA, ERS, using data from Mintel’s Global New Product Database (Data as of May 2021).

Figure 29.3

New product introductions of consumer packaged goods, 1998–2020

Much of the literature evaluating the performance of MOs and MCs focuses on commodity markets, competitive market clearing, and contracting with first handlers, and discusses the provision of largely homogenous products. It rarely portrays cooperatives and their competitors as branded product marketers.

FOUNDATIONS OF POSSIBLE MARKETING ADVANTAGES FOR COOPERATIVES We use the concepts of the marketing margin and vertical integration to discuss key marketing functions supported by voluntary or mandatory coordination of actions performed by producer organizations, and support our discussion with insights developed in the advertising literature. A marketing margin denotes the difference between the price at which another company purchases a commodity (farmgate or commodity price) and the price at which final products are sold to the consumer (retail price). Despite increased consumer willingness to pay for products with multiple quality dimensions, the grower’s share of food market baskets remains relatively low, at 16 percent on average. Even for minimally processed fresh fruits and vegetables, the margin amounts to only 25 percent (USDA, 2021b).

480  Handbook of research on cooperatives and mutuals The primary economic function MOs and MCs provide is to allow producers to act collectively. They can address the changing structure of modern agricultural markets and contribute to the economic viability of farmers in four key ways: (1) restrict the flow of farm product to downstream markets; (2) increase the scale of operations to overcome capital requirements, and counterbalance manufacturer and retail market power; (3) vertically integrate beyond first-level downstream operations to market products more efficiently or internalize marketing margins; (4) invest in product innovation and branding to improve consumers’ willingness to pay and increase both retail and commodity prices. Vertical contracts and integration have become common practices and are utilized widely in agricultural markets (Goodhue, 2011). Small and medium-sized producers cannot restrict the flow of products, overcome capital requirements, counterbalance downstream market power, or market their products effectively to consumers, however. While many producers have tried to fully vertically integrate and sell directly to the consumer (DTC), scale limitations and overall inefficiencies limit their opportunities to increase farm revenue in the DTC channel. Despite increased participation in DTC marketing channels, overall dollar sales did not. DTC sales remain a small segment of the market and opportunities to generate additional revenue are limited (Low et al., 2015, Plakias et al., 2020a). Producer organizations can allow small and medium-sized farmers and food entrepreneurs to more meaningfully address existing market failures. Yet, collective decision-making might not be sufficient to ensure that producer organizations succeed in today’s agricultural markets. Organizations that focus solely on volume restrictions to regulate commodity prices are usually short-lived and have little impact on their members’ economic success (Cook, 1995). Only cooperatives that vertically integrate and collectively invest in research, product innovation, and marketing can pay their members more favorable farmgate prices than contracts with large IOFs that have buying power (for example, Rogers and Sexton, 1994).5 Adherence to cooperative principles can create hard to overcome structural disadvantages when trying to compete with large food companies and household names such as Nestlé, PepsiCo, or Kraft, or private labels increasingly established by large retailers (for example, Costco, Safeway, Amazon/Wholefoods). As users of a cooperative, producers might primarily be looking for a home for their harvests, resulting in only seasonal product availability. As owners they receive net margins in proportion to their patronage rather than as return on investments that can secure year-round availability and more versatile product lines. Brand building requires significant investments in product development and marketing over several years. But a patronage-based earnings structure can both enable members to receive the benefits without having contributed (free-rider problem), and limit cooperative returns in the short term (horizon problem). Member retains are their primary source of equity and can make delivery prices appear lower than commercial prices received for their commodity. Finally, the boards of MCs are made up almost exclusively of producer-members who lack the marketing expertise needed to oversee effective branding strategies, resulting in the principal-agent problem (Hardesty, 2005a). Nevertheless, MCs can offset these disadvantages and meaningfully differentiate their products in modern agricultural markets by exploiting the fact that they are directly sourcing commodities from producer-members as a marketing advantage. Effective communication of their

Product innovation and promotion of value-added products  481 cooperative identity through compelling storytelling can further strengthen brand recognition consumers’ preferences for their foods advertised as healthy, sustainable, or locally produced. Informative versus Persuasive Advertising as Effective Marketing Strategies Nelson (1970; 1974) first argued that marketing strategies and advertising pursued by firms are primarily a result of consumer decision-making under uncertainty. The uncertainty results from unknown characteristics of the set of products available and the consumption value consumers may receive. Some quality dimensions, such as size and color, are easily observed and costlessly searchable before purchase. Others, such as taste and texture, can be experienced. Consumers can resolve all uncertainties about these quality differences post-purchase. Consumers can also search for these attributes and quality differences (for example, by using consumer reports) before purchase, and producers can aim to reduce their search costs by offering free samples. Darby and Karni (1973) introduced credence attributes as an additional quality dimension. Unlike search and experience attributes, the accuracy of claims about credence attributes such as nutrient content or specific production processes (for example, organic and local production) cannot be verified by consumers even after purchase. When discussing advertising for credence quality dimensions, it is important to distinguish between informative and persuasive advertising. Informative advertising presents facts or clear definitions and allows consumers to form accurate expectations or correct biases. In contrast, persuasive advertising relies on emotional appeals to alert consumers to the existence of a product, tapping into their feelings or reinforcing subjectively held beliefs. Regulated claims and third-party or government certifications can turn credence qualities into searchable attributes (for example, Nutrition Facts Panel and the USDA National Organic Program). In other words, uniformly agreed-upon and enforced standards can turn claims into facts. However, consumer uncertainty regarding credence attributes cannot fully be resolved post-purchase by uniform standards and clear label definitions. Consumers may continue to rely on perceptions formed based on previous experiences or subjective beliefs. For example, advertised health benefits might only be observable over time and cannot be easily traced to consuming a particular food or beverage. Brand preference and loyalty is primarily a result of positive and memorable experiences. Persuasive advertising provides stronger branding opportunities to producers. Consumers react more strongly to emotions and can access their feelings more easily than facts, although informative advertising can be more beneficial to consumers. It allows them to adjust their purchases and consume goods that are verifiably better aligned with their values. The behavioral economics literature further illustrates that even when objectively accurate information is available, consumers might not properly update their perceptions and assumptions (Tversky and Kahneman, 1983; Rabin and Schrag, 1999; Zimmerman, 2020; Malmendier, 2021). Consumers are not only constrained by their income but also by their time and cognitive abilities. They may only selectively pay attention and adjust their beliefs only when newly available information reinforces previously held beliefs. Product differentiation in today’s retail environment therefore results from both informative and persuasive advertising. Informative advertising could reduce some consumers’ willingness to pay (Johnson and Myatt, 2006), but brands that reinforce uniformly defined credence qualities via persuasive advertising can create brand loyalty (for example, Kiesel et al. 2011;

482  Handbook of research on cooperatives and mutuals Villas-Boas et al., 2020; Kiesel and Spalding, 2019). The relative efficacy of informative versus persuasive advertising depends on the severity of information asymmetries between consumers and producers, the existing biases of strongly held consumer beliefs, and the accessibility of information or cost to the consumer of becoming more informed. Consumers desire brands that align with their values and demand transparency about how, where, and by whom their food is produced. The relatively small share of food expenditures in their overall budgets, limited knowledge about agricultural supply chains and production processes, and time constraints might prevent consumers from critically evaluating claims made by established brands, however. Consequently, consumers might not always be aware of alternative products that are more closely aligned with their values and might not seek these out. Possible Complementarities between Marketing Orders and Marketing Cooperatives While the production and market research funded by MOs is intended to benefit all producers in an industry, the net benefits of commodity promotion and generic advertising may vary significantly across producers. These services provided by MOs could be perceived as suboptimal substitutes to brand-specific marketing efforts, and could reduce returns for producers that already effectively market their products to consumers (Crespi and Marette, 2002). Funded by per-unit assessment k, which can be visualized as a parallel inward shift of supply (see Figure 29.4), MOs mainly provide informative advertising about commodity characteristics (for example, nutrition intake and health benefits from consuming certain fruits and vegetables). They can only differentiate their members’ products from similar products produced in other regions and countries via additional persuasive advertising. Their marketing actions shift commodity demand out to the right, depicted as a parallel shift by r for simplicity. The resulting new equilibrium price P2=P1+r would benefit all farmers as long as r>k or the new commodity price net of tax, P2–k, exceeds P1. Check-off assessment rates are usually less than 1 percent of sales value, and farmers who sell in commodity markets likely benefit from even small increases in demand. Thus, empirical analyses focusing on commodity markets have consistently found that MOs increase producer and consumer welfare overall (for example, Alston et al., 2007). However, benefits are only equal across producers who process commodities and market products when consumers do not perceive retail products differently (Crespi and Marette, 2002, 2003). For producers or processors that offer differentiated products, the benefit of increased commodity demand from generic advertising might be overshadowed its potential to reduce product differentiation. To illustrate the above scenario, assume that one unit of a farm commodity is converted into one unit of a branded retail product (holding other average and marginal costs constant and setting them equal to zero for simplicity). Promotional efforts and generic advertising could either reinforce consumers’ previously held beliefs and brand preferences independent of their initial willingness to pay (Panel (a) of Figure 29.5) or reduce product differentiation and the value of branded products perceived by at least some consumers (Panel (b) of Figure 29.5). For example, while some activities pursued by MOs could be complementary to brand-specific marketing efforts, highlighting health benefits or effectively communicating an overall higher quality of specialty crops produced in certain regions could reduce brand preference and willingness to pay of previously loyal consumers who believed only a particular branded product offered these benefits. Even if the generic advertising attracts new consumers (with a lower

Product innovation and promotion of value-added products  483

Source: Adopted from Alston et al. (2007).

Figure 29.4

A commodity market model of MOs’ check-off programs

willingness to pay) to this brand, the manufacturer could be worse off through a MO’s generic advertising.

Note: Panel (a) depicts a scenario in which generic advertising is complementary to brand-specific marketing efforts at all possible price-quantity combinations and unambiguously benefit establish brands while panel (b) illustrates a scenario in which generic advertising could be a substitute to brand-specific marketing MCs and IOFs engage in and result in net costs to an established brand. Source: Generated by authors.

Figure 29.5

Effect of generic advertising on producers or manufacturers’ demand for differentiated products

484  Handbook of research on cooperatives and mutuals Crespi and Marette (2002, 2003) formally modeled the scenarios in Figure 29.5. They hypothesize that producers with well-recognized consumer brands may view the commodity promotion and generic advertising function of MOs as non-complementary to their brand-specific advertising. The authors provide empirical evidence supporting their analysis using retail-market sales and advertising data for the US prune industry. Isariyawongsen et al. (2009) provide further insight into when firms might view generic advertising as complementary to brand-specific advertising. They assess interactions between informative and persuasive advertising and show that firms can benefit from generic advertising that is informative if it lowers consumer search costs for credence attributes. However, informative advertising can be a suboptimal or imperfect substitute if it makes scientific information more easily accessible and educates consumers to disentangle and rank-order a multitude of claims regarding complex quality dimensions. They also conclude that persuasive advertising that increases brand value across competitors can be viewed as a strategic complement to brand-specific marketing efforts. Losses and anticipated losses in brand equity due to generic advertising would restrict some producers’ willingness to pay for activities pursued by MOs. Greater variability in returns due to more frequent new product introductions further decreases the probability of being in favor of generic advertising and services provided by MOs (Liaukonyte et al., 2015). IOFs own most well-recognized consumer food and beverage brands, and these companies are responsible for the majority of new product introductions. These large companies with profit-generating consumer brands benefit relatively less from research funded by MOs and may be able to fund their own production and market research. The analysis of survey data on why producers voted to terminate the California fresh peach and nectarine marketing orders confirms these findings (Plakias et al., 2020b). Larger producers that maintained consumer brands were less likely to vote for continuation, while smaller producers and producers engaged in organic production were more likely to vote for continuation and the existence of MOs. MOs will likely need to modify their services to remain relevant to all industry stakeholders. Persuasive advertising—storytelling and emotional appeals—are perhaps more effectively implemented by established brands, and can result in positive spillover effects for all producers in an industry. For example, The Wonderful Company (Halos) and Sun Pacific (Cuties) pursued marketing and branding efforts that increased mandarin sales overall. Implementing credit-back programs that reward and reimburse producers or processors for their advertising and promotional efforts can be a step in acknowledging the complementarity and effectiveness of these efforts (Goodhue and Kaiser, 2020). MCs can benefit from the services offered by MOs and can support the continuation of existing check-off programs and services provided by MOs. Members of cooperatives can vote as a block in marketing-order referenda. MCs might also have competitive advantages over IOFs when marketing high-quality retail products differentiated by a variety of credence attributes. We argue that these branding opportunities for cooperatives are currently underexploited in the food industry as a whole.

Product innovation and promotion of value-added products  485

UNIQUE BRANDING OPPORTUNITIES FOR MARKETING COOPERATIVES Vertical integration is critical to the long-term success of MCs in today’s agricultural markets (for example, Sexton and Iskow, 1988). Many cooperatives have opted to engage in vertical integration to capture a larger share of marketing margins. Yet, only a limited number of studies analyze branding opportunities for MCs. Grashuis (2019) analyze 707 US marketing cooperatives and report a positive relationship between brand equity and financial performance in general, and Gruber et al. (2000) find that advertising intensity increases when brands operate as cooperatives compared to IOFs. Finally, Hardesty (2005a and b) highlights successful strategies pursued by California’s agricultural cooperatives (for example, Organic Valley, Naturipe, and Sunkist). In general, MCs exploring branding opportunities in retail markets can capture consumers’ attention in two ways: through cost-leadership with branded and private label products or through meaningful product differentiation.6 While many MCs have chosen the cost-leadership strategy in the past (Hardesty, 2005a), increased concentration in manufacturing and retail markets, especially the development of vertical contracts and vertically integrated private label retail brands, makes it increasingly challenging to increase sales and pay higher returns to their members by pursuing this strategy alone. MCs, therefore, must engage in meaningful product innovation. Food is one of the most highly branded categories in US retail, and successful brands need to continuously cater to consumers’ changing wants. Product life cycles are an important consideration in effective marketing strategies, and product innovations ensure that consumers can build lasting habits and seek variety without switching brands. Successful innovations extend the life cycles of existing products and result in new product introductions. They ensure optimal levels of brand equity over time (see Figure 29.6).

Note: Product innovations can extend existing products’ life cycles and ultimately replace declining products with new product introductions. Source: Generated by authors.

Figure 29.6

Extension and renewal of brand equity by product innovation

486  Handbook of research on cooperatives and mutuals MCs face unique challenges when pursuing product innovations. User-owners receive net margins in proportion to their patronage rather than as return on investments, and the user-financed and controlled principle results in the horizon and principal-agent problems (for example, Cobia and Anderson, 1988; Hardesty, 2005a). Nevertheless, Saitone and Sexton (2017) suggest that producer-controlled marketing organizations can overcome high fixed costs of innovation and support quality differentiation. They define research, product development, and certification of credence attributes as possible functions producer organizations can provide. We extend their argument to suggest that the services MOs and MCs provide to their members can complement and enable vertically integrated MCs to better compete with consumer brands owned by IOFs. Importantly, their cooperative identity and the ability to differentiate their products in more dimensions than by growing region or country can provide MCs with a competitive advantage. Differentiation and product positioning in health benefits provided, environmental stewardship, and community impacts are aligned with cooperative principles. MCs can exploit the fact that they are acquiring the raw product directly from their producer-members as a marketing advantage and increase transparency and traceability compared to similar claims made by IOFs. Consumers generally perceive products marketed by MCs as higher quality. In a 2003 nationwide survey, 69 percent of the consumers indicated that they were more likely to purchase food produced by a farmer-owned cooperative, and 64 percent agreed that food produced by a farmer-owned cooperative was of better quality than food produced by other types of companies (Hardesty, 2005b). A significant share of consumers also value knowing how their food is produced (Magnusson and Cranfield, 2005; Bernard and Bernard, 2010; Loureiro and Rahmani, 2016; Edenbrandt et al., 2018), where it is produced (DePelsmacker et al., 2005; Loureiro and Lotade, 2005; Hainmueller et al., 2011; Loureiro and Hain, 2015), and by whom (Cirne et al., 2019; Wang et al., 2015; Balogh et al., 2016). The existing literature further suggests that branded messages are more effective than regulated or certified claims at communicating credence qualities such as nutrition benefits (for example, Kiesel et al., 2011, Kiesel and Villas-Boas, 2013, Villas-Boas et al., 2020), organic production (for example, Kiesel et al., 2005, Kiesel and Villas-Boas, 2007), and local production (for example, Kiesel and Spalding, 2019). These findings suggest that MCs can benefit from informative advertising provided by MOs that reduces consumers’ search costs for these qualities. They can then generate additional brand value with emotional appeals and authentic storytelling. Existing research confirms that consumers assign independent and complementary values to quality attributes they perceive as related (for example, Onozaka and McFadden Thilmany, 2011). Products marketed by MCs can therefore simultaneously suggest health benefits, highlight sustainable production methods, and emphasize regional production. For organic production specifically, consumers may view MCs’ claims as more authentic and develop strong preferences for MC brands as a result. Many early organic products were produced and marketed by MCs and sold in food co-ops. For example, Organic Valley was originally founded in 1988. Its seven members wanted to support organic produce. The cooperative quickly developed an organic dairy brand and increased its sales from $15 million to $122 million between 1998 and 2003 (Hardesty 2005b). They differentiated themselves based on organic production and their cooperative structure (“a cooperative of small organic family

Product innovation and promotion of value-added products  487 farms”). The brand was promoted by effective storytelling that featured profiles of local producers on their milk cartons and on large storyboards designed for in-store display. Most MCs can further ensure that their products contain locally grown ingredients and are processed regionally. Even if their products are sold in retail markets that are much larger or removed from the geographic area of their operations, consumers likely value the positive community impacts they provide. Although integrated into Organic Valley’s marketing efforts, perhaps the most underexplored marketing advantage of MCs is the effective communication of their cooperative identity. The marketing literature has amended the traditional four Ps of advertising (product, place, price, and promotion), to the four As of marketing that need to be considered to create brand value: acceptability, accessibility, affordability, and awareness (Sheth and Sisodia, 2012). Despite overwhelmingly positive consumer perceptions of cooperatives once consumers learn about these business models, additional investments and a collective commitment of MCs across various industries will be needed to increase consumer awareness of cooperatives operating in agricultural markets. Below we discuss the marketing activities pursued by the Almond Board of California and Blue Diamond as a short case study that further illustrates how MCs can successfully establish consumer brands.

BLUE DIAMOND AND THE ALMOND BOARD OF CALIFORNIA7 California accounts for 83 percent of the world’s supply of almonds, and the majority of growers (69 percent) operate on less than 100 acres. The Almond Board of California (ABC) is the governing body of the federal marketing order for the California almond industry. It was originally established in 1950 as a federal marketing order primarily aimed at addressing compliance issues with production and quality standards within the industry. Blue Diamond, a marketing cooperative, has successfully established itself as the leading almond brand, selling its products nationally and in over 91 countries worldwide. Established in 1910 as the California Almond Grower’s Exchange, it was originally formed to improve the quality of almonds and eliminate speculations from the market. With a membership of more than 3,000 almond growers operating on orchards with an average size of 77 acres, the cooperative represents roughly half of the growers in California. Since the Almond Board’s formation, its focus has shifted toward market development, engaging in research on almond production, marketing and nutrition, generic advertising and promotion, sustainability goal setting, and information dissemination. It has invested heavily in research projects focusing on production, nutrition, and food safety. ABC has funded nearly 700 projects totaling $102 million since 1973. It also works to provide stakeholders with the most up-to-date information on the state of the almond industry. Year-end and monthly position reports, updated almond trade statistics, crop forecasts, nursery sales reports, and spatial acreage maps are made easily accessible on the ABC website. Furthermore, ABC has established sustainability standards for the industry. It created almond orchard sustainability goals for 2025, which focus on: (1) reducing the amount of water used to grow a pound of almonds by 25 percent, (2) achieving zero waste in the orchard, (3) increasing the adoption of environmentally friendly pest management tools by 25 percent, and (4) reducing the dust produced during almond harvesting by 50 percent. These industry-wide

488  Handbook of research on cooperatives and mutuals standards incentivize innovations that cut producer costs and work toward the industry’s long-term sustainability in California. The California Almond Sustainability Program (CASP) supports these goals and allows growers to understand best practices through self-assessment modules and compare their current practices to others in the industry. CASP offers workshops, on-farm visits, irrigation scheduling, and nitrogen budgeting calculators. ABC ensures that these efforts translate into valuable export opportunities for California almond growers. For instance, ABC has worked with US and EU stakeholders on pesticide and sustainability requirements and on aflatoxin strategies between the US and Japanese governments. Finally, ABC engages in generic advertising campaigns for almonds, including campaigns with the National Football League and the Olympics promoting almonds as a source of fuel for work and exercise. These campaigns can be viewed as combinations of informative and persuasive advertising with functional and emotional appeals that position almonds as a healthy snack. They likely complement brand-specific advertising by shifting consumer demand for almonds. Individual producers or processors could not fund such comprehensive campaigns and successfully compete for consumers’ attention with popular snack foods offered by large food corporations (for example, Nestlé, PepsiCo, and Kraft). Blue Diamond has been able to leverage many of these resources and services provided to expand its operations. Marketing has been a primary focus for the cooperative in the last decade. Its vertical integration and established consumer brand allow the cooperative to expand on the messages promoted by the ABC via continuous product innovation and creative brand-specific advertising. While it spent $35 million on marketing between 2011 and 2015, Blue Diamond increased its marketing budget to more than $100 million in recent years. As a result, Blue Diamond continues to developed new and innovative value-added products and sells its almonds as ingredients to other value-added brands. In 2012, Blue Diamond created its own Almond Innovation Center, which develops new uses for almonds. For example, Blue Diamond’s Almond Breeze almondmilk was one of the first lactose-free and soy-free milk substitutes introduced to the market, containing significantly fewer calories than milk and other dairy substitutes (30 calories per cup of unsweetened almond milk versus 103 calories for 1 percent milk). To continue to differentiate itself among emerging new non-dairy alternatives and brands, Blue Diamond now features its sustainable production processes and its producer-members on packages. Blue Diamond references its cooperative business structure and takes advantage of the fact that it acquires almonds directly from its growers. Consumers can also scan QR codes on packages and visit an almond orchard via augmented reality features (see Figure 29.7). Blue Diamond has also initiated several successful advertising campaigns that reinforce messages communicated by the ABC and create additional brand recognition. Notably, Blue Diamond created its own advertising campaign aired during the 2012 Olympics in London and continues to seek strategic partnerships that make its products widely available. For instance, in 2015, Almond Breeze almondmilk was available in 60 percent of Dunkin Donuts nationwide, and Blue Diamond almonds were featured in McDonald’s Asian chicken salads. The cooperative further negotiates exclusive contracts and supplies value-added products perceived as high quality—such as KIND bars—with their almonds. This focus on product innovation and brand-specific marketing supported by ABC’s services has generated significant marketing margins and resulted in higher patronage payments to its members. Blue Diamond grower returns for almonds were only 1 cent/lb higher than the market average between 2000 and 2010. Today, value-added products account for two-thirds

Product innovation and promotion of value-added products  489

Source: Photograph taken by authors.

Figure 29.7

Almond Breeze milk carton positioning their almond milk as a sustainable, high-quality milk alternative

of the cooperative’s revenue, and as a result growers received prices that were 16 and 22 cents/ lb above the market price in 2019 and 2020, respectively. Blue Diamond’s increased brand equity also allowed it to increase its scale of operations. In 2015 Blue Diamond established a new warehouse in Salida and increased the almond receiving capacity of the cooperative by 33 percent. A new plant in Turlock opened in 2020 to meet the growing demand for Almond Breeze almondmilk. The investments and expansions have led to cost savings of $56 million between 2011 and 2015, and an additional $13 million in 2020. Finally, these expansions increased the cooperative’s bargaining power and ability to achieve favorable agreements with international governments and major retailers. For instance, the Blue Diamond’s government relations team successfully worked alongside the US government to develop a free trade agreement with Columbia, Panama, and South Korea in 2012, reducing tariffs on almonds to zero and generating an additional $75 million in sales.

490  Handbook of research on cooperatives and mutuals

CHALLENGES AND FUTURE RESEARCH DIRECTIONS Producer-controlled marketing organizations are diverse. Their operations and the industry structures in which they compete vary widely. The marketing efforts of MOs and MCs can be complementary and generate higher farm prices, as in the example of the California almond industry. In other contexts, MOs have been terminated. A better understanding of modern agricultural markets gained by considering the implications of increasing product differentiation, greater emphasis on product quality, and vertical coordination among firms can mitigate much of the dispute and litigation due to mandatory participation in MOs. Future economic research needs to identify creative solutions that allow MOs to restructure and stay relevant to all producers in the industries they serve. To date, relatively few MCs have established well-recognized consumer brands. More comprehensive data must be made available and systematically analyzed to identify and disseminate successful marketing strategies. These analyses should include an evaluation of approaches used by cooperatives abroad (for example in Europe), where cooperative brands are relatively strong. We have highlighted product innovation as a key to success. However, once established, brand equity might ultimately result in a conversion to other business models. Traditional cooperative structures limit the ability of members to benefit from an increase in brand equity directly, and additional research can identify how cooperatives can redefine themselves without fundamentally changing their organizational structure. Limited access to capital and equity constraints are likely to remain the biggest challenges faced by MCs. While hybrid models such as New Generation Cooperatives and Limited Cooperative Associations were developed to address many of these capital constraints, they continue to account for a small portion of cooperatives as a whole. Although they are discussed in more detail in other chapters, more research is needed to discuss strategies that ensure MCs can keep pace with the rate at which IOFs innovate and introduce new products. In turn, successful product innovation and marketing strategies employed by MCs might lead to broader adoption of aggressive marketing tactics employed by IOFs. The now widespread promotion of organic production and the increasing use of local labels by large manufacturers and retailers serve as examples. Future consumer research can better understand belief-based consumer preferences and identify how MCs can continuously differentiate themselves from similar IOF brands. Finally, we discussed the effective communication of the cooperative identity as a possible strategy that can suggest additional value to consumers. However, consumer knowledge and awareness about the cooperative business model remains low, especially among US consumers. Additional research is needed to identify ways to increase consumers’ awareness of cooperative businesses’ added value more generally. Very few cooperative brands currently incorporate their cooperative identity into their brand-specific advertising. One notable exception is Recreational Equipment, Inc (REI). When introducing its new line of clothing in 2014, the co-op also publicly re-emphasized its business model. In the following year it launched a redesigned logo, which now prominently features the word “co-op” (Michelson, 2015). While doing this might create little additional brand equity at present, it might provide positive spillover effects for the entire cooperative industry and gradually strengthen marketing opportunities for all cooperatives.

Product innovation and promotion of value-added products  491

NOTES 1. The authors wish to thank Richard Sexton, Eric Micheels, Zoë T. Plakias, Matthew Elliot, and two anonymous reviewers for helpful comments and suggestions. 2. Pure bargaining co-ops do not physically handle or take possession of products and pure processing co-ops only process raw farm commodities. 3. Marketing functions and decisions that are member-facing, like pooling and payment policies structures, are covered in detail in other chapters. Upstream vertical integration can further result in purchasing or supply cooperatives. These types of vertical integration and cooperatives are discussed in other chapters as well. 4. Agriculture and its related industries provide 10.3 percent of US employment. 5. An oligopsony is a market form in which the number of buyers is small while the number of sellers, in theory, could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of buyers. 6. Cost-leadership is establishing a competitive advantage by having the lowest cost of operation in an industry. 7. All references in this section stem from the Blue Diamond Growers annual reports, the Almond Board of California annual reports, industry interviews, or the Almond Board website.

REFERENCES Alston, J.M., J.M. Crespi, H.M. Kaiser and R.J. Sexton (2007). An evaluation of California’s mandated commodity promotion programs. Review of Agricultural Economics, 29, 40–63. Balogh, P., D. Bekesi, M. Gorton, J. Popp, and P. Lengyel (2016). Consumer willingness to pay for traditional food products. Food Policy, 61, 176–84. Bernard, J.C. and D.J. Bernard (2010). Comparing parts with the whole willingness to pay for pesticide-free, non-GM, and organic potatoes and sweet corn. Journal of Agricultural and Resource Economics, 35(3), 457–75. Cirne, C.T., M.H. Tunick, and R.E. Trout (2019). The chemical and attitudinal differences between commercial and artisanal products. Science of Food, 3(1), doi 10.1038/s41538-019-0053-9 Cobia, D. and B. Anderson (1989). Product and Pricing Strategies. In D. Cobia (Ed.) Cooperatives in Agriculture. Eagle Cliffs, New Jersey: Regents/Prentice Hall. Cook, M.L. (1995). The future of U.S. agricultural cooperatives: a neo-institutional approach. American Journal of Agricultural Economics, 77, 1153–9. Crespi, J.M. and S. Marette (2002). Generic advertising and product differentiation. American Journal of Agricultural Economics, 84(3), 691–701. Crespi, J.M. and S. Marette (2003). Are uniform assessments for generic advertising optimal if products are differentiated? Agribusiness, 19(3), 367–77. Cropp, R. and G. Ingalsbe (1989). Structure and Scope of Agricultural Cooperatives. In D. Cobia (Ed.) Cooperatives in Agriculture. Eagle Cliffs, New Jersey: Regents/Prentice Hall. Darby, M.R. and E. Karni (1973). Free competition and the optimal amount of fraud. The Journal of Law and Economics, 16(1), 67–88. De Pelsmacker, P., L. Driesen and G. Rayp (2005). Do consumers care about ethics? Willingness to pay for fair-trade coffee? Journal of Consumer Affairs, 39(2), 363–85. Edenbrandt, A.K., C. Gamborg and B.J. Thorsen (2018). Consumers’ preferences for bread: transgenic, cisgenic, organic or pesticide-free? Journal of Agricultural Economics, 69(1), 121–41. Goodhue, R.E. (2011). Food quality: the design of incentive contracts. Annual Review of Resource Economics, 3, 119–40. Goodhue, R.E. and H.M. Kaiser (2020). Modifying marketing orders to face new challenges. ARE Update, 24(1), 1–4. UC Giannini Foundation of Agricultural Economics. Grashuis, J. (2019). The impact of brand equity on the financial performance of marketing cooperatives. Agribusiness, 35, 234–48.

492  Handbook of research on cooperatives and mutuals Gruber, J.E., R.T. Rogers and R.J. Sexton (2000). Do agricultural marketing cooperatives advertise less intensively than investor-owned food-processing firms? Journal of Cooperatives, 15, 31–46. Grunert, K. (2005). Food quality and safety: consumer perception and demand. European Review of Agricultural Economics, 32(3), 369–91. Hainmueller, J., M. Hiscox and S. Sequeira (2011). Consumer demand for the Fair Trade Label: evidence from a field experiment. Review of Economics and Statistics, 97, doi 10.2139/ssrn.1801942 Hardesty, S. (2005a). Cooperatives as marketers of branded products. Journal of Food Distribution Research, 36(1), 237–42. Hardesty, S. (2005b). Positioning California’s agricultural cooperatives for the future. Giannini Foundation of Agricultural Economics. https://​s​.giannini​.ucop​.edu/​uploads/​giannini​_public/​69/​f4/​ 69f424de​-e6b3​-4f56​-a7f9​-82aba680757a/​v8n3​_4​.pdf Hueth, B. (2014) Missing markets and the cooperative firm. Workshop on Producers’ Organizations in Agricultural Markets, September 4–5, 2014. Toulouse: Toulouse School of Economics. Isariyawongse, K., Y. Kudo and V.J. Tremblay (2009). Generic advertising in markets with informative brand advertising. Journal of Agricultural & Food Industrial Organization, 7, 1–20. Johnson, J.P. and D.P. Myatt (2006). On the simple economics of advertising, marketing, and product design. The American Economic Review, 96(3), 756–84. Kiesel, K. and S.B. Villas-Boas (2007). Got organic milk? Consumer valuations of milk labels after the implementation of the USDA Organic Seal. Journal of Agricultural & Food Industrial Organization, 5(4), 1–38. Kiesel, K. and S.B. Villas-Boas (2013). Can information costs affect consumer choice? Nutritional labels in a supermarket experiment. International Journal of Industrial Organization, 31(2), 153–63. Kiesel, K., J.J. McCluskey and S. B. Villas-Boas (2011). Nutritional labeling and consumer choices. Annual Review of Resource Economics, 3, 141–58. Kiesel, K. and A. Spalding (2019). New marketing opportunities for local food producers. ARE Update, 23(1), 1–4. Kiesel, K., D. Buschena and V. Smith. (2005). Do voluntary biotech labels matter? Evidence from the fluid milk market. American Journal of Agricultural Economics, 87(2), 378–93. Liaukonyte, J., T.J. Richards, H.M. Kaiser and B.J. Rickard (2015). Under-contribution to generic advertising due to self-interested inequity aversion. European Review of Agricultural Economics, 42(3), 473–97. Loureiro, M.L. and J. Lotade (2005). Do fair trade and eco-labels in coffee wake up the consumer. Ecological Economics, 53, 129–38. Loureiro, M.L. and D. Rahmani (2016). The incidence of calorie labeling on fast food choices: a comparison between stated preferences and actual choices. Economics and Human Biology, 22, 82–93. Loureiro, M. L. and S. Hine (2015). Discovering niche markets: a comparison of consumer willingness to pay for local (Colorado grown), organic, and GMO-free products. Journal of Agricultural and Applied Economics, 34(3), 447–87. Low, S.A., A. Adalja, E. Beaulieu, N. Key, S. Martinez, A. Melton, A. Perez, K. Ralston, H. Stewart, S. Suttles, S. Vogel and B.B.R. Jablonski (2015). Trends in U.S. local and regional food systems. Washington DC: U.S. Department of Agriculture, Economic Research Service, www​.ers​.usda​.gov/​ webdocs/​publications/​42805/​51173​_ap068​.pdf​?v​=​42083 Magnusson, E. and J.A.L. Cranfield (2005). Consumer demand for pesticide free food products in Canada: a probit analysis. Canadian Journal of Agricultural Economics, 53, 67–81. Malmendier, U. (2021). Exposure, experience, and expertise: why personal histories matter in economics. Journal of the European Economic Association, 19(2), 2857–94. Michelson, M. (2015). REI co-op brand gets an overhaul. REI, September 25, 2015, www​.rei​.com/​blog/​ camp/​rei​-co​-op​-brand​-gets​-an​-overhaul Nelson, P. (1970). Information and consumer behavior. Journal of Political Economy, 78(2), 311–29. Nelson, P. (1974). Advertising as information. Journal of Political Economy, 82(4), 729–54. Onozaka, Y. and D. McFadden Thilmany (2011). Does local labeling complement or compete with other sustainability labels? A conjoint analysis of direct and joint values for fresh produce claims. American Journal of Agricultural Economics, 93(3), 693–706.

