COOPERATIVE RATIONALITY IN CONTEMPORARY
AMERICAN AGRICULTURE

Dissertation for the Degree of Ph. D.
MICHIGAN STATE UNIVERSITY
MENWOUYYELLET ASSMARE
1977

 

  

L [13 1?. A R Y

lV'chliiijm State
University

   
   

6 This is to certify that the

thesis entitled

COOPERATIVE RATIONALITY
IN CONTEMPORARY AMERICAN AGRICULTURE

presented by

MENWOUYYELLET ASSMARE

has been accepted towards fulfillment
of the requirements for

 

 

The Ph. D degree in Management
\M t K .\
Majo orofessor
May 6, 1977

Date

 

0-7639

 

ABSTRACT

COOPERATIVE RATIONALITY IN CONTEMPORARY
AMERICAN AGRICULTURE

By

'Menwouyyellet Assmare

The objective of this dissertation is to prove that the cooper-
ative form of business organization has become incompatible with the
performance requirements of the tasks it has to undertake in contem-
porary American agriculture. The proof would involve a demonstration
of: (a) the nature of the tasks that agricultural cooperatives would
have to undertake in order to survive in contemporary American agricul-
ture, and (b) the inability of agricultural cooperatives to carry out
these taske effectively and efficiently without violating the con-
straints and contingencies that arise from the cooperative character
of agricultural cooperatives.

As American agriculture continues to use an increasingly advanced
technology, agricultural cooperatives find it imperative to assume an
increasing number of the activities of the family farm as well as to
undertake the processing of farm products and the manufacture of farm
supplies. However, if these activities are to be carried out effec-
tively and efficiently, it is necessary that the activities of the
family farm become subordinated to those of the agricultural cooper-
atives. And such a subordination becomes more feasible as the growing
complexity and capital intensity of the operation of the family farm
continues to reduce the role of the farmer to that of a laborer. But

such a relationship violates one of the two fundamental attributes of

Menwouyyellet Assmare

the cooperative form of business organization: the subordination of
the activities of the cooperative to those of its members.

0n the other hand, the persistence to observe the other fund-
amental attribute of the cooperative form of business organization has
become the basic source of the financial plight of agricultural coop-
eratives. The nature of the tasks that agricultural cooperatives have
to undertake are such that a large amount of equity capital has to be
raised. However, the commitment to observe the unity of patronage
and ownership in the member restricts the source of such capital just
to the family farmers who patronize agricultural cooperatives. And
as the financial plight of family farmers became increasingly acute,
agricultural cooperatives could not raise their required equity cap-
ital by directly soliciting their members for contributions. The only
way they could raise such a capital without violating the unity of
patronage and ownership in the member is by pursuing a policy of high
princes and low cash patronage refund.

It is a general practice of agricultural cooperatives to raise
their prices beyond what the competition permits as well as to restrict
as much as possible the amount of cash patronage refund due to their
patrons. Such a practice is, however, proving counter-productive. The
policy of high prices and low cash patronage refund has made the
opportunity cost of patronizing agricultural cooperatives so unbearable
that family farmers are increasingly becoming reluctant to patronize
agricultural cooperatives. It is thus a matter of time before agricul-
tural cooperatives will have to go to the capital market to raise the
equity capital they need. Andehen that happens, agricultural cooper-

atives will be indistinguishable from the corporations.

Menwouyyellet Assmare

Effective and efficient performance of the tasks that agricul-
tural cooperatives have to undertake in contemporary American agricul-
ture requires that they operate outside the constraints and contingen-
cies that arise from the cooperative character of the organization.
However, inasmuch as these constraints and contingencies are the fund-
amental attributes that differentiate the cooperative from the corpor-
ation, the inability of agricultural cooperatives to operate within
these constraints and contingencies makes their mode of operations
indistinguishable from those of the corporations. And this means
that agricultural cooperatives will have to repudiate their cooperative
character in order to be equal to the tasks they have to perform in

contemporary American agriculture.

COOPERATIVE RATIONALITY IN CONTEMPORARY
AMERICAN AGRICULTURE

By

Menwouyyellet Assmare

A DISSERTATION

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Management

1977

Dedicated to Nancy J. Gruskin whose friendship I cherish.

ii

ACKNOWLEDGMENT
I would like to express my gratitude to Dr. Lawrence Foster,

the chairman of my dissertation committee, for his encouragement,

support, and advice in my endeavour to write this dissertation.

iii

TABLE OF CONTENTS

Page
INTRODUCTION .......................... 1
CHAPTER
I COOPERATIVE RATIONALITY. .......... . ....... 5
The Concept of Cooperatives ............... 7
The Organizational Character of Cooperatives . . . . 7
The Particularity Of the Cooperative Form of
Organization ................... 8
The Subordination of the Cooperative Form Of
Organization to its Members .......... 8
The Unity of Patronage and Ownership in the
Cooperative Form of Organization ....... ll
Summary ..................... T2
The Concept of Cooperatives and Cooperative Principles . l3
Cooperative Principles ............... T3
The Rationale of Cooperative Principles ....... 16
Summary ....................... 22
Cooperative Rationality ................. 24
The Effect of Unity of Patronage and Ownership . . . 25
The Effect of Subordination of the Organization to
the Activities of the Patron-Owners ........ 29
Summary ....................... 33
II COOPERATIVE RATIONALITY AND THE FAMILY FARM ....... 39
The Concept of the Family Farm ............. 4]
The Changing Role of the Family Farm .......... 44
The Change in the Investment Function of the Family
Farmer ...................... 44
The Change in the Managerial Function of the Family
Farm ....................... 49
Summary ....................... 52
The Changing Role of the Family Farm and Corporate
Agriculture ..... . ................ 53
The Farm Supply Industry and the Family Farm . . . . 54
The Processing Industry and the Family Farm ..... 56
The Changing Role of Agricultural Cooperatives and
the Cooperative Rationality . . . .......... 60

iv

CHAPTER Page

Summary ......................... 54
III THE ORGANIZATIONAL COMPETENCE OF AGRICULTURAL COOPER-
ATIVES AND COOPERATIVE RATIONALITY ........... 72
The Bargaining Role of Agricultural Cooperatives and
the Structure of Agriculture ............. 72
The Changing Structure of Agriculture .......... 75
Open Market Agriculture ............... 75
Industrialized Agriculture ............. 78
The Industrialization of Agriculture . . ...... 79
The Industrialization of Agriculture and the Change in
the Role of Agricultural Cooperatives ......... 84
Contract Farming and the Bargaining Role of Agri-
cultural Cooperatives ............... 84
The Industrialization of Agriculture and the Operat-
ing Role of Agricultural Cooperatives ....... 37
Financing Agricultural Cooperatives and Cooperative
Rationality ...................... 89

IV THE INTERNAL SOURCE OF EQUITY CAPITAL AND COOPERATIVE
RATIONALITY ....................... 100

The Nature Of Savings in Agricultural Cooperatives . . . 100
The Limits of the Internal Source of Equity Capital and

Operating Efficiency ................. 104
The Limited Financial Base Of Agricultural Cooper-
atives and Operating Efficiency .......... 105
Democratic Control and Operating Efficiency ..... 108
The Cooperative Manager and Operational Efficiency . ll2
Summary ....................... 116

The Internal Source of Equity‘Capital and Price Policy . ll7
The Internal Source of Equity Capital and the Policy of

Patronage Refunds ................... 119
The Internal Source Of Equity Capital and the Commit-
ment of Patrons to Agricultural Cooperatives ..... 122
The Internal Source of Equity Capital and Cooperative
Rationality ...................... l26
V CONCLUSION ....................... 133
Price Policy and Cooperative Rationality ........ 134
The Opportunity Cost of Patronizing Agricultural Cooper-
atives ........ w ................ 135
The Changing Role Of Agricultural Cooperatives and the
Imperatives of Coordination .............. 137
BIBLIOGRAPHY .......................... 141

V

INTRODUCTION

The fundamental thesis of this dissertation is that the cooper-
ative form of business organization is increasingly becoming incom-
patible with the performance requirements of the tasks it has to
undertake in contemporary American agriculture. Such incompatibil-
ity gets its expression in this dilemma: if agricultural coopera-
tives are to operate within the constraints and contingencies that
arise from their cooperative character, they have to accept the grow-
ing sacrifices in effectiveness and efficiency of performance that
such a course of action entails; on the other hand, if they are to
carry out their activities as effectively and efficiently as the
competition demands, then they have to operate outside these con-
straints and contingencies. The task of this dissertation is, there-
fore, to show how the limits of the capability of agricultural
cooperatives as imposed upon them by their cooperative character
have been compromising the effectiveness and efficiency of their
performance, and how these cooperatives are finding it increasingly
imperative to Operate outside such limits so that the activities
they have been compelled to undertake can be carried out as effec-
tively and efficiently as the competition demands.

The first problem that must be overcome is the identification
of the limits for the capabilities of the cooperative form of bus-

iness organization. Since capability limits of organizations are

found in the constraints to be faced and the contingencies to be

met in pursuing the technical rationality of their operations, then
the limits of the capability of the cooperative form of business or-
ganization are to be found in the constraints and contingencies

that arise from the cooperative character of that organization.

Thus, the problem Of identifying the limits for the capabilities of
the cooperative form of business organization is transformed into

a problem of identifying the constraints and contingencies that

arise from the cooperative character of these organizations. And
when technical rationality in the cooperative form Of business or-
ganization is limited by such conStraints and contingencies, the Tim-
it to such a potential is referred to as its cooperative rationality,
a concept which the first chapter explores.

The cooperative form of business organization can be differ-
entiated from other forms Of business organization in two fundamental
ways: the subordination of the activities of the cooperative to
those of the patrons, and the unity of patronage and ownership in
the member. The subsequent chapters of this study are devoted to
examining the extent to which these essential attributes of the coop-
erative form of business organization are being Observed in the oper-
ation of agricultural cooperatives and at what cost.

The second chapter examines the extent to which the activities
that agricultural cooperatives have been compelled to undertake are
subordinated to those of the patrons. The nature Of the activities
that the family farm can perform and those that the agricultural
cooperative has to perform in contemporary American agriculture is

such that the relationship between the activities of both can be

3

more efficiently coordinated if the activities of the family farm
are subordinated to those of the agricultural cooperative. As a
result of such subordination, however, cooperative rationality is
violated.

Chapters III and IV deal with the problem of observing the
unity of patronage and ownership in the family farmer. The first
of these two chapters explores the way in which the nature of the
new tasks that agricultural cooperatives have been compelled to
undertake has been creating a problem of raising equity capital.
Agricultural cooperatives are being compelled not only to assume
the managerial and financing functions of the family farm but also
to undertake the processing of farm products and the manufacture
Of farm supplies if they are to play any meaningful role in the in-
creasingly integrating American agriculture. And the undertaking
Of these tasks requires increasingly large amounts of financial
outlay.

Contemporary American agricultural cooperatives are thus under
an unrelenting pressure to raise larger and larger amounts of equity
capital to finance the operation of the new tasks that they have
been compelled to undertake. At the same time, the financial plight
of family farmers is such that this required equity capital can not
be raised from patron-owners. Agricultural cooperatives are thus
faced with the prospect of having to raise the equity capital they
require from non—patrons, a prospect which is tantamount to an annul-
ment of the unity Of patronage and ownership in the member. And
inasmuch as this annulment makes the cooperative form of business

organization indistinguishable from the corporation, agricultural

4

cooperatives can not raise equity capital from non-patrons and still
continue to call themselves agricultural cooperatives. The alterna-
tive they have chosen is to raise their equity capital "internally."
The fourth chapter considers the strategies that agricultural
cooperatives use to raise equity capital "internally." These stra-
tegies include a policy of high prices for the goods and services the
cooperatives sell and low cash patronage refund. The consequence of
such policies is to increase the cost of patronizing agricultural
COOperatives. And this means that the unity of patronage and owner-
ship in the member can be maintained only at an increasingly high
cost to the patron. But the growing financial plight of the farmer,
particularly the young farmer, is such that he will not be able to
bear the burden Of such a rising cost of patronizing cooperatives.
It is thus just a matter of time before agricultural cooperatives
find it imperative to abandon the unity of patronage and ownership

in their members and transform themselves into corporations.

CHAPTER I

COOPERATIVE RATIONALITY

Cooperative rationality as used in this dissertation is de-
rived from what James D. Thompson calls organizatiOnal rationality.
The legitimacy Of this derivation is based on the conceptualization
of cooperatives as a specific form of organization. Thus, because
cooperatives constitute a specific form of organization, the organ-
izational rationality that assumes a distinctive character in the
cooperative form of organization can be termed cooperative rational-
ity.

The notion of organizational rationality as used by Thompson
refers to what purposive organizations must do to accomplish desired

results,1

thus justifying their survival. In the final analysis,
the task Of surviving requires that organizations become effective
and efficient in their operations. Effectiveness (Thompson uses
instrumentality instead)2 is necessary because the organizations at
issue are purposive; and efficiency (Thompson uses economic instead)3
is necessary because organizations have a limited amount of resources
at their disposal.

In order to be able to be effective and efficient in their
operations, organizations strive to achieve technical rationality.
And inasmuch as organizations are interdependent with their task

environments for the acquisition Of their inputs and for the disposal

5

of their outputs, their pursuit of technical rationality requires
that they face constraints and meet contingencies that arise from
these environments. Thus, operational effectiveness and efficiency
in organizations cannot be achieved by technical rationality alone,
but by a more comprehensive rationality that takes environmental
constraints and contingencies into consideration. It is to this
comprehensive form of rationality of organizations that Thompson
gives the label organizational rationality.4 According to Thompson,
therefore, organizational rationality refers to the environmental
constraints to be faced and the contingencies to be met by organiza-
tions in their pursuit of technical rationality of their Operations.5
The specific nature of the constraints to be faced and the con-
tingencies to be met varies from one organization to another. In a
cooperative form of organization, there are constraints and contin-
gencies that arise from the cooperative nature Of the organization
which give organizational rationality a distinctive character that
could be specified as cooperative rationality. To appreciate cooper-
ative rationality, however, it is necessary not only to ascertain
the specific constraints and contingencies that arise from the cooper-
-ative character of the organization, but also to understand how these
constraints and contingencies give organizational rationality in a
cooperative form of organization its peculiar feature. The first
part of the rest of this chapter is thus devoted to establishing the
constraints and contingencies that arise from the very concept of
cooperatives; and the last part of the chapter demonstrates how these
constraints and contingencies give organizational rationality its

cooperative character.

7

The Concept of Cooperatives

 

Depending upon the purpose the definition is supposed to serve,
a rather diverse conceptualization of cooperatives has emerged, a
diversity which is so enormous that Anders Orne characterized the
concept of cooperatives as a “term which like religion and philosophy
defies exact definition. Almost every writer on the subject has a

definition of his own."6

In the area or agricultural cooper-

atives, even the different Departments of the federal government of
the United States have different definitions of cooperatives.d The
Internal Revenue Service of the Department of the Treasury defines
cooperatives in such a way that the administration Of the tax laws
will be facilitated. On the other hand, the Capper-Volstead Act of
l922 defined cooperatives such that they could be exempted from anti-
trust laws. Each definition emphasizes certain aspects of cooper-
atives and omits others. And none would claim to be exhaustive.
However, the sum total of the attributes identified by each defin-

ition could give a profile of what constitutes the concept Of cooper-

ative.

The Organizational Character of Cooperatives

C. R. Fay conceptualized cooperatives as a specific form Of

association.7

So did the Capper-Volstead Act of l922--the Magna
Carta of Agricultural Cooperatives in the United States. In fact,
the title of the Act reads: "An act to authorize association Of

8 On the other hand, other

producers of agricultural products."
people conceptualize cooperatives as a form of organization; Joseph

Knapp. for example, defined cooperatives this way.9

8

The conceptualization of cooperatives as a form of both asso-
ciation and organization is not difficult to reconcile since, after
all, an association is a form of organization, a designation which
both Webster and the Random House dictionaries make. And the con-
ceptualization of cooperatives as a form of association suggests that
the cooperative is a second derivative of the concept of organiza-
tion. Thus, whether the cooperative is conceptualized as a form of
organization or association, the organization character Of cooper-
atives cannot be disputed.

