What is a Cooperative?
A cooperative is a private business organization that is owned and controlled by the people who use its products, supplies or services. Although cooperatives vary in type and membership size, all were formed to meet the specific objectives of members, and are structured to adapt to member's changing needs. Cooperatives are formed by individuals who coordinate among themselves (horizontal coordination) to achieve vertical integration in their business activities.
Although people have been working together for their mutual benefit throughout human history, the cooperative form of business organization began during the Industrial Revolution. Cooperatives were useful for promoting the interests of the less powerful members of society. Farmers, producers, workers, and consumers found that they could accomplish more collectively than they could individually.
The US Department of Agriculture listed three principles that uniquely characterize a cooperative organization:
- The User-Owned Principle: The people who own and finance the cooperative are those who use the cooperative.
- The User-Control Principle: The people who control the cooperative are those who use the cooperative. They democratically elect a board of directors. The board sets the overall operating policies, approves the annual budget, oversees its operation, and distributes the benefits derived from use of the cooperative to members. The board also hires professional management to handle the day-to-day operations.
- The User-Benefit Principle: The cooperative's sole purpose is to provide and distribute benefits to its users on the basis of their use. While the goal of agricultural cooperatives is not to generate a return on investment, they, like all businesses, must cover costs and generate capital to cover expansion and unforeseen emergencies.
The International Cooperative Alliance is a world-wide association of cooperatives. The Statement of Cooperative Identity which it adopted in 1995 contains seven cooperative principles that are more socially-minded:
- Voluntary and Open Membership
- Democratic Member Control
- Member Economic Participation
- Autonomy and Independence
- Education, Training and Information
- Cooperation Among Cooperatives
- Concern for Community
Most simply, cooperatives can be categorized by their purpose; their members procure from and/or provide goods and services to the cooperative. For example, members of grocery cooperatives procure grocery items from their cooperatives while members of worker cooperatives provide their labor to their cooperative. Sometimes, members provide goods and/or services to the cooperative, as well as procuring goods and/or services; for example, members of an arts and crafts cooperative can purchase supplies from the cooperative and provide their artwork and labor to market their crafts through a cooperative store.
Cooperatives operate in a broad variety of industries, including the following:
- Agricultural cooperatives help producers assure markets and supplies, achieve economies of scale, and gain market power through jointly marketing, bargaining, processing, and purchasing supplies and services. (more)
- Arts and Crafts cooperatives help artists and crafts persons maximize their earning potential and working conditions. (more)
- Business cooperatives are formed by businesses to purchase supplies or obtain services at a lower cost. (more)
- Child Care and Preschool cooperatives provide high-quality enrichment and educational programs for children and their families. (more)
- Credit Unions provide at-cost financial services to a wide cross-section of the population. (more)
- Custodial and cleaning services cooperatives create employment opportunities and provide the benefits of ownership for their worker-members. (more information in the next secion under worker cooperatives)
- Food cooperatives and buying clubs gain access to grocery products using a consumer-directed approach. (more)
- Hardware wholesaling cooperatives, like other business cooperatives, allow independent businesses to be competitive by cutting expenses and adding member services through joint purchasing and marketing. (more information in the next section under business cooperatives).
- Housing cooperatives offer ownership options for Californians from all income groups. (more)
- Insurance cooperatives operate much like retail cooperatives except that they provide insurance services instead of consumer goods. (more)
- Student cooperatives are set up and run by students to meet specific needs. (more)
- Utility cooperatives provide utilities such as communication services, electricity, and water to their members. (more)
- Worker cooperatives create employment opportunities and provide the benefits of ownership to members.
Types of cooperatives (detail)
Agricultural cooperatives are user-owned and user-controlled businesses from which benefits are derived and distributed equitably on the basis of use.
From the farm to the kitchen table, agricultural cooperatives are present in nearly every stage of the food and fiber industries, and have been a part of U.S. agriculture for more than a century. Today, there are more than 3,000 agricultural cooperatives in the U.S., with 2.8 million memberships, a total net income of nearly $1.2 billion and net business volume of more than $96 billion.
Marketing, supply, and service cooperatives are the most common types of agricultural cooperatives organized in the United States.