Product innovation and promotion of value-added products  493 Plakias, Z., I. Demko and A.L. Katchova (2020a). Direct marketing channel choices among US farmers: evidence from the Local Food Marketing Practices Survey. Renewable Agriculture and Food Systems, 35, 475–89. Plakias, Z., R. Goodhue, and J. Williams (2020b). Terminated marketing order provided resources to California peach and nectarine growers. California Agriculture, 74(3), 155–62. Rogers, R.T. and R.J. Sexton (1994). Assessing the importance of oligopsony power in agricultural markets. American Journal of Agricultural Economics, 76(5), 1143–50. Rabin, M. and J.L. Schrag (1999). First impressions matter: a model of confirmatory bias. The Quarterly Journal of Economics, 37–82. Saitone, T. and R.J. Sexton (2017). Agri-food supply chain: evolution and performance with conflicting consumer and societal demands. European Review of Agricultural Economics, 44(4), 634–57. Sexton, R.J. (2013). Market power, misconceptions, and modern agricultural markets. American Journal of Agricultural Economics, 95(2), 209–19. Sexton, R.J. and J. Iskow (1988). Factors critical to the success or failure of emerging agricultural cooperatives. Giannini Foundation Information Series No 88-3. Sexton, R.J. and T.A. Sexton (1987). Cooperatives as entrants. RAND Journal of Economics, 18(4), 581–95. Sheth, J. and R. Sisodia (2012) The 4 A’s of Marketing: Creating Value for Customer, Company and Society. New York: Routledge. Twersky A. and D. Kahneman (1983). Extensional versus intuitive reasoning: the conjunction fallacy in probability judgement. Psychological Review, 90, 293–315. United States Department of Agriculture, Agricultural Marketing Resource Center (2021a). USDA value-added ag definition. www​.agmrc​.org/​business​-development/​valueadded​-agriculture/​articles/​ usda​-value​-added​-ag​-definition United States Department of Agriculture, Economic Research Service (2021b). Price spreads from farm to consumer: summary findings. /www​.ers​.usda​.gov/​data​-products/​price​-spreads​-from​-farm​-to​ -consumer/​summary​-findings​.aspx United States Department of Agriculture, Economic Research Service (2021c). New products. www​.ers​ .usda​.gov/​topics/​food​-markets​-prices/​processing​-marketing/​new​-products​.aspx United States Department of Agriculture, Economic Research Service (2021d). Ag and food sectors and the economy. www​.ers​.usda​.gov/​data​-products/​ag​-and​-food​-statistics​-charting​-the​-essentials/​ag​-and​ -food​-sectors​-and​-the​-economy/​ United States Department of Agriculture, Rural Development (2019). Agricultural Cooperative Statistics 2019. https://​www​.rd​.usda​.gov/​sites/​default/​files/​publications/​sr83​_agr​iculturalc​ooperative​statistics​ _2019​.pdf. Accessed 17 December 2021. Villas-Boas, S.B., K. Kiesel, J.P. Berning, H.H. Chouinard and J.J. McCluskey (2020). Consumer and strategic firm response to nutrition shelf labels. American Journal of Agricultural Economics, 102(2), 458–79. Wang, Q., E. Thompson and R. Parsons (2015). Preferences for farmstead, artisan, and other cheese attributes: evidence from a conjoint study in the Northeast United States. International Food and Agribusiness Management Review, 18(2), 17–36. Zimmerman, F. (2020). The dynamics of motivated beliefs. American Economics Review, 110(2), 337–63.

30. Mutuals1 James M. White

DEFINITION OF A MUTUAL The cooperative business model has been applied in a number of different contexts. One has been providing insurance to groups and people who otherwise could not afford what would be available to them. These cooperative insurance providers have given their customers a financial foothold and allowed them to establish the basis for a better life. When individual members of a community experience hardship—death of a family member, illness, large expenditures—or have a problem they cannot address on their own, communities have traditionally bonded together in some manner to help solve the problem collectively. The history of these mutual aid efforts goes back so far and takes so many shapes that it would be impossible to provide a full description of them. However, this desire to work together to help people we identify as being part of “our” community is the foundation of the term “mutualism” or “mutuals” in this chapter. The objectives of this chapter are to describe the history and evolution of mutual organizations, discuss current trends and challenges, and suggest possible future paths for these organizations. According to the Oxford English Dictionary,2 the term “mutualism” has two definitions, one economic and one biological. Economically, mutualism is “the doctrine that individual and collective well-being is attainable only by mutual dependence; a system based on this.” Biologically, mutualism is “a condition of […] symbiosis in which two organisms contribute mutually to the well-being of each other.” This twofold definition is consistent with the idea that mutual behavior is deeply rooted in our personalities, culture, and history, and also that it is a very natural behavioral tendency. For the purposes of this chapter, “mutualism” includes the wide range of ways in which a community of people works for each other’s benefit; “mutuals” will refer to established organizations, up to and including the large insurance companies we call “mutual insurance companies.” The mostly informal efforts of smaller communities (for example, bringing prepared meals to families who recently experienced a death of a relative or “passing the hat” at a church to help a family experiencing financial difficulties) shared many of the objectives of the more formal organizations called “mutual aid societies” and “friendly societies” in the eighteenth and nineteenth centuries. These, in turn, have, again speaking in broad terms, have evolved into much larger charitable and social groups in the twentieth and twenty-first centuries. Whether informal or formal, whether based in a local community or serving a national or international community, whether providing money or volunteering time, the efforts are based on the principle that helping other people can be rewarding to both the recipient and the giver. Around the time of the Industrial Revolution, another form this type of mutual aid assumed was mutual insurance. For example, Benjamin Franklin organized the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire in 1752. The organization functioned for 16 years before incorporating in 1768,3 and it continues to exist today. While their offerings have expanded far beyond fire insurance, the founding principle of the 494

Mutuals  495 Contributorship is that the consequences of losing buildings to fire are difficult for individuals to deal with on their own, and they also have consequences for the larger community. Thus, mutually insuring each other from these losses represents a natural extension of the mutual aid principle. These early efforts grew, expanded in scope, and became more specialized. Different types of insurance companies emerged in the nineteenth century, and the first credit unions appeared in the United States in the early twentieth century.4 More importantly, the size of these insurance and financial companies grew significantly. From an economic perspective, this growth introduced the concepts of economies of scale and scope into them while also moving them away from their roots in community-supported assistance. From a practical perspective, the development of actuarial science, the formal quantification of risk and the most economically viable way to mitigate it, became an element of the professionalization of the industry. The question of what constitutes “our” community is a significant issue for these organizations. One way this can be defined is the geographic boundaries of the community. The Philadelphia Contributorship, for example, did not initially offer insurance to people in New York. This closer affiliation to a local community is a natural tendency for many people, and it also creates and reinforces our social bonds with the people we see, work with, and socialize with every day. Furthermore, from a practical perspective, a fire department (as organized by the mutual) can only travel so far to successfully put out a fire. As the nineteenth century progressed, the definition of “our” community became more diverse as different waves of immigration brought people of different ethnicities, religions, and professions to the United States. The question of who belongs to “our” community in this context continues to challenge our society to the current day. Defining who is “in” the circle and who is “out” of it is difficult both from definitional and exclusionary perspectives. Groups that faced oppression along racial, ethnic, religious, gender, or other lines have come together and provided both a refuge to each other as well as a source of identity and preserving their cultural traditions. Establishing an identity became a crucial element of social and economic mutuals. Mutuals thus present us with blurry boundaries (economic versus social benefits, how big or small “our” community is, and so on) and difficult questions (who is included or excluded, how can we protect members from economic, social and societal hardships, and so on), but they also represent the real, imperfect attempts by real, imperfect people to grapple with the real issues facing the members of their community. This chapter will discuss two types of mutual insurance companies—fraternal benefit societies and township mutual fire insurance companies5—in more detail to describe the achievements and challenges addressing mutuals more generally. “Fraternals” and “township mutuals” evolved from community-based mutual aid efforts in the nineteenth century. Both are similar to commercial mutual insurance companies, but they go beyond the basic principles of mutual insurance by adding the elements of community and cultural traditions. The chapter will only discuss more general topics of the mutual insurance industry and mutual aid efforts in terms of how they affect and were affected by fraternals and township mutuals. This chapter will also examine the growth and subsequent decline of these organizations,6 their response, and the challenges currently facing them.

496  Handbook of research on cooperatives and mutuals

WHY ARE THEY IMPORTANT? (“WHY DO I CARE?”) In addition to the individual financial benefits community members may receive as members of a mutual insurance company, using the example of fire loss above, community members also realized that when an individual or family suffered a devastating loss, the impact of that loss carried over to the whole community. Helping the victims of these losses re-establish themselves as productive members of the community made the community itself stronger. Furthermore, the Industrial Revolution and the expansion of capitalism brought with them economic and social injustices. Like other types of cooperatives, mutual insurance companies helped remedy gaps in the market and the rise in the market power of firms. For example, communities of marginalized people banded together to form fraternal benefit societies based on their members’ common identity to ensure they were treated fairly in acquiring what we now call life insurance. Similarly, when farmers in rural Minnesota could not purchase fire insurance at a reasonable price, they formed township mutuals to provide these services to themselves. More generally, mutuals, as collective action organizations, helped people solve problems for which they did not have another avenue of recourse. Responding either to individual financial hardships, social injustice, or the market power of larger, corporate entities, these collective action organizations empowered individuals to assume more control over their economic destinies and minimize the types of negative financial and social outcomes that can result from the actions of larger, more powerful groups against smaller, marginalized groups.

THE INSURANCE INDUSTRY This section discusses three features of providing insurance—the regulation of insurance at the state level, the assessment system, and economies of scale—and provides an overview of the sub-industries from which fraternals and township mutuals evolved. Insurance helps pay for the risks of life by spreading the risk of certain losses over a pool of people, all of whom are paying premiums with the knowledge that only some percentage of them will experience losses. People who do not experience a loss are indirectly paying to compensate those who do. The insurance company determines the amount of the premium by estimating the likelihood that a loss will occur, and the size of the loss. The premium is “actuarially fair” if it estimates these numbers correctly. With a provision for administrative costs and regulatory-required or fiduciary-determined surplus capital positions (basically, “rainy day” deposits of money to cover periods of excessive loss), the premiums policyholders pay should exactly cover the estimated losses. This basic model can be adapted to fit any type of risk and loss that people may face. 1.

State Regulation of Insurance

In the United States, insurance is primarily regulated at the state level, not the national level, meaning both that the policies, regulations, and environment under which insurance companies operate is different from state to state and that the data collected on insurance companies varies from state to state in terms of frequency, quality, and quantity. Any insurance company

Mutuals  497 operating across state lines must include a state-level organization to respond to these different requirements. Regulation at the state level has long been a contentious subject. It is not immediately clear why insurance is regulated this way; there are no “local peculiarities” in insurance. Furthermore, the burdens imposed on the insurance organizations operating in multiple states are not trivial (Patterson, 1944). Although a more coordinated system of state and federal regulation has developed over time, it is not clear that either consumers or insurance companies benefit from this approach. 2.

The Assessment System

Fraternals and township mutuals were initially organized around the assessment system, which is different than the premium system described above. The model is simple: when a given loss occurs (for example, death or fire in the case of fraternals and township mutuals), members are assessed a pro-rata portion of the benefits paid to the beneficiaries. While members were also charged some portion of the administrative and other operating costs, the main cost of providing this insurance was in these assessments. The primary benefit of the assessment system is that it keeps costs low. Unless losses are unusually high, this simple form of organization was cheaper than commercial insurance because it kept administrative costs lower. In addition, the companies did not need to keep money allocated as reserves against excessive loss, further lowering the cost to policyholders (Valgren, 1924; Kip, 1953).7 Keeping costs low was particularly attractive to the people providing the insurance, namely lower income and marginalized groups. The assessment system had the added advantage of not appearing to make some people rich at the expense of the members, and it did not pay out profits to shareholders. The assessment system also has weaknesses, primarily that it does not scale well. As the number of members increases, the administrative burden of assessments became unmanageable, and the firm could not keep enough cash on hand to meet the needs of the members in a timely manner. Furthermore, as the relevant population of policyholders grew, it became increasingly difficult to accurately predict losses. As administrative burdens, regulatory requirements, and liquidity problems became unworkable, fraternals and township mutuals replaced assessment-based systems with an actuarially based premium system (Keillor, 2000). There is also the question of what represents a “fair” pro-rata basis on which to allocate assessments. Should it be purely democratic (equal to all members) or adjusted for, using one example, the size of a member’s farm? Early Development of the Life Insurance Industry Life insurance initially developed as a “death benefit,” intended to cover the costs of burying a deceased family member, with some additional money remaining for the survivors. From this basic idea, what we know as modern life insurance products developed gradually (Clough, 1946). The first life insurance companies were formed in England in the late seventeenth century, although the exact date and first company is a subject of dispute. The first surviving life insurance company in the United States was the Pennsylvania Company for Insurance on Lives and Granting Annuities, which was chartered in 1812 and was the first to use an actuary to manage its risk. Originally, life insurance did not have the established processes and

498  Handbook of research on cooperatives and mutuals procedures it does today, and, in the nineteenth century, it was characterized by fraud and mismanagement, which resulted in “not reducing” the cost of insurance (Clough, 1946). Both state governments and consumers reacted strongly to this mismanagement, but it was the reactions of consumers that prompted the companies to self-regulate. Consumers became increasingly sensitive to how much they were paying for insurance and how the money they paid in premiums was being spent. They believed they were sending money to a distant company in return for an unreliable promise of service in response to infrequent events. Maslow’s Hierarchy of Needs (Maslow, 1943) suggests that as people move beyond subsistence living, they begin to consider questions of financial security and the protection of their wealth, which insurance, by definition, provides. Early life insurance was largely an urban phenomenon as insurance products were both harder to market efficiently in rural communities and in lower demand there, because of either lower amounts of wealth or the ability to better withstand losses. Early Development of the Fire Insurance Industry Fire insurance protects policyholders against loss from fire, but, more fundamentally, from events that can wipe out their assets and ruin them financially. It is no surprise, therefore, that fire insurance would be one of the first forms of insurance. The principle of spreading the risk of loss from fire over a larger group of people can be traced as far back as 1735 in the United States, with earlier examples coming from England a century earlier (Valgren, 1924). Many early fire insurance companies were mutuals, and stock companies appeared near the end of the eighteenth century. These companies experienced high levels of growth in the first part of the nineteenth century. As with life insurance, the resulting industry had more stock than mutual insurance companies, and it observed high levels of fraud and economic mismanagement (Valgren, 1924). Fire insurance, by its nature, addresses specific needs for a group with a similar risk profile, leading to a group of fire insurance companies designating themselves as “class mutuals,” which focused on specific types of firms, such as creameries and cheese factories. Class mutuals provided two benefits: they developed expertise in lowering both their clients’ specific types of risk and the number of fraudulent claims, and they also generated group-level cohesion for their members. This second benefit contributed to the realization by farmers that many commercial insurance offerings were expensive to them as a group, and, if they worked together, they could mutually insure each other’s risks. Life insurance and fire insurance are, in concept, very simple products, requiring only a population of policyholders, calculated expected losses, and contributions from those policyholders to cover the losses. The reality is more difficult, and both industries developed more sophisticated, “scientific” methods to provide these products. For example, early life insurance contracts were “brief, simple in form, and loosely worded,” and they needed to be both “tighter” and based on more precise and predictable calculations of premiums. This made necessary a “suitable” mortality table for life insurance and more accurate predicted losses from fire for fire insurance companies (Clough, 1946 and Kip, 1953). Moreover, questions of the relevant population, who might become members, and the ultimate size of the company became important as these organizations evolved. Fraternals and township mutuals, as individual companies, have been smaller than their mutual or stock competitors because of how they are organized.

Mutuals  499

THEORETICAL CONSIDERATIONS Mutuals can appear anachronistic when analyzed through the lenses of traditional neoclassical economic theory and competitive analysis. For example, the traditionally smaller size of mutuals, considering the economies of scale in the financial services and insurance industries (Houston and Simon, 1970), would imply they have higher average costs and thus a long-run competitive disadvantage. Moreover, the democratic ownership structure hinders both raising capital and making decisive strategic decisions. For these reasons, mutuals should have disappeared from the competitive landscape long ago. Yet, they have survived. Answering this apparent contradiction must start by observing that the neoclassical economic model of rational, profit-maximizing, and utility-maximizing agents does not capture the nuances of the economic decision-making within mutuals. In examining different models of organizational ownership, Hansmann (1996) argued that the original intent of mutuals was to promote closer alignment of incentives between policyholders and management. If the policyholders were owners, they would make better decisions in managing the company. Thus, mutuals sought to avoid the transaction costs of agency theory (Jensen and Meckling, 1976; Fama, 1980). More recent literature on mutuals suggests that increasing corporate transparency and the shareholder rights movement may have reversed this relationship, leading mutuals to experience higher transaction costs than stock corporations.8 Economies of scale allow larger companies to distribute larger relative fixed costs over more units of output, lowering average total costs. Mutuals, at least early in their development, defined themselves in ways that limited their potential size, which would inherently put them at a long-run competitive disadvantage relative to larger stock insurance companies. For example, the territory restrictions of township mutuals limited their efficiency, as measured by their expense ratio (Valgren, 1924).9 This desire for size and growth have also changed the competitive dynamics of mutual insurance. Whereas before fraternals and township mutuals could serve markets that were unattractive to the larger companies, now the larger companies are actively pursuing these customers.10 Moreover, the constraints placed on these companies because of how they were organized now serve to place them at a strategic disadvantage because of economies of scope. For example, township mutuals are prohibited from offering the breadth of products and services that larger, national insurance carriers can offer (White, 2013). Mutuals violate the neoclassical economic assumption that all transactions occur at “arm’s length” and are made for purely “rational” reasons. Rationality is here defined as profit or utility maximization. However, mutuals were organized in an environment where economic rationality was only one of many considerations, with some others being preservation of cultural heritage, overcoming the market power of large firms, maintaining a certain way of life, and social affinity. This is not to say that mutual policyholders went against their economic interests, just that their decisions were not solely based on the economic merits of the product. Furthermore, policyholder retention and persistence, more favorable claims experience, and litigation expenses in mutuals may also counteract the impact of economies of scale. These other considerations allowed mutuals to withstand purely value-based competition, and today they inform questions of corporate social responsibility and the social obligations economic firms have or should have. Related to this, standard economic theory does not systematically account for concepts such as loyalty and the impact of leadership and personal relationships,

500  Handbook of research on cooperatives and mutuals which are embodied in the concept of “social capital” and provide one basis from which firms can achieve extra-normal returns on capital and realize a sustainable competitive advantage. Mutuals also challenge the standard economic assumption of free exit, the idea that if a business is not sufficiently profitable, it would and should exit the industry at little or no cost. Before publishing Competitive Strategy, Michael Porter examined a dataset of companies that appeared to defy the assumption of free exit (Porter, 1976); he concluded that this was simply an example of irrational behavior, and did not analyze this result further. However, firms that stay in business even when not making a “sufficient” profit may be motivated by non-economic considerations, and if the economic consequences of these decisions are not catastrophic, these decisions and outcomes will defy the expectations of economic theory. Adverse selection and moral hazard have both played a part in fraternals and township mutuals. First, adverse selection weakened the assessment system in fraternals when the needs of younger members, who had a different level of impending mortality than older members, bristled at the idea of paying into a system where the benefits were more remote for them. Thus, they experienced a form of adverse selection, or Akerlof’s “lemon” problem (Akerlof, 1970). Also, in responding to criticism of the lower, and presumably non-actuarially based, premiums that fraternals charged members, fraternals indicated that, being more closely knit as a community, they were better able to screen the health of applicants and, in essence, use adverse selection to their advantage. Township mutuals, by conducting inspections of member farms, were similarly able to avoid the lemon problem and the moral hazard problem of removing incentives for policyholders to curb their risk of fire because the community will compensate them for losses. Furthermore, the assessment system is also highly vulnerable to the free rider problem because, although assessments could be estimated and collected before a claim is filed, if individual members observed that they seemed to be paying for a lot of other people’s negligence, it would be hard to justify staying in the group. Moreover, if assessments were collected after the claim, it is not clear how they would be enforced. When an assessment was made, how quickly and easily could it be collected? If estimated, is it correct, or too high? On the one hand, the Insurance Commissioner of Minnesota cited this as one of the reasons for his opposition to township mutuals. On the other, collective action and social capital literature suggests small groups of homogenous actors should be able to enforce these types of obligations on their members at a higher level than firms as defined by standard economic theory.

INDUSTRY LIFE CYCLE In economic analysis at the industry level, the following questions arise: first, whether industries follow a natural progression as they develop, grow and mature; second, whether the features and characteristics of this progression can be detected; third, whether this progression is similar across industries. In answering these questions, Gort and Klepper (1982) found such a model does exist across their dataset of 46 industries over the period 1887–1960. The principal variable in this model is the net entry rate of firms into the industry, which is calculated by taking the number of firms who enter the market each year and subtracting the firms who exit. Their five-stage model analyzed the dynamic evolution of industries in an “industry life cycle,” which begins with an innovation, which here plays the role of a disruptive event. These innovations represent a “technological change,” which is here broadly defined to include both

Mutuals  501 actual technology and business practices, and they begin a process where firms may adopt the innovation or new firm forms to develop it. On a larger scale of time, these technological changes, and their dispersal between and among producers, are not a continuous phenomenon, but they keep to a pattern, with a disruption followed by a time of reaction and potential adoption followed by a period of relative calm followed by another disruption (Christensen et al., 2015). The industry life cycle model also suggests each industry stage has different attributes, at both the industry and the firm level (Agarwal and Gort, 1996, 2002). As Figure 30.1, which is based on Gort and Klepper’s (1982) description of industry phases, suggests, an innovation creates a new industry, where the earliest entrants determine if the new idea or technology creates a viable business model in Stage I. Note that the number of firms is small and does not increase significantly over this stage. Furthermore, the graph will look the same whether it measures number of firms or industry revenue or other related metrics.

Figure 30.1

Industry life cycle phases

If the early firms in the new industry find a business model that produces sufficient profits, many other firms enter this new industry to quickly chase these profits. This is Stage II of the industry, which is characterized by rapid expansion, a focus on revenue over profit, and the positioning of individual firms in the developing industry. Next, whether through market saturation or changing consumer preferences, this growth slows to almost zero, and the competitive dynamics of this now-established industry shift to favor profitability over revenue growth. Stage III is also the first point in the industry life cycle where exit and consolidation are more prevalent than entry, and the number of firms starts to decline. Stage IV is where industry revenue is either slowly increasing, flat, or declining, but the number of firms competing for that revenue drops significantly, as winners and losers emerge in a competition for market share, profitability, and survival. Finally, in Stage V, enough firms have exited to establish an equilibrium where entry and exit are rare. Once an industry reaches Stage V the

502  Handbook of research on cooperatives and mutuals Table 30.1

Gort, Klepper and Agarwal's Description of Industry Life Cycle Stages

Stage

Characterized by

Stage I

Begins with product introduction and ends with sharp increase in entry rate

Stage II

Rapid increase in the number of firms in the industry with a wide range of competing versions of the product and processes for delivering it

Stage III

Exit and entry nearly balance one another, leaving a rate of net entry into the industry of roughly zero and a declining number of entrants and slowly increasing number of exits drives the reduction in the change in net number of firms. Firms begin to focus on process innovations rather than product innovations and a diversity of product innovations declines

Stage IV

Steady decline in the total number of firms, which is driven by an exit rate that greatly exceeds the entry rate, and the entry rate will decrease to zero or nearly zero. The total output of the industry will likely continue to increase, even though the number of firms is decreasing. The rate of change in market share declines for the largest firms, which stabilizes the leadership of the industry

Stage V

May or may not occur, depending on the industry. Second period of approximately zero net entry

cycle may begin again with a new innovation, or continue the decline in the number of firms. In Figure 30.1 above, the dark grey dashed line represents such a rebirth; the light grey dashed line represents the continued decline, as seen in the industries studied in Putnam (1999). Table 30.1 summarizes these stages (Gort and Klepper, 1982; Agarwal and Gort, 1996). Agarwal and Gort (1996, 2002) extend industry life cycle analysis into a survival analysis framework,11 establishing the net entry rate of firms as “an additional factor [covariate] in explaining entry, exit and survival”; in other words, the industry life cycle stage itself drives the dynamics of entry and exit described above. They note the different industry stages have different hazard rates, or differing probabilities of a firm’s likelihood to exit the industry in the next period. In the 2002 study, they further claim there are “large differences” in the hazard rates associated with different industry stages. In other words, each industry has its own timeline of development, growth, maturation, and decline, and at each point in time in this cycle the likelihood that a given firm will exit in the upcoming year is heavily influenced by the life cycle stage the industry is in at that time. Developing the knowledge, skills, and expertise to reduce costs and increase product quality can become a barrier to entry in the later phase of an industry’s development (Gort and Klepper, 1982). If a firm enters an industry in Stage III, for example, it would encounter incumbent firms that have the experience to compete more effectively than it, and, in the absence of either an innovation, an expansion of the market along geographic or demographic lines, or some other competitive advantage, the entrant would have a very difficult time establishing themselves and competing over the long run. As innovations decrease, the opportunity for free entry diminishes over time. The role of innovation in this life cycle is complex because innovation is both the cause and a product of industry phase evolution. By offering new technological changes, innovations create demand for the new products or services. As the industry matures and demand wanes, producers have an incentive to innovate. In other words, as the revenue growth in the industry slows, producers have the motivation to create the next innovation. A final factor driving innovation is firm size, which is also a function of industry phase. Large firms will be more likely to produce incremental, process-based innovations compared to smaller firms, who will produce larger, product-based innovations (Klepper, 1996). As we have seen, average and relative firm size also increases as the industry moves from stage to stage, implying that type

Mutuals  503 and nature of innovations is driven by the industry stage and highlighting the truly disruptive nature of the innovations that start new industries. Fraternals and township mutuals fit this basic model. Fraternals, borrowing from mutual insurance companies generally, implemented the idea that small groups of people could come together to provide each other a level of financial security without being at the mercy of large corporate interests. In the first phases of the industry’s development, different technologies of offering the product (the “assessment system” and the “reserve system”) competed to establish themselves in the market, with one of these technologies (the reserve system) establishing itself as the clearly better choice. Finally, the basic nature of the product does not significantly change in the later phases. Life insurance contracts are now well-established commodities, and firms seek to differentiate themselves through price, service, ratings, bundling, or other means. Township mutuals innovated by applying the class mutual system to farmers and followed the same pattern.

FRATERNAL BENEFIT SOCIETIES Introduction Fraternal benefit societies are a combination of basic financial services with a social organization and support network that emerged in the United States in the post-Civil War era. Founded on a “common bond”—geographic area, ethnicity, religion, profession, or gender—fraternals offered an early form of life insurance to groups who could not otherwise obtain it. These groups provided life insurance and, hence, an early, private form of social safety net to their members, those people with the same common bond. Fraternals helped lower income, marginalized, and recent immigrant groups by providing their members the opportunity to both protect themselves financially and establish communities of people like themselves. The motivations to form fraternals, “economic assistance to members plus social networking for mutual assistance” and “preserv[ing] the cultural values of the community,” were more universal and deeply held when fraternals were first organized than they are today (Solt, 2002). Fraternals provided as much life insurance to individuals as commercial life insurers into the early twentieth century (Kip, 1953). In 1900, membership was at about five million people organized into approximately 600 fraternal organizations (Meyer, 1901). In 1920, roughly ten million people were involved in some form of fraternal insurance (Kip, 1953) While some authors suggest fraternals date back to the Greek or Roman eras or were fashioned after the English “Friendly Societies,” the first fraternal in the United States, as they are defined today, was the Ancient Order of United Workmen, formed on October 27, 1868 in Meadville, PA. The social conditions of the last half of the nineteenth century motivated the creation of fraternals. For example, the legend behind the formation of the Aid Association for Lutherans (AAL) was that an explosion in a flour mill in Appleton, WI widowed a woman and her family and inspired AAL’s founders to create a “death benefit” for people in similar situations (Strand, 2001). The lack of social insurance and welfare programs, modern medicine practices to reduce the incidence of serious or fatal diseases, and the technological and social advancements which reduce the incidence of serious, work-related accidents made this a revolutionary response, by creating a company to perform the duties traditionally handled informally within the community. It was also perfectly consistent with the tradition of mutual aid.

504  Handbook of research on cooperatives and mutuals Definitions of Fraternals Combining insurance and a social organization based on a common bond are the distinguishing characteristics of a fraternal. Organizations that focus on social, educational, charitable, patriotic, and religious activities but do not provide insurance to their members are exempt from federal income tax under section 501(c)(10) as “domestic fraternal societies” (Solt, 2002). A group like the Freemasons does not offer formal insurance products to members and would be an example of a fraternal society that is not a fraternal as defined in this chapter (Beito, 1990). Organizations that also provide insurance benefits to their members are exempt from federal income tax under section 501(c)(8) as “fraternal beneficiary societies, orders or associations.” Fraternals are owned by their members, and in this way directly resemble mutual insurance companies. In addition to tax classifications, fraternals have four characteristics: a lodge structure, a “representative form of government,” insurance or other benefits payable to members, and a non-profit structure and organization (Meyer, 1901). The first requirement, a lodge system, serves to bind members to the fraternal through financial contributions and provides a social outlet through volunteer time and social activities. Local chapter organizations must meet regularly and have elected officers. Second, members of a fraternal must have a regular opportunity and a defined process for voicing concerns or issues, ensuring the organization’s strategic direction is consistent with the wishes of the members, and electing officers at the fraternal-wide level. The third feature of fraternals, providing insurance to members, started as a “death benefit” or “orphan benefit,” and has become the basis for offering life, health, disability, and annuity insurance and other financial products and services. Finally, fraternals must operate on a non-profit basis. The additional requirements of a chapter structure and a democratic governance structure (resulting from the requirement to operate through lodges) are necessary for fraternals to maintain their tax-exempt status. Members of a fraternal also share a “common bond,” a characteristic that unites its members. Examples of common bonds include religion (for example, Aid Association for Lutherans, Catholic Financial Life), ethnicity (for example, the Croatian Fraternal Union of America, Association of the Sons of Poland), women-only (for example, Unity of Bohemian Ladies, Grand Court Order of Calanthe [African-American women]) and professions (for example, the Railwaymen’s Relief Association of America). Early History of Fraternals One of the early questions facing fraternals was whether they were specific forms of mutual insurance companies or something different. On the one hand, B.H. Meyer, a sociology professor at the University of Wisconsin motivated by the early mismanagement and fraud in fraternals, wrote in 1901 that “[t]he dual nature of fraternal [benefit] societies has probably been partly responsible for the perpetuation of the fallacy that insurance is one thing and that fraternal insurance is another and a different thing.” On the other hand, fraternal insurance initially was a “different thing,” both in terms of combining economic and social objectives and of organizing in specific communities. Fraternals were not necessarily trying to emulate commercial insurers but, either out of ignorance or as a reaction to the perceived fraudulent practices of the commercial insurers, organized to increase the financial security and welfare of their members and did not necessarily include profit maximization among their objectives.