The Particularity of the Cooperative
Form of Organization

The categorization of cooperatives under the general concept
of organization does not enable us to come to grips with the essence
of cooperatives. Therefore, there is a need to differentiate the

cooperative form of organization from other forms of organization.

And one basis for such differentiation is to recognize the cooper-

ative as a form of association.

The Subordinations of the Cooperative
Form of Organization to its Members

According to Random House Dictionary, the word association
"was first used among congregationalists fOr a society of a number of
pastors of neighbouring churches, united for promoting the interests
of religion and the harmony of churches but claiming no ecclesias-
tical authority." What then is critical in the essence of an associ-
ation is not that it is a union of people but rather the fact that the
union has no authority over its constituency. Although the meaning

may have undergone some modification, the relative independence that

the members of the union enjoy is the central feature of an asso-
ciation. What distinguishes an association from a corporation in
the United States is that the latter has a charter while the former
does not. Moreover, a speech by Abraham Lincoln makes this non-
authoritative character of an association rather unmistakable: "If
the United States be not a government proper, but an association of
states in the nature of contract merely, can it, as a contract, be
peaceably unmade by less than all the parties who made it?" Here,
again, the high degree of independance of the members of the union
of an association is Obvious.

The conceptualization of a cooperative as an association is

indeed consistent with its raison d'etre. According to Edwin G.

 

Nourse, recognized as the dean of scholars on cooperatives, the cooper-
atives were trying

...to organize a naturally decentralized type of industry for
the large scale Operations demanded in a scientific, commer-
cialized, and capitalistic way, while at the same time preser-
ving thegpersonal independence and dynamic element of individ-
ual participation and reward which seemed to be threatened
under some forms of modern industrialization.

 

Thus, one of the essential tasks of cooperatives is the preservation
and not the decimation of the personal independence of its members.
Frank Robotka, for example, conceptualized the cooperative as an
organization that enables small units to gain some of the advantages
Of group action and large scale operation and "at the same time retain
a maximum of independence in their individual pursuits."H
The law itself recognizes the high degree of independence of

the members of the cooperative. The very purpose of the Capper- '

Volstead Act of l922 was to exempt the cooperatives from anti-trust

IO

laws which would have made associations of independent producers
illegal. In discussing the bill, Mr. Volstead pointed out that

...the Objection made to these organizations (cooperatives)

at present is that they violate the Sherman Anti-trust Act,

and that is upon the theory that each farmer is a separate

business entity. When he combines with his neighbor for the
purpose of securing better treatment in the disposal of his
crops, he is charged with a conspiracy or combination con-
trary to the Sherman Anti-trust Act.
Hhat the Capper-Volstead Act did was to make the cooperative a spec-
ial case in terms of applying the anti-trust laws, and in spite of
the fact that the cooperative was perceived to be an association of
individual business entities, it was made exempt from a charge of
conspiracy.

The Internal Revenue Service also recognizes the special char-
acter of the relationship of the cooperative and its members. While
the corporation is taxed as an entity, the cooperative is not; it
is only the members of the cooperative that are taxed. And this
policy of taxation is tantamount to recognizing the cooperative to
be an extension of its members. According to the Farmers Cooperative
Service of the USDA, "farmers look upon their cooperatives as exten-
sions of their own farming operations--as the marketing and purchas-

ing departments of their own farms.”3

Such a relationship suggests
that the cooperative organization is subordinate to the activities of
its members. In other words, the organizational personality of the
members is subordinate to their individual personality. The reverse
is true in other forms of business organizations, a fact cited by

14 15

Barnard and Simon along with Schien who emphasize the subordina-

tion of individual personality to organizational personality. Thus,

II

the subordination of the organizational personality to the individual
personality constitutes a significant differentiating characteristic
of the cooperative form of business organization.

The Unity_of Patronage and Ownership in the Member
of the Cooperative Form Of Organization

 

The classification of cooperatives under association does not
enable us to pinpoint what cooperatives are pg515g, Hence we have to
further differentiate the cooperative form of association from other
forms of association. C. R. Fay made such a differentiation by
suggesting that a cooperative has joint trading as its purpose,16
while Margaret Digby pointed out that the purpose of cooperatives is

17

to undertake commercial and financial operations. In the United

States cooperatives are conceptualized as a form of business organ-

ization. Thus, B. H. Pentecost,‘8

along with the Internal Revenue
Servicelgdefined agricultural cooperatives in this way. Yet although
this business orientation of cooperatives may help us differentiate
them from other fOrms of association, we still have to distinguish
between the cooperative form and other forms of business organization.
Joseph Knapp drew such a distinction when he suggested that
"the non-cooperative business is set up by an individual or a group
to perform a service for some one else, of course, at a profit. The
cooperative is, on the other hand, set up by a group of persons or

20 In other words, the

firms to perform services for themselves."
patrons and the owners of cooperatives are the same people. The

unity of patronage and ownership in one person is recognized to be
so fundamental a characteristic of cooperatives that it often con-

stitutes part Of the elements that define it. Thus, B. H. Pentecost

12

claimed that the cooperative form of agricultural business organ-
ization is different from other forms of business organizations in
that the former is owned and controlled by member agricultural pro-

21

ducers, while the Internal Revenue Service defined a cooperative

as "a business organization formed for the purpose of providing

goods or services for its patron-owners or marketing their products."22
The unity of patronage and ownership in one person makes the

cooperative form of business organization distinct from other forms

Of business organization in that it involves only two distinct groups

of people: the patron-owners and the employees. All the other forms

of business organization involve three distinct groups of people:

the owners, employees, and customers.23

Accordingly, the unity of
patronage and ownership in one person must constitute a fundamentally
distinguishing characteristic of the cooperative form of business

organization.

Summary

The cooperative is a form Of business organization differen-
tiated from other forms Of business organization on two counts: the
subordination of the organization to the patron-owners and the unity
of patronage and ownership in one person. And as it will be shown,
even the cooperative principles that are Often used to define the
concept of cooperatives are derivations from these two fundamental

attributes of the cooperative form of business organization.

T3

The Concept of Cooperatives and
Cooperative Principles

The concept and principles of cooperatives are so interrelated
that they are often used interchangeably. In fact, it is not un-
usual to see the concept of cooperative defined in terms of cooper-
ative principles. Edwin Nourse dramatized the impact of cooperative
principles on the concept of cooperatives in this manner: "the
Rochdale Dogma says in essence if you require every member to buy a
share of capital stock and limit the amount any member may hold, if
you put a low ceiling on interest paid to purchasers and follow mar-
ket prices, sell for cash and return any residual in proportion to

24 Nourse's characterization of

patronage you have a cooperative."
cooperative principles as the Rochdale Dogma suggests that they are

not intrinsic to the concept of cooperative.

Cooperative Principles
The origin of cooperative principles is the Rochdale Pioneers.
In fact, the cooperative principles adopted by the International
Cooperative Alliance (ICA) in 1937 were in effect a modification of
the Rochdale principles. The same principles were reaffirmed by the

ICA in l966 and still prevail today.25

They include the following:
l. Open membership
Democratic control

‘Limited interest on capital

#00“)

Distribution of surplus to members in proportion of their
participation in the transaction of the society
5. Political and religious neutrality

6. Cash trading

l4

7. Education

Inasmuch as the agricultural cooperatives in the United States
are, at least indirectly, members of the ICA, they are expected to
Observe the cooperative principles adopted by the ICA. But adher-
ence to these principles is not complete. Indeed, Bakken found out
that most of the cooperatives in the United States select their mem-
bers, thus violating the principle Of open membership.26 Nor is the
principle oi’cash trading Observed, and political and religious neu-
trality as well as education are not considered to be relevant enough to
constitute cooperative principles in American agriculture. Instead,
according to the USDA, the three distinctive principles of American
cooperatives are democratic control, limited returns on capital, and

27

operation on a cost Of doing business basis. And Kelsey B. Gardner

confirms that these three cooperative principles have commonly been

accepted in the United States.28

though interesting to note it that
there is an increasing pressure to modify them.

The changing nature of cooperative principles is not difficult
to understand when one recognizes how these principles came about.

Abbot noted that they evolved out of trial and error.29

In fact,
efforts to organize and operate cooperatives before 1844 resulted in
failure, but the lessons that could be drawn from these failures cul-
minated in the success of the Equitable Pioneers Cooperative Society.
And the rules of organizing and operating a cooperative successfully
have come to be known as the Rochdale Principles. Since then, the

cooperative of the Rochdale Pioneers has been a model of organizing

and operating cooperatives. In the words of Rheinhold Hezler,

15

Cooperative principles always were intended tO serve as guid-
ing maxims in founding cooperatives and spreading the cooper-
ative idea and in so doing, to influence and eliminate
alternative solutions. Over and above this, these principles
were and still are meant to influence, guide and keep together
an organization which though decentralized in all its parts is
based on an identical concept.30
The insistence on a strict adherence to cooperative principles
has resulted in making these principles and the concept Of cooper-
ative virtually indistinguishable. In the United States, as indicated
previously, democratic control and service on cost basis have often
been used to define the concept of cooperatives. Thus, William Jus-
tice defined cooperative as "a business enterprise that is organized,

"31 And B. H. Pentecost defined

owned and controlled democratically...
agricultural cooperatives as a business organization...which operate...
on a cost basis after allowing for the expenses of the operation and
maintenance and any other authorized deductions for expansion and
necessary reserves."32

Yet the difference between the concept of cooperative and
cooperative principles is unmistakable. That the concept of cooper-
atives preceded the cooperative principles is a matter of fact.33
After all, the cooperative principles came into being after l844,
while the concept of cooperatives was conceived in lBZOs by the utop-
ian socialists. Nevertheless, the concept of cooperative has virtu-
ally undergone no change, while cooperative principles have been
substantially modified, at least in the United States. And, indeed,
the fact that cooperative principles resulted from the problem of
organizing and operating cooperatives in a specific place and at a

specific period of time emphasizes their transient nature.

T6

The Rationale Of Copperative Principles

 

Although the concept of cooperatives and cooperative prin-
ciples are different, they are interrelated. Each of the three
cooperative principles that are still in vogue in the organization
and operation of agricultural cooperatives in the United States could
be derived from the two-fold character of the concept of cooperative
itself.

The principle of service at cost is derived from the fact that
agricultural cooperatives are extensions of the family farm, a con-
ceptualization which suggests that a transaction between the farm and
the cooperative would have to be considered as an internal one. And
to the extent that an organization cannot make profit from an inter-
nal transaction, cost as a basis of such a transaction becomes im-
perative. Accordingly, inasmuch as the marketing cooperative repre-
sents the marketing department and the purchasing cooperative repre-
sents the purchasing department of the family farm, the transaction
between each of these cooperatives and the family farm would have to
be handled on the basis of cost.

While the conceptualization of agricultural cooperatives as an
extension Of the family farm could make the principle of service at
cost imperative, the unity of patronage and ownership in one person
makes this principle operational in a cooperative form of business
organization. Hhere patronage and ownership are not united in one
person, the generation of profit from a transaction between a bus-
iness organization and its patrons would be indispensable. After-
all, profit is the inducement for the participation of investors in

an organization.

I7

Elaborating on the inducement contribution model of Chester
Barnard, Herbert Simon identified three different fOrms of induce-
ments that a business organization would have to Offer in order to
sustain the participation of the three different groups of people
that constitute it: profit for the enterpreneur (owner), wages for
employees, and attractive prices for customers.34 Inasmuch as the
cooperative fOrm of business organization is made up Of two differ-
ent groups of people, two different forms of inducements would be
sufficient to sustain their participation: attractive prices for
patron-owners and wages for employees. Profit cannot be realized as
an inducement to sustain the participation of the patron-owners in
the cooperative, for profit cannot be generated in a transaction be-
tween the cooperative and its patron-owners. Accordingly, the bene-
fits that could accrue to the patron-owners for their participation
in the cooperative form of business organization can only be realized
in the form of attractive prices.

The savings or net margins (as the difference between revenues and
expenses is referred to in cooperatives) do not represent profits. In-
stead, they represent the excess in price that the cooperative charges
its patrons. Such a phenomenon becomes unavoidable when one recognizes
the difficulties involved in precisely ascertaining the cost of service
at the time the transaction occurs between the cooperative and its mem-
bers. Even when these net margins emerge, however, they are eventually
distributed in the form of patronage refunds as price adjustment.

The fact that all the residuals of the economic benefits that
appear in the form of savings or net margins are distrubuted to pa-

trons as price adjustments makes it imperative that the inducement

18

for the ownership interest of the patron-owner become fixed. For
unless the return on equity capital is fixed, cooperatives cannot
claim that the economic benefits they generate are distributed

in the form of attractive prices to their patrons. If the return

on equity capital is allowed to vary, then the benefits that would
be associated with patronage would have to be relatively fixed. To
ensure that the beneficiaries of improved performance of the cooper-
ative are its patrons and not its owners the return on equity
capital would have to be fixed so that the return on patronage could
vary along with the changes in the level of performance of the cooper-
ative. And, indeed, one of the cooperative principles is limited
returns on equity capital.

The principle of limited return on equity capital could not
have been Operational if there were no unity of patronage and owner-
ship in one person. In fact, it is unlikely that the current legal
maximum of 8% return on the equity capital of agricultural cooper-
atives could have been Of sufficient inducement to raise equity cap-
ital if the patrons were separated from the owners. In a cooperative,
however, the economic benefits that an investor could realize are not
limited to the 8% rate of return, but also include the price advan-
tages he could obtain from his transaction with his cooperative. Even
if the rate of return could be reduced to 0%, the expectation for
price advantages could be of sufficient attraction to induce the
patron-owners to contribute equity capital. The motivation for this
investment is not the limited rate of return on equity capital peruse,
but rather the overall economic benefits that could accrue to the

patron-owners regardless of the fOrm in which these benefits may be

19

realized. It is the totality of the price advantages and the
limited rate of return on equity capital that serve as an inducement
for the patron-owner to contribute equity capital. And such a com-
bination of inducements could not have been realized without the
unity of patronage and ownership in one person.

The principle of democratic control is derived from the fact
that agricultural cooperatives should be subordinated to family
farms. But the nature of this subordination is such that each farm
cannot individually monitor it. Rather, since the subordination of
the agricultural cooperative is not to the individual farm but to the
collectivity of the family farms, such a subordination can be mon-
itored only collectively. And democratic control serves such a pur-
pose. The one-man one-vote rule is designed to ensure that the
agricultural cooperative caters to the needs and interests of the
individual family farms rather than the other way around.

If, on the other hand, the basis of control were to be the
size of either equity capital contributed or the volume of business
generated, then those who have more resources to contribute equity
capital or to generate a greater volume of business could control
the cooperative, thereby developing a capability to compel the cooper-
ative to serve primarily their Own interests at the expense Of the rest
of the members. Then, since the interest of those who could contri-
bute less equity capital and generate a smaller volume of business
would be subordinated to the interests of the rest of the members,
there would be a general propensity on the part of the latter to
withdraw their membership. Nor would the withdrawal solve the prob-

lem once for all; for each withdrawal would create a fresh situation

' 20
that would precipitate another withdrawal. And as the dynamics of
withdrawals would continue to operate, what was once a cooperative
would eventually dissolve into a soleproprietorship form of business
organization. The one-man one-vote rule is thus designed to ensure
that the cooperative remain subordinated to the collective interest
of the patron-owners.

The one-man one-vote rule is based on membership. Differences
in the contribution of equity capital or the generation of the volume
of business among the members cannot be reflected in the one-man one-
vote rule. Neither the equity capital contributed nor the volume
of business generated has a bearing on how much control a member has.
Instead, once membership is Obtained, a member automatically has as
much say as any other member with respect to the affairs of the cooper-
ative. It is only when the differences in the level of equity capital
contributed and the volume of business generated among the members is
rather small that ownership and patronage would have no bearing on
the extent of control a member could have on the cooperative. Accord-
ingly, the one-man one-vote rule presupposes that the size of equity
capital contributed and the volume Of business generated by each
member is homogeneous. And such homogeneity is, in fact, the basis
for the validity of the other two cooperative principles.