Marketing cooperatives assemble, pack, process, and sell members' products in both domestic and foreign markets. The level of service provided depends on member needs and the product.
Supply cooperatives purchase products and services for their members. They make large-scale purchases of fuel, seed, fertilizers, and crop protectants and pass their cost-savings on to members.
Service cooperatives provide members with specialized services, such as ginning, hulling, and horticultural advice, which are usually not economical for an individual farmer to obtain.
Additionally, there are bargaining cooperatives, which are often called bargaining associations. They bargain or negotiate with processors and other first handlers for better prices and terms of trade for their producer-members.
Today's agricultural cooperatives, large and small, are an important part of the global market. They have formed marketing agencies-in-common to jointly export their products, and continue to serve their members by looking for growth opportunities and the use of new technologies. The mission of cooperatives, however, always remains the same--to serve members.
Cooperatives offer several benefits to artists and craftspeople. By working together artisans can gain marketing advantages, reap quantity discounts on supplies through joint purchasing, and share studio space and equipment. Performing artists use the cooperative model to increase their artistic freedom and control over performances.
Arts and Crafts cooperatives are democratic organizations that are governed on a one-member one-vote basis. Typically the cooperative members elect a board of directors that makes major policy decisions and may hire a manager or staff to maintain day-to-day operations. Some artisans operate their cooperative as a collective where all members function as the board of directors and make decisions through consensus.
Through joint marketing artisans of all types can maintain their independence and creativity while reducing time spent on selling and promoting their art. Artisans can open a cooperative store to provide a retail and display place to sell and market their product. Cooperative members can pool their resources to hire a store manager, allowing them to devote more time to their craft. Because they are member-owners of the cooperative, they can decide how their pieces will be displayed and devise equitable ways to rotate or share prime display sites within the store. By marketing their products jointly, co-op members can earn more from sales because they don't have to pay a dealer or agent. They may also be able to reach a broader market through catalogue or retail sales.
By forming a cooperative, artisan members can share studio space that they may be unable to obtain on their own. They can share expensive tools, kilns, or equipment by purchasing them together. When artisans use similar supplies and materials they can use the cooperative for joint purchasing and save money through bulk or quantity purchases. If they wish to, members can offer technical assistance, collegiality, and constructive critiques to one another.
Some arts and crafts cooperatives operate as performance troupes. These performing arts cooperatives are owned and democratically controlled by the performers, directors, stage hands, and other staff of the troupe. Performing arts cooperatives offer member artists more artistic freedom and control over performances than is usually available in more traditional stage companies and dance troupes.
Business cooperatives are formed by businesses to purchase supplies or obtain services at a lower cost. They vary widely both in size and type and include cooperatives of individual business proprietors such as individual taxi-cab owners joining together for dispatch services, small businesses such as retail pharmacies, hardware stores or plant nurseries that purchase supplies cooperatively and real estate information-sharing cooperatives.
Parents are attracted to child care and preschool cooperatives because they offer high quality, affordable child care or early education programs for children. The parent involvement allows parent input and intimate knowledge regarding their preschoolers' out-of-home experiences, as well as opportunities to interact with other parents. As members, parents elect a board of directors that establishes policies and hires qualified staff who run the day-to-day operations.
Preschool cooperatives, also known as parent participation nursery schools (PPNS), date back to 1916 when a group of faculty wives at the University of Chicago organized a cooperative program to provide social and educational experiences for their young children, and to gain child-free time to pursue volunteer activities. Contemporary preschool cooperatives usually offer enrichment activities for children for two to four hours per weekday. The program is staffed by an expert in early childhood education and parents assist in the classroom. Parent involvement contributes to the quality of the program and also cuts down on operational costs. Because PPNS programs often have significant parent participation requirements, they tend to attract children with one parent who is at home full-time.
Child care cooperatives offer quality care for children while their parents work. Although many aspects of the programs are identical to PPNS programs, they usually differ from them in three significant ways: they offer full-day care, more staff are hired, and parent participation requirements are significantly reduced.