Mutuals  505 Furthermore, the historical focus of the commercial life insurance industry on middle and upper class customers led to two important features in the development of fraternal insurance: first, their organization by people who were not insurance professionals and did not have the training or experience to run such an operation, and second, a belief that commercial life insurers were charging prices that were too high, solely to make themselves richer. As a result, the organizers of fraternals wanted life insurance that was low cost and simple to understand, resulting in the use of the assessment system (Kip, 1953). In other words, the founders of many fraternals were not insurance professionals and did not necessarily have the training to successfully run an insurance company. Their motivation came from elsewhere. Inevitably, these different motivations and lack of the proper skills became a problem. Concerns raised about fraternals were they were not charging sufficiently high premiums to cover the risk they were assuming, and were not maintaining cash reserves against excessive loss (Meyer, 1901). When confronted with early charges of mismanagement, fraternals argued that their membership requirements, particularly in the local system of lodges, provided an additional level of screening of individual insurance policy holders. As discussed with regard to adverse selection above, they argued that the mortality tables used by insurance companies did not apply to them because their members were not selected out of the general population. As a result, they could more aggressively assess the health of a prospective member, which would result in more favorable insurance risks. They also argued that the membership structure provided a level of self-policing against fraudulent claims, and ownership by the members aligned the incentives of the members with the fraternal, which addresses the question of moral hazard. Third, fraternals argued that they did not have the expenses of a commercial stock insurance company. Operating on a non-profit basis removed the imperative to provide returns to shareholders and having a smaller set of product offerings lowered administrative expenses relative to commercial insurance companies. While these claims are debatable, they persisted in the handling of fraternals as businesses (Meyer, 1901). The National Fraternal Congress of America (NFC) was formed in 1886 to provide “mutual information, benefit and protection” for all “legitimate” fraternal benefit societies. It established financial management standards and practices (including actuarially based mortality tables) for its members, which promoted the credibility of fraternals among the general public and regulators, in addition to the traditional role of advocacy. In 1898, the American Fraternal Congress (AFC) was organized in Omaha. The AFC introduced the more stringent requirement of a reserve fund against excessive claims on member firms, which divided fraternals into two warring camps. State regulation of the fraternal industry in its early stage was also problematic. The inconsistencies and incompleteness of state regulation exacerbated financial mismanagement problems through a combination of incompetence and fraud (Meyer, 1901). To set the fraternal industry back on the path to solvency, states compelled fraternals to establish reserves and to use the NFC Table of Mortality or an equivalent, and they directly intervened through legislation when necessary. These steps largely brought fraternals in line with the practices of commercial life insurers, who were subject to more thorough scrutiny from state regulators. Fraternals also faced the question of what role they should have in addressing social injustices. It is problematic to judge historical organizations by current standards of what people should do, but with that in mind, David Beito, a professor of history at the University of Alabama, suggested that, within the context of their time and place, fraternals did a creditable job of providing assistance to groups that, in the pre-New Deal United States, were disadvan-

506  Handbook of research on cooperatives and mutuals taged, thus highlighting the positive role fraternals played in providing economic and social assistance to communities of African Americans, recent immigrant groups, working-class tradespeople, and women. He also discussed the perspective fraternals took toward helping others, namely that a fraternal would provide assistance, not charity. Furthermore, he indicated that the relationship between a fraternal and its members was based on reciprocity, not a donor–recipient situation (Beito, 1990). On the other side of this discussion is the nature of a common bond, which is an example of Putnam’s “bonding” type of social capital, in which groups enhance their ability to effect change because they either include or exclude people based on their innate characteristics and features. This is contrasted with “bridging” social capital, which looks to find commonalities across groups to increase their ability to effect change (Putnam, 1990). In addition to the formal exclusion of people from “our” community, these organizations’ objective was not to promote broader conceptions of social justice. It was to take care of the needs of “our” people. Turning to the question of the actual impact of fraternals, Barbara Solt, a researcher in social work, asserted that it is hard to overestimate the financial and social impact of fraternals in the pre-Social Security era. In addition to the economic impact of financial assistance to groups that could not afford private insurance, these organizations provided a social function by helping immigrant groups maintain their cultural heritage—either through rituals or organized festivals, practicing English in a non-threatening environment, helping with employment opportunities or issues, or practicing the exercise of democracy in managing the lodges (Solt, 2002). Maturation and Decline of Fraternal Benefit Societies Charles K. Knight of the Wharton School of Commerce and Finance examined the fraternal industry roughly 25 years after Meyer, in 1927. By this time, fraternal financial mismanagement had been largely, if not completely, eradicated. Now fraternals faced a different challenge, namely that by making their products and premiums consistent with those of commercial life insurers, they had more difficulty differentiating themselves, and as a result had seen a decline in membership. Knight described the process of readjusting rates to become more actuarially sound, effectively raising premiums, and indicated that higher premiums had led to lower membership. He also wrote that the adjustment of premiums created a “loss of prestige” for fraternal members, as they were no longer clearly distinguished from commercial life insurers. He differed from Meyer in suggesting that the democratic government of a fraternal does lead to lower expenses (Knight, 1927). In the 1950s fraternals were again examined as an industry, this time by Richard de Raismes Kip, whose dissertation for the Wharton School was subsequently published as a book in 1953. Kip both charted the decline and discussed the unique features of fraternals. He also reviewed the state regulation of fraternals, noting that the existing data on fraternals was incomplete because many fraternals never responded to the agencies collecting the data. Kip placed fraternals in one of six groups: growing, declining, rebounding, merged, converted to commercial companies, and disbanded/failed. He concluded that a given fraternal’s health in 1951 was directly related to whether it “faced up to [its] responsibilities” and undertook the premium adjustments described above, and that, if it wavered in taking them, its financial difficulties would continue. He also concluded that premium adjustments were necessary but not sufficient to help a struggling fraternal survive (Kip, 1953).

Mutuals  507 As a final note, the differing disciplines and locations of the researchers who have studied fraternals is suggestive of the broad reach and multi-faceted impact they have had.

TOWNSHIP MUTUAL FIRE INSURANCE COMPANIES Introduction Township mutuals were organized in the latter half of the nineteenth century to provide fire insurance to their mostly small, rural farmer members, who were responding to a gap in the product offerings of the larger stock and mutual corporations. As with life insurance in the case of fraternals, fire insurance for smaller farmers, many of whom were recent immigrants, was too expensive. Stock corporations had neither the ability nor the incentive to provide low-cost fire insurance to farmers spread over a large geographic area. These communities responded by insuring themselves. The first mutual fire insurance companies organized by farmers for the insurance of their property came into existence shortly after 1820, with the first law governing their operations enacted by the New York State Legislature in 1857. Despite the early repeal of this law, a subsequent law in New York and similar laws in different states were on the books by the mid-1870s. By the 1920s, “suitable” township mutual fire insurance laws had been enacted in 25 states. The development of township mutuals naturally occurred in those states that had taken the initiative to pass the types of legislation that would foster their growth. This primarily occurred in the Northwest and Midwest (Valgren, 1924). One feature of these early companies was their lukewarm reception from state insurance regulators, who were apprehensive about their unique organizational features, namely their small size and lack of professional management. Ultimately, these concerns were shown to be unfounded, and township mutuals gained broader acceptance. Another feature was their relative growth in the Northeast and Midwest, compared to a lack of wide acceptance in the South. This difference in regional acceptance resulted from state-level organization of township mutuals in the South as compared with local or county-level organization in the Northeast and Midwest, which then led to a relative lack of solidarity and loyalty to these firms (Valgren, 1924). Minnesota has a well-documented history of township mutuals (Keillor, 2000), and the experiences in Minnesota highlight the unique attributes of township mutuals. Starting as early as the 1860s, communities of farmers began to provide an assessment-based form of fire insurance as a natural evolution of the mutual aid they had previously provided to each other. The first recorded township mutual was organized in Vasa in Goodhue County, Minnesota in February 1867.12 Although this organization was initially unincorporated, it existed independently into the late twentieth century. Around this time, a statewide effort to provide mutual fire insurance to farmers led to the creation of the Minnesota Farmers’ Mutual Fire Insurance Association of Minneapolis (MFMFIAM) in July of 1865. This organization was in line with the “Old Stock”13 political leadership of Minnesota at the time, and it subsequently did not attract wide support from the more recent immigrant farming communities. It also competed with an in-state rival, the St. Paul Fire and Marine Insurance Company, a stock company operating in regional and national markets. MFMFIAM did attract the attention of the Grange, which was developing methods to provide lower-cost insurance to farmers.

508  Handbook of research on cooperatives and mutuals During the late 1860s and early 1870s, the Grange navigated a township mutual law through the legislature in 1873 which then, curiously, was not signed into law by the governor. This legislative sidestep and the ensuing confusion was orchestrated by A.R. McGill, the Insurance Commissioner, who strongly opposed the formation of township mutuals. In his 1874 Annual Report, McGill wrote that the signature of the governor “was prudently withheld” (1874 Minnesota Fire Insurance Report, p.73). The Grange then assumed the leadership of the MFMFIAM in 1874 and spent several years fighting with the political and commercial interests that opposed township mutuals. A township mutual authorization law was enacted in 1875, and the MFMFIAM continued to operate between the large stock and mutual companies and the emerging township mutuals until it ceased operations around 1900. Prior to the authorization act, many of the existing community organizations providing fire insurance operated without a governing law, primarily because they were able to avoid the attention of the state’s Old Stock political and business leadership (Keillor, 2000). However, by 1885, ten years after the passage of the law, 43 township mutuals were registered with the state providing more than $8 million dollars of insurance, and, by 1910, the corresponding figures were 149 companies and $254 million of insurance (Valgren, 1911). Finally, as early as 1900, more growth in the industry came from existing companies rather than new entrants (Valgren, 1924). The opposition to township mutuals was based on the claim they were too small to both sufficiently spread the risk of their members and provide enough policyholders to make them viable. As a result, the claim went, they would be unable to provide the necessary capital to cover their losses. Opponents also argued they would be unable to collect assessments, and, by focusing on lowering costs to the exclusion of all else, were of a “low value” nature, meaning they would be unable to provide a full suite of insurance services. These arguments do not account for the willingness neighbors had to enforce the obligations of the company on each other (Keillor, 2000). As township mutuals evolved, the administrative burdens of both the assessment system and high growth compelled them to become more professional and more focused, replacing the assessment system with an early version of a premium system, training management, and introducing more systematic operating procedures. For example, the failure of the Scandinavian Fire Insurance Company can be traced to having multiple, simultaneous objectives: promoting member political interests, providing mutual aid through insurance, ethnic unity, and advocating religious conduct. The weight of these objectives caused the organization to fail (Keillor, 2000). Attributes of Township Mutual Fire Insurance Companies To understand township mutual fire insurance companies it is helpful to start with a discussion of fire loss itself, the first consideration of which is that fire losses on farms are largely separable, meaning the risk to each policyholder is unique to them and their property. As a practical matter, fires on farms did not spread to other farms, a fact that greatly reduces the geographic area and number of policyholders necessary to spread the risk among a group of farmers. This contrasted with the situation confronting the Philadelphia Contributorship. Second, fire loss is largely preventable (Valgren, 1924). For organizations motivated to lower insurance cost, this became a highly relevant and important fact.

Mutuals  509 The basic elements of the policies are the types of covered risks, the property insured, and the business territory. Covered risks included both human-created and lightning-initiated fires. Township mutuals also covering damage from windstorms in their policies faced greater business risk because windstorms greatly increase the variance of losses in a given year, and windstorm damage is largely not separable, like fire damage (Valgren, 1924). As a result, most township mutuals did not offer windstorm coverage. Next, property insured originally included farm buildings and equipment. However, the question of whether crops were also covered quickly became a source of contention. Initially, one fifth of all crops were assumed to be in storage on the farm in assessing the asset value of the farm, and they were included in the policy (Valgren, 1924). Second, the community nature of these firms gave the assessors of the damage caused by fire broad discretion in determining how much damage took place, with the relevant standard being the agreement of other members. This question was not definitively put to rest until much later, and it created much confusion and controversy. Finally, the territory covered by township mutuals would seem to be limited by the term “township” in their name. The original intent was township mutuals be small, local, and limited to the “ethnic groups in a few contiguous townships [who] would form one mutual” (Keillor, 2000). The 1875 law authorizing township mutuals in Minnesota limited their operations to certain counties and to one township per firm. These requirements were loosened before 1890, expanding the insurable area and providing greater assurances that these firms could satisfy their obligations. Township mutuals also require a relatively low amount of capital to begin operations. The assessment system made large amounts of working capital and reserves unnecessary. This was a highly attractive feature to low-income rural farmers, and it made it possible to create many township mutuals. In Minnesota, the unfavorable attitude of the Minnesota Legislature and administrators toward cooperative organizations in general led to the provision in the 1870 law authorizing cooperative associations linking dividend payments and cash reserves, which had the effect of compelling early cooperatives to have more working capital on hand, both limiting their ability to invest and provide dividends to members and working against the mode of operation and the insurance products of these companies (Hensley, 1962). Township mutuals had strong motivation to lower the cost of fire insurance. Insurance companies can be successful by either collecting enough premium revenue to cover the costs of “high-value” services or lowering costs and offering lower premium rates. Since their members overwhelmingly preferred the latter approach (Keillor, 2000), township mutuals incorporated five elements: organizational form, the assessment system, strictly defining insurable risks to limit exposure, inspections to lower the costs of losses, and lowering administrative costs by performing their own administrative duties. First, the organizational form of township mutuals effectively lowered the costs of insurance by limiting the size, specializing in one type of risk, limiting the capital required, and aligning the ownership and management of the company. Furthermore, the sole purpose of insuring fire risks led to a better understanding of how fires could be prevented. Next, community ownership and the relative lack of funds on hand limited the opportunities for fraud in these organizations (Keillor, 2000). Finally, by being a form of mutual, these companies had democratic management and transparency as features. Second, the assessment system lowered the cost of insurance by assessing members directly for losses and not keeping a significant amount of capital on hand, and by not including the costs of administering a large company or paying dividends to shareholders in their cost structure. A more subtle effect of the assessment system is that, particularly in small rural

510  Handbook of research on cooperatives and mutuals communities, assessments can be scrutinized by policyholders, who can withhold payment if they are judged to be excessive. Third, by excluding certain types of loss—for example, windstorm loss—the founders of early township mutuals limited the exposure and the risks they faced. Another township mutual further limited their exposure by only insuring up to two thirds of the value of the damaged goods and not initially covering losses from sparks from trains (Keillor, 2000). While each company’s policies were different, this method of defining the reimbursable risks helped to lower costs. Fourth, by using inspectors these companies could help educate members how to lower fire risk, evaluate claims more effectively, and discourage risky behaviors. Inspectors more than paid for themselves by performing these tasks (Valgren, 1924). Furthermore, the majority of policyholders in early township mutuals favored close inspection, as it helped to keep costs low. Because inspections were performed by neighbors, members of a community could develop a reputation, which would have a bearing on any claims they would make (Keillor, 2000). Fifth, the principle of forward integration, where producers either perform certain functions themselves or eliminate middlemen, lowered administrative costs. Since they did not employ professional agents and acquired new members through word of mouth, they could forego the costs of a salesforce. Also, the relatively small geographic area meant information and other administrative costs were lower. As with many other organizations, this singular focus on cost containment was not unambiguously good. The heavy focus on lowering costs eventually began to hurt these organizations, creating “false economies.” For example, using a local secretary who is underpaid might mean a township mutual cannot attract or retain the best people for these jobs, which would end up costing the firm over the long run (Valgren, 1924). The counterargument to this is even “part-time, underpaid” officers, presumably motivated by a sense of duty to the community, performed their tasks well (Keillor, 2000). Application of Collective Action Principles Collective action was not necessarily an explicit objective for the members of early township mutuals, but it heavily influenced their behavior. The nature of the township mutual communities was heavily ethnic, which led to four factors contributing to their success: “(1) members purchasing and selling in the same market; (2) members having similar racial, religious, political, occupational, and linguistic characteristics; (3) members sharing a tradition of jointly running an organization such as a church or a voluntary association; and (4) an absence of factions or contradictory economic interests among members.” Although the homogeneity of these communities began to dissipate by the 1890s, township mutuals satisfied these requirements. Prior experience working together in the community made the adoption of township mutuals relatively easy. Furthermore, addressing the concern of unpaid assessments (the free rider problem), early township mutuals in Minnesota experienced low levels of unpaid assessments (Keillor, 2000).14 Finally, many of the methods and techniques used by early township mutuals to lower costs—acquiring new members through word of mouth, having community members fill the roles within the companies, subjectively evaluating risk and claims, and using a strict set of

Mutuals  511 inspections to manage the risk of moral hazard—are direct applications of collective action principles. Moreover, they worked, lowering the costs by lowering loss rates (Valgren, 1924).

EVOLUTION OF MUTUALS Since both fraternals and township mutuals have existed for more than 150 years, we can evaluate how they have evolved as industries. Looking first at fraternals, the peak for Total Insurance in Force (TIF) for fraternals as an industry was 1928 (Knight, 1927). Since then, TIF has been in constant decline. The township mutual industry in Minnesota faced a similar dynamic. Putnam (2000) details this phenomenon across many different community-based organizations. Many causes for this decline have been offered, and while the data for some of them appear compelling, there are no clear direct causes (Putnam, 2000). Figures 30.2 and 30.3, showing the number of fraternals and township mutuals, respectively, in a given year, highlight the entry, high growth, maturation, and decline of fraternals as an industry (White, 2013). These graphs are consistent with the theoretical graph in the discussion of the industry life cycle in Figure 30.1 above. Confronted with this dynamic at an industry level, what can mutuals do? What should they do? One response has been to consolidate. In the graphs above, when two mutuals merged, the number of firms would decline even though, technically, the same amount of insurance (TlF) would still be offered to customers of the new, merged company. However, the graphs for TIF show the same trend, suggesting consolidation may stall but not alleviate the impact of these trends. Another response has been to exit, which is the economically rational decision of a small provider in an industry dominated by economies of scale. Yet other firms have “demutualized,” becoming stock insurance companies. Whether firms selecting this approach retain their mutual character and history is an open question. Others have attempted to grow and survive in a changing environment. A study of Aid Association for Lutherans (AAL, one of the companies that merged to form Thrivent) examined how fraternals could successfully adapt to a changing market, finding that AAL’s move to offer insurance services to all

Figure 30.2

The number of fraternal benefit societies in the United States, 1868–2012

512  Handbook of research on cooperatives and mutuals

Figure 30.3

The number of township mutual fire insurance companies in Minnesota, 1875–2006

Lutherans and not just those of a particular branch of Lutheranism; changing the description of their “family financial protection”; calling their lodges “branches”; and orienting their philanthropic and community service efforts to the entire community, not just their Lutheran constituencies, helped AAL both maintain its tax-exempt status when challenged in the late 1980s and also survive the changing competitive environment in which it found itself (Solt, 2002). Finally, mutuals can just “bear it,” accepting the decline in members and revenue and doing what they can to survive. This group best represents the type of company Porter (1976) found to be irrational. The Future of Mutuals While many mutuals have been able to retain their essential character as they adapt to a changing marketplace, it becomes a fair question for outside observers to ask whether the modifications and adaptations have changed these mutuals into something their founders would not recognize or identify as mutuals. This debate, for understandable reasons, can evoke deeply passionate responses. An interesting sidebar in this discussion is the tax exemption debate surrounding fraternals. On one side of the argument is the claim that if fraternals are operating like stock and larger mutual insurance companies, they should pay taxes like those organizations. On the other side is the claim that these organizations are fundamentally different, and the social benefits they provide justify the continuance of the tax-exempt status. Related to this is the question of what fraternals do with the funds they would otherwise have paid in taxes. This question also highlights the question of whether fraternals continue to be “a different thing.” The tax reform initiative of 1986 reviewed the tax exemptions of all insurers. Blue Cross/ Blue Shield and TIAA-CREF lost their tax exemption in this review because their operations too closely resembled those of commercial insurance organizations. The US Treasury Department explored two policy options with regard to fraternals: “No Change in Current Tax Treatment” and “Modify Tax Treatment of Fraternal Benefit Societies.” In support of the

Mutuals  513 first recommendation, the report noted: “The charitable services provided by fraternal benefit societies benefit society as a whole. Fewer of these charitable goods and services are likely to be provided unless current tax treatment continues. The economic distortions caused by the special treatment of fraternal benefit societies are relatively minor in comparison to other policy priorities.” While this is far from a clear endorsement of continuing the tax exemption of fraternals, it has continued to be the policy of the US government. This is clearly a complicated topic, and it would be possible to reach different conclusions regarding the appropriate response. The study of AAL referenced above also suggested that the changes AAL undertook played a significant role in the organization retaining its tax exemption. If true, how do we evaluate these changes? Furthermore, a report comparing the benefits fraternals provide the US with the cost of continuing the tax exemption claimed the government enjoys a 68:1 return on the “investment,” or $3.4 billion in societal benefits against $50 million in foregone taxes. The estimated benefits are calculated by attaching a value to fraternal, charitable, and volunteer activities as well as a calculation of the indirect positive impacts of strengthening local communities. As a result, they are what are generally called “soft benefits,” meaning they cannot be linked to direct dollar savings or revenues. The report also contended that state and local governments could not provide the social welfare functions of fraternals (Swagel, 2010).

SUMMARY In summary, according to the dynamics of competitive analysis, mutuals, with fraternals and township mutuals as examples, should have disappeared long ago, but they have persisted. The very factors that put them at a disadvantage also provide them with the ability to withstand the pure cost-based competition of larger companies, creating a form of differentiation. That said, the techniques mutuals have used to survive call into question whether they still are mutuals. For example, if State Farm provides my insurance, is my experience different than it would be with GEICO? The type of emotional attachment members have traditionally had to their mutual organizations also seems to have waned. Finally: Do these questions really matter? Is the survival of mutuals a sufficient good to justify the means by which it occurs? These are the questions facing mutuals going forward.

FUTURE RESEARCH Given the biological and economic nature of mutualism, many of the research questions that emerge from this discussion do not fit neatly into existing datasets, and they also cross the boundaries of many disciplines. One of the most important questions is whether the economic benefits of mutual behavior can be identified and measured in a way that either supports their continued existence or justifies their disappearance. A related question is whether the adaptations mutuals have made to survive economically have fundamentally changed their nature. Specifically, does organization in the form of mutual holding companies effectively constitute demutualization of mutual insurance companies? Another avenue for research is the question of whether mutuals (defined broadly) survive the decline in social capital in the United States documented in Putnam’s Bowling Alone? One

514  Handbook of research on cooperatives and mutuals specific question is whether mutual insurance companies can compete with equivalent stock companies over time. More generally, what is the future of “mutuals,” in the forms discussed here? What should happen, or what do we as a society want to have happen? Going beyond the mere survival of mutual organizations, there is also a question of how technology in general, and social media in particular, changes the nature of what social relationships in mutuals were historically. These later questions are not highly empirical in nature but will require normative and qualitative analysis.

CONCLUSION This chapter has examined the historical foundations of modern mutual organizations. Using a number of different lenses, it has looked at the economic and personal implications for a group of people who choose to organize in this manner. It has examined the evolution of two particular types of mutual organizations—fraternal benefit societies and township mutual fire insurance companies—as they have grown and faded over time. Given the starting point of this analysis—the idea that groups of people banded together to solve problems they could not solve individually—this chapter also asks what the future holds both for the surviving organizations, and for the ways in which future groups of people will address similar problems.

NOTES 1. 2. 3. 4. 5. 6. 7. 8. 9.

10. 11.

I would like to thank Mike Boland and Chris Kopka for their helpful comments and suggestions, as well as their encouragement and friendship. Shorter Oxford English Dictionary, Fifth Edition, 2002. www​.1752​.com. See www​.ncua​.gov/​about​-ncua/​historical​-timeline. Throughout this chapter, insurance companies are classified as either “stock” (in other words, traditional investor-owned firms) or “mutual.” Similarly, fraternal benefit societies are called “fraternals” and township mutual fire insurance companies are called “township mutuals.”. This general pattern of growth and decline in community organizations is discussed in more detail in Putnam (2000). Kip cites a slogan from the late nineteenth century common among fraternal members: “Keep your reserve in your pocket.” For example, Cummins and Zi (1998) began their analysis of efficiency in the life insurance industry with the assumption that mutuals are less efficient than stock companies because of this reversal, although their study shows the data do not support that conclusion. Valgren found efficiency increased as firm size increased to a coverage area of 6–10 townships but decreased as firms grew larger. Moreover, in his Appendix 4, he showed losses as a percent of total expenditures did not decrease significantly until a firm covered 4–5 counties, and, interestingly, expenses as a percentage of total expenditures also increased after the same 6–10 township groupings. For example, the investment by Warren Buffett in GEICO in 1996 is considered by many analysts in the industry as ushering in a new wave of competition for township mutuals, and there has been considerable consolidation in Minnesota township mutuals since that time (White 2013). Survival analysis determines the probability that a given firm will exit an industry in the upcoming period (hazard rate), given a set of covariates.

Mutuals  515 12. The members of this group did not feel any strong compulsion to incorporate. Based on a strong heritage of mutual aid and collective action, “ethnic farmers’ mutuals had less need for state legal sanction” (Keillor, 2000, p.83). 13. Keillor uses this term to describe families that had immigrated to Minnesota a few generations before the 1860s and contrasts it with the more recent, ethnic-centered immigrant communities. 14. Keillor also made the additional point that the norms of ethical behavior of the Scandinavians that comprised a number of these organizations also helped reduce the risks of moral hazard and unpaid assessments (p.83). It should also be noted that these factors mirror the common bonds of fraternals.

REFERENCES Agarwal, R., and M. Gort. “The Evolution of Markets and Entry, Exit and Survival of Firms.” Review of Economics and Statistics 78, no. 3 (1996): 489–98. Agarwal, R., and M. Gort. “Firm and Product Life Cycles and Firm Survival.” American Economic Review 92, no. 2 (2002): 184–90. Akerlof, G.A. “The Market for “Lemons”: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84, no. 3 (August 1970): 488–500. Beito, D.T. “Mutual Aid for Social Welfare: The Case of American Fraternal Societies.” Critical Review 4, no. 4 (Fall 1990): 709–36. Christensen, C., M. Raynor and R. McDonald. “What is Disruptive Innovation?” Harvard Business Review (December 2015). Clough, S.B. A Century of American Life Insurance. New York: Columbia University Press, 1946. Cummins, J.D., and H. Zi. “Comparison of Frontier Efficiency Methods: An Application to the U.S. Life Insurance Industry.” Journal of Productivity Analysis 10 (1998): 131–52. Fama, E.F. “Agency Problems and the Theory of the Firm.” Journal of Political Economy 88, no. 2 (1980): 288–307. Gort, M., and S. Klepper. “Time Paths in the Diffusion of Product Innovation.” The Economic Journal 92, no. 367 (1982): 630–53. Hansmann, H. The Ownership of Enterprise. Cambridge: Belknap Press of the Harvard University Press, 1996. Houston, D., and Simon R. “Economies of Scale in Financial Institutions: A Study in Life Insurance.” Econometrica 38, no. 6 (November 1970): 856–64. Hensley, R.J. Competition, Regulation and the Public Interest in Nonlife Insurance. Berkeley: University of California Press, 1962. Jensen, M., and W. Meckling. “Theory of the Firm: Managerial Behavior, Agency Costs, and Capital Structure.” Journal of Financial Economics 3 (October 1976): 305–60. Keillor, S.J. Cooperative Commonwealth. St. Paul, MN: The Minnesota Historical Society Press, 2000. Kip, R. de Raismes. Fraternal Life Insurance in America. Philadelphia: College Offset Press, 1953. Klepper, S. “Entry, Exit, Growth and Innovation over the Product Life Cycle.” American Economic Review 86, no. 3 (1996): 562–83. Knight, C.K. “Fraternal Life Insurance.” Annals of the American Academy of Political and Social Science 130 (March 1927): 97–102. Maslow, A.H. (1943). “A Theory of Human Motivation.” Psychological Review 50(4): 370–96. Meyer, B.H. “Fraternal Insurance in the United States.” Annals of the American Academy of Political and Social Science 17 (March 1901): 80–106. Patterson, E.W. “The Future of State Supervision of Insurance.” ABA Sec Ins Negl & Comp L Proc 18 (1944): 18. Porter, M. “Please Note Location of Nearest Exit.” California Management Review, XIX(2) (1976): 21–33. Putnam, R.D. Bowling Alone. New York: Simon & Schuster Paperbacks, 2000. Solt, B.E. “Blending Service and Financial Security: A Study in the Organizational Adaptation of a Fraternal Benefit Society.” Social Thought 21, no. 1 (2002): 21–37.

516  Handbook of research on cooperatives and mutuals Strand, P. Promises Kept: The Story of the Aid Association for Lutherans and Its Extraordinary Heritage of Service. Appleton, WI: Aid Association for Lutherans, 2001. Swagel, P.L. “Economic and Societal Impacts of Fraternal Benefit Societies.” Washington DC: Georgetown University McDonough School of Business working paper, September 10, 2010. Valgren, V.N. “Farmers’ Mutual Fire Insurance in Minnesota.” Quarterly Journal of Economics 25, no. 2 (February 1911): 387–96. Valgren, V.N. Farmers’ Mutual Fire Insurance in the United States. Chicago: The University of Chicago Press, 1924. White, J. “The Evolution of Collective Action Business Models: Applications in Fraternal Benefit Societies and Township Mutual Fire Insurance Companies.” PhD dissertation, University of Minnesota Applied Economics Department, 2013.

31. Worker cooperatives: solidarity at work Sonja Novkovic and Jessica Gordon Nembhard

INTRODUCTION Worker cooperatives are worker-owned and controlled enterprises. Workers (members) own all or most of the capital, individually and/or collectively; most workers are members and most members are workers (CICOPA 2004); and any category of worker in the enterprise can become a member, therefore excluding partnerships such as law firms from this definition (Perotin 2020). Strategic decisions are made through collectively devised democratic structures and processes, with members holding one vote regardless of the amount of capital they hold in the enterprise (ibid.). Democratic decision-making by the workers, including the appointment of management, is a critical defining characteristic that separates worker cooperatives from employee share ownership forms such as Employee Stock Ownership Plans (ESOPs) (Bonin et al. 1993). The early notable mentions of worker cooperatives as a progressive form of enterprise notwithstanding (J.S. Mill 1852 [1987], as cited in Zamagni 2014), the economic theory of worker cooperatives in the twentieth century has been marked by the neoclassical approach to the theory of the firm, with some variations introduced with different schools of thought. The question of governance, “Why does capital hire labor, and not the other way around,” or why are worker cooperatives relatively rare, dominated the neoclassical theory (Dow 2018). Besides attempts with the neoclassical and property rights theories, transactions costs and new institutional economics, followed by behavioral economics offered some insights. Humanistic theories (relabeled socio-economics) have been revisited of late, and seem to show promise in capturing the foundational characteristics of worker cooperatives. We outline the assumptions and sketch the approaches in different schools of thought, elaborating on current theoretical advances, and end with a presentation of empirical evidence of the socio-economic impact of worker cooperatives and directions for future research.

THE NEOCLASSICAL APPROACH Benjamin Ward’s seminal article of 1958, inspired by self-management in the former Yugoslavia at the time, assumes that the objective function of worker cooperatives is to maximize the average income of worker-members, in contrast to the profit maximization of investor-owned firms (IOF). This model was later accompanied by the macro-level analysis of a labor-managed economy of Jaroslav Vanek (1970). Average income maximization accompanied by the assumption that labor can be freely varied produced well-known “perverse results”: a backward-bending supply curve with production and employment inferior to an IOF. Since wages are endogenous in a worker cooperative, rather than fixed and determined by the market, wages are higher and employment is lower under the assumptions of the 517

518  Handbook of research on cooperatives and mutuals Ward-Vanek model. This implies layoffs when demand for a firm’s product increases while hiring more worker-members to spread the fixed cost when demand declines. Literature that followed included various conditions that remove worker co-op inefficiencies of the Ward-Vanek model: from a competitive market (Dreze 1976); to introduction of multiple outputs (Domar 1966); to utility maximization with both employment and wages as variables (Smith 1984) or a market for membership shares, that is transferable membership rights (Sertel 1982; Dow 1986; 1996)—all resulted in an efficient outcome comparable to the profit maximizing, investor-owned (IOF) benchmark model. Worker cooperatives in the neoclassical theory are also unstable (Webb and Webb 1920; Ben-Ner 1984): with increasing demand, they will hire non-member workers to divide profits among fewer members, reducing the member-to-non-member ratio and degenerating until they demutualize and transform into a capital society. The vast empirical work examining worker cooperatives in the UK, France, US, Uruguay, and Italy, to name some key contributions (see Bonin et al. 1993; Dow 2018; Perotin 2020) did not produce any evidence in support of the Ward-Vanek hypothesis besides a comparatively less elastic supply curve. Levine and Tyson (1990) find that the combination of participation and ownership in worker cooperatives increases productivity and provides “superior working conditions” in worker cooperatives, thereby disputing the inefficiency hypothesis. The empirical literature also shows that worker cooperatives adjust wages rather than employment1 in response to changing market conditions (Pencavel et al. 2006; Perotin 2020), thereby contradicting the labor variability hypothesis of the Ward-Vanek model. Further, the empirical literature supported the inclusion of employment into the objective function of worker cooperatives, indicating a misspecification of the objective function of the Ward-Vanek model, as suggested by Dow (2003, 2018).