Indeed, the family farms that started agricultural cooperatives
were relatively homogeneous with respect to the resources they could
contribute and the volume of business they could generate. After all,
the scale of operation ofqthe family farms was homogeneously small--
averaging 160 acreas,a scale whose disadvantages made it imperative

for family farms to organize agricultural cooperatives. Accordingly,

21

that the agricultural cooperatives were organized and patronized by
homogeneously small size farms cannot be disputed. And such a situ-
ation suggests that the equity capital contributed and the volume of
business generated by each member would be rather homogeneous.

The principle of service at cost, for example, cannot be ex-
pected to be operational unless there is homogeneity among the mem-
bers with respect to the size of equity capital they contribute and
the volume Of business they generate. And to the extent that the.
savings or net margins are to be distributed on the basis of patron-
age, there is no benefit to be gained by contributing more equity
capital than anybody else. As a result, there is a propensity for
every member to contribute just the minimum equity capital required
which results in homogeneity in the amount Of equity capital contri-
buted. But if correspondence is to occur between the benefit a
member receives from and the resources he commits to the cooperative,
the pattern of the volume of business generated must correspond to
the pattern of equity capital contributed among the members.

The necessity for homogeneity in the size of equity capital
contributed has already been shown to be the precondition for the
operation of the principle of service at cost. And if there is to
be correspondence between the pattern of the contribution of equity
capital and the generation of the volume of business, then the volume
of business generated by each of the members has to be homogeneous.
For if incongruity in the pattern of contribution of equity capital
and generation of volume of business were permitted, the recipients
of the benefits would be different from those who supplied the re-

sources. But benefits will correspond to the resources committed

22

only if there is correspondence in the pattern of contribution of
equity capital and the generation of the volume of business. In

this case, the pattern assumes homogeneity of size both in the equity
capital contributed and the volume of business generated, a precon-
dition for'the principle of service at cost to be operational.

It is also the homogeneity of the size of equity capital con-
tributed and the volume Of business generated by each member that
makes the principle of limited rate of return Operational. In fact,
such homogeneity renders the level of rate of return on equity cap-
ital irrelevant as an incentive for its contribution. Whether the
distribution of the savings or net margins is made on the basis of
equity capital contributed or the volume of business generated or a
combination of both, the size of benefit that a member would ulti-
mately be able to receive should be the same. But if the rate of
return on equity capital is increased, the patronage refund must be
decreased by the corresponding amount so that total amount of bene-
fits received by each member would remain the same. As a result, the
restriction on the magnitude of the rate Of return would have no
bearing upon the decision of how much equity capital a member should

contribute.

Summary
The rationality Of cooperative principles can be sustained under
a situation wherein the scale of operation Of the members is uniformly
small. Indeed, where heterogeneity prevailes in the size of equity
capital contributed and the volume of business generated, none of the

cooperative principles could hold. Inasmuch as changes in the

23

degree of homogeneity of the equity capital contributed and the volume
of business generated by the members of a cooperative could invalidate
the application of cooperative principles, the transitory character
of the cooperative principles becomes Obvious. Thus, cooperative prin-
ciples reflect not the essence but the fprm_that the co-Operative might
assume when a certain degree of homogeneity of membership with respect
to equity capital contribution and volume of business generation pre-
vails. But as the degree Of homogeneity of the membership changes,
so does the validity of the three cooperative principles that are
still in vogue. And the growing Obsolescence of many of the prin-
ciples of the Rochdale pioneers testifies to the transient nature of
the cooperative principles; and those that are still in vogue are
viable only when a certain degree of homogeneity of membership pre-
vails.

The essence of the concept of cooperative is to be found in the
subordination of the organization to and in the unity of patronage
and ownership in the member. It is these two attributes and
not cooperative principles that fundamentally distinguish the cooper-
ative form from other forms of business organization. Cooperative
principles, on the other hand, reflect the form that the cooperative
assumes in a particular environment. Thus, it is the need for subor-
dinating the cooperative to the collective will of its members that
made the one-man one-vote rule as well as the principle of service
at cost imperative. At the same time, it is the unity Of ownership
and patronage in the member that makes the application of the one-man
one-vote rule as well as the principle of service at cost possible.

And inasmuch as the limited rate Of return is a corollary to the

24

principle of service at cost, it can equally be argued that the prin-
ciple of limited return on equity capital is made imperative by the
need for subordinating the Cooperative to the family farm while its
application is made possible by the unity of ownership and patronage
in the member. Thus, the cooperative principles are consistent with
the dual character of the cooperative form of business organization

when the environment that is specific to these principles prevails.

Copperative Rationality

 

The conceptualization of the cooperative as a specific form of
organization suggests that the operation of cooperatives is governed
by organizational rationality. At the same time, the unique character
of the cooperative form of organization makes organizational rational-
ity in cooperatives unique. And it is this specific form of organ-
izational rationality that is here referred to as cooperative ration-
ality.

If Cooperative rationality is a specific form Of organizational
rationality, its particularity must have been primarily a result Of
the essential attributes of the cooperative and the specific form in
which these attributes express themselves. Hence, the subordination
of the cooperative organization to the activities of its members and
the unity of patronage and ownership in the member define the general
character of the environmental constraints the cooperative has to face
and the contingencies it has to meet; and the cooperative principles

make these general constraints and contingencies more concrete.

25

The Effect of Unity of Patronage and OWnership

The unity of patronage and ownership in one person creates
constraints and contingencies that are peculiar only to the cooper-
ative form of organization. This requirement for customers to be
owners and for owners to be customers limits the domain of both the
market for the disposal of outputs and the source of resources for
the acquisition of inputs, respectively.

The market for the Output of the cooperative form of business
organization is more restricted than the sole proprietorship, partner-
ship, and the corporation forms of business organization. None of the
latter requires any qualification before a customer can buy its pro-
ducts. In a cooperative, however, there is such a qualification:
the Internal Revenue Service will not recognize agricultural cooper-
atives as cooperatives if more than 50% of their volume of business
is with non-member farmers or if more than l5% of their volume of

35 None of these restrictions

business is patronized by non-farmers.
exists for any of the other three forms of business organizations.

The problem of the market is aggravated by the fact that the
patrons to whom the cooperative caters are Of limited purchasing power.

After all, the raison d'etre of the cooperative form of organization

 

is to serve people of moderate means. Thus, Bedi noted that "cooper-
ation implies an enterprise of those who are financially weak,"36

and according to the Committee of Cooperation in India, the "theory
of cooperation is...that an isolated and powerless individual can,

by association with others...obtain the material advantages available

37

to wealthy or powerful persons." The result is that the potential

volume of business in a cooperative is rather limited compared to

26

that for other forms of business organizations.

The market that the patron-owners Of the cooperative can muster
is not of sufficient magnitude to justify the use of advanced tech-
nologies because the output of such technologies is too large for
the restricted market Of the cooperative to handle. Accordingly, the
cooperative has to either limit the kind Of technology it uses or
find additional outlets for the large Outputs of the advanced tech-
nologies it can use. It is not surprising, then,that cooperatives
in general have a propensity to expand the domain of their markets
beyond that which is determined by the unity of patronage and owner-
ship, although the extent of this expansion is limited by law. As
a result, the use of even a relatively advanced technology makes the
cooperative very much dependent upon its patron-owners. And this
dependence, as certified by the increasing call of the cooperative
on its patron owners to be loyal, is exacerbated by the attempt of
the competing business organizations to win over the cooperative's
patrons to their side.

Such a high degree of dependence on the patron-owners means
that the patrons of the cooperative have a greater influence in the
behaviour of the organization than do their counterparts in the other
forms of business organization. Unlike the patrons of these latter
organizations, the patrons Of the cooperative can successfully in-
sist that the organization adjust to their requirements instead of
the other way around. Accordingly, the cooperative's patrons be-
come a source of a more serious contingency than their counterparts
in other forms of business organization. And because of this, cooper-

atives make every effort to win the loyalty of their patrons. In

27

fact, patronage refund is often used as an instrument for increas-
ing and maintaining the loyalty of the patrons.

The unity of patronage and ownership also becomes a constraint
in the acquisition Of inputs by the cooperative. Unlike the cor-
poration, the cooperative has no access to organized capital markets.
Rather, in agricultural cooperatives the source of equity capital is
limited to farmers. In fact, the courts have declared that “substan-
tially all the voting stock of an association must be owned by pro-
ducers who market their products or purchase their supplies through

"38 And the Internal Revenue Service has indicated

the association.
that "the association will be required to show that the ownership
of its capital stock has been restricted as far as possible to actual

"39 The

producers who market their products through the association.
requirement that stock holders be limited to agricultural producers
thus denies the cooperative the option of raising equity capital from
other sources. The problem acquires additional acuteness when we
recognize that the producers are not a reliable source of equity
capital.

Unlike the owners of soleproprietorship and partnership forms
of business organizatiOn, the financial standing of the owners of the
cooperative is relatively weak. And this weakness, as already
pointed out, inheres in the concept of cooperative itself. Digby .
pointed out that cooperatives enable their members "to carry through
commercial and financial Operation which none Of them would have the

knowledge or the funds or the standing to undertake alone,"40

while
according to J. D. Black, "the main object of cooperative is to se-

cure the advantages that accompany an increase in strength through

28

4] If the financial weakness of the owners is

combination of effort."
admitted, the cooperative cannot rely on them as a source of equity
capital.

Because of the financial problem that the patron-owner himself
faces, his investment in the cooperative is often nominal. In fact,
the par value of the common stock of the cooperative is often limited
to $10.00 and in many cases to $1.00. And inasmuch as ownership of
common stock cannot be used to exercise control over the cooperative
and to the extent that the maximum rate of return on equity capital
is restricted by law to 8%, there is no motivation to own more than
one share Of common stock. Indeed, in many cases the article of in-
corporation limits the number of shares Of common stock one can
hold to one.42

The large capital outlays that advanced technology requires
cannot be expected to be met by the equity capital that cooperatives
can raise. Accordingly, the cooperative has to either limit the kind
of technology it uses or find other methods of financing the advanced
technologies. Debt financing serves such a purpose. However, debt
financing creates new problems for the cooperative.

Because the equity capital of cooperatives is rather low, the
magnitude of debt capital that can be raised is correspondingly low,
too. After all, the cooperative has to maintain a certain level Of
debt to equity ratio in order to convince its creditors that their
investment is not in jeopardy. Thus, if the cooperative is to raise
debt capital beyond the level that the creditors perceive as safe,

then either the cost of the debt rises, or the cooperative has to

make concessions to the creditors so that they have more control over

29

the cooperative, or both. Since every major decision to be made by
the cooperative has to be compatible with the interests of its cre-
ditors, the heavy reliance on debt financing presents an increasing
constraint and contingency to the decision making process in the
cooperative.

Nor does the financial situation permit the employment of tal-
ented individuals capable Of managing these stifling constraints and
contingencies. The financial plight of cooperatives is of such a
nature that cooperatives cannot afford to attract competent individ-
uals. Even when the money is available, the board of directors,
whose members are themselves patron-owners, find the salary that com-
petent executives ask for too exorbitant. As a result, the board
Often Opts to employ a less expensive and hence often less competent
executive.

The Effect of the Subordination of the Organization
to the Activities Of the Patron-Owners

The subordination of the cooperative organization to the activ-
ities of its patron-owners creates contingencies that are not preval-
ent in other forms of business organizations. Because the cooperative
is an extension of its patrons, it has to adjust constantly to their
activities. And in spite of the doctrine that the consumer is king,
neither the soleproprietorship, nor the partnership, nor the corpor-
ation fOrms Of business organizations have to make similar levels of
adjustments to their patrons. John Kenneth Galbraith has argued
rather persuasively that the consumer is very much subordinated to
the interests of the corporation rather than the other way around.43

The principle of service at cost is a derivative of the

3O

subordination of the cooperative organization to the activities of
its patron-owners. If the principle is to be applied strictly, the
cooperative will be left with no savings or net margins at the end
of each fiscal period. The patronage refund itself is supposed to

constitute a restoration of service at cost.44

At least in theory,
therefore, the cooperative is supposed to be financially barren at
the beginning of each fiscal year. In practice, however, some of
the savings are retained and the cooperative is never rendered fin-
ancially barren. In fact, it is a standard practice to retain some
of the margins for purposes of expansion and necessary reserves.45
As to how much Of the net margins should be retained is a decision

made at the discretion of the decision makers.

The decision regarding the amount of net margins to be turned
over to the patrons involves a conflict of interest between the cooper-
ative as an entity and its patrons. The latter would like to see as
much of the net margins as possible turned over to it, while the former
would like to see as much of the net margins as possible retained in
the organization. And the financial plight of both the cooperative
and the patrons makes the problem particularly acute. The problem
is supposed to be resolved, at least in theory, in favour of the inter-
est of the patrons. However, unless the cooperative is adequately
financed, its viability in the future will be endangered. Thus, the
subordination of the cooperative organization to the activities Of
its patrons does not eliminate the need for balancing the short-term
and long-term interests of the patrons. The short-term interests

dictate to turn over the net margins to the patrons, and the long-term

interests dictate to retain the net margin in the cooperative.

31

In its effOrt to accommodate the long-term interests of the
patrons, the cooperative would have to pursue a price policy capable
of generating adequate net margins along with a policy of patronage
refund that would result in retaining a substantial portion of the
net margins. But such policies disenchant the patrons. And when
this disenchantment is exploited by the competing forms of business
organizations which temporarily Offer more attractive prices, the
cooperative faces a problem of retaining the loyalty of its existing
members. Thus, the policy Of generating and retaining net margins
is Often pervaded with the possibility of losing patrons.

To ensure the loyalty of the patrons from being undermined,
cooperatives make them sign marketing contracts. But these contracts
create a problem of enforcement since the patrons who sign the con-
tract are the owners of the cooperative, and it is unfeasible and
impractical to bring suit against members who fail to live up to their
contracts. Thus, an attempt to generate and retain net margins is
full of uncertainties. And when the limited domain Of the cooper-
ative's patrons is recognized, the effect of these uncertainties be-
comes increasingly crucial. NO wonder, then, that the balancing Of
the short-term and long-term interests of the cooperative's patrons is
a vexing problem.

It is the board of directors that is called upon to balance the
short-term and long-term interests of the patrons of the cooperative.
However, the genreal composition of the board is such that it lacks
the necessary knowledge and insight to arrive at an appropriate bal-
ance. The unrelenting emphasis on democratic control does not, un-

like the corporation, permit knowledgeable non-patron-owners to become

32

members of the board. And because all the members of the board are
elected from the patron-owners, their collective capability to make
decisions of this nature is questionable. After all, one of the
reasons that compelled producers to undertake cooperatives in the
first place is their limited knowledge about handling the growing
complication of business.46

Frustrated by a "catch 22" dilemma, the board attempts to
mitigate the problem by increasing the net margins which often in-
volves the formulation of price policies and expenditure patterns.
In the process, the cooperative's board of directors increasingly
assumes more managerial functions than its counterpart in the corpor-
ation form of business organization. And the problem of the increased
managerial role of the board is not limited to the questionable man-
agerial competence of its members but also extends to democratic
decision making in business organizations. These decisions are often
compromises and are generally made rather belatedly.

Decisions arrived at democratically do not often reflect what
is technically correct from the standpoint of the organization. Rather
they represent compromises of the individual interests of the decision
makers. And the more heterogeneous the interests of the members are,
the greater the possibility that the decision arrived at is a compro-
mise. To the extent that the cooperative organization is subordinate
to the interests Of its members, then, the democratically arrived at
solution is likely to reflect a consensus of the interests of its
members rather than those of the organization. And the fierce ad-
herence to the one-man one-vote rule ensures that democratic control

will not be circumvented.

33

Another problem associated with democratically arrived at
decisions is the time they take: the process Of arriving at a con-
census is often time consuming. If many of the urgent decisions have
to be subjected to the delays that inhere in democratic decision mak-
ing, coordination is likely to be more difficult in cooperatives than
in other forms of business organizations. Indeed, the increasing man-
agerial role of the board makes it more difficult to achieve techni-
cal rationality in cooperatives than in other forms of business

organizations.