A growing number of PPNS programs are modifying or offering options to their programs so they can accommodate employed parents. Many offer additional "after preschool" child care services. Some allow nannies or grandparents to complete the parent participation requirements or participation options that can be completed during evenings or weekends. Other programs offer members the option of reducing their parent participation requirements by paying an increased fee.
Employer-Assisted Cooperative Child Care can be a useful model for on- or near-worksite child care. In the employee model, parents at the worksite develop a child care cooperative as previously described. The employer may assist the cooperative by helping with start-up expenses, contributing financially, or by providing in-kind assistance like utilities, use of buildings and outdoor space, duplicating, secretarial assistance, or other goods or services.
In a child care consortium, businesses, rather than parents, are the members and they join together to provide near-worksite child care for their employees. In this model, businesses share the costs and benefits associated with employer-assisted child care programs. The consortium model is helpful to smaller companies, or those with a small parent population who don't have a sufficient population to support a child care center on their own. Some larger businesses become involved in consortia because they want to "try out" offering child care benefits to their employees.
Baby-sitting cooperatives allow parents to equitably exchange baby-sitting services so they can enjoy a night out or travel on business trips. These cooperatives are less formal and involve relatively short-term arrangements. When parents take care of a child or children from a member family they earn points or scrip that can be "spent" when they need baby-sitting services.
A credit union is a member-owned, non-profit, financial cooperative organized by consumers to encourage savings and to obtain loans at the lowest possible cost. Its members share a common bond such as having the same occupation or employer, belonging to the same association or religious group, or living in the same community. Members elect a board of directors on a one-member one-vote basis.
Credit unions developed at a time when banks were not very interested in the consumer market, especially in small deposits and loans typically needed by working-class people.
The credit union idea came to the United States from Germany, where the first credit union was formed about 130 years ago. The first U.S. credit union opened in 1909, in New Hampshire. In California, the first credit union was formed in Fresno in 1924 and the first California credit union law was signed in 1927. This paved the way for the widespread development of credit unions in the state. The number of credit unions grew even more rapidly after the formation of the California Credit Union League in 1933 and the passage of the Federal Credit Union Act of 1934. California passed an updated version of its credit union law in 1951, which explicitly affirms the democratic purposes of credit unions.
Community Development Credit Unions are credit unions organized in predominantly low-income communities. In addition to providing for consumer needs, they have an explicit mission of community reinvestment and revitalization. They provide financing for housing acquisition and rehabilitation and for small businesses, both privately and cooperatively owned. CDCUs were developed in response to findings that traditional financial institutions take out more capital from low-income communities than they put in.
California credit unions can be chartered under either federal or state laws, but most are federally insured. In both membership and economic terms, credit unions comprise the largest consumer cooperative sector in California and represent a large share of the financial services industry.
Food cooperatives are one type of consumer cooperative. They range from multi-outlet supermarkets to small buying clubs with a few members. They are formed by consumers to obtain lower prices and greater control over product range and quality. Many cooperative supermarkets began as small buying clubs and developed into storefront cooperatives as membership increased.
The first consumer food cooperative in California was formed in 1867 in San Francisco. Although the modest daily sales were financially sound, the store lasted only a short time. In the 1930s there was a burst of cooperative activity throughout the United States in response to the Great Depression. In California two long-lived consumer cooperatives were formed, in Palo Alto in 1935 and in Berkeley in 1937. Although the 1988 closure of the Berkeley food cooperative was a setback for the consumer cooperative movement, many other food cooperatives in California are thriving and expanding; most have been formed within the last 20 years. In addition to traditional economic benefits associated with cooperative food purchasing, these cooperatives often emphasize nutritional quality and the politics of production and distribution. Cooperatives' priorities in these areas vary, and this is reflected in differing policies on labor and capital investment, as well as in financial policies such as patronage refunds, markups, and discounting.
Food cooperatives are governed by a board of directors, elected by the members on a one-member one-vote basis. Volunteer work by members is not a requirement of membership, but some members do volunteer time to their cooperative.
In addition to storefront food cooperatives there are numerous buying clubs in California, consisting of a group of individuals or households coming together to buy food in bulk to take advantage of quantity discounts and to obtain a range of foods not available locally. Buying clubs are mainly run on a volunteer basis by members, with a majority of members volunteering time.