PROPERTY RIGHTS THEORY Furubotn and Pejovich (1970), also inspired by the labor-managed firm in the former Yugoslavia, examined the impact of the allocation of property rights on individual investment incentives. As in most worker cooperatives elsewhere, workers in Yugoslav firms did not have transferable ownership rights of the firm’s assets. Bringing the unit of analysis to the individual rather than the organization, the authors posit that self-financed worker-managed enterprises will result in underinvestment since workers will prefer to distribute surpluses through wage income or bonuses instead of reinvesting it into the enterprise. Internally generated financial capital is collective rather than individually owned. Individual workers therefore have claims on the generated returns only as long as they are members (Jensen and Meckling 1979; Bonin et al. 1993). Non-transferable property rights are at the heart of this investment “horizon problem,” which has been cited in the literature as an inherent problem in cooperatives with “vaguely defined” property rights, from workers to agricultural producers (see Cook 1995, for example). Proposals to resolve this issue have spanned from establishing markets for membership shares (Sertel 1982, 1987; Dow 1986, 1996) to the creation of dual-individual and collective accounts (Ellerman 1986, 2013), indivisible reserves, and investment bonds (Tortia 2007).

Worker cooperatives: solidarity at work  519 However, at issue also is that collective ownership of cooperative assets is superimposed on individual property rights, giving rise to the “tragedy of the commons” dilemma (Hardin 1968). The necessity of this outcome has been theorized and most notably disputed by Ostrom (1990), who established conditions under which the collective management of the commons is more effective than their privatization. Regardless of these latter developments, Gray (2004) notes that the collective nature of cooperative capital is interpreted as “vaguely defined [individual] property rights” by the neoclassical economic theorists advocating the re-privatization of cooperative assets. The collective nature of ownership implies that the use of collective assets and benefit from this use in a cooperative are individual membership rights (Ellerman 1982, 1986, 2013), while the right to dispose of cooperative assets is collective and limited (see ICA, 2015: p.39). As Ellerman (1990) explains, in worker cooperatives what results from employee-owners renting capital (instead of the other way around) is that the “new assets and liabilities created in production” accrue to the workers—the residual claimants (p.207). Beyond these theoretical considerations, empirical literature seems to find no evidence of underinvestment in worker cooperatives (Bonin et al. 1993; Fakhfakh et al. 2012; Perotin 2013, 2020; Burdin 2014), refuting the hypothesis that worker cooperatives have lower capital/labor and capital/output ratios (Bonin et al. 1993), or that they are relatively small compared to their investor-owned counterparts (Perotin 2020).

NEW INSTITUTIONAL APPROACH AND TRANSACTION COSTS ECONOMICS The literature on worker cooperatives in the last two decades of the twentieth century bore the mark of transaction costs economics, and in particular the work of legal scholar Henry Hansmann (1996) offering a unifying theory of the firm’s ownership. Ownership rights include the right to control the enterprise and the residual income. The author argues that the costs of ownership and the costs of contracting will determine the most efficient firm ownership arrangement, so workers will be owners when contractual costs are high. Worker-owned enterprises, according to Hansmann, include worker cooperatives, partnerships of service professionals such as lawyers or dentists, and ESOPs. The author recognizes partial worker ownership by workers’ inclusion in either the control of the enterprise (such as the German co-determination system including the employees on the board of directors) or the residual income rights (profit sharing). Ben-Ner and Jones (1995) further elaborate on worker participation in decision making (control right) and finance (residual right) to identify the nuances of the two types of “rights” or forms of participation. They identify worker cooperatives as the only enterprise form with workers participating fully in both the income distribution and control of the enterprise. However, the transaction costs approach has not been very successful in providing an explanatory model for worker cooperative formation or performance. Hansmann’s (2013) claim that “all firms are cooperatives—and so are governments” is indicative of the misguided logic and argumentation behind a firm’s ownership, control, and purpose; it is also indicative of the siloed approaches in different disciplines, pointing to the need to look at firms as human creations from multiple, social, economic, and behavioral, perspectives, and not just as a nexus of contracts.

520  Handbook of research on cooperatives and mutuals

BEHAVIORAL ECONOMICS The relevance of behavioral economics to the theory of worker cooperation lies in its fundamental assumptions about human nature. Contrary to neoclassical optimizing behavior by rational economic agents who respond to extrinsic incentives, actual human decision-making is characterized by bounded rationality (Simon 1979). Under conditions of complexity and uncertainty, people are not able to fully process information (ibid.); they resort to “rules of thumb,” but also group decision-making, peer-monitoring, and reciprocity (Gintis et al. 2005). Workers are intrinsically motivated by values, such as dignity at work, fairness, and solidarity, making room for the return of “moral sentiments” to economic analysis (Bowles and Gintis 2011; Bowles 2016). Due to trust and reciprocity among workers who are insiders to the enterprise, cooperation is more likely than pure self-regard. However, worker cooperatives are significantly less numerous than investor-owned companies. Behavioral economists look for answers in the reliance of cooperative organizational design on intrinsic motivations of their members, and its vulnerability to heterogeneous member preferences. New members who join a worker cooperative need not be values-aligned (Ben-Ner and Ellman 2013), leading to hybridization of the cooperative and/or demutualization. On the positive theory side, cooperative formation is viewed as a deliberate choice by the actors engaging in reciprocity as the mechanism of exchange and trust building (Zamagni and Zamagni 2010; Zamagni 2014). Worker cooperatives engender relational incentives (Zamagni 2014) through psychological components of the organizational culture. They create workplaces that promote a sense of belonging, identity, shared values, and mutuality, contributing to their competitiveness and longevity. Further, voluntary and spontaneous cooperation is identified to be an additional component of the coordination mechanism in cooperative organizations (Borzaga and Tortia 2017).

HUMANISTIC ECONOMICS2 Sharing basic assumptions about human nature with behavioral theories, and starting from an understanding that economics is about satisfying human needs while promoting human dignity and well-being, humanistic economics adopts a complexity perspective on human nature in a conception of a “dual self” (Lutz and Lux 1988; Lux and Lutz 1999). While psychologists assign duality to the hierarchy of human needs, from material to social; to needs for self-actualization (Maslow 1968, cited in Lutz and Lux 1988); and/or to balancing physiological brain functions (Cory 2006; Levine 2006), humanistic economists attach the important proviso that the balance existing within this duality is socially and institutionally mediated (Hogan 1984; Lux and Lutz 1999; Novkovic 2012; Puusa et al. 2016). Of relevance for worker cooperative theory and practice is the recognition of work as integral to human development and self-realization. Labor is therefore considered a “fictitious commodity” (Polanyi 1944), since work is not created for exchange, but is an integral part of human beings. Haynes and Gordon Nembhard (1999), for example, argue (based on Hogan 1984) that “people are the key factor and their labor which is generated and expended on themselves and the material means of survival is the driving force of the political-economic system” (p.55). For Hogan, external work is the expenditure of human energy to create the material means of survival for the human population. The political-economic challenge is

Worker cooperatives: solidarity at work  521 about control over that human energy. From the humanistic perspective, therefore, worker ownership and control are central to dignified work, instead of being paid wages via contractual rental arrangements in labor markets (Ellerman 1990). In other words, the purpose of worker cooperatives is to de-commodify labor (Novkovic 2021). David Ellerman’s opus about the democratic firm (1982, 1986, 1990, 2014, 2016) captures the essence of the humanistic approach to the relationship between labor and capital. While mainstream economic theory treats both as inputs in production, commodifying labor through a market transaction and wage as its price, Ellerman points out the non-separability of labor from a person. Wage labor and contractual arrangements stand against human dignity and self-responsibility at work, as human beings have agency and responsibility for their actions and cannot be “human rentals” but ought to organize economic activity through economic democracy (Ellerman 1986). The non-alienability of work and the collective nature of the enterprise provide the foundations of the humanistic theory of worker cooperatives and their governance. Although also the owners, worker-members are not investors; rather, they collectively engage in a working relationship and hire the capital they need (see Lutz and Lux 1988, p.160). Logue and Yates (2005, p.56) highlight that “cooperatives facilitate people in pooling their greatest asset, their labor, along with small amounts of cash (perhaps all the cash they have), to create a larger enterprise from which they will receive a benefit and return.” Further, Ellerman stresses the nature of economic democracy (voice) as a personal right of worker-members rather than a property right, contrasting the dominant property rights approaches in the economics of labor-managed firms (Furubotn and Pejovich 1970; Jensen and Meckling 1979). Stefano Zamagni, Vera Negri-Zamagni, Luigino Bruni, and Benedetto Gui can also be added to the proponents of humanistic theory with their approach highlighting the relational goods produced by cooperation (Gui 2005; Bruni and Zamagni 2013); people-centered economy (Negri-Zamagni 2019); civil economy (Bruni and Zamagni 2017); and an overall understanding of the worker cooperative model as the foundation of a human-centered economic system (Zamagni 2014).

THEORIES BUILT FROM INSTITUTIONAL PRACTICE AND EMPIRICAL EVIDENCE Among the most influential practical examples of successful worker cooperative networks are the Italian model and the Mondragon model in Spain. Many theoretical advancements were inspired by the institutional arrangements in these two regions; some are legal and regulatory requirements, but most come from self-defined rules and practices by worker cooperative enterprises and their networks. Speaking to both systems, the importance of networks or “leagues” (Smith 2001; 2004a, 2004b) has been recognized as the hallmark of cooperation and cooperative growth. Associations, federations, and consortia (Italy) and a cooperative group (Mondragon) have been recognized as one the key factors in their long-term success (Arando et al. 2010; Menzani and Zamagni 2010; Zevi et al. 2011; Roche et al. 2018; Negri-Zamagni 2019). In terms of its influence, the “Italian school” made significant contributions to advances in cooperative finance and to social cooperatives, among others. The former group explores the role and impact of indivisible reserves in Italian cooperatives, as well as the collective devel-

522  Handbook of research on cooperatives and mutuals opment funds and other solidarity financial instruments. National cooperative federations (La Lega Cooperativa and Confcooperative) play a particularly important role, having created cooperative development funds and other financial institutions available for cooperative development (Negri-Zamagni 2019; Ammirato 2018). Worker cooperatives, then, have been theorized as “commons,” featuring collective and indivisible asset ownership (Navarra and Tortia 2014; Navarra 2016; Tortia 2018), with implications for employment and wage stability as well as longevity and resilience. This line of research supports the empirical evidence challenging the predictions of the “first generation” theoretical models (also see Dow 2018). Regarding social cooperatives, this is the newer wave of cooperative development initiated in Italy with the introduction of the Law on Social Cooperatives in 1991, in response to some 20 years of their functioning prior to the enactment of the Law (Vezina and Girard 2014). Social cooperatives are often discussed as a multi-stakeholder cooperative form. However, some are worker cooperatives, and when multi-stakeholder, they are labor-inclusive (Novkovic 2020). In other words, in most Italian social cooperatives workers are members who contribute to their governance (Borzaga and Depedri 2014, 2015). The “Mondragon school,” on the other hand, explores labor sovereignty in worker cooperatives as the source of institutional structures that nurture solidarity, intercooperation, and cooperative networks as governance tools providing resilience to the networks’ close to 100 cooperatives (Ellerman 2005; Arando et al. 2010; Roche et al. 2018). Contrary to theoretical assumptions suggesting inefficiency of democratic governance due to high transaction costs (Hansmann 1996), democratic features and cooperative values have been the source of Mondragon’s competitiveness and survival through various externally imposed crises since the inception of the first cooperative in 1956. Mondragon institutionalized solidarity and income equity by paying close attention to the highest-to-lowest pay ratio and instituting a no layoffs policy and by strategically deploying solidarity among cooperatives. The latter feature includes sharing labor, creating supply chains, and common services such as social security, research and development, and education, as well as providing finance through collective indivisible reserves. Mondragon also instituted dual accounts that resolve the potential “horizon problem” (Ellerman 1986). Worker cooperatives also feature different growth patterns than the competing enterprise forms. They form horizontal and vertical networks of small to medium-sized enterprises to achieve scale, as well as resort to spinoffs (Roelants et al. 2001; Zevi et al. 2011; Ellerman 2013; Roche et al. 2018), which, together with the indivisible capital reserves, frames the resilience hypotheses (Navara and Tortia 2014; Tortia 2018) evidenced in empirical findings about the longevity and viability of this business form (Bonin et al. 1993; Dow 2018). Other empirical research deals with socio-economic features of the worker cooperative model, realizing that workers are interested in creating and preserving quality jobs—more so than income maximization (Burdin and Dean 2009; Arando et al. 2010; Navarra 2016). Borzaga and Galera (2012, p.9) also find that “conventional firms tend to adjust employment levels, while worker cooperatives adjust pay, thus safeguarding employment.” They contend that cooperatives, whose mission is to meet the needs of their members (not accumulate profits), tend to redistribute their resources to workers by increasing their wages or employment, or to redistribute to consumers. Similarly, Franklin (2014) finds that worker cooperatives address the challenges of low-wage jobs and unemployment because they are self-sustaining businesses whose goal is to sustain and create jobs with livable wages.

Worker cooperatives: solidarity at work  523 Worker co-ops are an expression of human dignity in the workplace (Stocki and Hough 2016) and worker empowerment (Cannell 2015). More recent developments in platform capitalism (Srnicek 2016), causing a changing world of work, have prompted an explosion and a movement of platform cooperativism, with workers taking control over platforms that control “virtual” jobs in the gig economy (see Scholz 2016; Scholz and Schneider 2016).

BENEFITS OF WORKER COOPERATION Worker co-ops are not just economic enterprises but also are associations of people (members) and communities of workers (Ellerman 1990; Malo and Vezina 2004; Novkovic et al. 2022). There is evidence that worker ownership and control/participation increase productivity and create shared value as well as community benefits (Vanek 1970; Levine and Tyson 1990; Spear 2000; Logue and Yates 2005; Borzaga and Galera 2012; Novkovic and Gordon Nembhard 2017). Vanek (1970), for example, notes the efficiencies gained from active participation in ownership. This leads to participation in control and management of the co-op, which leads to equitable income sharing. Logue and Yates (2005) find that worker cooperatives and employee-owned firms have survival rates that equal or surpass conventional firms, and produce a combination of conventional and non-traditional economic returns. They “place more emphasis on job security for employee-members and employees’ family members, pay competitive wages (or slightly better than their sector), provide additional variable income through profit-sharing, dividends or bonuses, and offer better fringe benefits” (2005, p.ix). Besides the impact of worker participation on economic efficiency, worker co-ops have clear social impacts due to the inalienability of labor from the person and their social life. Worker co-ops redistribute good jobs, good salaries, and wealth; offer economic security, income and wealth generation, and democratic economic participation to employees; and provide meaningful and decent jobs and often environmental sustainability to communities (see Roelants et al. 2001; Gordon Nembhard 2014, 2015). Workers form cooperatives to jointly own and manage a business themselves, stabilize employment, make policy, and share the profits. Worker cooperatives are often established to save a company that is being sold off, abandoned, or closed down; to solidify or maintain a unionized business; or to start an enterprise that exemplifies workplace democracy and collective management. Conversions from a conventional company into a worker-owned cooperative (that is, worker buyouts) are also recognized as a strategic tool in SME succession planning (Zevi et al. 2011; Vieta 2021) and as a cooperative growth model (Zevi et al. 2011). Cooperatives anchor resources and keep them recirculating in a community as well as giving back to and supporting their communities in myriad ways (see Fairbairn et al. 1991; Gordon Nembhard 2015). They provide a mechanism for low-resourced and marginalized people with few traditional opportunities to create new economic opportunities for themselves and their co-workers and/or neighbors (Franklin 2014; Gordon Nembhard 2014, 2015). Gordon Nembhard’s research documents the efforts of African Americans to address racial discrimination and economic exclusion and exploitation through cooperative ownership. Black worker cooperatives were specifically developed throughout US history to address unemployment, exclusion, and low wages in the mainstream economy, as well as underdevelopment and disinvestment in Black communities. The fastest-growing worker co-ops in the US in the twenty-first century are those owned by women of color.

524  Handbook of research on cooperatives and mutuals Further, worker co-ops develop many types of human and social capital (see Shipp 2000; Borzaga and Galera 2012; Gordon Nembhard 2004, 2014). Member/owners not only gain industry-specific skills, but also a variety of general business skills and leadership capacities. They develop leadership skills and team building by participating in “joint action by a social group sharing a collective identity” (Borzaga and Galera 2012, p.11). For example, Gordon Nembhard (2004, 2014, 2015) illustrates many examples of African Americans, especially Black women, exerting and developing leadership by forming cooperatives, educating people about cooperatives, and leading cooperative societies, organizations, and businesses. From Spear (2000) we understand both the economic and social advantages of worker cooperatives: they “provide a uniquely favorable basis for the utilization of social capital, its reproduction, and accumulation” (p.519) because of their associative nature and their strong connections with community. Co-ops are able to attract non-traditional resources as well as traditional ones, reduce costs of ownership, provide “a network of [reciprocal and] trust relationships which reduce asymmetric information and opportunistic behavior,” and “allow more efficient economic exchanges and activities” (Spear, 2000, p.519). Spear (2000, p.522) concludes that worker co-ops are more flexible, and contribute “less inflation and less unemployment in downturns which produce a positive macroeconomic effect.”

FUTURE RESEARCH Worker ownership and democratic control result in positive outcomes, from increased productivity to positive social impacts. Yet worker cooperatives, although present in every corner of the world, continue to be relatively rare compared to investor-owned enterprises. It has been recognized for a while that an explanatory economic theory of the worker cooperative firm has yet to be developed (Dow 2003, 2018; Borzaga and Tortia 2017), but we argue that this is not possible to do without an interdisciplinary approach. Besides lessons from psychology applied in behavioral economics, a worker cooperative theory needs a socio-economic understanding of factors that motivate cooperative members to join this associative form of business enterprise. A compelling (socio)economic theory of the worker cooperative as a collective enterprise is yet to be crafted, but some of its elements rest in its associational nature—collective ownership and democratic control, collective contributions and income distribution proportional to work (see Novkovic, Puusa and Miner 2022)—while others lie in the assumptions of individual motivations countering neoclassical homoeconomicus, such as the self-determination theory which identifies intrinsic and autonomous motivation as the source of human satisfaction (Deci and Ryan 1985; Borzaga and Tortia 2006). Research is also needed to provide better understanding of the institutional environment that is detrimental to worker cooperative development when compared to its investor-owned counterparts. Comparisons in the literature often include IOFs whose shares are traded in capital markets, but cooperatives are typically SMEs. We need to learn more about the institutional conditions required to start up a small business versus a worker cooperative, from legal and regulatory frameworks, to the types of support available to collective entrepreneurs. Besides these foundational and “old” issues, new developments in the platform and gig economy call for research on new applications of the worker cooperative model, and motivations for their entry. Some issues are not new, but have a different form. At one end of

Worker cooperatives: solidarity at work  525 the spectrum is the poorly regulated platform economy which provides no protection to its workers (Scholz 2016). Precarious work is another related issue in this new world of work, so worker cooperatives often provide the missing layer of security. This is evidenced in the rise of platform cooperatives, as well as labor cooperatives which provide social security, income smoothing, or job placement and training for members. Also of relevance for worker cooperative organizing is the renewed interest in reclaiming the commons (Bollier and Helfrich 2019). Based largely on Ostrom’s dispute of the imminent tragedy of common resources, there are lessons to learn from worker cooperative experiences that can be applied to democratic governance of the commons. The labor-inclusive multi-stakeholder form is of interest in this field (discussed elsewhere in this volume). Worker cooperatives are different from other types of cooperative enterprises not only because labor is not alienable, but also because their members are insiders who interact with each other in close proximity and in multiple domains—from professional to personal. Social capital plays an important role in a well-functioning worker cooperative, and so does the system of democratic governance and in particular systems that either reduce the likelihood of conflict or provide de-personalized conflict resolution mechanisms, whether self-managed or where worker-owners hire outside managers. Many self-managed worker co-ops in particular have evolved effective democratic governance practices; an increasing number use sociocratic governance (Rau and Koch-Gonzalez 2018) with consent instead of consensus as a decision-making mechanism. Sociocracy and other governance systems need to be better understood, especially from the perspective of reducing the cost of governance. Another important aspect of worker cooperation that is under-studied is the web of key performance indicators used to assess effectiveness. Tools such as the Coop Index (Stocki et al. 2010; Novkovic et al. 2012) offer some insights, but more research is needed to adequately understand this form of enterprise and effective democratic practices, and to develop appropriate indicators to assess its performance.

CONCLUSION Worker cooperatives have existed at least since the 1830s (Perotin 2013), yet they have disappeared from economics textbooks under the dominance of neoclassical economics (Kalmi 2007), being proclaimed inefficient and irrelevant. The dominant neoclassical economics school identifies the problem of worker cooperatives to be in the missing labor markets (Dow 2018) and attempts to resolve this to achieve an efficient outcome. This proposition is illustrative of the siloed approach to socio-economic issues, such as in work by economists who treat work as an input in production rather than an integral part of a person. The entire point of the formation of worker cooperatives as an alternative way of organizing production is to de-commodify labor (Novkovic 2021). Therefore, the labor market may be “missing” because worker cooperators choose not to engage with it, rather than it being a problem to be solved (Zamagni and Zamagni 2010 term this the “supply side” cause for cooperative formation). A good modern economic theory of worker cooperatives has not yet been developed because modern economic theories center on efficiency and the management of scarcity, with profit maximization as the benchmark model, whereas economic cooperation is about the organization of human beings to manage resources equitably and to address human needs collectively. Worker cooperatives facilitate and emphasize the ways in which groups of people

526  Handbook of research on cooperatives and mutuals engage in communities of work, dignify and empower labor, and celebrate collective work, democratic governance, and equitable distribution of income and wealth. Future research needs to uncover some of the characteristics of the worker cooperative firm, which may be indicative of a different kind of economic organizing—collective and self-governed—that is at the forefront of the third and fourth industrial revolutions. From technology-assisted distributed work to global calls for distributed wealth, economic democracy is gaining ground. Old theories of worker cooperatives need to be given a makeover to understand the conditions under which they can thrive in the new economy.

NOTES 1. In Yugoslavia, layoffs were not possible as an institutional, legally mandated constraint (Horvat 1984; Novkovic and Rees 1992). 2. Humanistic economics broadly understood encompasses socio-economics (Lutz 1999) and socio-ecological economics (Stash 2017) schools of thought.

BIBLIOGRAPHY Ammirato, P. (2018). The Growth of Italian Cooperatives: Innovation, Resilience and Social Responsibility. Routledge. Arando, S., F. Freundlich, M. Gago, D. Jones & T. Kato (2010). Assessing Mondragon: Stability & Managed Change in the Face of Globalization. William Davidson Institute Working Paper Number 1003. Ben-Ner, A. (1984). On the stability of the cooperative type of organization. Journal of Comparative Economics, 8(3): 247–60. Ben-Ner, A. and Jones, D.C. (1995). Employee participation, ownership, and productivity: a theoretical framework. Industrial Relations, 34(4): 532–44. Ben-Ner, A. and M. Ellman (2013). The contributions of behavioural economics to understanding and advancing the sustainability of worker cooperatives. Journal of Entrepreneurial and Organizational Diversity, 2(1): 75–100. Bollier, D. and S. Helfrich (eds) (2019). Free, Fair and Alive. New Society Press. Bonin, J.P., Jones, D.C., and Putterman, L. (1993). Theoretical and empirical studies of producer cooperatives: will ever the twain meet? Journal of Economic Literature, 31, 1290–1320. Borzaga, C. and Depedri, S. (2014). Cooperatives providing welfare services: the case of Italian social cooperatives, in Gijselinckx, C., Zhao, L. and Novkovic, S. (eds), Cooperative Innovations in China and the West. Palgrave, pp. 140–58. Borzaga, C. and Depedri, S. (2015). Multi-stakeholder governance in civil society organizations: models and outcomes, in Laville, J.L., Young, D.R and Eynaud, P. (eds), Civil Society, the Third Sector and Social Enterprise. Routledge, pp. 109–21. Borzaga, Carlo and Galera, Giulia. (2012). Promoting the Understanding of Cooperatives for a better world. Summary, proceedings of “Promoting the Understanding of Cooperatives for a Better World” conference, sponsored by Euricse and International Cooperative Alliance, March 15 and 16, 2012, Venice, Italy. September 28, Euricse. Retrieved from http://​ica​.coop/​sites/​default/​files/​media​_items/​ Report​_Venice2012​_PRINT​.pdf. Borzaga, C. and Tortia, E. (2006). Worker motivations, job satisfaction, and loyalty in public and nonprofit social services. Nonprofit and Voluntary Sector Quarterly, 35(2): 225–48. Borzaga, C. and Tortia, E.C. (2010). The economics of social enterprises: an interpretive framework, in Becchetti, L. and Borzaga, C. (eds) The Economics of Social Responsibility: The World of Social Enterprises, Routledge, pp.15–33.

Worker cooperatives: solidarity at work  527 Borzaga, C. and Tortia, E.C. (2017). Co-operation as coordination mechanism: a new approach to the economics of co-operative enterprises, in Michie, J., Blasi, J. and Borzaga, C. (eds) The Oxford Handbook of Mutual, Co-operative, and Co-owned Business, Oxford University Press, pp.55–75. Bowles, Samuel (2016). The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens. Yale University Press. Bowles, Samuel and Gintis, Herbert (2011). A Cooperative Species: Human Reciprocity and Its Evolution. Princeton University Press. Bruni, L. and Zamagni, S. (2013). Handbook on the Economics of Reciprocity and Social Enterprise. Edward Elgar Publishing. Bruni, L. and Zamagni, S. (2017). Civil Economy: Another Idea of the Market. Columbia University Press. Burdin, G. (2014). Are worker-managed firms more likely to fail than conventional enterprises? Evidence from Uruguay. Industrial and Labor Relations Review, 67, 202–38. Burdin, G. and Dean, A. (2009). New evidence on wages and employment in worker cooperatives compared with capitalist firms. Journal of Comparative Economics, 37, 517–33. Cannell, B. (2015). Cooperation as conversation, in Novkovic, S. and Miner, K. (eds), Co-operative Governance Fit to Build Resilience in the Face of Complexity. ICA, pp.70–73. CICOPA (2004). World Declaration on Worker Cooperatives. www​.cicopa​.coop/​wp​-content/​uploads/​ 2017/​12/​World​-declaration​-on​-Worker​-coops​_EN​.pdf [January 12, 2022]. Cook, M. (1995). The future of U.S. agricultural co-operatives: a neo-institutional approach. American Journal of Agricultural Economics, 77, 1153–9. Cook, M. (2018). A life cycle explanation of cooperative longevity. Sustainability, 10(5), www​.mdpi​ .com/​2071​-1050/​10/​5/​1586 [January 20, 2021]. Cory Jr, G.A. (2004). The Consilient Brain: The Bioneurological Basis of Economics, Society and Politics. Kluwer Academic Publishers. Cory Jr, G.A. (2006). A behavioral model of the dual motive approach to behavioral economics and social exchange. The Journal of Socio-Economics, 35: 592–612. Deci, E.L. and Ryan, R.M. (1985). Intrinsic Motivation and Self-determination in Human Behavior. Plenum. de Peuter, G. and Dyer-Witheford, N. (2010). Commons and cooperatives. Affinities: A Journal of Radical Theory, Culture, and Action, 4(1): 30–56. Domar, E. (1966). The Soviet collective farm as a producer cooperative. American Economic Review, 56: 743–57. Dow, G.K. (1986). Control rights, competitive markets, and the labor management debate. Journal of Comparative Economics, 10: 48–61. Dow, G.K. (1996). Replicating Walrasian equilibria using markets for membership in labor-managed firms. Economic Design, 2: 147–62. Dow, G.K. (2003). Governing the Firm: Workers’ Control in Theory and Practice. Cambridge University Press. Dow, G.K. (2018). The theory of labor-managed firm: past, present and future. Annals of Public and Cooperative Economics, 89(1): 65–86. Dreze, J. (1976). Some theory of labor management and participation. Econometrica, 44(6): 1125–39. Ellerman, D. (1982). The Socialization of Entrepreneurship: The Empresarial Division of the Caja Laboral Popular. Industrial Co-operative Association. Ellerman, D. (1984). Theory of legal structure: worker cooperatives. Journal of Economic Issues, 18(3): 861–91. Ellerman, D. (1986). Horizon problems and property rights in labor-managed firms. Journal of Comparative Economics, 10: 62–78. Ellerman, David (1990). The Democratic Worker-owned Firm. Unwin Hyman. Ellerman, D. (2005). The two institutional logics: exit-oriented versus commitment-oriented institutional designs. International Economic Journal, 19(2)(June): 147–68. Ellerman, D. (2013). Three themes about democratic enterprises: capital structure, education, and spinoffs. Advances in the Economic Analysis of Participatory & Labor-Managed Firms, 14: 329–55. Ellerman, David (2014). On property theory. Journal of Economic Issues, 58(3): 601–24.

528  Handbook of research on cooperatives and mutuals Ellerman, D. (2016a). The Democratic Firm. Retrieved from www​.ellerman​.org/​wp​-content/​uploads/​ 2016/​06/​DEMOFIRM​.pdf. Ellerman, D. (2016b). The labour theory of property and marginal productivity theory. Economic Thought, 5(1): 19–36. Fairbairn, B., Bold, J., Fulton, M., Hammond Ketilson, L. and Ish, D. (1991). Cooperatives and Community Development: Economics in Social Perspective. Saskatoon, Saskatchewan: University of Saskatchewan, Centre for the Study of Co-operatives (revised 1995). Fakhfakh, F., Perotin, V. and Gago, M. (2012). Productivity, capital, and labor in labor-managed and conventional firms: an investigation on French data. Industrial and Labor Relations Review, 65, 847–879. Franklin, N. (2014). Worker Cooperatives for New York City: A Vision for Addressing Income Inequality. New York: Federation of Protestant Welfare Agencies. Furubotn, E.G. and Pejovich, S. (1970), Property rights and the behavior of the firm in a socialist state: the example of Yugoslavia. Zeitschrift für Nationalökonomie, 30, 431–54. Gintis, H., Bowles, S., Boyd, R.T. and Fehr, E. (2005). Moral Sentiments and Material Interests: The Foundations of Cooperation in Economic Life. MIT Press. Gordon Nembhard, J. (2004). Non-traditional analyses of cooperative economic impacts: preliminary indicators and a case study. Review of International Co-operation, 97(1): 6–21. Gordon Nembhard, J. (2014). Collective Courage: A History of African American Cooperative Economic Thought and Practice. University Park, PA: Pennsylvania State University Press. Gordon Nembhard, J. (2015). Understanding and measuring the benefits and impacts of co-operatives, in L. Brown et al. (eds) Co-operatives for Sustainable Communities: Tools to Measure Co-operative Impact and Performance, Co-operatives and Mutuals Canada and Centre for the Study of Co-operatives (University of Saskatchewan), Friesens, pp.152–79. Gray, T (2004). De/Reconstruction of vaguely defined property rights within neoclassical discourse and cooperative finance. Journal of Rural Cooperation, 32(2): 99–110. Gui, B. (2005). From transactions to encounters: the joint generation of relational goods and conventional values, in B. Gui and R. Sugden, Economics and Social Interaction, Cambridge University Press, pp.23–51. Hansmann, H. (1996). The Ownership of Enterprise. The Belknap Press of Harvard University Press. Hansmann, H. (2013). All firms are co-operatives, and so are governments. Journal of Entrepreneurial and Organizational Diversity, 2: 1–10. Hardin, G. (1968). The tragedy of the commons. Science, 162(3859): 1243–8. Haynes, Curtis Jr, and Jessica Gordon Nembhard. (1999). Cooperative economics -- a community revitalization strategy. Review of Black Political Economy, 27(1) (Summer): 47–71. Hogan, Lloyd. (1984). Principles of Black Political Economy. Routledge & Kegan Paul. International Co-operative Alliance (ICA). (2015). Guidance Notes to the Co-operative Principles. Retrieved from www​.ica​.coop/​en/​media/​library/​research​-and​-reviews/​guidance​-notes​-cooperative​ -principles​?​_ga​=​2​.213320660​.1108928060​.1578059513​-265847386​.1575143535. Jensen, M.C. and Meckling, W. (1979). Rights and production functions: an application to labor-managed firms and codetermination. Journal of Business, 52, 469–506. Kalmi, P. (2007). The disappearance of cooperatives from economics textbooks. Cambridge Journal of Economics, 31(4): 625–47. Levine, D. (2006). Neural modeling of the dual motive theory of economics. The Journal of Socio-economics, 35: 613–25. Levine, D. and D’Andrea Tyson, L. (1990). Participation, productivity, and the firm’s environment, in Alan S. Blinder (ed.) Paying for Productivity: A Look at the Evidence. Brookings Institute, pp.183–243. Logue, J. and Yates, J. (2005). Productivity in Cooperatives and Worker-Owned Enterprises: Ownership and Participation Make a Difference! Geneva, Switzerland: International Labour Office. Lutz, M. and Lux, K. (1988). Humanistic Economics: The New Challenge. The Bootstrap Press. Lux, K. and Lutz, M.A. (1999). Dual self, in Earl, P.E. and Kemp, S. (eds), The Elgar Companion to Consumer Research and Economic Psychology. Edward Elgar Publishing, pp.164–69.