Summary

The two-fold character of the concept of the cooperative as
well as the cooperative principles that can be derived from this con-
cept create constraints and contingencies that are specific to this
form of business organization. First, as a result of the unity of
patronage and ownership in one person, there is a serious constraint
and contingency on the acquisition of inputs and on the disposal of
outputs. And inasmuch as inputs and outputs have a bearing upon the
kind of technologies that the cooperative can choose from, they limit
the technological options that cooperatives can utilize. An attempt
to expand technological Options thus necessitates an increased pres-
sure fOr debt financing and the loyalty of the patron-owners. Yet
not only is it difficult to rely on debt financing and the loyalty of
the patron-owners indefinitely, but each of these strategies also
creates new constraints and contingencies for the cooperative. Thus,
technical rationality in cooperatives is to be achieved under more

restrictive constraints and more difficult contingencies than would

34

be the case in the other forms of business organizations, particu-
larly the corporation. And the difficulty of attracting a compe-
tent executive to manage these constraints and contingencies only
makes the problem worse.

. The subordination of the activities of the cooperative to
those of the patron-owners is a second constraint peculiar to the
cooperative fOrm of business organization. Unlike other forms of
business organization, the cooperative has to adjust rather meticu-
lously to the requirements of the actiVities of its patrons. The
principle of service at cost reflects such a relationship between
the cooperative and its patrons. In practice, however, services are
not rendered at cost--the price that cooperatives charge includes
markups that nay have to be turned over to the patrons at a latter
stage. And the magnitude of the markup and the refund is to be de-
termined by the board of directors of the cooperative, whose deci-
sions, since they are elected democratically, are supposed to be in
the interest of the patrons. Since there are short-term and long-
term interests of the patron-owners, the decision of the board in
the final analysis is one of balance. Whether the board has the
competence to undertake such a task is questionable.

If agricultural cooperatives are to operate on the basis Of
cooperative rationality, they should be expected to achieve technical
rationality without violating the fundamental attributes Of the con-
cept of the cooperative form of business organization as well as the
cooperative principles that can be derived from these attributes. The
extent to which agricultural cooperatives can achieve technical ra-

tionality that will justify their continued operation in contemporary

35

American agriculture while at the same time remaining faithful to the
concept of cooperatives and cooperative principles is the issue we

intend to explore in subsequent chapters. In the next chapter we will
examine the extent to which contemporary American agricultural Cooper-

atives can remain subordinate to their patron-owners.

36

FOOTNOTES

1James D. Thompson. Organizations in Action. New York:
McGraw-Hill Book Company, 1967, p. 19.

21bid., 14.

31bi

41bid.. p. 19.

51 id., p. 24.

6Anders Emanuel Orne. Cooperative Ideals and Problems. Man-
chester, England: The Cooperative union Ltd}, 1937, p. T1

7C. R. Fay. Cppperatives at Home and Abroad. London: P. S.
King & Son, 1937, p. 8.

8

9Joseph G. Knapp. Farmers in Business. Washington, D. C.:
American Institute of Cooperation, 1963, p. 4.

10Edwin G. Nourse. "The Economic Principles Of Cooperation in
Agricultural Cooperation," in Martin A. Abrahamsen and C. L. Scroggs
(eds.), Agricultural Cooperation. Minneapolis: University Of Minn-
esota Press, 1957, p. 183.

1]Frank Robotka. "A Theory Of Cooperation in Agricultural Cooper-

ation," in Martin A. Abrahamsen and C. L. Scroggs (eds.), A ricultural
Cppperation. Minneapolis: University of Minnesota Press, I957, p. 106

12U. S. Department of Agriculture. Legal Phases of Farmer Cooper-
atives, Information 100. Farmer Cooperative Service, U. S. Department
of Agriculture, 1976, p. 295.

13Ibid., p. 356.

14Herbert A. Simon. Administrative Behavior. New York: Mac-
millan Publishing Co., Inc., 1957. pp. 16-17.

15Edgar Schein. Organizational Psyphology. Englewood Cliffs,
New Jersey: Prentice Hall, 1970, p. 9.

16

17Margaret Digby. The World Copperative Movement. London:
Hutchinson University Library, 1963, p. 9.

 

0.

Sec. 1 7 U.S.C. Sec. 291.

C. R. Fay. Op. cit., p. 38.

188. H. Pentecost. "Legal Aspects of Cooperatives Reviewed,"
American Cooperation, 1973-74, p. 263.

37
19U. S. Department of Agriculture. 0p. cit., p. 427.
.20 '

21

Joseph Knapp. Op. cit., p. 18.

B. H. Pentecost. Op. cit., p. 263.
22

23

24Edwin G. Nourse- "From Dogma to Science in Cooperative Think-
ing," in Martin A. Abrahamsen and C. L. Scroggs (eds.), Agricultural

Cooperation. Minneapolis: University of Minnesota Press, 1957, p. 111.

25International Cooperative Alliance. "Resolution Adopted by
the ICA 23rd Congress," Review of International Cooperation, November
1966, p. 284.

26Henry H. Bakken. Basic Concepts, Principles_end Practices of
Cooperation. Madison, Wisconsin: Mimir Publishers Inc., 1963, p. 40.

27Irwin W. Rust. Cooperatives in Agribusiness. Farmer Cooper-
ative Service, U. S. Department of Agriculture, T968, p. 10.

28Kelsey B. Gardner. "Matching Cooperative Principles with
Today's Operating Practices." American Cooperation,_l971, p. 160.

29Fred Abbot. "Cooperative Efficiency and the Principles," in
Cooperative Principles in the Modern World. Cooperative College Papers.
Laughborough, England: The Education Department, Cooperative Union '
Ltd., 1967. p. 9.

, 30Rheinhold Henzler. "Are the Cooperative Principles Still Valid,"
in Cooperative Principles in the Modern World. Cooperative College
Papers. Laughborough, England: The Education Department, Cooperative
Union Ltd., 1967, p. 41.

3William F. Justice. "Cooperatives are Unique: Keep them that

way." News for Farmer Cooperatives, Farmer Cooperative Service, U. S.
Department of Agriculture, December, 1975, p. 2.

32
33
34
35

36R. D. Bedi. Theory, History and Practice Of Cooperation.
Meerut, India: Loyal Book Depot, 1969, p. 4}

U. S. Department of Agriculture. 0p. cit., p. 427.
Herbert Simon. Op. cit., p. 16.

 

 

 

 

 

B. H. Pentecost. 0p. cit., p. 264.

C. R. Fay. Op. cit., pp. 9-10.

Herbert Simon. 0p. cit., p. 16.

U. S. Department Of Agriculture. Op. cit., p. 361.

 

38

37K. R. Kulkarni. Theory and Practice of Cooperation_jn India
and Abroad, Vol. 2, Part 1. Bombay: Cooperators' Book Depot,71959,
p. 6.

 

38

391bid., p. 401.
40

4lJOhn 0. Black. Research in Agricultural Cooperation. New
York: Social Science Research Council, 1933, p. 4.

42U. S. Department of Agriculture. Cooperatives: 'Distipetive
Business Corporations. Information 66, Farmer Cooperative Service,
U. S. Department of Agriculture, 1970..P. 16.

43John Kenneth Galbraith. The New Industrial State. Boston:
Haughton Mifflin Company, 1967, p. 211.

44Edwin G. Nourse. The Legal Status Ongricultural Cooperation.
New York: Macmillan Company, 1928, p. 117.

45

46Louis P. F. Smith. The Evolution of Agricultural Cooperation.
Oxford: B. Blackwell, 1961, p. 26.

U. S. Department Of Agriculture. Op. cit., p. 400.

Margaret Digby. Op. cit., p. 9.

B. H. Pentecost. Op. cit., p. 263.

CHAPTER II

COOPERATIVE RATIONALITY AND THE FAMILY FARM

One of the two fundamental attributes of the cooperative form
of business organization is the subordination of its activities to
those of its patrons. And if cooperatives are to operate on the
basis of cooperative rationality, it is incumbent upon them to Ob-
serve this relationship. In agricultural cooperatives, then, cooper-
ative rationality requires that the activities of the cooperative
become subordinated to those Of the family farm, a subordination
that inheres in the very concept of agricultural cooperatives which

locates their raison d'etre in the preservation of the family farm.1

 

Indeed, the choice of the cooperative form of business organization
over the corporation is based on the fact that the former is con-

sistent with the concept of the family farm.2

And the fact that ag-
ricultural cooperatives are conceptualized as an extension of the
family farm underscores the subordinate relationship of the former
to the latter. Nevertheless, important to note here is that the
roles that agricultural cooperatives and the family farm have as-
sumed in contemporary American agriculture are such that they can

be performed effectively and efficiently only if the activities of
the family farm become subordinated to those of agricultural cooper-

atives.

As American agriculture continues to adopt an increasingly

39

4O

advanced technology, the competence of the family farmer to under—
take farm Operations is becoming more and more restricted. And in-
asmuch as agricultural cooperatives are extensions of the family
farm, they find it imperative to take over those activities that
can not be performed by the family farm. As this transfer of activ-
ities from the farm to the cooperative continues, the role of both
changes qualitatively: instead of being the center of farm activ-
ity, the role Of the family farm is virtually reduced to that of a
laborer; and instead of being a mere eXtension of the family farm,
the agricultural cooperative increasingly becomes the center Of
farm activity. Such a change in roles makes it imperative that

the activities of the family farm become subordinated to those of
the agricultural cooperative.

The task of this chapter is to demonstrate how the changes in
the roles of the family farm and the agricultural cooperative have
brought about an alteration in the nature of the relationship between
the two, thereby resulting in a negation Of cooperative rationality. “
However, to attribute the change in the nature of this realtionship
to an alteration in the role of each is not enough; rather the imper-
atives for the change in roles of both should also be explained.
Thus, the first part of the remainder of this chapter is devoted to
an examination of how the changes in the roles of the family farm
and the agricultural cooperative are brought about.

Because agricultural cooperatives are conceived as an exten-
sion of the family farm, any change in their role is induced by a
change in the role of the family farm. Thus, it is necessary to first

show how the role of the family farm has changed. And the change in

41

the role of the family farm cannot be appreciated unless the role of
the farm in contemporary American agriculture can be compared to

its role when the cooperative form of business organization was in-
troduced into American agriculture. Preceding such a comparison will
be a discussion of the family farm concept itself since, after all,
agricultural cooperatives were introduced into American agriculture

to preserve the family farm.

The Concept of the Family Farm

 

The concept Of the family farm in the United States is as old
as the Republic itself in that its origin can be traced to Jeffer-
sonian democracy, a democracy which was based on ownership of pro-
perty. In fact, ever since the Republic was created, it has been
the consistent policy of the United States to widely diffuse the
ownership of land,3 a policy based on the idea of distributing land
of sufficient size, usually 160 acres, te each farmer such that a
household using its labor could produce an income that would provide
a comfortably living for a family.4 In conceptualizing the family
farm, however, different people have emphasized different aspects.

The family farm is Often defined in terms of either labor, or
decision making, or ownership of the means of production, or a com-
bination thereof. Thus, Leroy Quance and Luther Tweenten defined the
family farm as a unit where the family provides at least half of the
labor,5 while Don Paarlberg included decision making by the farmer as
an essential attribute of the concept of the family fann when he
defined the family farm as "one on which the majOrity of the labor

and decision making are supplied by the farmer and his family."6

42

For Dale Hathaway, however, the private ownership of the productive
resources constitutes an integral part Of the concept of the family
farm which he conceptualized as "a type of agricultural organization
marked by private ownership of the productive resources, with owner-
ship, management and labor functions carried out by a single family."7
The conceptualization of the family farm in terms Of the supply
of labor is not helpful for our analysis. Thus, although the family
farmer has historically been providing a substantial portion of the

labor required in the Operation of his farm, the association of the

raison d'etrecfi’agricultural cooperatives with the family farm can

 

not possibly mean the preservation Of the family farmer as a laborer.
Indeed, even the corporation would permit the family farmer to continue
playing the role of a laborer. What role the corporation would not
permit the family farmer to play, however, is the one he used to play
with respect to the ownership of and decisiOn making in the family
farm. Accordingly, the association Of the cooperative form of bus-
iness organization with the preservation of the family farm can only
be related to the risk taking and the managerial role Of the family
farm. And this latter conception is consistent with the historical
and legal concept of the family farm.

Emphasizing the role of decision making by the family farm, Don
Paarlberg had this to say:

...we chose to be a nation of predominantly family sized farms

with decision making responsibility in the hands of the man

who tilled the land. This issue was written into law through a

series of governmental actions: The ordinance of 1787, the

Homestead Act, the Reclamation Act, and many others.

According to this concept of the family farm, the benefits that accrue

to the farmer are primarily associated with risk taking in decision

43

making. As Marshal Harris noted, the farmer "assumes all of the

risks and losses, and reaps all of the gains of the entire farm

business."9

Indeed, such a concpet of the family farm is consis-
tent with its legal definition.

According to the Internal Revenue Service, "a person is a pro-
ducer if, as owner or tenant, he bears the risks of production, cul-
tivates, Operates, cn~nenages a farm for gain or profit--in short

I "10

if he is engaged in the trade or business of farming. The Justice

Department underscores this same point with regards to risk taking on
the family farm. For example, a press release by the US Department of

Justice noted that

...the requirement that the membership of a cooperative must

be farmers suggests that members who use contract growers may
cause a cooperative to lose its exempt status. Under certain
contract growing arrangements the company does not have an in-
vestment in land, buildings and equipment and does not have

the risk of loss of this investment. Under these circumstances
the company may not be considered a "farmer" and would not be
entitled to anti-trust exemption.n

Nor is the assumption of any risk sufficient to qualify as a
farmer. Thus the Internal Revenue Service pointed out that

...if a person acquires a growing crop, a sufficient period of
time must elapse between the purchase and harvest to evidence
the taking of risks and responsibilities of the owner of grow—
ing crops as opposed to taking only the risks of market value
at time of harvest. Only then is he considered a producer by
the Service.

This emphasis on risk taking and decision making as essential
attributes of the concept Of the family farm sets the farmer apart
from the agricultural laborer. The litmus test of the farmer in
contradistinctiOn to the laborer is the nature of the income of the
farmer and the laborer. While the income Of the laborer represents

the sale of his labor, the income of the family farmer primarily

' \

44

represents compensation for the risk he assumes in making production
and marketing decisions. As the decision making power of the farmer
as well as the risk he can assume declines, however, that portion

of his income representing compensation for the risk of decision
making also declines while the portion representing the sale of his
labor rises in significance. And if the trend persists, the farmer

will find his primary source Of income to be the sale of his labor.

The Changing Role of the Family Farm

 

Inherent in the concept of the family farm is that the farmer
become both its owner and manager. And such a role presupposes that
the investment and operational requirements of the farm are within the
bounds of the capability of the farmer. In this section we will show
how these requirements of contemporary American farms are outgrowing
the family farmer's capability. And the attempt to meet these require-
ments is slowly but surely changing the role of the family farmer to
that of a laborer.

The Change in the Investment Function
of the Family Farmer

One of the most significant changes that has been taking place
in agriculture is the growing significance Of capital as a means of
production. According to Ball and Heady, capital inputs constituted
only 15% of the total inputs in 1910; today, however, capital inputs
account for more than 85% of the total inputs of agricultural produc-

13 That the significance of capital as a means of production

tion.
is expected to grow is affirmed by the National Advisory Commission

on Food and Fiber which has estimated that by 1980 the total average

45

capital inputs may increase by 94% over that of 1964.14

In contemporary American agriculture, the production of any
agricultural commodity involves a great deal of investiment. In
fact, Don Paarlberg has estimated that "a modern farm big enough to
supply an income equivalent to what can be earned in town might in-
volve an investment of a quarter of a million dollars or more."15
And Knuston concluded that "as new technology is injected into ag-
riculture, the scale of our farm operations has inereased to the point
where minimum capital requirements today are in the hundreds of
thousands Of dollars and could easily approach a million dollars with-

in a few years."16

As long as the pressure for improved technology
continues, the capital requirements of farm units will increase.
Afere all, the substitution of capital for labor or land or both
is inherent in the introduction of new technologies.17

The pressure for new technology and thus for more capital con-
tinues unabated. Godwin and Jones concluded that

...the outpouring of new technology from public and private

research and development sources may be expected to continue

at an unprecedented rate.... Continuous pressure is thus ex-
erted in the direction Of even higher productivity associated
with complex, large scale and highly capitalized production
units.