Housing cooperatives make up one of the largest cooperative sectors in California. Housing cooperatives are set up as corporations that are owned by members or shareholders who receive services from the corporation in the form of housing. Each member owns a share in the corporation, which entitles him or her to occupy a unit of housing. Cooperatives are typically financed through a blanket mortgage that covers the entire property. Mortgage payments and operating expenses are met through member carrying charges.
Many cooperatives were developed to provide affordable housing and ownership opportunities for low and moderate income households. These types of cooperatives almost always receive public subsidies to ensure affordable carrying charges. Share prices in these cooperatives are usually low, and member households may not own more than one share. To further preserve affordability and prevent speculative resale, price restrictions are placed on the sale of shares.
The importance of such affordable cooperative housing was recognized by the California Legislature in 1979, when legislation was passed that provided legal status for limited-equity housing cooperatives. This legislation requires that such cooperatives be incorporated as non-profit public benefit corporations, limit share price increases to 10 percent per annum, and mandate dedication of any profits from the sale of a cooperative to public or charitable entities. Since the legislation passed, thousands of apartment units and mobile home spaces have been developed through limited-equity housing cooperatives.
Some cooperatives operate in the private market and receive no subsidies. In these cooperatives, sometimes known as market-rate or stock cooperatives, individual members of the cooperatives arrange private financing of share purchases. Members can own more than one share and rent out the additional units for a profit. When a member moves out the share is sold to the incoming member for its full market value.
In mobile home park cooperatives the individuals homes are owned privately; the rest of the land and facilities are owned by the cooperative. Members own a share in the cooperative, which entitles them to occupy a homesite or space and to use the park facilities. Mobile home park cooperatives have been set up in both market rate and limited equity forms.
Insurance cooperatives operate much like retail cooperatives except that they provide insurance services instead of consumer goods. Policyholders constitute the membership and elect the board of directors. Insurance cooperatives operate by pooling and investing the premiums paid by members. The revenues generated are then used to reduce the costs of providing insurance. Because policyholders are also owners, any profits are returned to the consumers as dividends. Insurance cooperatives are able to provide lower insurance rates and greater control for members.
Retail cooperatives sell consumer goods to members as well as non-members. Members, however, enjoy discounts or patronage refunds, or both. Patronage refunds are a percentage of the total amount of money a member has spent on purchases over a specified period of time. These refunds come from the earnings of the cooperatives. Retail cooperatives also offer control. Because the members elect representatives to the board of directors and can participate in general membership meetings, consumers control the operation and policies of the cooperative.
Student cooperatives are set up and run by students to meet specific needs. Housing and food cooperatives are the most common student cooperatives. Others include child care cooperatives and bookstores. Student cooperatives are democratically run through the one-member one-vote principle. Although members are primarily students, board members may also include alumni, university officials, or other non-students.
Besides reduced costs for important needs such as housing and food, student cooperatives provide other important benefits. Students can participate in the management of their cooperative and learn valuable business and organizational skills. In cooperative housing, students can gain valuable experience by living with people from different cultural and social backgrounds.
Utility cooperatives provide utilities such as communication services, electricity, and water to their members. Cable television cooperatives are organized very much like utility cooperatives. Members share the start-up and capitalization costs. In return, they benefit from the lower rates that result when users are also owners. Telephone cooperatives also play a major role in rural areas, serving more than a million members nationally.
A worker cooperative is a business owned by the workers. The cooperative form of organization allows ordinary people to combine their energy, capital, and skills to gain steady employment and income, participate in the ownership and management of their business, and share the profits made from their investment and labor.
Historically, worker cooperatives date back to 1790 in the U.S. and the 1760's in England. They are found all over the world. The cooperative form of organization can be applied to any business area, including manufacturing, services, shipbuilding, food products, restaurants, computer software, engineering, reforestation, construction, and many other industries.
Worker cooperatives are unique both as cooperatives and businesses. Workers participate directly in decisions that affect them in their workplace as well as those that determine the growth and success of the business. Worker cooperatives provide worker-members with employment and income along with the ownership and control of the enterprise. Through their ownership and control the worker-members receive a fair share of the profits and control over the way their work is organized, performed, and managed.
