Transcript Unit 1. - Department of Economics

Unit 1.
The Cooperative Form of
Business
What is a Cooperative?
A special
type of business
(usually corporate) owned and
controlled by its member patrons.
This is in contrast to ordinary
corporations that are investorowned firms (IOFs).
Basic Philosophy of Cooperatives
Through joint effort and
collective action (cooperation)
on the part of individuals with
mutual interests, these
individuals will be better off.
Requirements for Being a Member
Owner of an Ag Co-op
1. Be an agricultural producer
or other co-op
2. Provide equity capital (equity
=> from owners)
3. Be a customer (active)
Member
Responsibilities/Obligations
1.
2.
3.
4.
Patronize Co-op
Provide Equity Capital
Keep Informed
Accept Risks of Being a
Member
PATRON =
CUSTOMER =
User of the business
(buyer of inputs
or
seller of products)
NOTE: Co-op patrons not always
‘members’.
PATRONAGE
$ amount or
$ volume of business done
with a cooperative
Co-op Versus Coop
Co-op = abbreviation for
cooperative
Coop = place for chickens
Business Firm Interest Groups
1. Users (customers)
2. Owners (investors)
3. Controllers (decision makers)
4. Employees
Concerns and/or Characteristics of
Corporations
Survival/Perpetual Life
Customer Needs (purpose)
Efficiency
Profitability
Limited Liability
Interest Groups/Stakeholders
Dual Objectives of Co-ops
= Serving Dual Interests of
Owners as:
1. Investors (return on
investment)
2. Patrons (services and return
on use)
Types of Co-ops
Based on Function Performed
1. Marketing
2. Supply
3. Service
Types of Co-ops
1.
2.
3.
4.
Based on Area Served
Local – local community to
multiple counties
Regional – multiple states
National
International
Types of Co-ops
Based on Organizational Features
1.
2.
3.
Interregional
- mbrs = other regionals
Federated
Farmers = mbrs of locals
Locals = mbrs of regionals
Centralized
Farmers = mbrs of regional
Local businesses run by regional
Steps in Starting a Co-op
Deter. Preliminary Mbr. Interest
Further Research/Analysis
Producer survey
Feasibility study (mkt, cost, …)
Organization
Reconfirm mbr interest
Get mbrs to commit/agree
Legal documents
Staffing (directors, mgmt)
Acquire facilities and financing
Recommendations in Starting a
Co-op
1. Use Specialists
Attorneys
University staff
USDA staff
Financial Experts
2.
3.
4.
5.
6.
Consider Alternatives to Starting a Co-op
Easier to Later Expand than Contract
Be Conservative in Projections
Require Producer Commitment
Make sure good management is
available and that members are willing to
pay for it.
Co-op Justification?
1. Economic NEED
2. Economic NEED
3. Economic NEED
Economic NEED?
1. Better Price (level or risk) by –
Increasing competition (or offsetting
mkt power)
B. Developing own product (or capturing
other-level profits)
C. Taking advantage of economies of size
A.
2. More Dependable Market (for
outputs or inputs)
3. Better Services
The ROCHDALE Society
A co-op retail store (i.e. consumer coop) that sold food, clothing, and other
household items to its patrons. The
co-op was founded in 1844 in
Rochdale, Lancaster, England by 28
craftsmen known as the Rochdale
pioneers. This co-op has been
recognized as the first such business
organization which has served as a
prototype for other co-ops.
Why Study Co-op Principles?
1. To understand unique or
fundamental aspects of co-ops.
2. To guide the operation of a co-op.
3. To understand the basis for many
co-op laws.
Cooperative Principles
1. User Ownership
2. User Control
3. User Benefits
User Ownership =
Users own (at least partially) the coop
Users provide equity capital (invest $)
(Creditors provide debt capital)
User Control =
The ability to influence co-op
decisions
May or may not mean active
involvement in the decision making
process; instead, it implies the
opportunity to do so if desired
Users normally exert their influence
thru an elected group of
representatives known as the board
of directors
Forms of USER Control
1. One Member, One Vote
2. Voting in Proportion to Patronage
Other Observations on ‘Control’
1. User Control ≠ investor control although
both are ‘democratic’ forms of control
2. Form of investor control is one share of
stock, one vote
3. Co-op member voting in proportion to
patronage is:
a.
b.
Illegal for co-ops with headquarters in Iowa
Used more often by regional co-ops than by
local co-ops
The user benefit principle is
related to the operation at
cost practice.
Operation at Cost =>
Cooperative earnings
(savings, surplus, profits)
are to be returned to the member
PATRONS.
Operation at cost
≠
Nonprofit
The Return or Distribution of
Earnings to:
1. Customers in proportion to the
amount of patronage done with the
business (i.e. return on USE)
= PATRONAGE REFUNDS
2. Investors in proportion to the amount
of money invested in stock in the
business (i.e. return on
INVESTMENT) = DIVIDENDS
Limits on Co-op Earnings
Distribution
Patronage refunds
No limit
Usually ≥ 20% cash (for tax reasons)
Dividends
- ≤ 8%
Patronage Refund Example
CO-OP
Sales:
Expenses:
Earnings:
MEMBER A
Purchases:
% of total for co-op
(8,000/200,000 = 4%)
Patronage Refund:
(4% x 20,000 = 800)
$200,000
$180,000
$ 20,000
$
8,000
4%
$
800
Patronage Refund
Total:
Cash (> or = 20%)
Noncash
$800
$160
$640
The noncash patronage refund is also
called a retained or deferred
patronage refund.
Why Co-ops May Have Earnings
1. Overcharges or underpayments
because costs are unknown initially.
2. Co-ops charge going market prices
which are above costs:
To avoid price wars
b. To avoid passing savings on to
nonmembers
a.
Evaluation of Co-ops as a
Marketing Alternative:
1. Level of prices initially paid (or charged)
2. Patronage refund
a.
b.
c.
Level
% cash
When noncash will be paid
3. Price and quality of services
4. Dependability as a market outlet (or input
supplier)
5. Economic effects without the co-op
(competitive yardstick)
6. Value of owning your own business