The continued heavy captialization of contemporary American
farms has been creating a financial problem for the farmer. When
the inputs that the farmer had to purchase were not substantial, he
could finance these purchases from his savings. As the farmer con-
tinued to purchase mechanical, chemical and biological technologies
in increasing proportions, however, he found it increasingly diffi-

cult to raise the necessary funds internally. Therefore, the capital

46

requirements of the Optimum size of the average farm have grown be-
yond the wealth that an average American--not to mention an average
farmer--can presently expect to accumulate over his life time.19
W. Burt Sundquist noted that the establishment of most conmercial farms
requires financial resources in amounts unlikely to be acquired

through individual savings.20

And the experience Of the young far-
mers bears out this conclusion. In fact, a survey of young farmers
in 1975 by Walter Jacoby and Gene Ingalsbe showed that one Of the
critical problems that they are facing is the difficulty of obtain-
ing "more credit over a longer period of time and at lower interest

rates."21

According to Olin B. Quin, the financial problem of the
farm is such that "the farmer is first concerned abOut the supply
of funds and only secondly is he concerned about price (interest
rate)."22
Continued financial pressure on the farm units makes it imper-
ative for the farmer to raise either debt capital or equity capital
or a combination of both. An attempt to raise equity capital would
inevitably lead to the use of a different form of business organiza-
tion. Instead of being a sole proprietorship form of business organ-
ization,the family farm would have to adopt a partnership or
a corporation form of business organization. Even then,a partnership
would prove to be only a short term solution: the growing capital
requirements of farm units will soon render this form of business
organization rather inadequate. The long-term solution along this
line is obviously a corporate form of business organization, a sol-

ution which is being actively entertained by many experts. Thus,

John R. Brake concluded that "the trends and experiences of the past

47

suggest a number of implications for capitalizing future farms.
Tenure forms are likely to change in the direction of more farm part-
nership and corporationsihian attempt to acquire and hold needed

23 24 with

equity capital in agriculture." Ball and Heady concurred
Brake's conclusion.

This change in the form of business organization from sole-
proprietorship to corporation qualitatively alters the concept of
family farm for once a corporate form of business Organization is
adopted, the owners and operators need not be the same people. Yet
the unity of ownership and management in one person is a decisive
attribute in the concept Of the family farm. Accordingly, solving
financial problems by changing the form of business organization ne-
gates the very concept of the family farm. Instead the solution must
be sought elsewhere if the integrity Of the family farm is to be main-
tained. Debt financing is the alternative.

Farmers have generally opted for debt financing to resolve the
financial problems that the use of an increasingly advanced technology
has been creating. As a result, not only has debt financing been
growing at a fast rate, but also the demand for credit has grown to
such a level that the traditional sources of credit have proved to
be inadequate.25 A survey of young farmers by Jacoby and Ingalsbe
showed their dissatisfaction with the existing arrangement. They
reported that "somehow, they (the young farmers) hope a lending insti-
tution can develop programs that recognize the increased credit needs
of younger farmers during the growth period of their farm operation."25

But even if new lending institutions could be established, they

cannot be expected to be a solution to the financial problem Of the

48

farmers because debts cannot be raised indefinitely without a corres-
ponding increase in equity capital. A creditor must percieve that
loans are adequately protected by equity capital before he is willing
to extend farm loans. Prior to financial institutions being willing
to extend credit, they make sure that the debt equity ratio is ade-
quate. And if debt capital continues to rise at a faster rate than
equity capital, the debt to equity ratio will grow to such a level that
it will no longer be possible to obtain loans without a further
increase in equity capital. Inasmuch as the farmer cannot be expec-
ted to raise the necessary equity capital, his capacity to borrow will
accordingly be limited.’ Thus, debt financing cannot be expected to
be a long run solution to the financial plight of the farmer.

Nor should the farmer hope that financial institutions will come
to his aid. Insurance companies, for example, reduced their farm

mortgage loans by 50% between 1965 and 1970,26

a decline which acquires
a special significance when one recognizes that farm loans have not
been historically significant. A survey of financial institutions
showed that a significant percentage perceive farm loans to be very
risky.27 And if financial institutions contemplate making farm loans
in spite of the growing risks associated with contemporary farms,
either they have to find ways of reducing the risks to an acceptable
level or the interest rates have to be raised to such a level as to
accomodate the rising cost of risk.

Interest rates can not be raised without any restriction; the
usury laws prohibit such a course of action. These laws, which are

designed to protect borrowers from exorbitant interest rates, have,

according to Roby Sloan, "tended to exclude certain types of loans

49

and classes Of borrowers from obtaining credit as market interest

rates rose above interest ceilings."29

Accordingly, the rising
risks associated with farm loans cannot be solved by raising the
interest rate. If the banks have to extend farm loans in spite of
the usury laws, then they may have to reduce the risk factor by
helping the farmer to improve the management of his farm.

The growing complexity of agricultural production is increas-
ingly raising the managerial requirements of farms. And since con-
ventional lenders are primarily oriented towards the activities of
industrial enterprises, they lack the necessary expertise to evalu-
ate agricultural production. As Godwin and Jones pointed out:

...individual operations (of farms) often become so complex

that conventional lenders lack the expertise to evaluate loan

applications or to adequately service loans after they are
made. A consequence of this development is that lenders are
increasingly requiring advance assurance of markets and profit-

able outcome before loans are made. Contracts and forward
pricing techniques are being used to provide this assurance.30

The Change in the Managerial Function
Of the Family Farm

The continued introduction Of advanced agricultural technology
into the family farm has been creatingamanagerial challenge that it
can not meet. Knuston pointed out that the capital requirements and
the complexity Of production Of contemporary American farms have made
it imperative that the managerial capability of family farms be up—
graded.3] Then the question becomes whether the family farm has the
potential of upgrading its managerial competence.

The technology of farm production has been growing increasingly
complex. Ball and Heady have described the general nature of the

problem in this manner:

50

Increasingly, farm production requires the use of a complex
bundle of capital items. These are most profitable if pro-
grammed together in economically efficient combinations rather
than used separately as individual items. The productivity of
an insecticide, plant growth hormone, or other input will be
much less if it is used with inappropriate plant populations,
fertilizer levels, crop varieties. Hence, there is a need to
see that the farmer uses a correct bundle of other inputs along
with particular ones being retailed by an industrial farm.32

The family farm does not have the capability of ensuring that the
correct bundle of agricultural inputs is being used: it does not
have the knowledge to carry out such a task. Dale C. Dahl, for ex-
ample, found out that large dairy producers generally lacked techni-

33

cal as well as market knowledge in buying feed. And Muller re-

ported that farmers lacked the technical capability that is required
of operating modern farms.34

The knowledge required to run a modern farm is too much for
one person to possess. Indeed, according to DaleAnderson, the
technical and economic complexity of operating a modern farm is grow-
ing so much that it is becoming almost impossible for one man to

35

function as a manager. Knuston has pointed out that agriculture

36 And in a

is increasingly becoming an activity of specialists.
case study of the Mechanical Tomato Harvester, Wayne Rassmussen con-
cluded that the "success of recent advances in farming has been the
result of the combined efforts of the engineers, plant breeders and
agronomists."37
The pressure for upgrading the managerial competence of the
family farm has been made more acute by the rising cost associated with
managerial incompetence. Lee Kolmer pointed out that "the capital
cost and managerial requirements for using today's technology is

such that an error in evaluation can result in the destruction of the

51

38

farm. And according to Gordon Leith, "a farm investment in crop

and livestock production is so high that he (the farmer) cannot
afford mistakes."39

If the production technology of the family farm is such that
the farmer does not have the knowledge to manage it and if the risk
of mismanagement is growing increasingly disasterous, then there is
an Objective necessity fOr the family farmer to surrender his man-
agerial functions. And the farmer himself has recognized such a
necessity. In fact, farmers, particularly the young, have been
actively seeking managerial assistance.

In a survey conducted by Jacoby and Ingalsbe, young farmers
pointed out that the services they need include tax and financial
consulting, advertising products, further processing of products,

4° E. H. Fallon,

management training, soil testing and feed testing.
a farmer, expressed the needs Of the farmer as consisting of: help
in proper selection of inputs to fit the needs of the individual
farm; management assistance involving accounting or other computer
services, or dynamic marketing systems; testing soil, forage, foliage

and water."41

The number Of services required has been prolifer-
ating as evidenced in Gordon Leith's wider inventory Of services re-
quired by the farmer which include: "gun cartridges, disposable
syringes and cartridges for animal health products, fertilizer, her-
bicide mixtures, feed, premix packages, paint spraying, bulk delivery
Of feed, fertilizer application, waste disposal systems, automated
feeding systems, minimum tillage systems, electronic monitoring
systems...etc."42

As the diversity of the services that farmers need has increased,

52

it has become imperative to change the delivery system for these

services. Farmers are no longer interested in bits and pieces of
services but rather in a package of services. Thus, a manager of
a cOoperative reported that "farmers want more than a ton of feed.
They want to buy profitable systems.... They don't want bits and

43

pieces of programs." Related to this is the absolute need for

crisp, accurate technical advice. Too much is at stake to gamble
on anything less than top quality technical advice.44
If the role played by the farmer is in the process of being re-
duced to that of carrying out programs designed by others, then he
is being cast into the position Of a specialized laborer. When this
occurs, the technical decisions that involve the assumption Of risk
are already being made for him. Under such a situation, the farmer
is being rewarded more and more for his labor instead of for the risk

he assumes in decision making. Indeed, the managerial functions Of

the family farmer are being continuously eroded.

Summary

The investment and managerial requirements of the family farm
in contemporary American agriculture have grown to such a level that
the farmer is no longer able to carry out these functions by himself.
Investment requirements of contemporary farms cannot be met by the
savings of the farmer. Nor can the family farmer rely on financial
institutions for relief from his financial plight. Indeed, the nature
of financial problems is such that they cannot be solved without
sacrificing the farmer's ownership functions. Nor can the farmer

solve his managerial problems without comprOmising his managerial

53

functions. The nature of the managerial problems is such that the
solutions can only be delivered by specialists whom the farmer cannot
afford to employ. Thus, he has to surrender his managerial functions
to those who have the knowledge to make decisions.

If the family farmer is losing his investment and managerial
functions, then the basis of his reward cannot continue to be the
profits associated with the risks of investment and decision making
functions. Instead, the farmer is being rewarded for a different
type of input: his labor.

The Changing Role of the Family Farm
and Corporate Agriculture

The managerial and investment functions of the family farm
could be undertaken either by corporations whose activities are most
directly and acutely affected by the farming sectors, or by agricul-
tural cooperatives whose survival depends upon the welfare of the
family farm. Corporations that are engaged in the farm supply and
processing business have both the vested interest and capability to
undertake the managerial and investment functions surrendered by the
family farmer. The farm suppliers need the farmer as an outlet for
their products; and the processors need the farmer as a source of
their inputs. And to the extent that both of them have access to
capital markets and their activities are intimately related with those
of the farmer, they have both the technical and financial capability
to assume these functions. Indeed, they have been increasingly under-

taking them.

54

The Farm Supply Industry and the Family Farm

The relationship Of the farm supply industry and the family
farm has been changing. Farm suppliers sell to the family farm not
only farm supplies but also an assortment of managerial and technical
services. In fact, a representative of one Of the major manufac-
turers of fertilizer proclaimed that "the industry needs to sell a
fertilizer program at a profit. This includes soil testing and other
services fOr the customer. What we do not need is selling product

45 And Dale C. Dahl indicated that the basis of

against product."
the relationship of the farm supply industry and the family farm is
not limited to the selling of farm supplies but also includes the sale
of a set of technical and management services.46
In order to be able to deliver these packages of services, the
input industry has increasingly been decentralizing its Operations.
Arlo Minden has reported that
...feed suppliers have decentralized their Operations such
that they would be able to offer a proliferation of product
variations and product related service packages that could
satisfy the specific natural demands of farmers... Dealers
serve in many instances as consultants to farmers on selection
of condition specific chemicals and application procedures.4
The continued sale of managerial and technical services by the
farm supply industry to the family farm enables the former to in-
fluence the buying patterns of the latter. Indeed, Dale C. Dahl
pointed out that the technostructure of the farm supply industry is
committed to creating a management system that would enable them to

influence the buying patterns of the farmer.48

49

For one of the prob-
lens that a rapidly growing and increasingly concentrated50 input

industry has to deal with is ensuring a reliable outlet for its

55

products. The mass production technology that large farm supply
firms are using requires a constant demand for large quantities of
output. And an influence on the buying patterns of the farmer will
enable the farm suppliers to control the market for their outputs.
The need to control the market has made it imperative for the
farm suppliers to help out the farmer in financing his farming activ-
ities. Thus, Ted Jones reported that the farm supply industry has

5] For example, a

become a major source of non-real estate credit.
fertilizer company Offered "to pay farmers the prime rate of inter-
est on their money from fall until spring if the farmer would take
delivery early and pay for the fertilizers then."52

The potential Of the farm supply industry to finance the agri-
cultural activities Of the family farm is so significant that Ronald
Aines is advocating what he calls linked permanent capital. He has
argued that it would be advantageous to both the farm suppliers and
the processors to make permanent capital available to the farmer
under agreements that would enable them to maximize their total bus-
. iness Operations, i.e.,

...take advantage of their synergistic relationships. For

example, working capital in the form of needed supplies or

equipment, technical assistance by personal, or an actual

loan may be made available to the farmer and in return the

farm supplier would be able to charge higher prices for the

supplies the farmer purchases and the processor would be able

to Obtain farm products at lower prices from the farmer.53

But as capital continues to be provided by the farm suppliers
and the processors, decision making, control and risk taking shift
from the family farm to the corporations. Ronald Aines has pointed
out that "nonfarm business entities that put their money and other

resources into farming want to have some control over how the money

56

is used in order to ensure returns. They are willing to share the
risk when they also have the possibility of making a larger return
if the venture pays off well."54
The mass production technology that the farm suppliers use
makes it imperative that they be assured of a stable and large market.
And it is the managerial and financial assistance they Offer to the
family farm that enables them to control the market, but in the

process, the family farmer is virtually reduced to the status of an

employee of the farm suppliers.

The Processing Industry and the Family Farm
The relationship of the processing industry and the family farm
has been changing. Instead of an Open market coordination, the em-
erging relationship requires closer coordination. Ray Goldberg
has indicated that mass market, extensive processing and the present
day scale of commercial agriculture require close vertical coordin-

ation.55

And Knuston reported that ”increasingly, the agribusiness
sector is finding it necessary to tie marketing decisions to produc-
tion decisions. In the agriculture of the future, an open market
will exist only at the time production decisions are made. A farmer
who has not committed his production in advance will not have a

market."56

Mueller argued that significant changes in the supply
condition of the farm products are necessary if the processing indus-
try is to operate profitably. One of these changes was that "pro-
ducers had to be informed of the product attributes that were most
advantageous from a technical processing standpoint. The development

of varieties especially adapted to canning and freezing was necessary."57

57

The required closer coordination could be brought about by
either a contractural arrangement between the family farm and the
processor or by a direct ownership of the family farm by the proces-
sor. Where the coordination is brought about by corporate ownership
of the farms, the status of the farmer is rather Obvious: he becomes
an employee of the corporation. It is in the contractual form of
coordination referred to as contract farming where the change in
the status of the farmer is less apparent.

Don Paarlberg described contract farming as constituting

...a contract between a farmer and a processor, to sell a cer-

tain amount of broilers or tomatoes or sugar beets at a stated

price. The contract is sought by both parties: the processor
wants an assured supply and the farmer wants a known market.