Worker cooperatives: solidarity at work  529 Malo, M-C. and Vezina, M. (2004). Governance and management of collective user-based enterprises: value-creation strategies and organizational configurations. Annals of Public and Cooperative Economics, 75(1): 113–37. Menzani, Tito and Zamagni, Vera (2010). Co-operative networks in the Italian economy. Enterprise & Society, 11(1): 98–127. Mill, J.S. (1848) [1987]. Principles of Political Economy. Augustus M. Kelley. Navarra, C. (2016). Employment stabilization inside firms: an empirical investigation of worker cooperatives. Annals of Public and Cooperative Economics, 87(4): 563–85 Navarra, C. and E. Tortia (2014). Employer moral hazard, wage rigidity, and worker cooperatives: a theoretical appraisal. Journal of Economic Issues, 48(3): 707–26. Negri Zamagni, V. (2019). Why we need cooperatives to make the business world more people-centred: the Emilia Romagna Experience. Presented at the UNRISD conference, “The SDGs: What role for social solidarity economy”, Geneva. Novkovic, S. (2020). Multi stakeholder co-operatives as a means for jobs creation and social transformation. In Roelants et al. (eds), Co-operatives and the World of Work. Routledge, pp.220–33. Novkovic, S. (2021). Cooperative identity as a yardstick for transformative change. Annals of Public and Cooperative Economics: 313–36. Novkovic, S., and Gordon Nembhard, J. (2017). Beyond the economy: the social impact of cooperatives. The Cooperative Business Journal, Fall: 12–22. Novkovic, S., Puusa, A. and Miner, K. (2022). Co-operative identity and the dual nature: from paradox to complementarities. Journal of Co-operative Organization and Management, 10(1): https://​doi​.org/​ 10​.1016/​j​.jcom​.2021​.100162 Ostrom, E. (1990). Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge University Press. Pencavel, J., Pistaferri, L. and Schivardi, F. (2006). Wages, employment, and capital in capitalist and worker-owned firms. Industrial and Labor Relations Review, 60, 23–44. Perotin, V. https://​www​.uk​.coop/​sites/​default/​files/​2020​-10/​worker​_co​-op​_report​.pdf [January 10, 2022] Perotin, V. (2006). Entry, exit, and the business cycle: are cooperatives different? Journal of Comparative Economics, 31(2): https://​doi​.org/​10​.1016/​j​.jce​.2006​.03​.002. Perotin, V. (2013). Worker cooperatives: good, sustainable jobs in the community. JEOD, 2: 2. Perotin, V. (2020) What do we really know about worker cooperatives? CoopsUK www​.uk​.coop/​sites/​ default/​files/​2020​-10/​worker​_co​-op​_report​.pdf [January 10, 2022]. Polanyi, K. (1944) (3rd edition 2001). The Great Transformation: The Political and Economic Origins of Our Time. Beacon Press. Puusa, A., Hokkila, K. and Varis, A. (2016). Individuality vs. Communality – a new dual role of co-operatives? Journal of Co-operative Organization and Management, 4(1), 22–30. Rau, T. and Koch-Gonzalez, J. (2018). Many Voices One Song: Shared Power with Sociocracy. Sociocracy for All. Roche, O., Freundlich, F., Shipper, F. and Manz, C. (2018). Mondragon’s amorphous network structure: “making the whole truly greater than the sum of its parts”. Organizational Dynamics: A Quarterly Review of Organizational Behavior for Professional Managers, 47(3), 155–64. Roelants, B., Pellirossi, V. and Biron, O. (eds) (2001). Cooperatives, Territories and Jobs. CECOP-CICOPA. Scholz, T. (2016). Platform Cooperativism: Challenging the Corporate Sharing Economy. Rosa Luxemburg Stiftung. Scholz, T. (2017) Uberworked and Underpaid: How Workers are Disrupting the Digital Economy. Polity Press. Scholz, Trebor and Schneider, Nathan (eds) (2016). Ours to Hack and to Own. OR Books. Sertel, M. (1982). A rehabilitation of the labor-managed firm, in Sertel, M. (ed.) Workers and Incentives. North-Holland, pp.11–26. Sertel, M. (1987), Workers’ enterprises are not perverse. European Economic Review, 31, 1619–25. Shipp, S.C. (2000). Worker-owned firms in inner-city neighborhoods: an empirical study. Review of International Co-operation 92–3(4/99–1/00): 42–6. Simon, H.A. (1979). Rational decision making in business organizations. The American Economic Review, 69(4): 493–513.

530  Handbook of research on cooperatives and mutuals Smith, S.C. (1984). Does employment matter to the labour-managed firm? Some theory and an empirical illustration. Economic Analysis and Workers’ Management, 18, 303–18. Smith, S.C. and Rothbaum, J. (2014). Co-operatives in a global economy: key economic issues, recent trends and potential for development, in Novkovic, S. and Webb, T. (eds) Cooperatives in a Post-growth Era, Zed Books, 221–41. Smith, Stephen C. (2001). Blooming Together or Wilting Alone? Network Externalities and Mondragón and La Lega Co-operative Networks. UNU-WIDER Discussion Paper No. 2001/27. Smith, Stephen C. (2004a). Network externalities and co-operative networks: Stylized facts and theory, in Sun, Laixiang (ed.) Ownership and Governance of Enterprises: Recent Innovative Developments, Palgrave Macmillan and UNU/WIDER, pp.181–201. Smith, Stephen C. (2004b). Network externalities and co-operative networks: A comparative case study of Mondragón and La Lega with implications for developing and transitional countries, in Sun, Laixiang (ed.) Ownership and Governance of Enterprises: Recent Innovative Developments. Palgrave Macmillan and UNU/WIDER, pp.202–41. Spear, R. (2000). The co-operative advantage. Annals of Public and Cooperative Economics, 71(4): 507–23. Spear, R. (2004). From cooperative to social enterprise: trends in European experience in C. Borzaga and R. Spear (eds) Trends and Challenges for Cooperatives and Social Enterprises in Developed and Transition Countries. Edizioni 31, pp.99–114. Srnicek, N. (2016) Platform Capitalism. Polity. Standing, G. (2011). The Precariat: The New Dangerous Class. Bloomsbury Academic. Stash, C. (2017). Social-ecological economics in Spash, C. (ed.), Routledge Handbook on Ecological Economics. Routledge, pp.3–17. Stocki, R. and Hough, P. (2016). CoopIndex: human dignity as the essence of cooperative values and principles. Journal of Co-operative Accounting and Reporting, 4(1): 79–104, www​.smu​.ca/​webfiles/​ 4​-JCARHuman​Diginityas​theEssence​.pdf [March 1, 2021]. Tortia, E.C. (2007). Self-financing in labour-managed firms: individual capital accounts and bonds, in Novkovic, S. and Sena, V. (eds) Cooperative Firms in Global Markets. Emerald, pp.233–61. Tortia, E.C. (2018). The firm as a common: non-divided ownership, patrimonial stability and longevity of cooperative enterprises. Sustainability, 10: 1023. https://​doi​.org/​10​.3390/​su10041023 Vanek, J. (1970). The General Theory of Labor-Managed Market Economies. Cornell University Press. Vezina, M. and Girard, J-P. (2014). Multistakeholder cooperative model as a flexible sustainable framework for collective entrepreneurship. An international perspective. In C. Gijselinckx, L. Zhao and S. Novkovic (eds), Co-operative Innovations in China and the West. Palgrave MacMillan. Vieta, M. (2021). Responding to business succession issues and crises by converting to co-operatives: Canadian realities and possibilities. Canadian Journal of Nonprofit and Social Economy Research, 12(2): 13–22. Ward, B. (1958). The firm in Illyria: market syndicalism, American Economic Review, 48: 566–89. Webb, S. and Webb, B. (1920). A Constitution for the Socialist Commonwealth of Great Britain. Longman. Zamagni, S. and Zamagni, V. (2010). Cooperative Enterprise: Facing the Challenge of Globalization. Edward Elgar Publishing. Zamagni, V. (2014). The cooperative enterprise: a valid alternative for a more balanced society, in S. Novkovic and T. Webb (eds) Cooperatives in a Post-Growth Era. Zed Books. Zevi, A., Zanotti, A., Soulage, F. and Zelaia, A. (2011). Beyond the Crisis: Cooperatives, Work, Finance. Generating Wealth for the Long Term. Brussels: CECOP Publications. www​.libeurop​.eu/​ shop/​product/​9782960086188​-beyond​-the​-crisis​-cooperatives​-work​-finance​-generating​-wealth​-for​ -the​-long​-term​-582665

32. Multi-stakeholder cooperatives Margaret Lund and Sonja Novkovic

INTRODUCTION Multi-stakeholder cooperatives are a growing but little understood evolution of the model in the global cooperative landscape. Unlike in traditional cooperatives with a single-member category (workers, producers, or consumers), members in multi-stakeholder cooperatives have diverse interests but a shared mission, goals, and objectives. While not a new phenomenon, this kind of cooperative was first codified in statute in Italy in 1992. There is evidence of multi-stakeholder cooperative practice in a wide range of countries, contexts, and industries with or without specific enabling legislation. Conventional economic theory fails both to predict the emergence and growth of this phenomenon and to sufficiently account for its contributions; the emerging literature on the commons, based on the pioneering work of Elinor Ostrom, may have more to contribute to the understanding of this development. This chapter reviews the experience of multi-stakeholder cooperatives in three of the places where the legal framework and practice has been most advanced (Italy, France, and Quebec) and reviews the scant literature on the practice and its outcomes. The chapter concludes with some directions for future research.

WHAT IS A MULTI-STAKEHOLDER COOPERATIVE? Classified by the nature of members’ interest in the cooperative enterprise, a multistakeholder cooperative has “more than one type of member with significant involvement in the activity of the cooperative, and in which: more than one type of member is represented in the governance structure of the cooperative; and no type of member has a dominant position through a majority of votes in the governing body or an exclusive veto over decisions” (ILO 2020: 19). Multi-stakeholder cooperatives (MSCs) integrate two or more classes of members in a single cooperative’s ownership and governance. Various member categories defined by the nature of members’ contributions to the operations of the enterprise may include workers, consumers, producers, community supporters, or other organizations. The nature of member (stakeholder) involvement and level of participation may vary widely, as do these cooperatives’ size, industry, location, context, and legal frameworks. As they are both ubiquitous and emergent, the model is fascinating to explore. We limit our consideration here to the ILO 2020 definition of MSCs, that is, cooperatives that formally engage multiple membership classes in ownership and control (that is, governance) of the enterprise, thereby meeting the International Cooperative Alliance definition of a member of a cooperative.

531

532  Handbook of research on cooperatives and mutuals

HISTORY AND LEGAL FORMS The multi-stakeholder cooperative was first codified as a specific and distinct legal form in Italy in 1991. The Italian framework and experience inspired other jurisdictions to adopt a particular MSC law of their own. These included Portugal, France, Greece, and four Canadian provinces. Many other places, including Germany, Spain, South Korea, and several US states, have also created a framework for this kind of cooperative under existing cooperative law, or, in the case of Denmark, under existing company statute (Defourney & Nyssens 2014; Münkner 2004; Vezina & Girard 2014). And in countries formerly part of Yugoslavia (for example, Croatia, Slovenia, Serbia), workers’ membership was a mandated element of the cooperative law under the country’s system of worker self-management, therefore creating a legacy of MSCs with diverse types of members (Novkovic & Golja 2015). An important factor in the development of the MSC model is that the practice of multi-stakeholder ownership and governance preceded a specific legal structure (Vezina & Girard 2014). In addition, reports continue to surface from countries worldwide documenting the emergent practice of multi-stakeholder cooperatives even in the absence of enabling legislation. While exciting and indicative of a lively interest in the MSC model, this widespread emergence makes it particularly challenging to comprehensively document the history or practices. The cases of Italy, Quebec, and France Italy, France, and Quebec in Canada are the three jurisdictions with the longest and broadest experience of MSC practice under specific enabling legislation. The Italian law governing MSCs is the oldest and is unique in several respects. Its history is an effort to institutionalize and standardize a process of stakeholder engagement that was already well under way in practice. Perhaps because of this, the Italian statute is both more restrictive in some aspects and more flexible in others than other legal MSC frameworks that followed. For example, unlike many other statutes, the Italian law applies only to a limited number of industries and situations where the practice was initially focused1 and does not cover the formation of MSCs in most other industries, and so in that way it is more limiting. On the other hand, the law is very accommodating and facilitates many different combinations of membership classes and governance, whereas the statutes to follow generally set some boundaries on these issues. In Italy, experimentation with the multi-stakeholder cooperative model emerged beginning in the 1980s in response to general community dissatisfaction with government delivery of some public goods, social services in particular. Locally grown civil society organizations arose as a way to deal with crisis, attracting a diverse array of stakeholders (beneficiaries, families, workers, community members, and so on) to their effort. Innovative methods of multi-stakeholder governance were developed to respond to and engage this diverse constituency, and thus emerged a new practice of governance that differed significantly from traditional nonprofit organizations or for-profit enterprises. Thus, while the Italian social cooperatives statute was the first formal legal framework for multi-stakeholder cooperatives codified in national law, its existence was the result of a bottom-up effort rather than a top-down directive (Borzaga & Depedri 2014; Vezina & Girard 2014 citing Pezzini 2008).

Multi-stakeholder cooperatives  533 Due to its emergence in the social service sector, the Italian MSC statute is actually a statute governing all “social cooperatives”—those delivering social, health, and educational services, as well as those operating to promote the reintegration of disadvantaged persons into the workforce.2 Currently there are about 15,500 such social cooperatives registered in Italy. One quarter of these have been in existence for more than 20 years, while a third have been formed only in the past five years, indicating the stability of this kind of cooperative and the continuing interest in their formation. As of 2020, 18 percent of social cooperatives were led by board presidents under 40 years of age, so it is also a model with significant appeal to younger cooperators.3 Not all cooperatives organized under the social cooperative statute in Italy are multi-stakeholder, leading to some confusion and erroneous conflation of the two terms. However, the majority are MSCs (about 70 percent according to Borzaga & Depedri’s data from 2014), making them one of the largest and most vibrant examples of MSC practice in the world. While restrictive in its applicability to only social services, the Italian statute also allows for a great deal of flexibility and experimentation on the part of the individual cooperative in the number and classes of membership permitted, and how those members are involved in governance. Social cooperatives in Italy may (or may not) include workers, volunteers, community supporters or public bodies in their governance structure, and there is much diversity in governance structure in practice (Vezina & Girard 2014). Volunteers are limited to 50 percent of the membership. Type A cooperatives (those of professionals providing health, education, or social services) tend to mostly involve workers and volunteers, but the membership categories of Type B cooperatives (those providing work opportunities for disadvantaged people) are more diverse and often include users as well as workers and community organizations (Birchall & Sacchetti 2017). Following on the successful example and inspiration of Italian law, other jurisdictions followed suit. Two of the most prominent examples are Quebec and France. In 1997 the province of Quebec established the first law permitting cooperatives of more than a single membership class, calling them “solidarity co-operatives,” a name that is now sometimes used to refer to MSCs in general. In contrast to the Italian freeform model, these cooperatives in Quebec were initially required to embrace all three categories of membership the law allowed: workers, users (such as consumers or producers), and supporter members. The law was amended in 2005 to allow solidarity co-ops to include only two of the three membership classes. Volunteers are not included as a separate category, but may join as supporter members. Public bodies are also not allowed as members, except in the wind power industry. Also unlike MSCs in Italy, solidarity cooperatives in Quebec were allowed to be registered in any industry. In addition to social services, solidarity cooperatives have been formed to provide services in the areas of recycling, food, housing, and the arts, as well as in technical fields like cable broadcasting and renewable energy. Indeed, one purpose of the solidarity cooperative law was to permit communities to more effectively mobilize around the provision of vital resources (food, energy, tourism, or other local anchor industries) to retain population and prevent out-migration (Vezina & Girard 2014). Whatever the industry, most MSCs in Quebec are organized at least to some degree around a social purpose, although this is not a requirement. In the French and Italian MSC models payment of dividends is strictly limited, but in Quebec dividends are permitted with one significant exception. Supporting members are

534  Handbook of research on cooperatives and mutuals required to be just that—supporters of the enterprise. They are not allowed to collect a financial dividend of any kind. Solidarity cooperatives also get a tax benefit if dividends are prohibited for all member classes. Like other cooperatives in Quebec, as well as those in many European countries, solidarity cooperatives are also required to allocate a portion of annual surplus to indivisible reserves4 until a certain level of equity is met. The French Sociétés Coopératives D’Intérêt Collective (SCIC) MSC law followed Quebec’s law in 2001. As in other jurisdictions, there had been some experimentation with the model pre-dating the formal legal designation as multi-stakeholder cooperatives. Like the Italian social cooperatives, SCICs are specifically designated in statute as social enterprises, with a dual social and economic purpose and an obligation to produce goods and services that are of public interest and use. The law is stricter than the other two regarding representation: governing boards must have at least one employee representative, one beneficiary, and one representative from a third class of member such as volunteers or public bodies. As in both Italy and Quebec, a significant portion of profits (57.5 percent minimum) must go to indivisible reserves (Vezina & Girard 2014, p.122). In Italian social cooperatives, this figure is 100 percent (as it also is for Portuguese multi-stakeholder social cooperatives: Defourney & Nyssens 2014, p.24). Growth of the Model As noted above, social cooperatives in Italy continue to be a popular vehicle for new cooperative formation, with a third of the total number being registered in only the past five years. In Quebec, multi-stakeholder solidarity cooperatives are even more popular: Since the mid-2000s this has become the primary method of choice for new cooperative formation, accounting for 60 percent of all new cooperatives formed in 2006–15 (Vezina & Girard 2014). These figures include new and single-member cooperatives converting to include additional member classes. Solidarity cooperatives have also successfully brought the cooperative model to industries and sectors where unique needs arose and cooperatives were scarce (for example, healthcare). Solidarity cooperatives also organized new categories of members such as physicians and other professional workers, who had not previously been involved with cooperatives. According to Vezina and Girard (ibid.), SCICs in France have not seen the same growth of MSCs observed under the Italian and Quebecoise law. The lack of growth is perhaps because the MSC law alone requires each new SCIC to get individual government approval, significantly constraining new development. The fact that French MSCs are required to include representatives of at least three different membership groups rather than two might also serve as an inhibiting factor. However, they have succeeded in bringing a multi-stakeholder approach to a wide variety of industries, with SCICs being set up in agriculture, consulting, the arts, housing, healthcare, and social services. The Role of Government The role of government on a local level has also diverged in these three primary examples of MSC development. In Italy, social cooperatives receive preference for local contracts in some situations. The same preference is not granted in France or Quebec. Still, in France, local public agencies have been very active in helping to finance MSCs, holding shares in more than 40 percent of SCICs a decade after the passage of the enabling legislation (Vezina & Girard,

Multi-stakeholder cooperatives  535 2014). In Quebec, however, which arguably has the most vibrant MSC sector globally, local government investment is not permitted in most cases. Defourney and Nyssens (2014) cite the evolution of social cooperatives in Europe as being strongly linked to evolution in public policy, both as an outcome of public programs and as an influencer of subsequent policy. Although not all social cooperatives in all countries are multi-stakeholder, it may be that multi-stakeholder ownership and governance were beneficiaries of benevolent public policy as a related and parallel development, even if not the direct target. Thus, it does not appear from the scant experience that there is a single magic path for public sector involvement to provide a beneficial environment for the growth of MSCs. In each of the three prominent cases, interest in and experimentation with the MSC model pre-dated the passage of formal enabling legislation, sometimes by decades. But direct involvement by local government—while helpful when in place—has been neither uniform nor necessary for success. However, the Italian national social cooperatives law and the Quebecoise solidarity cooperative law both appear to have played a significant role in the sector's growth by providing explicit definitions, boundaries, and legitimacy for this kind of cooperative by codifying this somewhat unusual practice into a recognized legal framework. The experience in France, however, has not been the same. The lack of French growth could be due to several reasons. For example, it may be because the enabling legislation has a more restrictive framework (requiring three or more membership classes and a recognized social purpose) and a more cumbersome approval process.

THEORETICAL CONSIDERATIONS The three jurisdictions provide the clearest examples of MSC practice supported by an enabling legal framework. But it is essential to recognize that experimentation with multi-stakeholder cooperatives has been going on for many decades and in many different places worldwide. The growing interest in and practice of multi-stakeholder cooperation in many respects runs counter to the expectations of mainstream economic theory. For example, with MSCs, there is added heterogeneity in governance. The notion is that heterogenous governance makes it more difficult to successfully manage collective action due to transactions costs (Dow 2003; Hansmann 1996). However, in practice, this model is a way to integrate labor into consumer and user cooperatives or internalize governance and management externalities by including outsider stakeholders in decision-making (Ajates Gonzalez 2017; Novkovic 2020). According to new institutional economics, different “patrons” of firms have specific and conflicting interests depending on the type of transactions with the enterprise (Hansmann 1996). Consumers seek lower prices; workers want higher pay; suppliers demand high prices for inputs they supply; investors aim to gain the highest return on investment, and so on. Therefore, ownership by a homogeneous group of patrons or stakeholders is least costly, while heterogeneity increases governance costs. Heterogeneous members are thought to contribute to inefficiency in governance and eventually cause cooperative degeneration (for example, Cook 1995, 2018). The impact of member heterogeneity on increased governance costs works through two mechanisms (Borzaga & Depedri 2014): democratic decisions will have increasing complexity and leave marginalized groups of voting members unsatisfied. Further,

536  Handbook of research on cooperatives and mutuals delegating decisions within the organization will also be costly without a clear definition of organizational goals. However, there can be advantages to having diverse interests involved in cooperative governance. Cooperative members “wear many hats” and may simultaneously engage in multiple roles as workers, consumers, and community members (Leviten-Reid & Fairbairn 2011; Lund 2011; Mamouni Limnios et al. 2018;). With different voices in decision-making within the organization, there seem to be more advantages to multi-stakeholder governance that could offset the additional transaction costs. Borzaga and Depedri (2014) point out that theoretical considerations do not translate into practice. Members of multi-stakeholder social cooperatives in Italy do not have significantly increased transaction costs because the heterogeneous groups agree on the organizational mission and purpose, translating into simplified and less costly decision-making processes (p.153). Further, Borzaga and Sacchetti (2015) suggest that social costs are missing in the transaction cost calculation. When they are included, the multi-stakeholder option may prove less costly than homogeneous member governance, especially in cases when social costs of exclusion5 are high. Further, the inclusion of multiple constituents increases access to various resources. Multi-stakeholder governance is more likely to fulfill stakeholder-specific and societal needs. In particular, democratic deliberation by multiple constituents seems to provide a good solution to complex social issues (ibid.; Girard 2015). Multi-stakeholder cooperatives with distributed ownership and control among diverse stakeholders may outweigh the increased costs of decision-making by reducing the costs of information asymmetries and managing complexity in a more effective way (Turnbull 2002). Positive externalities produced by multi-stakeholder cooperatives (Ajates Gonzalez 2017; Borzaga & Depedri 2014) may also explain why this form of enterprise is on the rise, particularly in the provision of social services (Borzaga & Depedri 2014, 2015; Zamagni 2012) and in other sectors with a focus on a general societal benefit such as work integration or renewable energy, as highlighted above. MSCs also internalize the externalities, moving from single member-orientation to complex relationships for positive socio-ecological and economic impact (Ajates Gonzalez 2017; Borzaga & Depedri 2015; Sacchetti & Birchall 2018; Vezina & Girard 2014). MSCs reduce the risk of co-optation of the cooperative model (Ajates 2021) through non-congruent isomorphism (Bager 1994; Di Maggio & Powell 1983). Ajates (2021) examines agricultural cooperatives and alternative food networks, noting that the MSC model increases social capital. Increased social capital reduces transaction costs and strengthens the cooperative culture, a feature not typically considered in economic models. Beyond short-term cost-effect perspectives, we can find some more normative arguments that emphasize solidarity as the root of social relationships in several MSCs. Diverse members do not necessarily represent a particular interest group as assumed in theory, but engage in solidarity with others for a common purpose (Borzaga & Depedri 2014; Miner & Novkovic 2020; Novkovic & Miner 2015). Lund terms this feature “solidarity as a business model,” arguing that stakeholders in MSCs build long-term relationships to encourage transformation, rather than engaging in purely transactional relations: “Another way to understand the multi-stakeholder cooperative model is to consider the different time horizon inherent in the solidarity approach. While a traditional price-driven business model (whether cooperative or not) may be seen as primarily transactional, the multi-stakeholder cooperative enterprise is often focused on being more transformational” (Lund 2011, p.5). In this sense, Lund points

Multi-stakeholder cooperatives  537 out that the general understanding of cooperative entry resulting from market (or government) failure6 needs to be modified as MSCs enter industries in response to social injustice. Indeed, fair (non-market) pricing, living wage, and equitable wealth distribution is the core principle of engagement of multiple stakeholder groups. Mainly, labor inclusion is essential in that it also reflects the uses of multi-stakeholder forms of governance for labor self-determination as a tool for social transformation (Novkovic 2021). Reasons for labor-inclusive multistakeholder formation vary in different contexts. It can stem from the ethical stance of the founding members regarding respect for workers’ rights and empowerment or social inclusion through work and labor’s transformative potential (ibid.). From the economic advantage point of view, it is argued that work is difficult and costly to monitor, especially in the social services sector, due to multitasking and its personalized nature relying on human relationships (Borzaga & Depedri 2015; Zamagni 2014). Intrinsic motivations are crucial to quality service, and it is efficient in these cases to empower and motivate workers as members. For example, the same argument can be used for other non-divisible outputs, produced in teams or service-based. The evidence is that workers are members of a significantly large number of MSCs in Italy, France, Quebec, Portugal, the US, and elsewhere; in some cases this is legally mandated, in others a voluntary development. Regarding governance, Turnbull (1997, 2001, 2002) provides compelling arguments outlining the advantages of the multi-stakeholder cooperative model (stakeholder mutuals, in his terms). Highlighting the governance structure of the Mondragon cooperative network as the blueprint, he makes a convincing case for the competitive advantage of distributed control and multi-stakeholder arrangements. It is not well known that some 25 percent of cooperatives in the Mondragon network are multi-stakeholder in nature (Imaz et al. 2022). They span all sectors—from education and consumer cooperatives to finance, the industrial sector, social services, and research centers. The common factor in the Mondragon case is the presence of workers as a member category in all MSCs, highlighting labor inclusiveness as one of the motivations for their formation. In particular, Mondragon’s MSCs were formed to provide services to the existing worker cooperatives (social security for their worker-members; education, research) and broader community, and to secure jobs and worker control (Imaz et al. 2022). More recent interest in the governance of the commons has brought multi-stakeholder cooperative ownership and control into focus. Multi-stakeholder governance in cooperatives offers a blueprint for democratic engagement of diverse stakeholders around a common purpose and the common good (or a common resource). Indeed, given the inability of mainstream economic theory to successfully explain the consistent ability of diverse groups of actors within MSCs to regularly overcome their differences and pursue common objectives with effective results, Leviten-Reid and Fairbairn (2011) propose that perhaps a new theoretical framework is in order. They suggest the promising pool of research around the collaborative management of common-pool resources would be an appropriate place to look for helpful parallels. The burgeoning projects and literature on the commons include the cooperative model without exception, although it encompasses a broader set of issues. The pathbreaking work of Vincent and Elinor Ostrom dismantled the assumptions that drove Hardin (1968) to the conclusion that commonly owned resources will necessarily be overused (Allen 2014; Bollier & Helfrich 2019; Ostrom 1990). E. Ostrom (1990) developed a set of design mechanisms behind successful community management of common-pool resources, proving the efficiency of collective participation over resource privatization and enclosure. These design mechanisms include features of cooperative organizations, such as

538  Handbook of research on cooperatives and mutuals clear boundaries, bottom-up decision-making, and collectively designed rules of engagement, among others. From the common-pool resources (Ostrom 1990), the term “commons” has been expanded to include “a resource shared by a group where the resource is vulnerable to enclosure, overuse and social dilemmas“ (Hess 2008, p.37) and a “common creation of value using peer governance to manage this process and peer property to protect common value from private appropriation” (Bauwens 2006, p.532). Hess (2008) elaborates on the definition of the “new commons,” which includes collective action, voluntary association, and collaboration. As the common good typically includes protection and decommodification of a resource through collective action, the multistakeholder nature is an integral feature of “commoning.” Therefore, the multi-stakeholder cooperative form is quite prevalent regardless of the legal form of the organization (Münkner 2004). Theorizing cooperatives and commons includes treatment of labor, knowledge, natural resources, urban spaces, other common goods benefiting broader society which should not fall under the private ownership regime, and market exchange (Bauwens 2006; Bollier & Helfrich 2019; de Peuter & Dyer-Witheford 2010; Hess & Ostrom 2007).

MULTI-STAKEHOLDER COOPERATIVES: PRACTICE AND PERFORMANCE Many observers new to multi-stakeholder cooperatives have two primary sets of questions: the first, technical one regards how votes, patronage, board seats, and other resources are allocated when there is more than one type of member in the cooperative. The second set of questions generally has to do with outcomes and performance. Can a diverse group of decision-makers really join around a common set of ideas and needs? Can MSCs ever be an efficient way to approach a market or situation, let alone a more effective way? Governance Structures The answer to the first set of questions is simple: MSCs exhibit a great deal of diversity in the ways that they set up their membership and governance structures, while at the same time adhering to the international cooperative principles (ICA 1995). MSC structures are particularly adept at addressing local conditions, and as such there is no single path to MSC governance, but rather a number of them. In terms of board seats, most MSCs mandate that a minimum number of board seats be held by representatives of each membership class. Under the Quebec and French systems, each member class must have at least one board seat, although in Quebec supporter members are only permitted a maximum of one-third of the board seats. MSCs that are organized using existing cooperative statutes naturally have the freedom to allocate board seats as they wish, as do cooperatives organized under the Italian Social Co-op law, which does not mandate multi-stakeholder membership or governance but only enables it.7 In some MSCs, all of the seats are allocated according to member class in governing documents, and in some cases there are also “at large” board seats that may be held by members of any class. In Portugal, both workers and users must be represented in MSC social cooperatives. In Greece, the social cooperatives must have individuals in the target group, healthcare workers, and community institutions represented on the board (Defourney & Nyssens 2014, p.23). In

Multi-stakeholder cooperatives  539 Ontario, originally MSCs were required to have a representative from each member class not only on the board, but present at every board meeting to keep quorum, until this element proved unworkable and was removed from law in 2009 (Leviten-Reid & Fairbairn, p.34). Interestingly, MSCs can also be formed at the secondary level. iCoop in South Korea is a secondary cooperative made up of 85 farmer cooperatives joined with 35 consumer co-ops (Birchall & Sacchetti 2017, p.7). MSCs in the Mondragon group are often formed to serve the other cooperatives in the system, but they also embrace worker-members and other stakeholders8 (Imaz et al., 2022). As for votes for the board, the Italian law directs that each member of the cooperative, no matter which class, shall receive one vote for the board of directors, with organizational members receiving five votes each.9 The French law divides members into voting “pools,” with each voting pool being allowed between 10 and 50 percent of the vote so no member group can dominate.10 The Quebec solidarity law directs that members of each class select their representative(s) to the board on a “one-member, one-vote” basis—worker-members elect the worker representatives to the board, consumer-members elect the consumer board seats, and so on—with the co-op’s bylaws setting the number of seats per member class (Vezina & Girard 2014).11 Many, although not all, US MSCs are also set up in this manner, and other MSCs around the world are as well. The reasoning behind members voting in pools is that each membership group presumably knows its area of expertise best, and can best select its own representatives. Pooled membership also allows the cooperative to balance power and financial benefit between the membership groups, by allocating more influence (via more board seats) to some categories of members—beneficiaries, for example, or workers—and limiting the influence of others, such as community supporters. MSCs can then use this pooled membership structure to differentially allocate any surplus among the groups of members (more money to worker-members, less to consumer, for example), which then can be equitably divided within each membership class according to patronage (Lund, 2011). A distinction should be made between multi-stakeholder cooperative ownership and multi-stakeholder governance. Some single-member cooperatives have experimented with MSC governance by inviting non-member representatives of an important stakeholder group—such as key customers or community representatives—onto their board as outside board members. This is a laudable practice, but not the same as the co-ownership we consider here. Other single-member cooperatives such as consumer co-ops have directed that a certain number of board seats be held by employees who are also consumer-members (or in other instances limited or prohibited employees from running as consumer-members).12 This is also not the same as being a multi-stakeholder cooperative. In the instances of an employee being elected to a consumer cooperative board, he or she is still being elected based upon their status as a consumer-member, not as a worker-member. It is possible for multi-stakeholder governance to serve as a precursor to MSC formation, however. The conversion of many single-member cooperatives in Quebec to solidarity cooperatives when the new law was passed suggests a good degree of comfort, and therefore perhaps familiarity, with the model beforehand (Levitan-Reid & Fairbairn 2011).