Worker cooperatives apply distinctive worker cooperative principles which specify that worker-members:
- take the full risks and benefits of working in, owning, and operating their cooperative business.
- equitably contribute to and benefit from the capital of their cooperative.
- decide how the net income, or net losses, are allocated.
- govern and control the enterprise on a one-member one-vote basis, by consensus decision making, or other democratic structure.
- work together (as opposed to being independent contractors) in a commonly owned business.
1752 - The first successful cooperative was organized in the United States when Benjamin Franklin formed the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire — the oldest continuing cooperative in the U.S.
1844 - The Rochdale Equitable Pioneers Society was established in Rochdale, England. These pioneers wrote down a set of principles to operate their food cooperative which contributed to their success and spread to other cooperatives around the world. The successful establishment of the cooperative in Rochdale marks the beginning of the modern cooperative era.
1865 - Michigan passed what is believed to be the first law recognizing the cooperative method of buying and selling.
1895 - The International Cooperative Alliance (ICA) was established. Today over 200 national cooperative organizations representing 92 nations belong to ICA, the apex organization of all national cooperative movements. The ICA aims to promote cooperative development and trade worldwide and boasts an individual membership of more than 750 million people.
1916 - The first national cooperative association was formed — now known as the National Cooperative Business Association.
1922 - Congress passed the Capper-Volstead Act allowing farmers to act together to market their products without being in violation of antitrust laws.
1920s & 30s - Congress established governmental agencies — the Farm Credit Administration (1929), the National Credit Union Administration (1934) and the Rural Electrification Administration (1936) — to provide loans and assistance to cooperatives.
1978 - Congress passed the National Consumer Cooperative Bank Act, establishing the National Cooperative Bank.
New State Statutes Allow Nonmember Equity Capital for Cooperatives
Shermain D. Hardesty.
Deanne Hackman, Director, Agriculture Innovation Center, Missouri Department of Agriculture.
A New Generation Cooperative (NGC) is a relatively new type of cooperative used primarily in the value-added processing of agricultural commodities. First used in the upper Midwest in the early 1970s, the NGC organizational form became popular in the early- to mid-1990s for producers interested in collectively adding value to their commodities. The NGC model has since been used for hundreds of new cooperatives across the United States, but has not yet been used extensively in Missouri.
The NGC is not a specific legal structure. Rather, the term New Generation Cooperative is used to describe how a firm operates. It primarily describes the relationship between the firm and its members and how the firm is financed. Unlike traditional cooperatives, in which start-up expenses are minimal and growth is financed through members' retained earnings, permanent equity to fund NGC start-up and growth is financed through the sale of delivery rights. These delivery rights represent a member's right to deliver a specific amount of commodities to the cooperative. Members benefit in proportion to their use, and nearly all NGCs are democratically controlled through one member/one vote.
There are six primary characteristics of NGCs:
- Defined membership. Frequently, NGCs are referred to as closed cooperatives. However, defined is a more accurate term. The number of members in an NGC depends upon the proposed capacity of the cooperative's operations. One of the key features of the NGC is its ability to control supply or access to the cooperative's operations. In other types of cooperatives, members can enter and exit as they please, and cooperatives operating without marketing contracts with their members have no way to guarantee a specific operating capacity at any one time. By limiting membership to those members who purchase the right to supply the cooperative, the NGC is able to ensure a steady supply of the agricultural inputs required for running operations at the most efficient level possible. In an NGC, the membership is generally not permanently closed. If the cooperative decides to expand production, for example, it could seek equity from producers outside the initial membership.
- Delivery rights: a right and an obligation to deliver. Once members contribute equity toward the NGC, they receive the right, and the obligation, to deliver a specific quantity of the commodity each year. This means if producers have purchased the right to deliver 5,000 bushels of corn each year, they must deliver 5,000 bushels—no more, no less. If they cannot deliver that amount or if the commodity does not meet the quality standards set forth in the marketing agreement, the cooperative may have the right to buy the commodity on the producers' behalf and charge for the difference in price.