The contracts are often drawn by the processor and offered

unilaterally to the farmer on a take it or leave it basis.58
That contract farming has been advantageous for both the processor
and the farmer has been well recongized. However, its effect on the
status of the farmer is rather significant. Knuston concluded that
contract farming "while advantageous from the standpoint of coordin-
ation, substantially changes the power position of the producer. His

59 And Radoje Nikolitch has

decision parameters are restricted."
pointed out that “contract arrangements can be so drawn and implemen-
ted that suppliers or processors and distributors of farm products take
over so much control Of operations that the farmer becomes little more
than a laborer who sells his labor and rents his land."60 The extent
of supervision and direction of the farmer under contract farming is
perhaps best described by Mueller:

In most cases...processors may actively control many of the

cultural and marketing decisions ordinarily performed by farm-

ers. They may control the time of planting, divide the most
appropriate part of the farm to plant, designate the kind and

58

amount of seed to use. the amount and analysis of fertilizer

to apply, when and how much to irrigate, the type and extent

of weed and pest control to use. when to harvest, and the rate

Of delivery... They give processors control over many farm

decisions just as if they were producing the corp in their

own land.6 _

The status of the farmer in contract farming has changed so
much that questions are being raised as to who is the producer in
contract farming. Knuston reported that "controversies have arisen
over whether the contract grower or the integrated corporate contrac-
tor is the producer under the Capper-Volstead Act."62 Indeed, the

63

loss of independence of the farmer is well dOcumented. The status

of the farmer under contract farming is changing from the owner-

64 and the source of

manager of the family farm to a piece laborer,
his income is no longer profit but the dale of his labor.

Alarmed by the extent Of change that has been taking place in
the status of the farmer, Ronald Knuston has warned that "if nothing
is done to arrest the forces in motion, commercial agriculture will
increasingly become concentrated in more industrialized units. A
system will evolve whereby great industrialized corporations will

control production and marketing of products."65

In fact, the ques-
tion of who is going to control American agriculture has been one Of
the hottest issues among agricultural economists in recent years.

8. L. Flenchbough and R. S. Fenwick concluded that whoever controls
the market and capital will control American agricultUre.66 And in
1973 a fourteen man task force composed of university professors and
agricultural specialists from the USDA concluded that control will
be in the hands of agribusiness corporations unless something is done

to arrest the trend.67

59

Agricultural cooperatives are expected to arrest the trend
and restore the control of agriculture to the farmer. And Knuston
argues that the only way of maintaining family farming in an indus-
trializing agriculture is through the use of agricultural coopera-

tives.68

However, such a solution raises another question: whether
the agricultural cooperatives have the capability of ensuring control
Of American agriculture by the family farms and whether the family
farm can remain independent of the cooperative system to which it
belongs. It will be shown that the problem that the family farm is
facing in contemporary American agriculture is such that agricultural
cooperatives do not have the capability of meeting them; and even

if they could, it would be at a cost of sacrificing the independence

of the farmer and thus making the whole scheme of the cooperative

system self-defeating.

The Changing Role Of Agricultural Cooperatives
and Cooperative Rationality

Inasmuch as the role of agricultural cooperatives is a comple-
ment to the role Of the family farm, the erosion of the managerial
and investment functions of the family farm suggests a corresponding
increase in the function of agricultural cooperatives. Thus, if agri-
cultural cooperatives are to remain as a complement to the family
farm,they have to assume the managerial and investment functions
surrendered by the family farm. .

Despite the fact that agricultural cooperatives do not have
access to the capital market, they have been undertaking the finan-

cing of the family farm. It is not unusual for agricultural

60

cooperatives to lease tractors and other farm equipment to the family
farmer. Agway Inc. is an instructive example. Robert Child, the
treasurer of Agway Inc., summarized the role of the cooperative in
question with respect to financing the family farm in this manner:
We worked With commercial banks and with Production Credit
Associations to develop a system which permitted Agway to take
notes from the farmers to cover their crop production require-
ments and to discount these notes with a Commercial Bank or
Production Credit Association. We have financed just about
everything that a farmer requires, whether he is a vegetable
grower or a poultry man or a dairy man except that we have
attempted to stay away from the real long term financing.59
The role of the agricultural cooperative in managing the fam-
ily farm is becoming quite akin to that of the processor in contract
farming. Knuston has argued that "as vertical coordination in the
corporate sector increases in importance, cooperatives will increas-
ingly be required to enter into similar arrangements which permit
forward planning, production scheduling, and forward sales by the

"70 And the nature of technology used by processors is

cooperative.
such that food processing cannot be carried out economically without
a contractual arrangement that ensures a reliable supply of the
desired farm products. Black and Knuston discovered that:
...more demands of long term nature are being placed on cooper-
atives. Proprietary food processors and merchandisers are
making investments in plants and equipment in the hundreds of
millions of dollars. They want and need to Operate them at
full capacity. They are particular about variety and product
quality. They are interested in regular and long term sources
of supply. Cooperatives can compete for these outlets and make
such commitments only if they have assurance of supply sources.71
The commitments that agricultural cooperatives make to proces-
sors cannot be fulfilled unless the farmers are made to sign marketing
agreements with their cooperatives. Indeed, agricultural cooperatives

are finding it increasingly imperative to sign such formal agreements

61

72

with their members. And these contracts are not different from

those signed by the farmer in contract farming with the corporation.73
The operation Of the Cotton producers Association (CPA) is an instruc-
tive example. Comparing the practice of CPA with contract farming,
W. Paris concluded that: "CPA's system is different from others only
in that it is owned by growers and that the profits flow to them as
Opposed to systems owned by feed manufacturers, hatchermen or proces-
sors, where profits flow to the stockholders and grOwers become a
little more than hired hands.“74
But small, single purpose agricultural cooperatives do not have
the competence to carry out the increasing managerial functions that
they are being pressured to assume. Neither the purchasing nor the
marketing cooperative can by itself provide the package of services
required by the farmers. Hence, it is becoming increasingly imper-
ative for these cooperatives to merge. Gordon Leith noted that the

75 the inte-

farmers expressed their desire for "one-stop shopping":
gration of farm supply and marketing cooperatives. And Robert Child
reported that cooperatives are merging with or acquiring each other
so that they would be able to provide the expanded facilities and

services that farmers are demanding.76

Thus, a change in the role
Of the family farm has necessitated not only a change in the role of
agricultural cooperatives but also has brought about an integration
among agricultural cooperatives.

The consequence of the continued transfer of the functions of
the family farm to agricultural cooperatives is to make the latter,

instead of the former, the center of agricultural activity. The

agricultural cooperatives are making the purchasing, marketing,

62

financing and production decisions. They decide the price for the
farm supplies that farmers have to pay, arrange as to how the farm
production is to be financed, determine as to how farm production
should be undertaken, and set the price that the farmer has to get
for his product. In theprocess of such a transfer of functions, the
status of the farmer is being virutally reduced to that of an em-
ployee of the agricultural cooperatives.

The agricultural cooperative is thus no longer an extension of
the family farm; rather the family farm is becoming an extension of
the agricultural COOperative. The farmer is no longer a constraint
in the relationship with the agricultural cooperative, but instead
a variable that has to adjust to the requirements of the operation
of the agricultural cooperative. Farmers are increasingly being
called upon to subordinate their activities to those of agricultural
cooperatives. In fact, Ronald Knuston has been calling upon farmers
for an increased commitment to their agricultural cooperatives.77
And Melvin Sims has advised farmers to give up their independence
if they want to take advantage of agricultural cooperatives.78 And
the farmers do not have any choice.

As agricultural cooperatives contine to increase their scale
Of operation, they become more insensitive to the needs of the farmer.
Marshal Harris described the change in the relationship of the agri-
cultural cooperative and the farmer in this manner:

In their original fOrm, most farmer cooperatives were small,

they maintained close contact with and were responsive to their

members. Under these conditions cooperatives usually acted as
agents of their members, and the consequent transfer of enter-
preneurship from farmer to cooperative was not substantial.

But as cooperatives became larger and attained the size of mod-
ern corporations, the tendency has been for management to

 

63

become less responsive to membership. Management has assumed

more and more controls; and membership has permitted perhaps

even abated such development. Some large cooperatives hold

a substantial portion. of members' entrepreneurship with buy-

ing and selling certain inputs and products.79

The operation of the cooperative fOrm of business organization
in agriculture presupposes the existence of family farms as its mem-
bers. But as the entrepreneurship functions of family farms are con-
tinually shifting to agricultural cooperatives, the status of the fam-
ily farmer is being reduced to that of a laborer: (the family farmer
first surrendered the marketing function, then the purchasing function,
then the management function, and now the financing function. And as
the agricultural cooperative continues to undertake the activities
that the family farm could not carry out, the family farmer is being
reduced to the status of an employee Of the cooperative and his activ-
ities are becoming an extension of those Of the cooperative. Even if
such a relatiobship may not have already been achieved in many of the
agricultural cooperatives, the technological and economic imperatives
are such that the function of the farmer will tend to be reduced to
a highly specialized task that approximates the role of a laborer in-
stead of an entrepreneur. Thus, in an attempt to protect the inde-
pendence of the farmer, the agricultural cooperative ends up making
him dependent on itself. Such a change in the relationship between
the farmer and the agricultural cooperative negates the very rational-
ity of such cooperatives.

The dilemma of the agricultural cooperative is this: if it
attempts to operate within the constraints of the concept of cooper-

atives, it ends up losing the farmer to the proprietary interests

and thus undermining the very existence of agricultural cooperatives;

64

if it keeps its membership, it will have to carry out tasks that will
necessitate the subordination of the farmer to itself. In either case,
cooperative rationality cannot be maintained in running the cooper-
ative form of business organization. If the managerial and invest-
ment requirements of the farmer are to be met, cooperative rationality
must be negated. And the imperatives for this negation are making

the cooperative form of business organization increasingly obsolete.

Mil

The technological and economic imperatives of contemporary
American farms are such that the family farmer is becoming increas-
ingly unable to meet his managerial and ownership functions. The
pressure for higher productivity has necessitated the adoption of an
increasingly advanced agricultural technology, and the capital require-
ments of adopting this technology have risen so high that the manage-
ment and investment requirements of farm production are outgrowing the
competence of the family farmer. As a result, the role of the family
farmer is increasingly changing to the status of a laborer.

The managerial and investment functions that the family farm
surrenders could be assumed by either corporations operating in the
farm supply and processing business, or agricultural cooperatives.
Both the farm suppliers and the processors have been increasingly
assuming the management and investment functions of the family farm;
and in the process, the farmer is becoming an appendage of either the
farm suppliers or the processors. Such has been the case in contract
farming; and that the family farmer has been reduced to a status of

an employee in the case of contract farming has been adequately

65

documented.

If agricultural cooperatives are to permit the corporations to
assume the management and investment functions Of the family farm, then
they bring upon themselves their own extinction. A contract grower
would have no need for the services that agricultural cooperatives
have to provide: these services can be made available by the contractor.
And without the family farmer as a member, agricultural cooperatives
cannot survive. The expansion of contract farming is making it
more difficult for agricultural cooperatives to have family farmers as
members. Contract farming is thus a threat to the survival of agricul-
tural cooperatives.

If agricultural cooperatives hope to survive, they must assume
the managerial and investment functions surrendered by the family far-
mer. But in the process they become the core Of farm activity. Ag-
ricultural cooperatives purchase farm supplies, make production deci—
sions, finance farm Operation and sell farm products of the family
farm. And as the agricultural cooperative becomes the center of farm
activity, the farmer becomes a mere extension of the cooperative. But
such a relationship is inconsistent with the concept of agricultural
cooperatives whose essential attribute is that they become an extension
of the family farmer and not the other way around. Accordingly, if
agricultural cooperatives continue to assume the managerial and invest-
ment functions of the family farm, they will find it increasingly
difficult to maintain cooperative rationality.

The subordination of the activities Of the family farmer to that
of the cooperative is not consistent with the concept of cooperatives

and hence of cooperative rationality. Yet such a relatiOnship is

66

inevitable if agricultural cooperatives are to continue to under-
take the managerial and investment functions of the family farm.
Thus, cooperative rationality is inconsistent with the role that the
family farm has to play in contemporary American agriculture.

The technological and economic imperatives of contemporary
farming are such that the cooperative form of business organization
is becoming obsolete. If agricultural cooperatives continue to under-
take the managerial and investment functions of the family farm, they
can no longer be characterized as agricultural cooperatives since
their mode of Operation is not consistent with cooperative rationality.
On the other hand, if they fail to undertake the managerial and invest-
ment functions of the family farm, they will be denied the membership
of the family farm, thus threatening their own survival. In either
case, cooperative rationality is losing its usefulness as a form of

business organization.

67

FOOTNOTES

1Ronald D. Knuston. "Fit in you may be left out.“ News for
Farmer Cooperative. Farmer Cooperative Service. U.S. Department
of Agriculture, October, 1974, p. 4.

2Edwin G. Nourse. "The Economic Principles Of Cooperation in
Agricultural Cooperation." in Martin A. Abrahamsen and C. L. Scroggs
(eds.), Agricultural Cooperation. Minneapolis: University of Minnesota
Press, 1957, p. 180.

 

3Philip Raup. "Social Goals in Farm Size," in Gordon A. Ball
and Earl O. Heady (eds.), Size. Structure,_and Future of Farms. Ames,
Iowa: Iowa State University Press, 1972, pp. 5-6.

4U. S. Department of Agriculture. Managing a Farm, Bulletin No.
10. Farmer Cooperative Service. U. S. Department of Agriculture,
1944, p. 20.

5Leroy Quance and Luther Tweenten. "Policies; 1930 - 1970," in
Gordon A. Ball and Earl O. Heady (eds.), Size, Structure and Future
of Farms. Ames Iowa: The Iowa State University Press, T972, p. 19.

6Don Paarlberg. "Family Farmers can Compete,“ News for Farmer
Cooperatives, Farmer Cooperative Service, U. S. Department of Agricul-
ture, May, 1973, p. 3.

7Dale E. Hathaway. "Agriculture: Production," in David L. Sills
(ed.), International Encyclopedia of Social Sciences. The Macmillan
Company and Free Press, 1968, p. 226.

8

9Marshal Harris. "Shifts in Enterpreneurial Functions in Agri-
culture," American Journal of Agricultural Economics, December.l969,
p. 519.

10U. S. Department of Agriculture. Legal Phases of Farmer Cooper-
atives. Information 100. Farmer Cooperative Service, U. S. Department
of Agriculture, 1976. p. 398.

11Keith I. Clearwaters. "Justice Spdkesman Looks at Immunity,
Constraints," News for Farmer Cooperative. Farmer Cooperative Service,
U. S. Department Of Agriculture. July. 1974, p. 6.

12

13Earl O. Heady and Gordon A. Ball. "Public Policy Means and
Alternatives.“ in Gordon A. Ball and Earl O. Heady (eds.), Size,
Structure, and Future of Farms. Ames Iowa: The Iowa State University
Press, 1972, pp. 381-382.

 

 

 

 

 

Don Paarlberg. 0p. cit., p. 2.

 

U. S. Department of Agriculture. Ibid., p. 400.

 

68

14John F. Timmons. "Tenure and Size." in Gordon A. Ball and
Earl O. Heady (eds.), Size Structure and Future of Farms. Ames, Iowa:
The Iowa State University Press, 1972, p. 243.

15

16Ronald D. Knuston. "A Full Service Cooperative Concept,"
News For Farmer Cooperatives, Farmer Cooperative Service, U. 5. Depart-
ment of Agriculture. August, 1975, p. 16.

I71bid.

18Marshal R. Godwin and L. L. Jones. "The Emerging Food and Fiber
system: Implications for Agriculture," American Journal of Agrioultural
Economics, December, 1971, p. 810.

19Ibid.

20W. Burt Sundquist. "Scale Economies and Management Require-
ments," in Gordon A. Ball and Earl O. Heady (eds.), Size, Structure,
and Future of Farms. Ames, Iowa: The Iowa State UniverSity Press,
1972, p. 89.

21Walter Jacoby and Gene Ingalsbe. "What We Want to Know About
Our Cooperative." News For Farmer Cooperatives, Farmer Cooperative
Service. U. S. Department of Agriculture. January, 1976, p. 16.

2201in B. Quin. "Sources and Uses of Funds in Agriculture."
American Journal of Agricultural Economics, December, 1974, p. 1065.

23John R. Brake. "Capital and Credit," in Gordon A. Ball and
Earl O. Heady (eds.), Size, Structure and Future Of Farms. Ames.
Iowa: The Iowa State University Press, 1972, p. 142.

24Gordon A. Ball and Earl O. Heady. "The Trends in Farm Enter-
prise Size and Scale," in Gordon A. Ball and Earl 0. Heady (eds.),
Size. Structure, and Future of Farms. Ames, Iowa: The Iowa State
University Press, 1972, p. 42.

25

Don Paarlberg. Op. cit., p. 2.