540  Handbook of research on cooperatives and mutuals Multi-stakeholder Cooperative Performance In answer to the second question about how multi-stakeholder cooperatives work in practice, the scant empirical research appears to validate the multi-stakeholder approach, with MSCs performing well vis-à-vis similar single-stakeholder co-ops on several important financial as well as governance measures. Borzaga and Depedri’s (2014, 2015) research data on a sample of 320 social cooperatives in Italy found that MSCs attract significantly larger number of volunteers (members and non-members) as well as members who contribute financially, compared to single-stakeholder social cooperatives, partly supporting the claim that access to resources increases in MSCs. MSCs also reported a higher level of autonomy from reliance on government contracts, and a higher propensity to accumulate locked assets, thereby reserving surplus funds internally, bolstering the financial stability of the organization overall. Finally, MSCs were more successful in reaching communities that had few other resources, and in general in the “satisfaction of unsatisfied needs.”13 The researchers did not find a difference between multi- and single-stakeholder cooperatives in terms of mission alignment, this being a strong motivational factor in both kinds of social cooperatives. Regarding multiple objectives, Campi et al. (2006) find no evidence that goals differ between single-stakeholder and multi-stakeholder organizations among work integration social enterprises in their study, indicating homogeneity of purpose among seemingly heterogeneous stakeholders. They also confirm the findings in Quebec and elsewhere that multi-stakeholder governance is not as costly as transactions costs literature suggests (Leviten-Reid & Fairbairn 2011), and that its benefits have not been fully accounted for in the literature. Homogeneity of purpose is also highlighted by Bianchi (2021), who tracks the development of the multistakeholder form in Italy beyond the social, to community development cooperatives. Inclusion of multiple stakeholders who rally around a common goal to provide community goods/services (not return on investment) is the formula for success and longevity accompanying the community revival, as well as innovation and diversification of this enterprise form. This observation holds true in multiple areas where MSC organization is an emergent phenomenon, rather than a specific legal form (see Novkovic & Golja 2015). Borzaga and Sachetti (2015) found additional, nuanced benefits to MSCs which could not be emulated by traditional single-member or investor-led organizations simply by contracting with others because “the protection offered by a contractual system does not hold for services of general interest or for the non-monetary elements of stakeholder relations” (p.4). In addition, they point out, the very existence of diverse points of view being represented at the strategic, governance level changes the nature of the output, for the better. This, in their view, makes multi-stakeholder governance a vibrant and creative driver of innovation rather than a drag on efficiency. Contrary to the fear that multi-stakeholder governance would lead to conflict, Levitan-Reid and Fairbairn (2011) found, in their surveys of solidarity cooperatives boards in Quebec, a high level of satisfaction with governance. More than 90 percent of respondents rated participation of multiple stakeholders as high, and their ability to achieve consensus was excellent. When asked to identify upcoming challenges, respondents cited common economic concerns such as increasing revenue rather than issues related to decision-making. The fact of involving other stakeholders in the cooperatives did not take away from the positive experience of worker-members. In both cases, in Borzaga and Depedri’s comparison

Multi-stakeholder cooperatives  541 of single-member worker cooperatives and multi-stakeholder social cooperatives, employees expressed high motivation and satisfaction with their jobs. They perceived their organizations as fair and communicative. In summary, they concluded that the “single-stakeholder governance model does not jeopardize users’ interests nor does multi-stakeholder governance model sacrifice employee’s wellbeing” (2015, p.119). MSCs are not without their challenges. While there are personal and organizational benefits from crafting a set of common rules and norms, this is seldom a quick and easy process. Multi-stakeholder governance takes more time and resources, at least initially, to align the interests of diverse stakeholders. MSC boards may also demand more from board members in terms of maturity, openness, and willingness to learn. Borzaga and Depedri (2014) found that more rigid norms might be necessary to coordinate the diverse set of actors, meaning someone will have to go to the trouble of codifying and monitoring those norms. Sacchetti and Tortia (2014) agree, noting that rules are necessary to facilitate the environment of reciprocity and trust needed to successfully achieve consensus among such different parties. Borzaga and Depedri (2015) also note that some categories of members might lose a degree of autonomy and independence by adhering to a more broad, multi-stakeholder mission. Taken together, however, the data that exists does not support the mainstream economics theoretical perspective of multi-stakeholder cooperatives as fraught, costly, fragile, and unstable. Indeed, the opposite seems to be the case. The significant growth of these cooperatives indicates that MSCs effectively address some needs and seize some opportunities that traditional single-member cooperatives may be missing.

CONTEXT AND ILLUSTRATIONS MSCs as a legal form are known to exist in at least a dozen different countries, and they are ubiquitous in many more. One of the explanations put forward by Leviten-Reid and Fairbairn (2011) for the emergence of these and other social economy organizations is the failure of governments and markets to provide for the needed goods and services and address challenging social and economic situations such as out-migrants and unemployment. This is undoubtedly the motivation behind the formation of many MSCs, but seeing the model only as a reactive response to larger economic forces does an injustice to some of its most creative proponents. In addition to responding to situations of adversity, MSCs have also been successfully used as a proactive tool to create a more desirable set of circumstances or structures more in keeping with a shared values-aligned notion of how complexity should be addressed in an organization. True to the definition of a cooperative, diverse members of multi-stakeholder cooperatives have joined together not only to meet their common needs, but also their shared aspirations. Broadly, MSCs have been active in four main situations or settings. These are discussed in the following subsections. Social, Educational, and Health Services The largest and most experienced community of practice for MSCs is unquestionably the social services sector. In Italy certainly, but also in Spain and Portugal, these new kinds of cooperatives emerged as a response to widespread dissatisfaction with the quality and availability of government social services. These contexts share common features, such as a histori-

542  Handbook of research on cooperatives and mutuals cal reliance on family as the first and primary provider of such services as well as a relatively weak nonprofit sector and a strong cooperative tradition, which help to explain the emergence of a new cooperative model based upon a diverse foundation of community stakeholders (Borzaga & Sacchetti 2015; Defourny & Nyssens 2014). In France as well, we see the growth of MSCs resulting from the move by the government to withdraw from the direct provision of some basic social services and decentralize their administration and delivery, leaving a gap to be filled by the new cooperatives (Vezina & Girard 2014). Complex Social Issues Beyond social, educational, and health services, Vezina and Girard (2014) in particular question “the capacity of the traditional single-stakeholder cooperative model to address contemporary challenges facing civil society” (p.111). While most research attention has been focused on the Italian social cooperative experience (with reason, given its size, policy support, and success), Vezina and Girard (2014) expand on this idea to document the emergence of multi-stakeholder cooperatives in a range of “complex social contexts characterized by high levels of instability and diversity” (p.129). In this way, they see the development of MSCs in the social service sector as being only one, albeit a very important, example of the application of the model to a range of contemporary situations and challenges, many brought on by a condition of increased globalization and the growing power of corporate interests. Examples they cite include the practice of solidarity cooperatives in Quebec taking on the provision of core goods and services such as food and fuel in rural communities, and the developing industry to combat the issue of out-migration. In speaking of social cooperatives, Borzaga and Sacchetti (2015) note that for these MSCs, “inclusive governance and deliberation do not have a transitional character but represent specific solutions which recognize the complexity and richness of public interests” (p.22). The same could be said for the wide variety of industries cited by Vezina and Girard, where MSCs have provided a framework for addressing difficult issues with a tool and an approach that itself embodies the “complexity and richness” warranted. Labor Inclusion While the first two examples could be characterized as situations where MSCs have developed in reaction to local and global events, it is worth noting that the largest multi-stakeholder cooperative in the world began in a completely different set of circumstances. Eroski, the chain of supermarkets owned by the Mondragon Cooperative Corporation in Spain, began as a consumer-owned cooperative in 1969 but converted to an MSC in the mid-1980s, with half the board seats elected by consumer-members and half by workers (Imaz et al., 2022).14 The complexity of embracing diverse points of view does not seem to have slowed this co-op down, as it experienced two decades of substantial growth following, and today has revenues of more than 1.7 billion euros.16 The motivation for converting to a multi-stakeholder model in this case was not external social and economic forces but rather an internal commitment to social and economic justice and the inclusion of workers in the ownership and control of all cooperative enterprises in the group. While Mondragon is justly famous for its remarkable illustration of widespread worker ownership, as noted above, 25 percent of the cooperatives in the network are actually MSCs (present in all sectors, from manufacturing, to finance,

Multi-stakeholder cooperatives  543 to R&D), with labor inclusion the driving force behind their formation. Similarly, several consumer cooperatives in the United States have either converted to MSCs or were formed as MSCs from the beginning, with fairness and labor inclusion as the driving force. Co-production Another example of proactive application of the MSC model comes from the United States local food movement. Unlike the most studied examples in the world, where MSCs have been focused on human services, in the United States their most common application has been in the production and distribution of specialty, non-commodity agricultural products, particularly local food. These cooperatives involve at least two of the three main categories of actors in the sector (producers, consumers, and workers) but can have as many as six different membership categories. Local government has not been included to date, but a variety of other organizations and individuals have been, including local food processing firms, nonprofits, and community supporters. These cooperatives are formed not out of direct need (there is plenty of food on the supermarket shelves in these communities) but out of a shared desire to promote and participate in a food system that is more closely and transparently tied to the members’ values. These might include fair compensation for farmers and farm workers, organic or sustainable farming practices and humane animal husbandry, and promotion of regional specialty products and community economic development. The primacy of price and a zero-sum system of asymmetric information gives way to a joint consideration of supply and demand, and a longer-term perspective where the positions of each actor on the value chain are considered (Lund, 2011, 2012).

KEY BENEFITS, CHALLENGES, AND CENTRAL TENSIONS The multi-stakeholder cooperative phenomenon is intriguing in the diversity of its structure, location, size, and sector, as well as the breadth of situations it is invoked to address. As Vezina and Girard (2014, p.129) note, “despite its anchorage in co-operative principles, the MSC takes diverse legal forms that enable it to consider both collective and societal issues” and, despite a common genome, “has been adapted in some important ways to the respective national context.” The tensions and costs implicit in engaging with a diverse body of stakeholders are commonly highlighted in criticism of the MSC model, although this is usually done without consideration of the externalities produced by single-member entities. Without the direct, ongoing, and mission-aligned democratic governance of diverse constituents that multi-stakeholder cooperatives enable, other organizations miss important information (its own source of tension). There are certainly many proxies available in the marketplace for some of the information exchange that common ownership and governance can facilitate (surveys, focus groups, contracts, to name a few), but such proxies are incomplete at best. Enhanced consideration of timeline is an important element in understanding the potential for innovation and impact of MSCs, as is a more comprehensive view of externalities and cost. The fact that MSCs are able to integrate—and by doing so, perhaps, mitigate—the cost of externalities by way of inclusive design is certainly a significant reason to pay attention to these co-ops and their development.

544  Handbook of research on cooperatives and mutuals The embrace of MSCs by diverse communities and community members across the globe makes it clear that many see the model as an important tool for self-help and self-determination while engaging in solidarity with other stakeholders—values that have been core to cooperative practice from the very beginning. Multi-stakeholder practice can also be an important tool for cooperatives themselves. As Novkovic (2020, p.221) notes, “Twentieth-century developments, in particular, globalization and deregulation in market economies, placed unprecedented competitive pressures on cooperative enterprise, often resulting in isomorphism and degeneration as cooperatives were emulating structures and behaviors of the ubiquitous investor-owned businesses.” Multi-stakeholder design can be used by cooperative members to combat such a drift toward conventional business practices and replace them with a uniquely cooperative solution. It is perhaps not surprising that the answer that has arisen, in many diverse circumstances, to deal with the complex social and economic situations shall itself also be the source of further complexity. Further research is needed in many areas to better understand this model and to inform potential members of its most effective use. The examples of Italy and Quebec, however, indicate that a clear but flexible enabling legislation can make a substantial difference in helping these kinds of co-ops to flourish, creating a community of common practice, and building a team of knowledgeable legal and finance professionals to assist.

FURTHER RESEARCH The multi-stakeholder cooperative form is both ubiquitous and emergent. It is as old as cooperation itself, but it has been recognized as a separate legal form only in recent decades. The multi-stakeholder cooperative model is therefore under-studied and poorly understood, offering fertile ground for future exploration. The literature suggests that multistakeholder governance is more effective than unitary boards (Turnbull 1997, 2002), even in the absence of ownership by various stakeholder groups. Studies of multistakeholder governance in cooperatives where decision-making is accompanied by ownership, use, and distributional benefits can inform this literature in profound ways. Directions for future research on multi-stakeholder cooperatives are many. They start from a mapping exercise to try and capture the context in which MSCs appear and thrive. We have some knowledge of MSCs when a legal framework exists, but hardly any sense of their prevalence where institutional framing of the membership type is not prescriptive. What is the context for MSC development? Existing research suggests it is about history and path dependence (Novkovic & Golja 2015), but also about complexity of member “needs and aspirations” and external dynamics (Borzaga & Santuari 2001; Vezina & Girard 2014). The challenges and benefits of MSCs compared to single-stakeholder cooperatives are also an important direction for future research, given the increasing interest in this cooperative form. MSC governance and its strengths, weaknesses, enabling structures and hindering factors could shed light on democratic governance mechanisms more broadly. In particular, MSC governance structures and processes are likely sources of innovation in democratic decision-making, yet not much is known about their comparative (dis)advantage relative to single-stakeholder cooperatives. Further, in jurisdictions where member categories are not prescribed, a relative performance of MSCs with different types of stakeholders is important to understand. As an example, MSCs may or may not include workers. Is there a difference

Multi-stakeholder cooperatives  545 when they do? What kind of difference (in governance, longevity, social capital, and/or performance)? The intersection of the multi-stakeholder cooperative form and the commons, understood as common goods benefiting broader society which do not fall under the market exchange, is of particular interest since “commoning” movements are on the rise in multiple areas—from community owned resources, to digital fabrication laboratories (FabLabs) driven by new technological developments and opportunities for coproduction and prosumerism. New economic models (social solidarity economy, the circular economy, and so on) are emerging which involve collaboration between multiple stakeholders and may or may not include explicit contractual arrangements. Models built on trust and reciprocity lend themselves to cooperative ownership and control, while supply chains resting on cooperative networks may contribute to the circular economy and sustainability. Research in multi-stakeholder cooperation may also contribute to stakeholder theory. There is a level of discomfort in using the term “stakeholder” in cooperative practice, due to the implied (and potentially conflicting) self-interest among different member categories in MSCs. The term “solidarity cooperative” is often used instead, as for example in the cooperative law in Quebec. Cooperative institutional logic is rooted in self-help and voluntary association; stakeholder-members, who are at the same time users and owners, are not selected by managers for their contribution to the enterprise; rather, they self-engage in collective action. What is the difference when a cooperative is established as an MSC from the start, compared to an expansion of a single-stakeholder cooperative to include another stakeholder group? How is the decision made in case of the latter, and does the literature on stakeholder salience (Khurram & Pestre 2017; Mitchel et al. 1997; Tashman & Raelin 2013) inform this process? Further, the dual nature of cooperatives suggests non-separability of social from economic function (Novkovic et al. 2022), adding a different dimension to the stakeholder salience line of inquiry.

NOTES 1. Health, education, and social services for Type A cooperatives and businesses integrating certain specifically defined marginalized populations for Type B cooperatives: see below. 2. Social cooperatives delivering health, educational, or other social services are referred to as “Type A” social cooperatives, while those aimed at providing work opportunities for certain specifically named categories of disadvantaged persons are “Type B” social cooperatives. Social cooperatives organized under the statute receive some preference for local government contracts as well as certain tax advantages (Vezina & Gerard 2014). 3. Valerio Pellirossi, Confcooperative, 2022 personal communication. 4. “Indivisible reserves” refers to retained earnings that must be kept in the cooperative to provide a sound financial foundation for the cooperative and finance collective benefits. These financial reserves may not be distributed to individual members as patronage. Most indivisible reserve provisions also require that, in the event that a cooperative should close, any indivisible reserves must be given to another cooperative, or a cooperative service entity. This is referred to as an “asset lock on closure.” 5. According to the authors, social costs arising from the exclusion of stakeholders in decision-making may include quality of social services, loss of creativity and motivation, persistent inequality, and so on (p.21).

546  Handbook of research on cooperatives and mutuals 6. Zamagni and Zamagni (2010) point out the difference between the demand side (reactive) motivation for cooperative entry and the supply side (proactive) deliberate choice of cooperative form of enterprise. 7. The exception is that social cooperatives are not allowed to have more than 50 percent of their members be volunteers. 8. As an example, cooperative bank Laboral Kuxha has as members cooperatives, workers in the bank, and consumers; Mondragon University is governed by its workers (faculty and staff), students, and cooperatives in the Mondragon network; while Eroski, a large retail cooperative, has workers and consumers as separate classes of members. 9. Italian MSCs may decide internally on a minimum of board seats for different classes of members, but the statute does not require this. 10. The French law is actually even more complex: voting pools do not equate directly with categories of members. A minimum of three categories of members is required, and there is a minimum of three pools of members. However, there may be as many as ten pools of members. There are two permissible ways to calculate the weight of each pool in matters put before the general assembly: either all of the votes may be voted according to the wishes of the majority of the members of a pool, or, alternatively, the pool may cast its vote proportional to the vote of its own members. Board membership rules also vary by the size of the cooperative. 11. Although in Quebec solidarity cooperatives it is only board seats that are elected by colleges of each member class; for issue put before the general assembly, each member has one vote, unless the cooperative’s organizing documents say differently. 12. This is also a legal barrier in credit unions in Canada, for example, as employees cannot serve on the board, regardless of their consumer membership status. 13. Borzaga and Depedri (2015), p.119. 14. While board seats are evenly divided, on the Eroski board the board president is always a consumer-member. 15. www​.statista​.com/​statistics/​749714/​sales​-value​-of​-eroski​-in​-spain/​[accessed 2.22.2022]. 16. www​.statista​.com/​statistics/​749714/​sales​-value​-of​-eroski​-in​-spain/​[accessed 2.22.2022].

REFERENCES Ajates, R. (2021). Reducing the risk of co-optation in alternative food networks: multi-stakeholder cooperatives, social capital, and third spaces of cooperation. Sustainability, 13(20): 11219. DOI:​10​ .3390/​su132011219. Ajates Gonzalez, R. (2017). Going back or going forwards? From multi-stakeholder cooperatives to Open cooperatives in food and farming. Journal of Rural Studies, 53: 278­–90. Allen, Barbara. (2014). A role for co-operatives in governance of common pool resources and common property systems, in S. Novkovic and T. Webb (eds), Co-operatives in a Post Growth Era: Creating Co-operative Economics. Zed Books: 242–63. Bauwens, M. (2006). The triune peer governance of the digital commons, in D. Bollier and S. Helfrich (eds), The Wealth of the Commons: A World Beyond Market and State. Levellers Press: 532–6. Bager, T. (1994). Isomorphic processes and the transformation of co-operatives. Annals of Public and Co-operative Economics, 65(1): 35–54. Bianchi, M. (2021). The social composition of Italian co-operatives: historical evolution and analysis of political and economic reasons. The Journal of European Economic History, 50(2): 121–40. Birchall, J. and S. Sacchetti (2017). The comparative advantages of single and multi-stakeholder cooperatives. Euricse Working Papers, 95: 17. Bollier, D. and S. Helfrich (2019). Free Fair and Alive: The Insurgent Power of the Commons. New Society Publishers. Borzaga, C. and S. Depedri (2014). Cooperatives providing welfare services: the case of Italian social cooperatives, in C. Gijselinckx, L. Zhao and S. Novkovic (eds), Cooperative Innovations in China and the West. Palgrave: 140–58.

Multi-stakeholder cooperatives  547 Borzaga, C. and S. Depedri (2015). Multi-stakeholder governance in civil society organizations: models and outcomes, in J.L. Laville, D.R. Young and P. Eynaud (eds), Civil Society, the Third Sector and Social Enterprise. Routledge: 109–21. Borzaga, C. and S. Sacchetti (2015). Why social enterprises are asking to be multi-stakeholder and deliberative: an explanation around the costs of exclusion. Euricse Working Papers 75/15. Borzaga, C. and A. Santuari (2001). Italy: From traditional cooperatives to innovative social enterprises, in C Borzaga and J. Defourny (eds), The Emergence of Social Enterprise. Routledge: 166–81. Campi, S., J. Defourny and O. Gregoire (2006). Work integration social enterprise: are they multistakeholder or multiple goal organizations, in M. Nyssens (ed.), Social Enterprise at the Crossroads of Market, Public Policies and Civil Society. Routledge: 29–49. Cook, M. (1995). The future of U.S. agricultural co-operatives: a neo-institutional approach. American Journal of Agricultural Economics, 77, 1153–9. Cook, M. (2018). A life cycle explanation of cooperative longevity. Sustainability, 10(5): www​.mdpi​ .com/​2071​-1050/​10/​5/​1586 [January 20, 2021]. Defourney, J. and M. Nyssens (2014) Social co-operatives: when social enterprise meets the co-operative tradition. Journal of Entrepreneurial and Organizational Diversity, 2(2): 11–32. de Peuter, G. and N. Dyer-Witheford (2010). Commons and cooperatives. Affinities: A Journal of Radical Theory, Culture and Action, 4(1): 30–56. DiMaggio, P.J. and Walter W. Powell (1983). The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields. American Sociological Review, 4(2): 147–60. Dow, G.K. (2003). Governing the Firm: Workers’ Control in Theory and Practice. Cambridge University Press. Girard, J-P (2015). Governance in solidarity, in S. Novkovic and K. Miner (eds), Co-operative Governance Fit to Build Resilience in the Face of Complexity. International Co-operative Alliance: 127–35. Hansmann, H. (1996). The Ownership of Enterprise. The Belknap Press of Harvard University Press. Hardin, G. (1968). The tragedy of the commons. Science, 162(3859): 1243–8. Hess, C. (2008). Mapping the New Commons. Available at SSRN: https://​ssrn​.com/​abstract​=​1356835 or http://​dx​.doi​.org/​10​.2139/​ssrn​.1356835 Hess, C. and E. Ostrom (eds) (2007). Understanding Knowledge as a Commons. The MIT Press. ICA (1995). Statement on the Cooperative Identity. International Cooperative Alliance, Brussels. https://​ www​.ica​.coop/​en/​cooperatives/​cooperative​-identity [November 29, 2022]. ILO (2020). Statistics on Cooperatives: Concepts, classification, work and economic contribution measurement. International Labor Organization, Geneva www​.ilo​.org/​wcmsp5/​groups/​public/​-​-​-ed​_emp/​ -​-​-emp​_ent/​-​-​-coop/​documents/​publication/​wcms​_760710​.pdf [March 20, 2022]. Imaz, O., F. Freundlich and A. Kanpandegi (2022). The governance of multistakeholder cooperatives in Mondragon: the evolving relationship among purpose, structure, and process in S. Novkovic, C. McMahon and K. Miner (eds), Humanistic Governance in Democratic Organizations: The Cooperative Difference. Palgrave Macmillan. Khurram, S. and F. Pestre (2017). Rethinking the salience of not-for-profit and for-profit stakeholders of a firm. Society and Business Review, 12(2): doi:​10​.1108/​SBR​-09​-2016​-0051 Leviten-Reid, C. and B. Fairbairn (2011). Multi-stakeholder governance in cooperative organizations: toward a new framework for research? ANSERJ, 2(2): 25–36. Lund, M. (2011). Solidarity as a Business Model: A Multi-Stakeholder Cooperative Manual. Cooperative Development Center at Kent State University. Lund, M. (2012). Multi-stakeholder cooperatives: engines of innovation for building a healthier local food system. Journal of Co-operative Studies, 45(1): 32–45. Mamouni Limnios, E., T. Mazzarol, G.N. Soutar and K.H. Siddique (2018). The member wears four hats: a member identification framework for co-operative enterprises. Journal of Co-Operative Organization and Management, 6(1), 20–33. https://​doi​.org/​10​.1016/​j​.jcom​.2018​.03​.003 Miner, K. and S. Novkovic (2020). Diversity in governance: the cooperative model for deeper, more meaningful impact. Cooperative Business Journal, Fall, NCBA, Washington DC: 4–14. Mitchell, R., B. Agle and D. Wood (1997). Toward a theory of stakeholder identification and salience. Academy of Management Review, 22(4): 853–86.

548  Handbook of research on cooperatives and mutuals Münkner, H. (2004). Multi-stakeholder co-operatives and their legal framework, in C. Borzaga and R. Spear (eds), Trends and Challenges for Co-operatives and Social Enterprises in Developed and Transition Countries. Edizioni 31: 49–82. Novkovic, S. (2020). Multi-stakeholder cooperatives as a means for job creation and social transformation, in B. Roelants, H. Eum, S. Novkovic, S. Esim and H. Walterri (eds), Co-operatives and the World of Work. Routledge: 220–33. Novkovic, S. (2021). Cooperative identity as a yardstick for transformative change. Annals of Public and Cooperative Economics: 313–36. https://​doi​.org/​10​.1111/​apce​.12362 Novkovic, S. and T. Golja (2015). Co-operatives and the civil society: potential for local co-operative development in Croatia. Journal of Economic and Organizational Diversity, 4(1): 153–69. Novkovic, S. and K. Miner (eds) (2015). Co-operative Governance Fit to Build Resilience in the Face of Complexity. International Co-operative Alliance. Novkovic, S., A. Puusa and K. Miner (2022). Co-operative identity and the dual nature: from paradox to complementarities. Journal of Cooperative Organization and Management, 10(1), https://​doi​.org/​10​ .1016/​j​.jcom/​2021​.100162 Ostrom, E. (1990). Governing the Commons: The Evolution of Institutions for Collective Action. Cambridge University Press. Sacchetti, S. and J. Birchall (2018). The comparative advantages of single and multi-stakeholder cooperatives: reflections for a research agenda. Journal of Entrepreneurial and Organizational Diversity, 7(2): 87–100. Sacchetti, S. and Tortia, E.C. (2014). The social value of multi-stakeholder co-operatives: the case of the CEFF system in Italy, in T. Mazzarol, S. Reboud, E.M. Liminios and D. Clark (eds), Research Handbook on Sustainable Co-operative Enterprise: Case Studies of Organisational Resilience in the Co-operative Business Model. Edward Elgar Publishing: 285–302. Tashman, P. and J. Raelin (2013). Who and what really matters to the firm: Moving stakeholder salience beyond managerial perceptions. Business Ethics Quarterly, 23(4): 591–616. Turnbull, S. (1997). Stakeholder cooperation. Journal of Cooperative Studies, 29(3): 18–52. Turnbull, S. (2001). The competitive advantages of stakeholder mutuals, in J. Birchall (ed.), The New Mutualism in Public Policy. Routledge: 171–201. Turnbull, S.A (2002). New Way to Govern: Organisations and Society after Enron. New Economics Foundation Pocketbook 6. Vezina, M. and Girard, J-P (2014). Multistakeholder co-operative model as a flexible sustainable framework for collective entrepreneurship: an international perspective, in C. Gijselinckx, L. Zhao and S. Novkovic (eds), Cooperative Innovations in China and the West. Palgrave: 64–78. Zamagni, S. and Zamagni, V. (2010). Cooperative Enterprise: Facing the Challenge of Globalization. Edward Elgar Publishing. Zamagni, V. (2012). Interpreting the roles and economic importance of cooperative enterprises in a historical perspective, JEOD, 1: 21–36. Zamagni, V. (2014). The cooperative enterprise: a valid alternative for a more balanced society, in S. Novkovic and T. Webb, Co-operatives in a Post Growth Era: Creating Co-operative Economics. Zed Books: 194–209.

Epilogue: future directions on research and education on cooperatives and mutualism Matthew S. Elliott and Michael A. Boland

This Handbook has introduced a broad range of topics related to cooperation and mutualism. Each chapter has introduced a survey of existing literature and recommended future research. What follows summarizes those suggestions into five broad topical research areas on cooperatives and mutuals.

MORE ATTENTION TO CONSUMER AND WORKER COOPERATIVES A common theme among the chapters is inadequate attention to consumer and worker cooperatives. This condition exists whether the consumer cooperative is in retail food, insurance, consumer products, or credit. Indeed, based on commonly used statistics, memberships in consumer cooperatives constitute almost 80 percent of all cooperative memberships worldwide. Yet much of the literature on cooperatives has been done on agricultural producer purchasing and marketing cooperatives. The focus is due in part to the influence of agricultural and agribusiness economists in the EU and North America, who discuss cooperatives as a distinct organizational form within the agri-food sector. While the focus on agriculture cooperatives has provided a rich body of theory, cases, and empirical studies, a broader emphasis on consumer cooperatives of all types seems prudent for a richer body of literature on cooperatives and mutuals. Indeed, the research conducted on cooperatives and mutuals should represent the observed cooperative population and economic impact.

QUANTIFY THE COMPOSITION OF MEMBERSHIP AND SOLUTIONS TO VAGUELY DEFINED PROPERTY RIGHTS An identified research topic was the need to collect data on governance in cooperatives. Researchers must collect data on cooperatives’ diversity, equity, officer structure, and membership composition. Statistics on board size and board composition would be required metrics. Research also needs to quantify membership composition and the membership’s shared interest. Without richer datasets, empirical testing of cooperative theories will remain inadequate. A second research need is to understand the capital structure, prevalence of permanent capital, and how the board and membership organize their capital reserve. Further research is needed to develop frameworks to measure and identify how the cooperative determines the exclusive boundaries of cooperative benefits that limit free-rider issues. Comparing coop-

549

550  Handbook of research on cooperatives and mutuals eratives with different exclusive boundaries of member and non-member benefits would be invaluable research. A third research need is understanding member businesses, the economic environment, the nature of member assets, and how cooperatives solve vaguely defined property rights issues. For example, land ownership trends seem to correlate with membership in producer cooperatives and farm success. Keller et al. (2022) report that in Minnesota, 261 farmers were identified as having 50 or more acres held by the same family for more than 50 years. Farmland with a long tenure with the same family constituted almost 12 percent of all farmland in Minnesota, where successful cooperatives are ubiquitous. Additional empirical evidence suggests that multi-generational farming and members of agricultural producer marketing and purchasing cooperatives are more likely to have farm success (for example, Elliott and James, 2017). The relationship of cooperative and member success to immobile assets such as farmland may further explain the persistence of cooperatives, the broad social networks, and the strong bonds that make cooperatives effective despite vaguely defined property rights.

GREATER UNDERSTANDING OF THE PERSISTENCE OF THE USER-OWNER BENEFIT PRINCIPLE A recent line of literature has focused on so-called hybrid or alternative models of cooperatives that may include outside investors or non-traditional sources of capitalization. However, alternative cooperative forms and capitalization are still relatively rare. There are anecdotal cases where the model has been successful or has acted as a stepping stone to demutualization of the cooperative. Alternatively, cooperatives may have permanent capital from transactions done with non-members or patronage refunds allocated to retained earnings or unallocated equity. In addition, cooperatives may have issued preferred stock to members or, in some rare cases, non-members. The permanent capital may be sufficient for cooperatives to capitalize and grow without changing to alternative forms. Indeed, there seems to be resistance to capitalizing on a cooperative using the alternative forms of cooperative organization. Instead, there is persistent adherence to the principle that equity capital should come from members or debt instruments. As a result, research needs to examine the prevalence of permanent capital in purchasing and marketing cooperatives and the composition of the capital reserve, in general, by sector and type of cooperative. The research would provide information on the user-owner principle as a core principle for many cooperative members and leaders that cannot be changed.

MORE RESEARCH ON COOPERATIVES AND MUTUALS IN UNDERSERVED POPULATIONS The cooperative or mutual model, and its ability to motivate concepts linked with democracy, is well known in the economic development literature. Many cooperatives and mutuals were formed due to colonial influence and development aid agencies in the early twentieth century. A better understanding of the resiliency of these early cooperatives to economic trends in the local and global economy is needed. Such trends might include migration and changes in the resulting demography, the prevalence of technologies such as broadband and cellular mobile

Epilogue  551 phone service and their use in price discovery, vertical boundaries of the cooperative, and relative ease or difficulty of a multinational firm in industries such as telecommunications, insurance, banking services, credit access, and dairying or other agricultural commodities. Several authors noted topics linked with the risk mitigation that a cooperative or mutual might provide to the member. An unexplored research area is whether mutual insurance firms have a common bond or interest, leading to a different portfolio of products and services than non-mutuals. For example, the threshold for a rate of return on an investment in a product or service for a cooperative or mutual might be different than that of an investor-benefit firm, which has implications for the portfolio of products and services offered. The emergence and persistence of mutuals in developing countries and underserved populations should garner more attention. We noted in the Introduction that data currently used in research might understate the impact of cooperatives and mutuals outside North America and Europe. For example, cooperatives and mutuals exist in Africa, Asia, Latin America, and Oceania and are successful in these areas. However, most research on cooperatives and mutuals is in the EU and North America, where more attention and data resources are available. Additional research is needed to better understand the relationship between the cooperative’s success and the members’ success in all regions. Researchers should strive to understand the role of transportation, geography, and other characteristics in cooperative performance across areas with vastly different economic and social histories. Further, research is required to understand members’ common bond that enables collective action.