- Upfront equity required from producers. Adding value to agricultural commodities can be capital-intensive. Before lending money to a project, banks and other lending institutions will require producers to raise part of the project cost. Often, this means producers must raise 50 percent or more of the total project cost. If the project is estimated to cost $1million, for example, producers will need to raise $500,000 or more. Although it may be possible to find private investors to reach the required equity level, producers are often the sole source of equity. As a way to tie members' use to the total project equity required, the total amount to be raised is broken into smaller units. These units are tied to the amount of product required to be delivered. A market feasibility study will help determine the most economically efficient size for the processing facility. Once you know the amount of commodities the plant will require each year, you should then determine how to allocate this total amount into shares. For example, if the most efficient size plant requires one million bushels of soybeans a year, you should divide one million into a specific number of shares. To determine the specific number of shares, you should set minimum and maximum amounts of delivery rights to be purchased. To determine this, you need to balance two issues: how many producers do you want involved in the business and what is financially viable for you and other producers to commit.
Example: Assume on the $1 million project above, producers need to raise $500,000. If one million bushels a year are required to run the plant at the most efficient level, you could divide the number of bushels into a minimum delivery right purchase of 5,000 bushels and a maximum of 50,000 bushels. Thus, the cooperative could have as many as 200 members or as few as 20 members.
- Delivery rights are transferable and may fluctuate in value. The delivery right is similar to a share of corporate stock because it represents a firm's permanent equity. As with a share of corporate stock, the value of your delivery right will depend on your firm's profitability. If an NGC is successful and provides value for its members, the delivery right may appreciate in value. If the NGC does not provide value to its members, the value of the delivery right may decrease. Unlike stock in a public corporation, however, the delivery right has a very limited resale or trading market. To comply with antitrust, securities, tax, and incorporation statutes, NGC bylaws limit transfer to other producers and usually require the board of directors to approve any transfer.
- Marketing agreement entered into between member and cooperative. Upon purchasing delivery rights, members are required to sign a marketing contract outlining the duties of both the members and the cooperative toward each other with respect to the delivery, quality, and quantity of producers' commodities. These contracts are usually evergreen contracts, meaning they are for specified periods of time (from one to five years). They are renewed automatically unless either party gives notice to the other within a window of time specified in the marketing agreement. The market agreement often specifies the high quality standards required of members' commodities, especially in cooperatives producing consumer-level goods. The marketing agreement outlines the specific quality required to be delivered, how quality will be measured, and the producer's rights and obligations if the quality standard is not met.
- Members and their NGC share three primary legal relationships.
- Members must purchase a share of common stock or other membership interest to enable them to vote in all decisions set forth in the bylaws.
- Members also purchase delivery rights, which are both a right and an obligation to deliver. The delivery rights are evidenced by legal documentation and are usually transferable upon approval from the board of directors.
- Finally, members must sign a marketing agreement when purchasing delivery rights and voting stock. The marketing agreement defines the rights and obligations of both the member and cooperative toward each other with respect to the delivery of commodities from the member to the cooperative.
As a result, members must pay money to the cooperative for both the voting stock (usually very minimal) and the delivery rights (amount varies on project size, minimum and maximum purchase requirements, and the specific amount of commodity to be delivered by the member). Members also are required to deliver the specified quality and quantity of commodities at pre-specified intervals for the length of the marketing agreement (which is usually, through evergreen contracts, perpetual in nature). The cooperative, in turn, is required to pay members a pre-specified price for the commodities delivered (usually a formula price based on spot market prices at a specified exchange, with additions or subtractions based on quality). The cooperative also is required to return any profits to members on a pre-specified schedule determined by the board of directors. Depending on operating cash requirements, the timeline for returning profits could be immediately. Due to securities law issues, cooperatives are not actively involved in the transfer of delivery rights. The cooperative usually requires approval from the board of directors before any transfer is complete, and sometimes an outside broker handles the actual transfer of delivery rights.
"What is a New Generation Cooperative?" first appeared in Innovations, Nov./Dec. 2001, newletter of the Ag Innovation Center, Jefferson, MO 65102