 

 

 

 

 

John R. Brake. Op. cit,, p. 142.
26

27Ronald O. Aines. "Linkages in Control and Management with
Agribusiness," in Gordon A. Ball and Earl 0. Heady (eds.), Size, Struc-
ture. and Future of Farms. Ames. Iowa: The Iowa State University
Press. 1972. p. 182.

28Beryle Stanton. "New Dimensions Proposed For Farm Credit
System," News For Farmer Cooperatives. Farmer Cooperative Service,
U. S. Department of Agriculture, June, 1970, p. 20.

Walter Jocoby and Gene Ingalsbe. 0p. cit., p. 16.

 

 

69

29Roby Sloan. "The Money Market - Is it Adequate for the Needs
of Today's Agriculture," American Journal of Agricultural Economics,
December. 1970, p. 688.

30

 

Marshal R. Godwin and L. L. Jones. Op. cit., p. 810.
31

32

33Dale C. Dahl. "The Changing Nature of Agricultural Input In-
dustry," American Journal of Agricultural Economics, December, 1970,
p. 687.

34Willard F. Mueller and Normal R. Collins. "Integration Of
Production, Processing and Marketing," American Journal of Agricul-
tural Economics, December, 1957, p. 1479.

35
36

37Wayne 0. Rasmussen. "Advances in American Agriculture: The
Mechanical Tomato Harvester - A Case Study," in Melvin Kranzeberg and
William H. Davenport (eds.), Technology and Culture: An Anthology.
New York: Schocken Books, 1972, p. 265.

Ronald D. Knuston. Op. cit., p. 18.
Earl O. Heady and Gordon A. Ball. Op. cit., p. 392.

 

 

Dale Anderson. Op. cit., p. 368.
Ronald D. Knuston. Op. cit., p. 16.

 

38Lee Kolmer. "Agricultural Decision Making in a New Environ-
ment.“ News For Farmer Cooperatives. Farmer Cooperative Service, U. S.
Department of Agriculture, May, 1972, p. 4.

39Gordon Leigh. "Emerging Needs of Farmer Give Clue to Cooper-
ative Horizons." American Cooperation, 1970, p. 13.

40Walter Jacoby and Gene Iagalsbe. "Give Us Stronger Management
and Marketing," News For Farmer Cooperative, Farmer Cooperative Service,
U. S. Department of Agriculture. February, 1976. p. 12.

41E. H. Fallon. "Can Yesterday's Cooperatives Meet Tomorrow's
Needs," News For Farmer Cooperatives. Farmer Cooperative Service,
U. S. Department of Agriculture. April, 1972, p. 5.

 

 

 

42Gordon Leith. Op. cit., p. 12.
43Ibid.
44

Ibid., p. 15.

45Arllo J. Minden. “Changing Structure of the Farm Input In-
dustry: Organization, Scale, and Ownership," American Journal of
Agricultural Economics, December 1970. p. 679.

46

 

 

Dale C. Dahl. 0p. cit., p. 687.

7O
47

48Dale C. Dahl. "Public Policy Changes Needed to Cope With
Changing Structure." American Journal of Agriculturalpgronomics,
May. 1975. p. 208.

49Ted. L. Jones. "Financial Management - The Key to Success."
American Cooperation, 1970, p. 369.

50
51
52

Arlo J. Minden. Op. cit., p. 679.

Ronald D. Aines. Op. cit., p. 183.
Ted L. Jones. Op. cit., p.368.
Ronald D. Aines. Op. cit., p. 187.
53Ibid., p. 181.

54Ipid.. p. 187.

55Ray Goldberg. "Farmer CO-Ops and Industry: Profitable Part-
nerships,“ News For Farmer Cooperatives, Farmer Cooperative Service,
U. S. Department of Agriculture. June, 1972, p. 4.

56Ronald D. Knuston. "Family Farmers Can Earn Membership in
Tomorrow's Industrialized Agriculture." News For Farmer Cooperatives.
Farmer Cooperative Service. U. S. Department of AgricuTture, June.
1972. p. 4.

57Willard F. Mueller and Normal R. Collins. Op. cit., p. 1471.
58

59Ronald D. Knuston. "Cooperative Strategies in Imperfectly
Competitive Market Structures - A Policy Perspective," American
Journal of Agricultural Economics, December, 1974, p. 906.

6°Radoje Nikolitch. "The Individual Family Farm," in Gordon A.
Ball and Earl O. Heady (eds.), Size, Structure and Future of Farms.
Ames, Iowa: The Iowa State University Press, 1972, p._250.

61

62Ronald D. Knuston. "Definition of Producer is Critical Policy
Issue,“ News For Farmer Cooperatives, Farmer Cooperative Service.
U. S. Department of Agriculture. August. 1974, p. 17.

 

 

Don Paarlberg. Op. cit., p. 4.

 

Willard F. Mueller and Normal R. Collins. 0p. cit., p. 1478.

 

63Wi11iam T. Manley and Donn A. Reimund. "Organization and
Control of the Food System," Marketingrand Transportaion Situation,
Economic Research Service, U. S. Department of Agriculture, February,
1973’ p- 15.

64Ronald D. Knuston. "Family Farmers Can Earn Membership in
Tomorrow's Industrialized Agriculture." p. cit., p. 4.

 

71

651bid.. p. 4.

66Berry L. Flinchbaugh and Richard S. Fenwick. "Who will Control
U. S. Agriculture," American Cooperation, 1974-75, p. 18.

67Ronald D. Knuston. "Family Farmers Can Earn Membership in
Tomorrow's Industrialized Agriculture." p. cit., p. 3.

68Ibid.

69

Robert 8. Child. "Can Cooperatives Serve Large Young Farmers
in the Seventies," News For Farmer Cooperatives, Farmer Cooperative
Service. U. S. Department of AgricuTture, September, 1970, p. 13.

70Ronald D. Knuston. "Cooperative Strategies in Imperfectly
Competitive Market Structures - A Policy Perspective," 0p. cit.,
p. 904.

71William Black and Ronald D. Knuston. "Let's talk about
Marketing Agreements," News For Farmer Cooperatives, Farmer Cooper-
ative Service. U. S. Department of Agriculture, September, 1974, p. 4.

72Paul Hill. "Does the Cooperative Help Young Farmers,"
American Cooperation. 1972—1973, p. 67.

73Ronald D. Knuston. "A Full Service Cooperative Concept,"
Op. cit., p. l6.’

74W. C. Paris. "Coordination in the Poultry Industry," Amer-
ican Cooperation, 1970, p. 111.

75

 

 

Gordon Leigh. Op. cit., p. 15.

75Robert Child. Op cit., p. 11.

77Ronald D. Knuston. "A Full Service Cooperative Concept,"
0p. cit., p. 17.

78Melvin E. Sims. "Controlling Our Own Destiny," American
Cooperation, 1970, p. 3.

 

79Marshal Harris. Op. cit., p. 527.

CHAPTER III

THE ORGANIZATIONAL COMPETENCE OF AGRICULTURAL
COOPERATIVES AND COOPERATIVE RATIONALITY

In the last chapter we saw how the change in the role Of the
family farm necessitated a change in the role of agricultural coop-
eratives. And inasmuch as this alteration may require new organiza-
tional capabilities. it is legitimate to raise the question Of whether
agricultural cooperatives have the organizational competence to assume
their new roles. Such a question cannot be answered, however, without
appreciating the full spectrum of change in the role Of agricultural
cooperatives. For the change in their role is not limited to that
necessitated by an alteration in the role of the family farm; rather,
the change in the role of agricultural cooperatives has also been made
imperative by changes in the structure of agriculture. And, unless we
can first specify the nature of these changes, we will not be able to
appreciate fully the extent tO which agricultural cooperatives have
the competence to assume their changing roles.

The Bargaining_Role of Agricultural Cooperatives
and the Structure of Agriculture

Inasmuch as agricultural cooperatives were once extensions of
the family farm, their initial role was primarily limited to that Of
a bargaining agency. The Purchasing Cooperative was the purchasing

agent and the Marketing Cooperative was the marketing agent. In each

72

73

case, the objective was to improve the price that the farmer could
get for his inputs and outputs. Such was the motivatiOn behind
organizing the Dairy Cooperative Association of New York in 1883,
the Farmers Elevators Exchange of Iowa in 1868, the Fruit and Vege-
table Marketing Association Of New Jersey in 1884, the Farmers'
shippers Association of Nebraska in 1882, and the Cotton Producers
Association of Mississippi in 1879.]
Theoreticians on agricultural cooperatives have also recog-
nized bargaining as the primary function of agricultural cooperatives.
According to Edwin Nourse, the essential philosophy of agricultural
cooperatives is "the idea that a means must be found for giving agri-
culture a type Of organization whose production and bargaining units
respectively will expand in step with the growing needs of agricul-
tural technique and of the size requisite to an effective bargaining

position with which they must deal."2

Don Paarlberg underscored this
bargaining function of agricultural cooperatives when he pointed out
that their role is to enable the individual farmers to obtain the
benefits Of large scale buying and selling without undermining the
decision making role Of the farmer.3 And Howard Elson indicated that
"virtually all (agricultural cooperatives) were founded...to improve
farmers' bargaining position by pooling their buying and selling
power."4

The bargaining function of agricultural cooperatives presupposes
a structure of agriculture that necessitates and permits such a func-
tion to be carried out. A bargained outcome is a negotiated outcome:

each of the parties of the negotiation makes certain concessions; and

the final outcome is a compromise. But a negotiated outcome also

74

presupposes that the parties to the negotiation are of comparable
bargaining power. Indeed, the moment one of the parties has the
power to dictate the terms of the agreement, the outcome can no
longer become a negotiated one. And this means that the bargaining
function of agricultural cooperatives cannot be expected to be car-
ried out in an agricultural structure that is characterized by a
highly centralized mode of coordination and control (here referred
to as industrialized agriculture).5 Nor is it neceSsary in an agri-
cultural structure that is characterized by a highly decentralized
mode of coordination and control (here referred to as open market
agriculture).6

In Open market agriculture the bargaining role of agricultur-
al cooperatives depends upon whether the market is perfect or imper-
fect. If the market is perfect, there is no bargaining role for
agricultural cooperatives to play. After all, the assumption of a
perfect market is that no firm can influence the price of commodi-
ties. But the moment that agricultural cooperatives become able to
influence prices, the market automatically becomes imperfect. Accord-
ingly, the bargaining role of agricultural cooperatives is incompat-
ible with a perfect market condition for agriculture.

The bargaining role of agricultural cooperatives is instead
associated with an imperfect market. Describing the imperatives
that gave rise to the formation Of agricultural cooperatives, Joseph
Knapp had this to say:

With rapid expansion and mechanization of farms, output in-

creased by "leaps and bounds," and this increased supply

exerted a downward pressure on farm prices, which was further

aggravated by the decline in the general price level which
followed the Civil War.

75

The farmer, however, would not accept the theory that his
troubles were entirely due to overproduction and deflation.
He blamed much of his plight on an unfair system Of "inter-
change." whereby he was forced to pay excessive toll in
marketing his products, and excessive prices for his purchased
supplies; and he was vehement in his treatment of all "monopo-
lists" and middlemen." As the farmer saw his condition, he
was "fleeced both coming and going."
Unable individually to protect himself against exploitation
from industry which was rapidly becoming organized in corpor-
ations and combinations, the farmer turned for relief to econ-
omic cooperation as a counter-method of organizatin, first
under the auspices of the Grange and then through the Farmers
Alliance movement. "Let us organize" became the battle cry.7
Whether the price decline was in fact due to overproduction and
deflation does not change the argument. What is significant is that
the motivation of the farmers to organize their cooperatives was
based on their perception that they were becoming victims of an imper-
fect market. Hence, agricultural cooperatives were organized to re-
dress the affliction that farmers suffered from such a market condition.
Accordingly, the bargaining role of agricultural cooperatives can
flourish in an Open market agriculture only if the market is imper-
fect. And if the structure of agriculture further changes. the bar-

gaining role of agricultural cooperatives becomes obsolete.

The Changing Structure of Argiculture
Webster's Dictionary defines structure as "the arrangement of
the parts into a whole." In this regard, the structure of agriculture
would be the arrangement of its parts into a whole. And what are
the parts that constitute agriculture? The food system is generally
conceived to constitute the farm input sector, the farming sector,

8

the processing sector, and the distributing sector. And each of

these sectors is composed of many firms. It is the arrangement of

76

these firms and sectors into a whole that we refer to as the
structure of agriculture. But the way these parts could efficiently
be arranged varies depending upon the nature of interdependence that

inheres among them.9

Open Market Agriculture

In open market agriculture the nature of interdependence be-
tween the different sectors is reciprocal. The farm input sector is
dependent upon the farming sector as an outlet for its output, while
the farming sector is dependent upon the farm input sector as a
source of its input: and the farming sector is dependent upon the
processing sector as an outlet for its output, while the processing
sector is dependent upon the farming sector as a source of its input.
The most appropriate way Of coordinating a reciprocal interdependence,
according to J. D. Thompson, is by mutual adjustment.10 And the price
system as a mode of coordination is a form of mutual adjustment.

The price system indeed coordinates the activities of recipro-
cally interdependent sectors. For example, the coordination problem
between the farm input sector and the farming sector is that the
former should produce what the latter would like to buy at a certain
price; and, conversely, the latter would have to buy what the former
would have to produce at a certain price. Without the price system
the farm input sector would not know what the farming sector would
like to buy, nor would the farming sector know what the farm input
sector would produce. The price system is thus a means of communica-
ting between these two sectors as tO what and how much of each com-

modity should be produced by the farm input sector. And the desired

77

quantity and quality is arrived at through a series of adjustments.
It is not, for example, uncommon for the farm input sector to produce
certain commodities below or above the quantity that is required by
the farming sector. In that case, the shortages would be reflected
in an increase in prices. thus signaling a production of more in

the future; and the suplUs would be reflected in a decline of price,
thereby signaling less production. Through such an adjustment pro-
cess. the fanning and farm input sectors coordinate their activities.

Other reciprocally interdependent sectors, mutatis mutandis, behave

 

likewise.

The price system also coordinates the activities of the dif-
ferent firms that constitute each sector. The price that is deter-
mined through the adjustment process between the reciprocally inter-
dependent sectors is the regulator Of the level of production of
each firm in the farm input sector and of quantity demanded by each
firm in the farming sector. Each firm in the farm input sector makes
its production decisions on the basis of prices determined by the
relative bargaining power of the reciprocally interdependent sectors.
Inasmuch as no firm has, in a competitive market. any influence on
the level Of price, firms in both sectors merely respond to these
prices. Accordingly, the price established by the relevant sectors
represents "a rule which constrains action of each unit (firm) into
paths consistent with those taken by others in interdependent rela-

u”

tionships. Uhless the firms in each sector are coordinated in

this manner, the price system cannot work. And this form Of coordination

12

is what characterizes a pooled interdependence. Indeed, the nature

of interdependence among the firms that constitute each sector is a

78

pooled interdependence.

In open market agriculture there is no direct interdependence
between firms from different sectors. At the price established by
the reciprocally interdependent sectors, the firms in question can
sell to or buy from any of the numerdus firms in each sector. Accord-
ingly, there is no coordination problem involved between firms Of
different sectors in open market agriculture. The reverse is true

in industrialized agriculture.

Industrialized Agriculture

In industrialized agriculture the primary interdependence that
prevails is not between sectors but between firms of different sec-
tors. Industrialized agriculture is thus characterized by vertical
integration which takes the form of integration by ownership or con-
tractual arrangements. In contract farming, for example, the farmer
is committed to sell his produce before he undertakes production.
The quantity. the quality and the price of the product are specified
in the contract. Even the method of production is planned for the
farmer therein. The plan is therefore a device used to coordinate
the activities of the farmer and the processor, a method of coordina-
tion which is appropriate for a sequential interdependence.13 And
the nature of interdependence between the processor and the farmer
is indeed a sequential one.