THE STRUCTURE OF FUTURE COOPERATIVE GOVERNANCE There have been changes in the regulatory environment in North America and the EU to improve oversight of corporations in light of systemic failures that had widespread economic impacts. There may be increased attention on cooperative governance to reach similar ends in the future. For example, nominating committees have become more important to identify a cooperative board of directors with the ability to fulfill their fiduciary responsibilities and oversight in cooperatives. However, most cooperatives are limited to seeking director talent from their membership, as stated in their bylaws. In doing so, member directors do not typically fit the regulatory goal of being independent directors. While cooperative and mutuals may be largely exempt from greater oversight regulation, regulatory agencies will likely pay more attention to cooperative governance as the cooperatives increase assets or as poor monitoring leads to systemic failures. It remains unknown if federal or state policies may require greater oversight competency and independence in the oversight of cooperatives and mutuals. However, researchers should continue to draw comparisons with the performance of alternative governance structures to minimize failures that can have a systemic societal impact. There has been a lack of attention to hybrid governance systems, where boards may have outside directors who serve on a board but are not voting members. Alternatively, governance systems can use a two-tiered structure with an outside governance body, sometimes called an assembly, comprising members who elect a board of directors and board officers, which may include members of management. These structures have been found in cooperatives that may allow more diverse members across broad geographical or political boundaries to participate

552  Handbook of research on cooperatives and mutuals in the strategic direction and oversight of the cooperative. Such designs are somewhat new, and knowledge of such systems and their performance is limited.

CONCLUDING THOUGHTS Cooperatives and mutual organizations have been integral to organizing transactions in many economies. Each chapter in the Handbook can provide a source and direction for further research on cooperatives and mutuals, representing ideas for future public and private funding sources. We encourage future researchers and stakeholders to continue to invest in research and education on the cooperative and mutual organization form to address the many economic and societal problems to which the cooperative or mutual may provide the most efficient solution. During the chapter development and review process, it became apparent that the development of this Handbook might foster collaborative relationships in research at a more global level. A potential product of the collaboration on this project may be the creation of an international or regional conference separate from each country’s programs to discuss research on cooperatives and mutuals, given the broad global presence and interest in cooperatives and mutuals. An international conference could further guide research on cooperatives and mutuals in the broad topical subject areas we discuss which incorporates the various regional dynamics that play an essential but confounding role in understanding cooperatives and mutuals’ performance.

REFERENCES Elliott, M., and H.S. James. (2017). Nature of the farm: revisited. Agricultural and Resource Economics Review, 46(1), 123–45. Keller, A., M.A. Boland, and S. Petty. (2022). The growing use of alternative farmland ownership methods in the United States and the need for targeted data collection. Journal of American Society of Farm Managers and Rural Appraisers, 1, 37–43.

Index

advertising as activity provided by marketing orders 477 brand-specific 478, 482–3, 484, 488, 490 enabling Blue Diamond’s growth and success 476 generic Almond Board of California 487, 488 effect on demand for differentiated products 484 provided by marketing orders 478, 482–4 informative combined with persuasive 488 versus persuasive 481–2, 483 provided by marketing orders 476, 482, 486 African American cooperatives Black women’s roles in 363–5 Black youth and 365–6 cooperative development 357, 359, 361–2, 363, 366–7 history 1800s to 1900s 356–59 in 1930s 359–360 from 1960s 361–3 civil rights 355, 361, 366 examples of early consumer cooperatives 358–9 little documentation on 354 overview 354–5, 366–7 agency costs 26–7, 34–5, 36, 43, 56–7, 125–6, 239, 242, 244 agency problems collective nature of cooperative ownership aggravating 128 cooperative principles reducing 119 in cooperatives 42–4, 154 existing in relationships between boards of directors and CEO 120 future research area 130 as limitation of social capital 125–6, 130 NGCs generally having fewer 87 agency theory 26, 119, 499 agri-food industry 33, 46, 242, 313, 317, 425, 429 agricultural cooperatives application of leadership theory to 143–4 in China importance of personal networks in 396 rapid development of 389

553

closing business units 241 cooperation with members 232–3 and debt-based capital 105–6, 111, 112 direct contributions 299–300 economic impacts economic contributions 304–5 industry comparison 305–7 spending patterns 303 equity and capitalization issues unique to 277–88 in EU establishment of joint data cooperative by 385 report giving status and development of 371 financial performance 258–9 future research areas 182, 222, 223–7, 233–4, 247–9, 273–4, 308, 436 implications of MIM to boards of directors 144–5 in Ireland 195–205 in Latin America accompanying smallholder farmers 3, 176–8, 180 future research areas 182, 436 history of smallholder 175–6 Paraguay 431 specific characteristics 422 marketing 11–13, 156, 272, 295, 298, 299–308, 474–5 and MSC model 536 organizational costs 54–62 solutions to 60–78 and pooling 170, 231–3, 234 primary motivation for forming traditional 237 problems of, in post-socialist transition economies 375, 383 profit distribution 252, 253, 257, 260, 262 research questions regarding strategic management of 247–9 risk in future research areas 222, 223–7 mitigation of 217–22 sources of 210–216 role in marketing year 230–231 social capital and governance of 116–30 spending patterns 299, 300–302, 303, 307 in sub-Saharan Africa

554  Handbook of research on cooperatives and mutuals background and context 440–441 data descriptives 445–7 history 441–3 success stories 447–9 summation and implications 449–50 theory 443–5 taxation 265–74 and transition to environmentally sustainable food systems context 313–14 discussion and future research areas 325–7 from farming to food chain and food system 314–16 role in sustainability transition 313, 314, 318–25, 326, 327 summation 327–8 transition perspective 316–18 in United States data on chains 188–9 farmer governance 187–8 implications for chain governance 189–91 number of, and membership 186 number of, and total sales by type 475 overview 185 successful branding strategies 485 summation 191 varying significantly in activities 475 and vertical integration 185–7 see also dairy cooperatives; farmer cooperatives agricultural products under collective membership organization 118 identifying new uses for 188–9 Latin America as leading exporter of 172 market flow in food industry 477 marketing and price risk 213 members’ interest in first stages of processing 127–8 pricing to increase farmer income 416 during marketing year 230–231 production risk 211–12 risk mitigation strategy 219 supply chain example 168 agriculture comparison of NGCs and TCs within 83–97 governance in 169–71 marketing channels, supply chains, and value chains 167–9 new intermediaries 111 rise of debt-based capital and pure cooperatives 105–6

risk

future research areas 222, 223–7 mitigation of 217–22 sources of 210–216 sustainable 313, 315, 321, 325 themes of environmental sustainability in 315 alliances 224–5 allocated equity see equity: allocated allocative efficiency 16, 18, 149, 259 Almond Board of California (ABC) 476, 487–9 Argentina dairy cooperatives 423, 426–8, 435–6 second wave of cooperatives 422 assessment system and fraternals adverse selection weakening 500 initially organized around 497 reasons for use 505 versus reserve system 503 and township mutuals initially organized around 497 reasons for use 509–10 replacement of 508 in US insurance industry 497 as vulnerable to free rider problem 500 asset risk 216 assets, additional, as risk mitigation strategy 219 behavioral economics 481, 520, 524 behavioral leadership approach 137–8 Blue Diamond 67, 69, 189, 233, 474, 476, 478, 487–9 boards of directors agency problems 120, 130 in cooperative governance structure 116–18 and cooperative profit distribution 253–5 division of roles with management 135–6 governance in US 462 and heterogeneity 127, 128 in Irish farmer cooperatives 193, 198, 202 of Latin American producer cooperative 181–2 leadership 138, 143–5 and nexus of contracts 41 of NGCs 87, 89–90 and principles behind cooperative governance 120–121 and protection of members’ rights 119 relationship with managers affecting cooperative performance 154, 215 retained allocations of patronage 278 risk and uncertainty 212, 215, 220, 223, 224, 227 role of 9–10, 43

Index  555 selection of equity management strategy 279 and social capital 124, 127, 130 and strategy formulation 245–7, 249 structure of future governance 551–2 and taxation 268–9 of TCs 84, 86 bonding social capital 123, 126, 129–30, 506 brand equity 242, 483–4, 485, 489, 490 brand recognition 247, 474, 481, 488 brand-specific advertising Almond Board of California 488 complementarity with generic 482–3, 484 incorporating cooperative identity into 490 provided by marketing cooperatives 478 branding opportunities for marketing cooperatives exploring 474 lack of research on 475 persuasive advertising offering 481–2, 484 recommendation for strengthening 490 unique 485–7 value-added products offering 478 Brazil broiler industry 261 coffee exporter 173 Comparte network member 179 dairy cooperatives 423–6, 435, 436 mining cooperatives and principles 335, 336 nut harvesting 176 second wave of cooperatives 422 bridging social capital 62, 123, 124, 126, 129, 506 Brightspring tea cooperative 393–4, 395, 398 business finance 101, 103 business operations capitalizing via additional member-owner contributed capital 107–8 via internal capital 106–8 via non-member equity capital 108–9 extending into value-added activities 126 governing complex 127–8 simple, and member-related 120–121 uniqueness of cooperative 307 business restructurings 109–10 business structures see cooperative business structures capital capitalizing business operations via internal capital 106–8 via non-member equity capital 108–9 context 100–101 cooperative philosophical orientations toward 101–4 debt-based 105–6, 108, 111 future research areas 110

initial capitalization of cooperatives 104–5 overview 101 and restructurings 109–10 testing assumptions and negative inferences about outside capital 110–112 capital constraints capital structure and growth 283–5, 287 as challenge for cooperative finance 109 inherent in ownership structure of TCs 86 NGCs as susceptible to 85, 92, 94–5 as rationale for mergers and acquisitions 224 capital structure definition 277 future research areas 287, 549–50 and growth 283–5 maximizing profit or yield inhibited in most cooperatives’ 111 and sustainability of growth 285 capitalism 465, 496, 523 capitalization of business operations via additional member-owner contributed capital 107–8 via internal capital 106–8 via non-member equity capital 108–9 of cooperatives, initial 104–5 overview 277–81 Carbery, West Cork federated model 201–3, 205 Chiapas 176, 180–181, 183 childcare cooperatives 458–9 Chile, dairy cooperatives in 423, 429–30, 435 China cooperative development challenges for 402–3 and departure from Western cooperative model 389–90 farmer 408–13 future research areas 403–4 important foundation for 391 prosocial motivation 396 research method 392 role of core members 389–90, 396, 402 social relations playing important role in 401, 403 cooperatives governance features of 406–8 intermediary role of 324 lifecycle of 403–4 nature of 401–2 rationale behind model 402 from social relationship perspective 401 farmer cooperatives authenticity of 414 context 406

556  Handbook of research on cooperatives and mutuals core and common members 407–8, 414, 417 development of 408–13 functions and performance of 415 future research areas 416–17 governance of 408, 414, 416–17 government intervention 408 governmental support for 319, 411–13 justification for 413–14 literature review 413–16 membership size 409–11, 417 population of 409 principles of 406–7 revenue of 411 role in poverty alleviation 415–16 “zombie” cooperatives 410, 411, 414–15, 417 land shareholding cooperatives 448–9 rural cooperatives core members 389–90, 391, 392, 394, 396, 397, 399–400, 401–4 future research areas 403–4 governance of 399–400 initiated by external business people through rural partners’ networks 394–5 initiated by rural elites 392–4 initiated by village committees 394 social relations in 392–5 social relations in Chinese rural cooperatives 392–5 to exert social pressure to build trust 397–9 future research areas 403–4 motivation for 396 research method 392 role in rural China 391–2 civil rights 355, 361, 366 co-production 543 coffee decommodification affecting 177 diversity among and within varieties of 177 in Ethiopia 442, 445, 448 Fair trade certified 174–5 as Latin American specialty crop 173 marketing channels, supply chains, and value chains 167–9, 171 coffee cooperatives 178, 180–183 collective action addressing wind erosion 443 application of principles 510–511 and common good 538 future research area 551 and governance 29–32, 535 and MSSAs 46

mutuals as organizations of 496 selective incentives 30–31, 47 collective decision-making costs 53, 57, 78, 121 collective interests 128–9 Colombia coffee exporter 173 Comparte network member 179 dairy cooperatives 423, 430, 435 commitment and cooperative performance 119 directors and agency costs 43 factors determining, among Canadian farmers 260–261 low levels amongst farmer members in China 415 and member participation 154–6 importance of former to latter 148, 156–60 weaknesses among Irish dairy cooperatives 201 common-pool resources initial contracts leading to problems 41–2 and MSCs 537–8 principles for efficient management of 32 and vaguely defined property rights 31, 44 the commons collective management of 519 governance of 525, 537 intersection of multi-stakeholder cooperative form and 545 renewed interest in reclaiming 525 tragedy of 29, 31, 519 Comparte network 178–9, 180 competencies 138–40, 141–2, 143, 145 competing values approach 151, 153–4 competitive yardstick concept of 185, 186–7 cooperative strategy 237–8, 239 and farmers 231 competitive yardstick effect 16–17, 19, 406 conjectural variations models 17, 19 connective businesses benefits of 177–8 faith-based 178–83 consumer cooperatives boundaries and classification 466 challenges associated with 460–461 conjectural variations models 17 consumers’ knowledge of and identification with 466 and cultural zeitgeist 467 current African American 361–3 data collection and documenting populations of 466–7 definition 454

Index  557 early African American 358–61 economic welfare 16 future research directions 549 governance 462 history 459–60 impacts 463–5 likely markets in which to operate 19 multi-stakeholder cooperatives 539, 543 nature of consumers in 461 need for developed scholarship on 467 objectives 11 ownership, benefits and costs of 462–3 patronage 451, 454, 463, 464, 466 prevalence 455 price and output solutions 14–15 reasons for forming 454–5 social movements 460, 463, 465 structure 462–3 as under-studied in academic literature 454, 465, 467 types 455–9 consumer welfare 454, 463–4, 465, 482 contract design 42, 226–7 contracting costs involved in 33, 35, 53, 58, 64, 78 growing need for research on 226 and horizontal integration of farmer-members 117 incomplete 32, 120, 125 market 53, 58, 64, 78 as risk mitigation strategy 217–18, 220, 223, 226 contracts, nexus of cooperative as 40–42 firm as 26–7, 519 cooperation among cooperatives principle 111, 334, 335, 336–7, 353, 407 benefits of worker 523–4 as form of vertical integration 185–7 between members and their cooperative 232–3 new forms of 378 user-owner nature of 135 cooperative behavior new meso-institutions restricting 46 previous research studies 19 underlying assertions about 9–11, 14–15 cooperative business structures access to capital 100–112 differential economic impacts for 292–308 cooperative development African American cooperatives 357, 359, 361–2, 363, 366–7 in China

challenges for 402–3 and departure from Western cooperative model 389–90 farmer 408–13 future research areas 403–4 important foundation for 391 prosocial motivation 396 research method 392 role of core members 389–90, 396, 402 social relations playing important role in 401, 403 and social capital 129 cooperative equity see equity cooperative genius 60, 61–2, 73 cooperative governance see governance cooperative membership see membership cooperative ownership addressing racial discrimination and economic exclusion and exploitation 523 adoption of quasi-new generation, as tinkering solution 71–2 benefits of adapting structure of 243–4 as challenge to leadership 135–6 collective nature of 128 consumer, costs and benefits of 462–3 contributing to anti-poverty and community-building 354 increasing use of by previously incarcerated people 367 influence of EU agricultural policy 195 and models built on trust and reciprocity 545 multi-stakeholder 537, 539 and type of CSR reporting 322 cooperative performance and commitment 158 conceptualization 148 context 148–50 in EU dairy industry 374, 379, 380 financial 258–9 future research areas 43, 158, 551 impact of embedded and environmental institutions on 45–6 impact of trust 156, 158 member participation for 155, 156, 158, 160 most commonly used measure 257 multi-stakeholder 540–541 organizational effectiveness frameworks providing approach to measuring 150–154, 158, 160–161 requiring multiple indicators to measure or evaluate 243 social capital as critical factor in 2 strategies without supportive internal characteristics as harmful to 247

558  Handbook of research on cooperatives and mutuals cooperative philosophy and capital 101–4, 111 future research area 110 and governance in rural cooperatives 391 cooperative principles 337–8 business 84, 135–6 and cooperative equity 281–2 ICA 103, 104, 108, 119, 182, 269, 334, 352–3, 358, 407, 413–14, 417 limitations 286, 480 linking SDGs to 334, 336–7, 338, 339, 340, 342–3, 345–6, 347–9 MSCs adhering to 538, 543 reporting on 334–6, 338 Rochdale 28, 39, 84, 119, 135, 358, 422, 428, 442 cooperative strategy see strategy cooperative taxation see taxation cooperative theory approaches to 23 early 37–9 neoclassical 17, 19, 39 nexus of contracts approach 41, 42 NIE concepts applied to 42–6 shift in, due to NIE 40–42 two broad theoretical perspectives 1–2 worker 520–521, 524 cooperatives access to capital see capital agency problems in 42–4, 154 as coalition (team) 37 competitive yardstick effect 16–17, 19, 406 cooperation among 111 cross-sector applications 3–4 economic efficiency of 17–18, 19, 463–4 effects on market performance 15–17, 476 financial performance of 145, 149, 152, 153, 253, 256–9, 380, 384, 485 as firm 37–9 formation and cultural zeitgeist 467 future directions on research and education on 549–52 future research areas 46–7 governance 2–3 hybrid structures 111–12 importance of organizational effectiveness in 150–154 incentivizing member investment in 111 mission 237–8 and new intermediaries 111 as nexus of contracts 40–42 objectives 10–11, 39, 239–40 organization 2 pooling 170, 232–4

profit distribution in 252, 253–6, 259–62, 267, 274, 305, 389 regional and cultural features 5 in relation to new and emerging structures 112 risk-shifting with members 227 social, environmental, and economic impacts 4 special sectors 5–6 taxation future research areas 273–4 options flowchart 254 overview 265–9 previous research 269–73 “zombie” 410, 411, 415–16, 417 see also African American cooperatives; agricultural cooperatives; China; consumer cooperatives; dairy cooperatives; farm supply cooperatives; farmer cooperatives; land shareholding cooperatives (LSCs); marketing cooperatives (MCs); multi-stakeholder cooperatives (MSCs); new generation cooperatives (NGCs); purchasing cooperatives; pure cooperatives; solidarity cooperatives of Quebec; traditional cooperatives (TCs); worker cooperatives cooperatives life cycle agricultural, in sub-Saharan Africa 443–5 dairy cooperatives in Brazil 424–5 environmental impacts 315 organizational costs through 58–62 stage 3 187 stage 5 199 core members in China and common members of farmer cooperatives 407–8, 414, 417 rural cooperatives 389–90, 391, 392, 394, 396, 397, 399–400, 401–4 cost leadership strategy 56, 241, 379, 383, 485, 491 cost-sharing, as risk mitigation strategy 220–221 Costa Rica, dairy cooperatives in 423, 430–431, 435 credit cooperatives as able to provide 318, 415 farm 105–6, 111, 261, 292 and financial risk 215 subsidized 442 credit unions 101, 334, 338, 357, 358, 359–362, 366, 456, 459, 495 cultural zeitgeist 467

Index  559 dairy cooperatives in EU comparison with IOFs 371–2 relative importance of 372–5 research on 375–84 summation and future research areas 384–5 in Ireland changing structure of 204 context 193–4 cooperative organizations 196–203, 205 future research areas 205 influence of EU agricultural policy 195–6, 204 multi-purpose nature of 193, 196, 205 supply chain 194–5 sustainability 204 in Latin America in Argentina 423, 426–8, 435–6 in Brazil 423–6, 435, 436 in Chile 423, 429–30, 435 in Colombia 423, 430, 435 context 422 in Costa Rica 423, 430–431, 435 and dairy sector 423 in Ecuador 431–3 in Mexico 423, 434, 435 in Nicaragua 423, 433–4, 435 in Paraguay 423, 431, 432, 435 summation and future research areas 435–6 in Uruguay 429, 435 organizational costs 68 in United States 189 dairy farmers in EU abolishment of milk quota as incentive to increase milk production 376 competitive position 195 impact of conflicting policies 196 member behavior 377–8 milk package to strengthen position of 371, 373–4 milk price as determinant of income 374 switching behavior 377, 380 and unfair trading practices 378 weak bargaining position for 373 information sharing programs 190–191 in Latin America “cooperative ecosystem” 434 initiative to improve bargaining power 429 numbers in Nicaragua 433 strategic alliance between 432 and tax deductions 272

in West Cork federated model 202–3 willingness to accept lower milk prices 190 Dairy Farmers of America 67, 292 dairy farms development strategy 431 in EU numbers reducing after abolishment of milk quota 371 volume of milk production 372 project to create climate-neutral 203 volume of milk production in EU 372 in Latin America 423 West Cork federated model 202–3 dairy market developments in European 371–2, 384 farmers’ pro-competitive effects in 379 Latin America Colombian 429 and dairy cooperatives 423 government intervention in Brazilian 425 Mexico’s steady growth trend 434 Uruguayan 429 Dairygold 200–201, 205 data collection area to explore primary 287 consumer cooperatives 466–7 cost of primary 293 different researchers approaching from different perspectives 455 by farmers 190–191 incorporating alternative production functions based on 295 as marketing function provided by marketing orders 477, 478 on membership composition and VDPR solutions 549–50 in relation to contracts 42 debt-based capital outside Farm Credit System 106 rise of 105–6 role of intermediaries 111 scaled cooperatives having preference for 108 decentralized autonomous organizations (DAOs) 112 delayed decision-making, as risk mitigation strategy 222 development see cooperative development differentiation further market, trend 385 product 6, 19, 84, 243, 378, 464, 474, 478, 482, 485, 490 as strategy 241, 243, 383

560  Handbook of research on cooperatives and mutuals directors see boards of directors distributing tax deductions 271–3 diversification limitations 241 product 195, 204 as risk mitigation strategy 218, 223, 239, 241 documentation consumer cooperatives 466–7 official, on NGCs 87–8 economic democracy 354, 355, 363, 367, 521, 526 economic efficiency as combination of technical and allocative efficiencies 149 of cooperatives 17–18, 19, 463–4 economic impact of cooperative business structures analytical framework 295–6 member distributions 297–8 metrics 297 multipliers 296–7 representative industries 298–9 conclusions and future research areas 307–8 context 292–3, 295 cooperative data direct effects 299–300 spending patterns 300–302, 303 direct effects agricultural cooperatives in NYS 299–300 definition 296 empirical results 302, 304–7 and multipliers 296–7, 302 empirical results agricultural cooperative economic contributions 304–5 industry comparison 305–7 multipliers 302–5 indirect effects definition 296 empirical results 302, 304–7 and multipliers 296–7 induced effects definition 296 empirical results 302, 304–7 and multipliers 296–7 member distributions accounting for level and type of 295 in analytical framework 297–8 contributions to NYS economy 299, 300 customized expenditure 293, 294 empirical results 302–6 and spending patterns 301–2 multipliers

analytical framework 295, 296–7 empirical results 302–5 summary of literature and model customizations to estimate 294 economic theory of cooperatives agricultural and consumer 9–19 conventional/mainstream, and MSCs 531, 535, 537 worker 517, 521, 524, 525–6 see also New Institutional Economics (NIE) economic welfare 15–16, 17 Ecuador Comparte network member 179 dairy cooperatives 431–3 education in African American cooperatives 359–360, 362, 363, 365, 366 commitment influenced by 157 Comparte 178 cooperatives providing 352, 355 future directions on 549–52 intentions 6 MIM and boards of directors 144–5 multi-stakeholder cooperatives 541–2, 545 quality, as SDG 337, 346–7, 352, 353 eldercare cooperatives 458–9 embeddedness of cooperatives 39, 203, 205, 324, 391, 400 of institutions 22, 27–8, 36, 45–6 emotional competence framework 138–9 environment economic 22, 41, 129, 550 institutional 27, 28, 46, 61, 77, 78, 390, 422, 524 environmental institutions impact on cooperative performance 36, 45–6 NIE versus neoclassical economics 36 as second level of institutional analysis 28–9 environmental sustainability see sustainability Equal Exchange 167–8, 171 equitable development 355–6 equity access to capital via 100–112 allocated 44, 253, 255, 277–8, 279–80, 282–3, 287, 288 business operations financed by 103 constraints, as challenge faced by MCs 490 cooperative derived rationale for 281–2 federated 280–281 future research areas 286–8 lack of transferability 154 limitations in context of VDPRs 283 needs 151, 182, 212 overview 277–81

Index  561 state of knowledge and critical issues of 281–5 trading of shares 109 member 83, 84–5, 92, 93, 212 NGCs and TCs compared 96 and ownership 288 “preferred shares” as method of building 463 in relation to pooling 232 revolving 252, 253–6, 260, 261, 271, 274, 278, 280, 282, 285, 288 as SDG indicator 341–2, 348 and tax 298 in traditional cooperative model 243 unallocated 44, 106–7, 245, 253, 260, 271, 273, 278, 279, 282, 550 upfront 65, 87, 279 West Cork agricultural cooperatives 202 see also brand equity; return on equity (ROE) equity capital and anti-speculation 112 acquisition in cooperatives 74–5 capitalizing business operations via non-member 108–9 choice between debt and 103 collectively owned, in agricultural cooperatives 320–321 constraints arising from property rights issues 284–5 cooperatives’ limited access to non-member capital due to 279 core and common members access to 407–8 as financial need of cooperatives 282 limited availability for risky investments in product development 375 maintenance organizational costs associated with attracting, rewarding and redeeming 56 and market forces 125 outside investor 110–112 principle of cooperative members providing 2, 112, 550 tax-deductibility of dividends paid on 265 unwillingness of members to provide additional 376, 378 upfront 63, 72 equity composition 277–9 equity management future research areas 287, 288 implications of cooperative principles 286 local cooperatives 223–4 and proportionality 282–3 and SGR 285 strategies systems 279–80 equity patronage 255–6, 257, 266, 268, 271, 284

equity redemption plan 72 equity redemptions 41, 224, 244, 257, 258, 260, 271, 280, 282–3, 300 equity rights 4, 44, 237, 244, 246 equity structure 244, 277–9, 282 Europe agricultural cooperatives addressing organizational costs in 64–6, 68, 70–73, 76–8 comparison with sub-Saharan Africa 440 developments in dairy markets 371–2, 384 European Union (EU) dairy cooperatives comparison with IOFs 371–2 relative importance of 372–5 research on 375–84 summation and future research areas 384–5 developments in European dairy market 371–2, 384 influence of agricultural policy 195–6, 204 see also sustainable development goals (SDGs) experiments in fresh produce sector of Uruguay 319–20 importance of 321 need for 318, 319 sharing economic risk of 327 fair trade (FT) 168, 174–5, 177, 343–4 faith-based connective businesses 178–83 Farm Credit System based exclusively on debt-based capital 105 debt-based capital outside 106 Farm Credit System cooperatives (FCC) 295, 299–302, 304, 305 farm supply cooperatives economic welfare 16 and financial equity in US Midwest 280, 282, 286 likely markets in which to operate 19 objectives 11, 18 price and output solutions 14–15 study on financial trends affecting 261 farmer cooperatives branding by 250 bridging and bonding social capital 129 in China development of 319, 408–13 future research areas 416–17 governance features of 406–8 introduction to 406 literature review 413–16 following profit maximization 262

562  Handbook of research on cooperatives and mutuals member commitment study 157 multi-stakeholder cooperatives 539 in New York State analytical framework 295–9 cooperative data 295, 299–302 empirical results 302–7 future research areas 307–8 primary role of efficiency 45 resources required 151 in US, revenue generated per member 446 farmer governance in Irish dairy cooperatives 193–4, 197, 198, 199, 200, 202, 204, 205 in United States 185–6, 187–8, 190–191 farmers see also dairy farmers farmers, role of from Irish perspective 193–205 from Latin American perspective 172–83 from US perspective 185–91 farmland fragmentation 417, 440, 445, 448, 449 federated cooperatives allocations by local cooperatives 223–4 equity 280–281 profit distribution 256 taxation 267–8 finance and performance of EU dairy cooperatives 379, 380, 384 tenet of cooperative 253 financial performance business success measured in terms of 96 of cooperatives concept of 256 context 252 dairy 380 future research areas 145, 261 versus IOFs 384 measuring 256–8 previous research 258–9 relation to profit distribution 253 used in assessing cooperative performance 149, 153 and corporate management compensation 220–221 positive relationship with brand equity 485 financial risk 215, 216, 223 fire insurance industry 498 see also township mutual fire insurance companies firm and agency costs 26, 42 allocation of resources in 27 cooperative as 37–9 governance 29

versus markets, early focus on 24, 29 as nexus of contracts 26–7, 519 NIE and neoclassical economics comparison 35–7 social capital as essential for 123 strategy 236–7, 245, 246, 248 see also theory of the firm firm behavior 15–16 focus of strategies 246 food and grocery retail cooperatives 456–7 food system example of marketing channels in 167 new functions for sustainable 327 perspective of 316 role of cooperatives in transition toward sustainable 318–25, 326 US agri-food system, river analogy 476 formation organizational costs (FOCs) in agricultural cooperatives in framework for understanding 58–9 solutions to 62, 64, 74, 77 types of 55 determining incentive to found organization 52, 54 fraternal benefit societies constraints placed on 499 definitions 504 early history 504–6 evolution of 495, 496, 503 future of 512–13 maturation and decline of 506–7 nature of 503 number in US 511 tax treatment 512–13 French multi-stakeholder cooperatives 532, 533–4, 535, 537, 542 friendly societies 494, 503 Glanbia 197–9 goal attainment approach 150, 151, 152 governance chain, implications for 189–91 collective action and transaction cost economics 29–35 of the commons 525, 537 cooperative and agency problems 125 care services 458 consumer 460, 462 farmer, in China 406–8, 414, 416–17 forms of 116–21 future structure of 551–2 housing 457–8 impact on financial performance 258

Index  563 as internal characteristic 236, 237, 243–4, 246, 326 in Latin America 425, 428, 429, 430, 433 multi-stakeholder 531, 532, 533, 535–41, 542, 543, 544–5 need to collect data on 549 participation in 154–5, 158 principles behind 120–121 regarding risk and risk management strategies 226–7 in rural China 389, 390, 391, 396, 399–400, 402 social capital in 121–4, 126, 128–9, 130 structure of 116–18 in sub-Saharan Africa 441, 442, 444, 446, 450 worker 521, 522, 525–6 definition 169 democratic 27, 269, 335, 390, 456, 504, 522, 525–6, 543, 544 and meso-institutions 46 of supply chains farmer 185–6, 187–8, 190–191, 193–4, 197, 198, 199, 200, 202, 204, 205 global value chain 169–71 hierarchical 242 in Latin America 181–2 as third level of institutional analysis 29 and transaction costs 24, 27, 32–5 government role in Italian, French, and Quebec MSCs 534–5, 536–7 in Uruguay 429 growth and capital structure 283–5 consumer cooperative 459 of cooperatives in China 402, 409, 410, 414, 417 economic, SDG relating to 337, 347, 352 of financial support for cooperatives in China 411–12 future research areas 287–8 impact of taxation on 271 impediments to 377 in Irish dairy cooperatives 194, 195, 198, 199, 203, 204 in Latin America 172–4, 176, 180–181 market share 234 of multi-stakeholder cooperatives 534, 535, 541, 542 of new intermediaries 111 profit distribution choices affecting 252, 253 retention choices affecting 252, 261 sustainability of 285

through mergers 66, 376 worker cooperatives 522, 523 health services 541–2 hedging alternative strategy to 241 as response to property rights problem 87 as risk mitigation strategy 217, 220, 223 heterogeneity in China 391, 402, 403, 404, 414–15, 417 in governance 535–6 in Latin America 423 as limitation of social capital 127–8 measurement of member 249 measuring of members’ economic interests 249 member preference 56, 70, 77, 78, 95, 261, 444 of patron tax situations 274 problems arising with member 6, 39, 70, 124, 241, 244, 326, 460, 535–6 suggested benefits from 45 horizontal integration 117, 126–7 housing cooperatives 457–8 human capacity, additional, as risk mitigation strategy 219 human capital additional, as risk mitigation strategy 219–20 distinction with social capital 121 participation in YA increasing 181 human risk 214–15, 216, 223 humanistic economics 520–521, 526 hybrid cooperative structures agricultural cooperatives creating 224 concept of 104 developed to address capital constraints 490 relative success or failure of 111–12 as relatively rare 550 hybrid organizations 33, 46, 54 idiosyncratic risk 210, 211, 212, 213, 214, 215, 216, 218 incremental investments, as risk mitigation strategy 222 individual interests versus collective interests 128–9 and increasing member heterogeneity 85 industry life cycle 500–503 influence definitions 140 importance of 140–141 as leader competency 139 leadership versus management 137 levels of 142–3 in MIM framework 141–3

564  Handbook of research on cooperatives and mutuals of people on each other 123, 142 in situational leadership theory 138 information informative advertising 476, 481–2, 483, 486, 488 timely and reliable, access to, as risk mitigation strategy 221 innovation as impact of consumer cooperative 464–5 in industry life cycle 500–501, 502–3 and multi-stakeholder governance 540, 544 niche 317 see also product innovation input-output (IO) all effects as linear across categories 302, 304–5 empirical results 302–7 and intermediate transactions 293 limitation 293 and member distributions 297–8 as model to estimate economic impact of agricultural cooperatives in New York State 4 modelling approach 295–6 inputs intermediate 177, 294, 297, 298, 299, 301–5, 307, 309 mixing, to produce output 36 monitoring and rewarding difficulties 25 for sustainability 319–20, 321, 327 and technical efficiency 18 institutional risk 214, 223 institutions collective action 29 context 22 embedded 36 embeddedness 22, 27–8, 36, 45–6 environmental 28–9, 36, 45–6 levels of analysis 27–35 and neoclassical economics 23 new meso-institutions 46 in nexus of contracts 42 and NIE 23–4, 27 reinvention 56, 60, 61, 62, 64, 65, 66, 68, 69, 71, 77 in rural China 391, 394, 403, 404 and sustainability 318 tinkering 42, 56, 60–72, 76–7 insurance alternative strategy to 241 and idiosyncratic risk 210 as risk mitigation strategy 218, 220 as type of consumer cooperative 459 see also mutuals insurance function 320–321

insurance industry assessment system 497 early development of fire insurance industry 498 of life insurance industry 497–8 state regulation of 496–7 intermediaries capturing and decreasing margins 476 cooperatives acting as 313, 324 introduction and growth of new 111 and US farmers 106, 111 internal process approach 150, 151, 153 international conference recommendation 552 International Cooperative Alliance (ICA) 1995 reformulation of cooperative principles 108 and China’s Cooperative Law principles 407, 417 cooperative principles 334, 352–3, 407 definition of member of cooperative 531 guidebook on sustainability reporting 323 influencing principles 119, 359 MSCs adhering to 538 principles as future research area 182, 349 on raison d’être of cooperatives 148 view on role of capital in cooperatives 102–3 international development 176 international taxation of cooperatives 269 internationalization of cooperatives, partly explaining rise in IOFs 384 EU’s strategy 372–3 investor-owned/oriented firms (IOFs) and bargaining cooperatives 373, 374, 378, 380 business school curricula focusing on 466 comparison with cooperatives board members 87 capitalization, equity, and growth 277, 278, 279, 284–5, 286, 287 communicating added value 476 in EU 380–382, 384 financials and performance 379 governance structure 462 marketing and brands 483–4, 485, 486, 490 markets, pricing, and welfare 464 member commitment 157 member participation 152–3 prices and risk premium 371–2, 374–5 product quality 93, 261 profits 151, 474, 517–18 reporting on SDG performance 334, 348–9 risk and contracts 226

Index  565 strategy differences 55–6 conversion to 62, 64, 68, 85, 86, 95 IOFs see investor-owned/oriented firms (IOFs) Ireland context 193–4 cooperative organizations Carbery, West Cork federated model 201–3, 205 Dairygold 200–201, 205 Glanbia 197–9 Ornua 196–7, 205 dairy cooperative supply chain 194–5 future research areas 206 influence of EU agricultural policy 195–6, 204 summation of trends in supply chain governance 205–6 Italian multi-stakeholder cooperatives 531, 532–4, 536, 537, 540, 541, 544 joint ventures 224–5 labor inclusion 522, 525, 537, 542–3 labor sovereignty 522 land shareholding cooperatives (LSCs) 441, 448–50 Latin America Comparte network 178–9, 180 context 172–3 cooperatives accompanying smallholder farmers 176–8 dairy cooperatives in Argentina 423, 426–8, 435–6 in Brazil 423–6, 435, 436 countries with one large, dominant cooperative 429–31 and dairy sector 423 other cases of 431–4 summation and future research areas 435–6 Fair trade movement 174–5 future research areas 182 governance 181–2 history of smallholder agricultural cooperatives 175–6 importance of specialty crops 173–4 integrated value chain in Chiapas 180–181 summation 183 leadership context 135 cooperative ownership challenge 135–6 future research areas 145 literature on 139–40 versus management 137 MIM

implications to boards of agricultural cooperatives 144–5 as synthesized holistic leadership model 140–143 leadership theories application to agricultural cooperatives 143–4 behavioural leadership approach 137–8 emotional competence framework 138–9 relational leadership theory 138 situational leadership theory 138 life cycles see cooperatives life cycle; industry life cycle; product life cycle life insurance industry 497–8, 505, 514 limited liability companies (LLCs) 65, 66, 86, 94, 95, 96–7, 434 LLCs see limited liability companies (LLCs) lobbying and influence costs 57 as solution to organizational costs 62 for sustainability 324–5 logic of cooperative taxation 269–70 maintenance organizational costs (MOCs) in agricultural cooperatives in framework for understanding 58–62 identifying 60 IOF strategy differences 55–6 solutions to 62–71, 75–8 subsets of costs 56–7 and competitive advantage 52, 54 managerial capital 441, 443, 444, 445–6, 449–50 managers and agency costs 26 and agency issues 42–3, 125 costs of controlling 53, 56–7 farm, risk preferences of 227 versus leaders 137 and nexus of contracts approach 41 recommendation for 160 role of 9–10, 135 salaries in sub-Saharan Africa 446 and unallocated equity 44 manufactured goods retail cooperatives 457 market access coffee cooperatives providing 178 importance to farmer members 378 rural subsistence farmers suffering from lack of 172 for sustainability 319, 321–3 TCs’ defensive purpose 89 market efficiency 463–4 market performance, effects of cooperatives 15–17, 476 market risk 213, 223, 227

566  Handbook of research on cooperatives and mutuals marketing chain see value chains marketing channels 167, 189, 371, 415, 475, 480 marketing cooperatives (MCs) agricultural 11–13, 156, 272, 295, 298, 299–308, 474–5 Blue Diamond and Almond Board of California 487–9, 490 branding opportunities 474, 475, 485–7 challenges for 76, 490 competitive yardstick concept 186–7 complementarities with marketing orders 482–4 conjectural variations models 17 and debt-based capital 105 definition 475 extent of market share 191 formation of 166 foundations of possible marketing advantages for 479–85 future research directions 490, 550 grain 241, 273, 282, 286 marketing channels 189 marketing functions provided by 478 membership policy and long-run equilibria 13 in modern agricultural markets 476–9 objectives 10, 18 performance as often analyzed in terms of membership policy 15–16 price and output solutions 11–13 primary economic function 480 recommendation for pursuit of product innovations 475–6 risk-pooling 230, 231–2 risk-shifting 227 selling well-recognized brands 474 stability of solutions 13 supply chains 189 traditional versus NGCs 92, 93 value chains 188–9 marketing orders (MOs) check-off programs, commodity market model of 483 future research areas 490 and marketing cooperatives benefiting from information provided by 475–6, 486 possible complementarities between 482–4, 486, 490 marketing functions provided by 478 in modern agricultural markets 476–9 nature of CH29 primary economic function 480 marketing year future research areas 233–4

and pooling 231–2 role of cooperative and 230–231 for US agricultural products 230 markets versus firms, early focus on 24 measurement of cooperative principles 334, 340–347, 348, 350 of organizational effectiveness 150–154 of SDGs 333, 339, 340–347, 348, 349 member distributions 293–4, 295, 297–8, 299–300, 301, 302–6 member economic participation 102, 279, 334, 340–341, 353, 407 member investment incentivizing in cooperatives 111 and member commitment 201 and NGCs 86, 92, 93 one member, one vote principle 42 member-owner contributed capital 107–8 member participation see participation member relations with boards of directors 123 department, creation of 63, 66, 72 in EU dairy industry 375, 377–8, 380 member commitment as unique feature of 157 members cooperation with cooperative 232–3 future research areas 262 implications of taxation and tax policies for 265–74 and profit distribution 259–61 and retained patronage 107 risk-shifting with cooperatives 227 role of 9–10 members’ rights, protection of 119–20 membership access to 89–90 rationales for 118 membership policy and competitive yardstick effect 16–17 LLCs versus NGCs 96 and long-run equilibria 13 NGCs with defined 71, 89 and performance of marketing cooperative 15–16 supply–demand balancing solution 63 membership share 104–5 membership size of Chinese farmer cooperatives 409–11, 417 mergers and acquisitions 224–5, 376 Mexico coffee cooperatives 176, 180–181, 183 Comparte network member 179 dairy cooperatives 423, 434, 435

Index  567 as net exporter to US 173 social benefits study 337 milk price average US class III 375 in EU cooperatives having overall positive impact on 384 cooperatives paying higher 379 dairy quota system aiming to stabilize 195 gap in information on 374 increasing use of vending machines as result of low 377 as main determinant of farmers’ income 374 as positively related to combined market share of dairy cooperatives 371 as reason for farmers leaving cooperative 378 strategy impacting 380 volatility 379, 384 in Ireland 199, 201, 203 willingness to accept lower 190 MIM see Multidimensional Influence Model (MIM) motivation for collective action 281 to form fraternals 503, 505 for forming cooperatives to counter large buyers and sellers 237 economic 84 failure of governments and markets 541 labor inclusion 542–3 most commonly cited 213 prosocial 396, 401, 402 importance in member participation 3, 156–60 intrinsic 462, 520, 524, 537 and mission alignment 540 motivational problem 53, 128 MSCs see multi-stakeholder cooperatives (MSCs) MSSAs (multi-stakeholder sustainability alliances) 46 multi-purpose dairy cooperatives 193, 196, 197–203, 205 multi-stakeholder cooperatives (MSCs) benefits, challenges, and central tensions 325, 543–4 context 531, 541 with farmers as one group of members 314 future research areas 544–5 history and legal forms cases of Italy, Quebec, and France 532–4 growth of model 534

role of government 534–5 versus “hybrids” 104, 111 illustrations co-production 543 complex social issues 542 labor inclusion 542–3 social, educational, and health services 541–2 labor inclusion 522, 525, 537, 542–3 nature of 531 practice and performance cooperative performance 540–541 governance structures 538–9 summation 6 theoretical considerations 535–8 Multidimensional Influence Model (MIM) framework 141–2 implications to boards of agricultural cooperatives 144–5 levels of influence 142–3 mutual aid in China’s Cooperative Law 406–7 early history African American 355, 356, 357, 358, 366 fire insurance as natural evolution of 507, 508 fraternals arising from 495 Industrial Revolution era 494–5 women’s roles 364 mutual aid societies 6, 355, 356, 494 mutual insurance companies African American 357, 358 as consumer cooperative in US 456 desire for size and growth changing competitive dynamics of 499 formation of, as response to asset risk 221 and fraternals 503, 504, 512 future research areas 513–14, 551 as type of mutual aid 494 mutualism biological and economic nature of 494, 513 definitions 494 future directions on research and education on 549–52 mutuals blurry boundaries 495 context 494–5 definition 494 demutualizing and remutualizing 3 establishing identity 495 evolutions of 511–12 future of 512–13 future research areas 513–14, 550–551 importance of 496

568  Handbook of research on cooperatives and mutuals summation 6, 513 theoretical considerations 499–500 see also township mutuals National Council of Farmer Cooperatives 135, 223 neoclassical contracts 33 neoclassical economics distinction with NIE 35–7, 38 NIE as byproduct of 22–4 and worker cooperatives 525 neoclassical theory of cooperatives 1, 10, 17–18 and mutuals 499–500 neoclassical paradigm 9 possible cooperative objectives 10–11, 39 worker cooperatives 6, 517–18 networking bridging social capital 123 in Irish dairy industry 205 for sustainability 318, 323–4, 327 new generation cooperatives (NGCs) empirical studies 92–5 evidence from active 87–92 future research agenda 94–7 membership access 89–90 offensive orientation 84, 89, 92, 248 ownership characteristics 83–4, 244 ownership structure 86–7 reasons for start-up of 77, 490 responses to property rights problems 86, 87 stock transferability 90–91 supply quantity 91–2 susceptibility to property rights problems 85 New Institutional Economics (NIE) approach to worker cooperatives 519 as broad theoretical perspective on cooperatives 1 broadening comparative analysis of all levels of institutions 27, 28 as byproduct of neoclassical economics and old institutional economics 22–4 concepts applied to cooperative theory 42–6 distinction with neoclassical economics 35–7, 38 early cooperative theory and emergence of concepts 37–42 early focus on firm versus markets 24 emergence and distinction of 22–35 future research areas 45–7 MSC application 535–6 nature and purpose of 22 theoretical building blocks of 23 transition from traditional school 53 vertical integration 37, 54

nexus of contracts see contracts, nexus of NGCs see new generation cooperatives (NGCs) Nicaragua Comparte network member 179 dairy cooperatives 423, 433–4, 435 economic stability 174–5 NIE see New Institutional Economics (NIE) non-hedgeable input or output commodities 225–6 non-member equity capital 108–9, 279 Nourse, E.G. 16, 85, 185, 186–7, 231 Organic Valley 67, 69, 73–6, 77, 88, 242, 474, 485, 486–7 organizational costs in agricultural cooperatives in forming 52, 54, 55 framework for understanding 58–62 in maintaining 52, 54, 55–7, 58, 60 solutions in Europe and US 62–78 context 52 definitions and typologies 52–3 importance of 54 and NIE 24, 25, 33, 34, 36 organizational effectiveness conceptualization 150 context 148, 149–50 importance in cooperatives 150–154, 158, 160–161 measurement 150–154 relationship with commitment and participation 3, 158–60 summation 160–161 Ornua 196–7, 205 Paraguay Comparte network member 179 dairy cooperatives 423, 431, 432, 435 sugar cooperative and banana exporter 176 participation collective efficiency 537 and SDGs 335 and commitment 154–6 and cooperative performance 148, 154, 158, 160 of dairy cooperatives in milk marketing and processing 424, 426, 434 of farmers, in carbon markets 190 feedback loop with organizational effectiveness 3, 152–3, 158–9, 160 in governance importance of social capital 122 motivated by interest in success of cooperative 155

Index  569 importance of motivation and commitment in 3, 156–60 low levels of, in consumer cooperatives 460 member economic participation principle 102, 279, 334, 340–341, 353, 407 in worker cooperatives 518, 519, 523 in YA value chain 181 patron-client relationship 390, 401 patronage consumer cooperatives 451, 454, 463, 464, 466 and financial performance 257 future research areas 262 impacting participation in cooperatives 252 and profit distribution 253–6, 259–61, 265–6 and taxation 266, 268, 270, 271, 272, 273 patronage refunds cooperatives with permanent capital from 550 in economic impact study 295, 297–8, 300, 302, 305 as feature of cooperatives 9 and profit distribution 252, 253, 259–61, 265–6 as reason for fixed salaries of cooperatives 125 and solution stability 13 statutory definition 265–6 and taxation 266, 270–271 use of, to pursue objective 10 performance-based pay, as risk mitigation strategy 220–221 persuasive advertising 481–2, 483, 484, 488 physical inventories, extra, as risk mitigation strategy 219 Pindos Poultry Cooperative (PPC) 64, 71–3, 77 political impacts of consumer cooperatives 465 pooling concept 187, 231–2 pooling cooperatives commodities in 232–3 ingredient and consumer products from 233 as possible solution to overfishing 234 vertical integration 170 pooling strategy 227, 239 pooling tax deductions 271–3 price and output solutions agricultural marketing cooperatives 11–13 farm supply and consumer cooperatives 14–15 price risk 213, 217, 227, 231 pricing efficiency 463–4 principal-agent modeling 41–2, 220 principal-agent problems 144, 480, 486 principles behind cooperative governance 120–121

collective action, application of 510–511 for efficient management of common-pool resources 32 of farmer cooperatives in China 406–7, 414, 417 see also cooperative principles processing coffee 173 as cooperative mission 238 and cooperative objective 239 downstream 37, 244, 247 in EU dairy industry 259, 373, 376, 377, 378, 379, 380, 383, 384, 385 fair trade 174 food 150, 189, 306, 316, 322, 543 in Irish dairy cooperatives 18, 193, 194, 195, 196, 197, 198–9, 201–3, 204, 205 in Latin American dairy industry 423–4, 426, 428, 429, 430–431, 433–4, 435 in marketing cooperatives 189, 299, 475, 478 in marketing year 230, 231, 232 members’ interest in first stages of 127 in NGCs 86–7, 89, 91, 92, 95, 279 purchasing of commodities from members for 292 risk and uncertainty in 212, 213, 214, 219, 227 in rural China 393, 395 as stage lying between producer and consumer 167 in transaction costs economics example 33–4 value added 86–7, 168, 257, 279 processing costs 11–12, 13–16, 34, 60, 121, 126, 260 processing function 188 producer organizations allowing farmers to address existing market failures 480 Comparte network 178–9, 180 Czech milk, strategies 376 dairy farmers encouraged to establish 373–4 leaving cooperatives to join 380 negotiating contract terms via 371 future research areas 383–4 marketing functions provided by 477–8, 486 marketing orders as regulated 474 most organized as LLCs 96 product innovation and Almond Board of California 488–9 benefits of 485 collective investment in 480 extension and renewal of brand equity by 485 in industry life cycle 502

570  Handbook of research on cooperatives and mutuals marketing cooperatives pursuing challenges of 486, 490 for success 475–6, 490 in modern agricultural markets 478 product life cycle 485–6 production risk 211–12, 216, 218, 219, 223 profit distribution context 252 in cooperatives in China 389 context 252 federated 256 future research areas 261–2, 274 income distribution flow chart 267 marketing 305 overview 253–6 previous research 259–61 implications of taxation for 270–271, 273–4 as interrelated with equity creation 253 and patronage 253–6, 259–61, 265–6 property rights allocation of, as internal organizational characteristic 236 contracts allocating 26, 27, 45 contracts securing 40, 42 definition 47, 83 embeddedness and environment 28–9, 36, 45–6 NIE versus neoclassical economics 36 and ownership 83–4, 86 problems 85–6, 87, 92, 94, 95–6, 232, 284–5 and proportionality 282–3 qualities of well-defined system 31 see also vaguely defined property rights (VDPRs) property rights approach to theory of the firm 24–5, 47 property rights theory 31, 518–19 proportionality 59–60, 76, 280, 281, 282–3 prosocial motivation 396, 401, 402 purchasing cooperatives distinction with marketing cooperatives 185 extent of market share 191 in healthcare sector 459 marketing channels 189 and member success 550 supply chains 189 value chains 188 pure cooperatives agriculture, and rise of debt-based capital 105–6 ideal financing of 103

reinvention 56, 60, 61, 62, 64, 65, 66, 68, 69, 71, 77 relational leadership theory 138 reporting consumer cooperatives 455, 456, 466–7 on cooperative principles 334–6, 338 on SDGs analysis 340, 343–5, 348 cooperative 335–6 future research area 349 growing need for and interest in 333 prior research on 334–8 problems with framework and cooperative lack of 337–8 towards new framework by cooperatives 339–40 sustainability 322, 336–8, 348 research on cooperatives and mutualism, future directions on concluding thoughts 552 data collection on membership composition and VDPR solutions 549–50 greater understanding of persistence of user-owner benefit principle 550 more attention to consumer and worker cooperatives 549 more research on cooperatives and mutuals in underserved populations 550–551 structure of future cooperative governance 551–2 reserve borrowing capacity, as risk mitigation strategy 221–2, 223 return on equity (ROE) 58, 84, 94, 125, 149, 243, 257, 258 revenue of farmer cooperatives 411, 412 in industry life cycle 501, 502 as risk mitigation strategy 220–221 risk and uncertainty continuum of 209–10 idiosyncratic to systemic 210 future research areas 223–7 mitigation strategies 217–22 matching with types of 222, 223 sources of 210–216 types of 209–10 framework for identifying 210 matching with mitigation strategies 222, 223 risk-bearing related costs 56 risk-shifting 227 Rochdale Pioneers 102–3, 104, 108, 112, 443

Quebec see solidarity cooperatives of Quebec

Sapiro, A. 85, 105–6, 185, 187, 234 SDGs see sustainable development goals (SDGs)

Index  571 sequential purchases–sales, as risk mitigation strategy 217 SGR (sustainable growth rate) 285 situational leadership theory 138 smallholder farmers in China 319, 390, 406, 408, 415 cooperatives accompanying, in Latin America 3, 176–8, 180 Fair trade movement popular among 174 social capital abuse of 124 amount among membership related to business environment 116 concept of 121–2 in cooperative governance 121–4, 126, 128–9, 130 decline of, in US 513 future research areas 130 “glue” of 129–30 importance for sustainability 325 limitations of 125–9, 130 MSC model increasing 536 positive intra-organizational relationships 153, 391 and role of social relations 404, 499–500 types of 122–3 and worker cooperatives 524, 525 social capital theory 117, 119–20, 122 social cooperatives 368, 521–2, 532–3, 534–5, 536, 538, 540, 541, 542, 545, 546 social impacts of consumer cooperatives 465 social issues, complex 536, 542, 544 social movements 176, 460, 463, 465 social relations in Chinese rural cooperatives 392–5 to exert social pressure to build trust 397–9 future research areas 403–4 and heterogeneity 128 in large membership 126–7 and leadership 138 motivation for 396 playing important role in cooperative development 401, 403 research method 392 role in rural China 391–2 solidarity as root of, in MSCs 536 social relationship perspective 401 social services 532, 533, 534, 536, 537, 541–2, 545 solidarity cooperatives of Quebec 533–4, 535, 539, 540, 542, 545, 546 solutions contractual 40, 44, 45 for cooperatives 37–8, 39, 40, 44–5 of NGC to property rights problems 87

to organizational costs in agricultural cooperatives 60–61, 62–4 Europe and US 76–7, 78 European 64–6, 68, 70–73 US 67–9, 73–6 price and output 11–13, 14–15 stability of 13 to VDPRs, future research area 549–50 specialty crops 173–4, 227, 475, 483 spending patterns 292, 293, 296, 298, 299, 300–302, 303, 305, 307, 308 stock transferability 90–91 strategic constituency approach 150, 151, 152–3, 158 strategic investments, costs of securing 57 strategy context 236–7 cost leadership 56, 241, 379, 383, 485, 491 decomposition into elements 236 differentiation as 241, 243, 383 EU dairy industry cost leadership versus differentiation 383 dominant growth 376 internationalization 372–3 making difference to milk prices 380 privatization 376 evaluation of, using framework 247–9 focus of 246 formulation, levels and responsibility of 245–7 marketing 321, 434, 481–2, 485, 490 process in high-performing versus low-performing cooperatives 248–9 representation of 238 taxonomy of cooperative 239 towards framework for cooperative mission 237–8 cooperative objective 239–40 external characteristics 240–242, 248 internal characteristics supporting strategy 237, 242–5, 248 structural social capital 122–3 sub-Saharan Africa agricultural cooperatives annual income generated through agricultural commercialization 446 cyclical but path-dependent evolution of 444 history of 441–3 percentage of employment creating generating 447 sample of 445 background and context 440–441

572  Handbook of research on cooperatives and mutuals cooperative life cycle framework 443–5 data descriptives 445–7 farmland fragmentation 440, 445, 448, 449 land shareholding cooperatives 441, 448–50 managerial capital 441, 443, 444, 445–6, 449–50 success stories 447–9 summation and implications 449–50 theory 440, 443–5 Sunshine tea cooperative 395, 397–8 supply chain management aims 167–8 definition 171 literature on 315 supply chains agricultural products example 168 captive 242 cooperatives having greater knowledge of 237–8 dairy cooperative 194–5 definition 167–8 distinction with value chains and marketing channels 167–9 functions associated with agricultural 189 governance of farmer, in Irish dairy cooperatives 193–4, 197, 198, 199, 200, 202, 204, 205 farmer, in US 185–6, 187–8, 190–191 implications for 189–91 in Latin America 181–2 role of producers 169–70 hierarchical 242 indirect effects 296 and IOFs 374 modular 242 reputational 242 short food 321–2, 324, 325 sustainable food 315–16 supply quantity 91–2 sustainability abolishment of EU milk quota increasing demand for 376 agri-food 46, 317 California Almond Board 487–8 as challenging to define 314 combining dimensions of 315 and cooperative principles 335 cooperatives usually supporting 355, 523 environmental dimension of 313 European dairy market driven by demand for 371, 384 and fair trade movement 174 food system perspective for conceptualizing 316

future research areas 326–7, 384 importance of cooperatives in enhancing, at farm level 376 increasing societal pressures for 46, 170, 313, 384 indicator and metric development 348 Irish dairy cooperatives 196, 198, 201, 202, 203, 204 literature on contribution of cooperatives to 314 reporting 322–3, 336–8, 348 research strand on 383 and SDGs framework as crucial to 333 indicator and metric development 343–7, 348 as step in defining and operationalizing 315 themes in agriculture 315 transition, roles of cooperatives in 313, 314, 318–25, 326, 327 US farmers and cooperatives responding to 190 sustainability of growth (SGR) 285 sustainable development goals (SDGs) cooperative values, business model and principles 352–3 development of cooperative-designed indicators for background and context 333–4 metric and indicator development 340–347 study discussion 347–8 summation and future research areas 348–9 linking SDGs to cooperative principles 336–7 reporting analysis 340, 343–5, 348 cooperative, on SDGs 335–6 on cooperative principles 334–5 future research area 349 prior research on 334–8 problems with, and cooperative lack of 337–8 toward new framework by cooperatives 339–40 system resource approach 150, 151 systemic risk 210, 211, 212, 213, 214, 215, 216, 222 taxation book versus tax differences 268 of cooperatives, internationally 269 of federated cooperatives 267–8

Index  573 flowchart of cooperative options 254 future research areas 273–4 overview 265–7 previous research impact on growth rate of cooperative 271 implications for profit distribution 270–271 logic of corporate taxation 269–70 on pooling and distributing tax deductions 271–3 recent changes in cooperative 268–9 TCs see traditional cooperatives (TCs) technical assistance 178, 319–21, 327, 362 technical efficiency 18, 149, 379, 408, 415 technological risk 215–16 theoretical considerations MSCs 535–8 mutuals 499–500 theory see agency theory; cooperative theory; cooperatives life cycle; economic theory of cooperatives; leadership theories; neoclassical theory; New Institutional Economics (NIE); property rights theory; social capital theory; worker cooperatives theory of the firm property rights approach to 24–5, 47 standard 9, 14 and worker cooperatives 517, 519 tinkering 42, 56, 60–72, 76–7 township mutual fire insurance companies application of collective action principles 510–511 and assessment system 497, 508, 509–10 attributes 508–10 constraints placed on 499 evolution of 495, 496, 511–12 history 507–8 innovating by applying class mutual system to farmers 503 moral hazard and free rider problems 500 number of, in Minnesota 512 traditional cooperatives (TCs) and brand equity 490 bridging education programs with MIM 144 comparison with China’s cooperative model 389, 400 with multi-stakeholder cooperatives 531 with NGCs 86–7, 89, 90, 91, 92, 94, 96 defensive orientation 84, 89, 92, 96, 248 in Mexican dairy sector 434 Minnesota as home to high number of 109 Organic Valley ameliorating structural issues of 74–5

ownership characteristics 83–4, 243 ownership structure 84–5 susceptibility to property rights problems 85–6 and vaguely defined property rights 44, 45, 78 transaction cost economics (TCE) approach to understanding optimal governance 29, 32–5 as NIE concept applied to cooperative theory 44–5 worker cooperatives 519 transaction costs and chain governance 190 Chinese cooperative model 391, 394, 401, 402, 414 constraints 178 of external investors 56 farmers and cooperatives 118, 394, 401, 414, 440, 443 firm versus markets 24–5 governance minimizing 28, 169 as major or sole type of organizational costs in firms 53 and MSCs 536 and mutuals 499 in nexus of contracts 26–7, 40 as NIE concept integrated into cooperative theory 37 and ownership rights 25 social capital lowering 121 transition classic example 316 definition 316 distinctive research approaches in study of 317 insights applied to farming 317–18 and multi-level perspective 317 processes, characteristics of 317 recommendation of theory to collaborate with unfamiliar businesses and civil society organizations 325 requiring experimentation 318 study discussion and future research areas 325–7 summation 327–8 sustainability, role of cooperatives in changing 313 dialogue, networking, and lobbying 323–5 empirical literature on 314, 325, 326 importance of classical functions 327 importance of size 314 inputs, experiments, and technical assistance 319–21

574  Handbook of research on cooperatives and mutuals internal and external conditions 326 main challenge for 325 market access 321–3 starting point for exploring 318 unallocated equity see equity: unallocated uncertainty see risk and uncertainty United States (US) agricultural cooperatives addressing organizational costs in 67–9, 73–8 comparison with sub-Saharan Africa 440 cooperation as form of vertical integration 185–7 data on chains 188–9 farmer governance 187–8 implications for chain governance 189–91 number of, and membership 186 number of, and total sales by type 475 overview 185 successful branding strategies 485 summation 191 varying significantly in activities 475 Black cooperative history 354–63, 366–7 Black women’s roles in cooperatives 363–5 Black youth and cooperatives 365–6 farmer cooperatives, revenue generated per member 446 marketing years for agricultural commodities 230 mutuals and insurance industry in 494–514 see also farmer cooperatives: in New York State Uruguay dairy cooperatives 429, 435 fresh produce sector study 319–20 user-owner principle 4, 84, 550 utilities cooperatives 458 vaguely defined property rights (VDPRs) collective nature of cooperative capital interpreted as 519 and common-pool resource problems 44 in dairy owners scenario 34 efficient management of common resources in circumstances of 32 and embeddedness 46 future research areas 77, 549–50 limitations of cooperative equity in context of 283 problems associated with 74, 78, 128, 220, 428, 440, 444–5, 518

specific problems of cooperatives in circumstances of 41 theory 31, 518–19 and tinkering 61 value-added aspects, provided by cooperatives 47 chains, uncertainty in 213 government helping Polish cooperative sector to increase 376 and induced effects 296 marketing services 415 as metric in economic impacts study 297, 298, 299, 301, 303, 305, 309 returns 244 ventures, as NGCs or LLCs 96 value-added activities cooperatives extending business operations into, via vertical integration 126 diversification 195 farmers seeking more marketing margin by developing 188 residual rights to 41 value-added branding strategy 240 value-added opportunities consumer 43 pursuing by developing brand equity and consumer marketing programs 242 value-added processing 83, 86, 213, 279, 478 value-added products of Blue Diamond 488–9 definition of 478 diversified mix of 204 fair trade 168 farmer cooperatives in China helping farmers to create 408 increasing price consumers willing to pay for 476 investment in R&D on 233, 476–7 Irish dairy cooperatives’ drive to achieve global reach through 193, 194 as more susceptible to changing consumer preferences 213 new dairy cooperatives in Belgium aim to provide 378 NGCs 87, 89 research on consumer attitudes to developing 198 unique marketing opportunities via producing and marketing 474 value chains buyer-driven 322 in Comparte network 178 and cooperative strategy 241, 247 dairy products 198 definition 168

Index  575 distinction with supply chains and marketing channels 167–9 Equal Exchange example 167–8, 171 and Fair trade 174, 175 future research areas 182 governance 169–70, 181–2 integrated, in Chiapas 180–181, 183 position of farmer in dairy 373–4 representation of activities 169 strategic constituencies in 150 trust in 243 types of 241–2 in US agricultural cooperatives 188–9 variability in product quality 212 values competing, approach 151, 153–4 cooperative 352–3 see also principles VDPRs see vaguely defined property rights (VDPRs) vertical integration cooperation as form of 185–7 as critical factor for success 474 farmers and chain governance 189–90 between firm and membership 117–18 and governance 169–70 in Irish dairy industry 193, 204 in Latin America 431, 435 as limitation of social capital 126–7 of marketing cooperatives 476, 479–80, 485–6, 488, 491 NGC engagement with 83, 89 in relation to organizational costs 54, 69 in rural agricultural cooperative 180–181, 182

selective, as risk management strategy 239 and traditional agricultural cooperatives 56 welfare efficiency 463–4 Western cooperative model 389–90, 401, 403 women’s roles in cooperatives 364–6 worker cooperatives African American 357, 363, 367 behavioral economics 520, 524 benefits of worker cooperation 523–4 context 517 economic theory of 517, 521, 524, 525–6 future research areas 524–5, 525–6, 549 humanistic economics 520–521, 526 labor sovereignty 522 livelihoods closely aligned to marketplace activities 109 and MSCs 537, 540–541 neoclassical approach 6, 517–18 new institutional approach and transaction cost economics 519 property rights theory 518–19 summation 6, 525–6 theories built from institutional practice and empirical evidence 521–3 theorized as “commons” 522 working capital reserves, as risk mitigation strategy 221 Yomol A’tel (YA) governance 182 integrated value chain 180–181, 183 youth and cooperatives 365–6 “zombie” cooperatives 410, 411, 414–15, 417