Although the processor is. to a certain extent, dependent upon
the farmer, it is the dependence of the farmer on the processor as
an outlet for his output that is more crucial. As it will be shown

later, the processor can easily produce its own farm products for its

input, while the farmer has virtually no capability to undertake

79

processing activities as an outlet for his output. Accordingly, it
is primarily the farmer who has to adjust to the requirements of the
processor. Such is the nature of sequential interdependence.14
In industrialized agriculture there is not significant inter-
dependence either among the firms of the same sector or between the
different sectors of agriculture. In fact, the vertical integration
between the firms of the different sectors obviates any interdepen-
dence that could exist among the firms of the same sector or between
the different sectors themselves. Contract farming, for example,
makes the behaviour of farmers or the interaction between the farming
sector and the processing sector virtually irrelevant. Hence, there

is no coordination problem involved among firms of the same sector

or between the different sectors of industrialized agriculture.

The Industrialization of Agriculture

The structure of agricluture is increasingly changing from an
open market to an industrialized form. Ronald Knuston has repeatedly
articulated this change, a change which is made imperative by the
continued use Of advanced technology in agriculture.

Acknowledging the impact of technology on the structure of
agriculture, Manley and Reimund had this to say:

Technology has played a leading role in bringing about change

both within and outside the food system. Major innovations in

the past have generally moved agriculture towards industrializa-

tion. This will likely continue even though there will be

changes in technological emphasis to accommodate such issues as

environmental enhancement.1
And the pressure Of technological advance continues unabated. In a
recent study by the Economic Research Service of the USDA, it was

reported that major tehcnological breakthroughs are expected in highly

8O

complex areas "such as the enhancement of photosynthesis efficiency,
in inhibition of photo respiration, increased biological nitrogen fix-
ation, carbondioxide enrichment, plant growth regulators, genetic
manipulation of plant proteins, bioprocessing and antitransparents."16
Arlo J. Minden reported that "almost without exception companies
maintain continuing research and development programs aimed at improv-
ing their offering varieties suited to new production technologies

‘7 Godwin and Jones are

and changes in the ecological environment."
no less emphatic about the impact Of technology on the structure of
agriculture. They pointed out that f
...rapid technological advance has been the single-most impel—
ling force dictating the current structure of productiOn in
agriculture... The continuous incremental improvements in the
quality and situation specificity of off-farm inputs create an
inflow of new technology that heavily influences the emerging
character of commercial agriculture...the outpouring of new
technologies from public and private research and dvelopment
sources may be expected to continue at an unprecedented rate...
Continuous pressure is thus exerted in the direction of even
higher productivity associated with complex large scale and
highly capitalized units.‘8
The economic imperatives of the continued use of advanced tech-
nology in argiculture are such that the effect of the uncertainties
that inhere in the price system of coordinating argiculture is be-
coming increasingly intolerable. The growing specification of input
attributes that the use of advanced technology requires is increasing
the likelihood of their shortages when the mode of coordination is
the price system. And to the extent that the production units in
agriculture have become more capital intensive and large scale in
their operations. the effect of the shortages and surpluses that inhere
in the price system Of coordination has become increasingly alarming.

Mueller characterized the problem that the price system of coordination

81

is presenting to the processor in this manner:
Risk manifests itself through extreme variations in the quan-
tity of the raw product available to producers at given times.
This variation can affect processing costs if the firm utilizes
large amounts of fixed factors. Dependence on price competition 19
is no guarantee to a processor that his supply will be increased.
Peter G. Helmburger noted that the price system is too ambiguous
for a contemporary American agriculture that is becoming more and
more sensitive with respect to the temporal, spatial and quality dimen-

20

sions of production, while Ronald Knuston reported that food firms

have come to realize that they cannot rely on the free and open market.21
The technological imperatives of contemporary American agriculture call
for a closer and more precise coordination. And such is the justifica-
tion for increasing vertical intergration in agriculture.
Seaver argued that the motive for integration is to avoid the risk and
uncertainties associated with the operation Of the free market.22
The vertical integration of agriculture could be brought about
through ownership or contractual arrangements between the firms of dif-
ferent sectors. The processor, for example, could own the farms that
supply it with the specific farm products it desires or arrange a
contract with the farmer such that the latter supplies the specific
products desired by the processor. Both of these arrangements would
enable the processor to Obtain exactly the quantity and the quality of
products it desired at a price that had been agreed to in advance.
Farm production could thus take place according to plans. The use of
plans to coordinate the agricultural activities of the different sec-
tors indeed reduces if not eliminates the shortages and surpluses that

inhere in the price system of coordination. But then there is the

question as to who does the planning or prepares the contract in '

82

contract farming. This issue could be resolved by the relative bar-
gaining power of the firms concerned.

Godwin and Jones concluded that the manner and rate at which
the change in vertical integration occurs will be determined by the
power balance between the processor and the farmer; and this balance
appears to be heavily on the side of the processor. In fact, the
processor is the originator of the new techniques of integrating

24 And Don Paarlberg noted that the contracts are often

agriculture.
drawn by the processor and offered unilaterally to the farmer on a
take it or leave it basis.25 And the impact of the contracts on the
farmer is pointed out by Knuston as "while advantageous from the
standpoint of coordination, substantially change the power position
of the producer."26
The industrialization of agriculture is thus making the proces-
sor the nucleus of agricultural activity; and the farmer is becoming
merely a subordinate participant. Indeed, an increasing amount of
concern has been expressed in recent years as to who will control
American agriculture: the farm supply manufacturer, the family farmer,
or the processor. Don Paarlberg pointed out that "fifty years ago,
the question of 'who is going to control agriculture' would have been
a ridiculuous question. Every one knew who was going to control ag-
riculture; it was the farm Operators, family farmers. They provided
the land, labor and capital; they made the decisions."27
Inasmuch as the corporation is the dominant form of business
organization in the farm input and processing sectors, both the farm

supply manufacturer and the processor have access to capital. How-

ever. the processor is in a better position to control markets. As

83

a result. control of agriculture is increasingly shifting towards
the processing sector of agriculture. Manley and Riemund concluded
that a large part of the decision making function has shifted from
the production sector to the processing and distributing sector.33
And Marshal Godwin and L.L. Jones argued that "agricultural producers
should expect pressure from processors and distributors for more
orderly supply flow process, increased product uniformity and greater
stability in new product prices."34 I
It is the technological and economic forces in motion that have
made the processing sector such a preponderant force in agriculture.
Ronald D. Aines discovered that the farm input and processing sectors
have grown faster than the farming sector; and the processing sector

has grown the fastest among the three.35

The growing preponderance
of the processing sector is further reflected by its share of the total
agricultural income. Thus, the USDA reported that "in a typical indus-
trialized country, $100 worth of food in the retail shop will contain
$50 representing the cost of processing and distribution against $20
in agricultural inputs and $30 of the value added on the farm."36
The growing dominance of the processing sector is further accen-
tuated by the continued concentration that characterizes its structure.
Manley and Reimund reported that food processing plants declined by
24%, while the output per plant increased by 82% between 1958 and
1967.37 Using the Bain classification. Knuston ascertained that 55%
of the value added is in industries where the eight largest firms have
over 70% Of the market or the four largest firms have over 50%.38 And
with such an increasing preponderance of the processing sector in gen-

eral and its oligopolistic structure in particular, the bargaining role

84

of agricultural cooperatives becomes rather precarious.
The Industrialization of Agriculture and the Change
in the ROTe of Agricultural Cooperatives

The industrialization of agriculture is characterized by vertical
integration which can be brought about through either ownership or
contractual arrangements involving the farmer. Where ownership is
the method of vertical integration, agricultural cooperatives obviously
play no role. It is only when vertical integration is brought about
by contractual arrangements that agricultural cooperatives can expect
to play one.

Contract Farming and the Bargaining Role
of Agricultural Cooperatives

In contract farming agricultural cooperatives act as a buffer be-
tween the farmer and the processor. The processor has a contract with
the agricultural cooperative for the delivery of the desired input at
a specified price, while the cooperative in turn has a contract with
its members for the delivery of desired products at a specific price.
The imperatives for such an arrangement are articulated by Black and
Knuston:

More demands of a long term nature are being placed on cooper-

atives. Proprietary food processors and merchandisers are

making investments in plants and equipment in the hundreds of

millions of dollars. They want and need to operate them at

full capacity. They are particular about variety and product

quality. They are interested in regular and long term sources

of supply. Cooperatives can compete for these outlets and such

commitments only if they have assurance of supply sources.39

The exacting demand imposed on agricultural cooperatives by the

processing corporations cannot be met unless cooperatives in turn enter

into a contractual arrangement with farmers. Khuston has thus argued

85

that "as vertical coordination in the corporate sector increases in
importance. cooperatives will increasingly be required to enter into
similar arrangements which permit forward planning, production shed-

4O

uling and forward sales by the cooperative." And Paul Hill noted

that agricultural cooperatives are finding it increasingly necessary

4] Nor do the farmers

to sign formal agreements with their members.
have any choice but to sign these contracts. Emphasizing the need for
the family farm to enter into a contractual relatiOnship with its
agricultural cooperative, Knuston had this to say:

The marketing trend is that, if the family farmers are going

to be a part of the developing industrialized system, enforced

marketing agreements will have to be adopted as an integral

part of cooperative membership. I know producers don't want

to be tied up to a single marketing alternative--but soon all

firms will be cantracting--praducers will be increasingly re-

quired to consider the market situation at the time grain is

planted and cows are bred.42

As a buffer between the processor and the farmer, agricultural
cooperatives can either assume the managerial role that the processor
would have undertaken if the contract were limited to the farmer and
the processor, or continue their bargaining role in negotiating a
better contract for their members than would have been the case other-
wise. However, the bargaining power of the processor is so overwhelm-
ing that agricultural cooperatives cannot expect to change the sub-
stance of the contract such that the processor would have to make
significant concessions.

Agricultural cooperatives are not in a strong position to force
significant concessions from the processing corporations. Inasmuch as
these corporations have the capability to undertake farm production,

agricultural cooperatives cannot threaten them to accept a contract

86

that requires significant concessions by withholding farm products

from them. Indeed, according to Knuston, "if the processing sector

is unable to get uniform supplies from the existing producers, the
processing sector itself will undertake farm production."43 And

Dale Anderson has concluded that "if the processor is unable to obtain
the necessary supply through traditional sources it may become nec-
essary to take on production or to corner the market, but to be assured
of the necessary quantity and quality of the product required."44
On the other hand, agricultural cooperatives, as it will be shown

later, would find it difficult to undertake processing if and when

they discovered that the terms of the contract by the processing car-
porations were disadvantageous to the farmer. In fact, the contract

is imposed upon the agricultural cooperatives which in turn impose it on
the farmers.

It is the failure of agricultural cooperatives to obtain sig-
nificant concessions from the processors that has prompted them to
undertake the processing of agricultural products. According to Louis
P.F. Smith, "the first entry of a cooperative into any processing
trade is the direct result of exploitation by private firms."45
Arguing why these cooperatives should undertake food processing, Howard
Elson pointed out that a soybean processing plant of the Farmers Grain
Dealers Association in Iowa receives more earning from processing 5
million bushels than from exporting 150 million bushels of corn and

46

soybeans. William F. Allewert has maintained that "if the cooper-

ative is to limit itself to selling to other manufacturers for repro-

cessing or manufacturing. they must reconcile themselves to the often

47

marginal profits related to any commodity marketing system." And

87

Gordon Leith has complained that "farmers have problems in selling
their products to their best advantage...I feel strongly that farmers
need to keep control of their products further down the marketing

line."48

Such are the limitations of the bargaining role of agri-
cultural caoperatives in an industrializing agriculture. And accord-
ing to Breimyer. "collective bargaining is more compatible with the
economy of yester-year than with the kind of economic system we pro-
mised ourselves for our day, and sometimes pretend we actually have."49
Indeed. the bargaining role of agricultural cooperative is becoming
an anacronism in an increasingly industrialized agriculture wherein,
as Harvey Ebert has reported, “many bargaining cooperatives have
moved in the direction of the operating cooperative with various de-

grees of success."50

The Industrialization of Agriculture and the
Operating Role of Agricultural Cooperatives
The operating role of agricultural cooperatives in an indus-
trializing agriculture can take either of two forms: to replace the
processing corporation in supervising and assisting the farmers such
that the latter would be able to produce according to the specifica-
tions of the processor or to undertake food processing by itself. The
former role would be contrary to the spirit of cooperative rationality
since it makes the agricultural cooperative an extension of the pro-
cessing corporation instead of the farmer; and the latter role raises
the question of whether agricultural cooperatives have the competence
to undertake such a task.
The operating role of agricultural cooperatives requires a sub-

stantial amount of investment. Differentiating between the bargaining

88

and operating roles of agricultural cooperatives, Harvey Ebert has
pointed out that unlike the bargaining role, the operating role of
cooperatives requires a huge amount of capital: a large amount of
capital is required in order to undertake extensive processing, re-
search and development. market research. packaging, advertisement.
merchandising and promotion programs, as well as maintaining a sales
force.51
To compete effectively with the processing carporations. agri-
cultural cooperatives have to invest a substantial amount of resources
in research and development. Allewert noted that the premium of bene-
fits in food processing accrues to those who put a premium on research
and development. But research and development require a substantial
amount of capital investment--”a capability to absorb losses and fail-r
ures and an ability to sustain efforts that may require years of work

to achieve profitability."52

The magnitude of the problem associated
with research and development is further increased since the federal
and state governments are withdrawing their traditional supports of
research and development programs. Robert Long has reported that
"it is clear to some of us close to the scene that increased federal
and state funds for agricultural research will be unlikely for the
foreseeable future."53
The pressure for increased financial outlay by operating
cooperatives is not limited to research and development; it is rather
pervasive. Melvin Sims, the President of FS Services, pointed out
that a large amount of capital is needed if agricultural cooperatives
are to provide new services to their members, build new facilities,

54

finance research and even to keep up with inflation. Thomas Ellerbe

89

agrees when he cites the most significant problem that these cooper-
atives are facing as the financing of new products, new services and

55 And Lee

new facilities essential to agricultural cooperatives.
Kolmer concluded that

a..probably the one single factor that seems to predominate

management's thinking as it looks towards the next decade is

the increasing critical problem of financing. Are we going

to rely on member equity far as high percentage of our total

capital needs as we have in the past? What kind of limita-

tions on growth are placed upon us if we do rely on member

equity.56

The industrialization of agriculture has made the bargaining
role of agricultural cooperatives rather obsolete. Instead, it is
making it increasingly imperative that agricultural cooperatives
assume operating functions. In fact, the USDA has reported that the

...size. scope and operational image of the growing processed

foods industry imparts a fairly clear message to family farmers

that an individual family farm would ever be able to participate

in any more than a subservient role in such an industry. Fur-

ther, opportunities are rapidly diminishing for any one cooper-

ative now operating to grow from within quick enough to capture

a significant foothold. 7
Accordingly, if agricultural cooperatives have to play any meaningful
role in an industralizing agriculture. they will have to undertake
food processing which requires a rather substantial financial outlay.
And how to raise this growing financial outlay has been a vexing prob-
lem that agricultural cooperatives have been facing.

Financing Agricultural Cooperatives and
Cooperative Rationality

In the final analysis. the source of finance for agricultural
cooperatives resolves itself into debt and equity capital. When the
role of agricultural cooperatives was primarily limited to bargaining,

the financial requirements were so low that they could substantially

90

be met by equity capital. As agricultural cooperatives increasingly
assumed operating functions. however, the need for debt capital be-
came more significant. Indeed, the financial requirements of operating
cooperatives have grown so much that a substantial portion of capital
is in the fOrm of debt. Noel W. Stuckman reported. for example, that
"a large cooperative here in the Eastern United States has more than
$100,000 invested for each producer member, of this the average pro-
ducer himself has an investment of more than $20,000 in stock and

58

debenture." The growing significance of debt financing in agri-

59 And John

cultural cooperatives is also recognized by the USDA.
Hopkin and J. E. Doyle argued that it is the high investment require-
ments of the changing technology and markets that has made it imper-
ative for agricultural cooperatives to rely more and more on borrowed
funds.60
The growing reliance of agricultural cooperatives on borrowed
funds is making the banks for cooperatives more circumspect about
their loan policies than they have been in the past. B. H. Schuttle
reported the change in attitude among the banks for cooperatives as:
The banks for cooperatives are. of course. directly affected
by this greater demand for funds. Some of the banks have
already adopted systems of advance capitalization particularly
as they relate to large new loans. Others are studying the
matter carefully because of continuing pressure on capital ratios
to develop the needed funds. We, as a group of banks. are watch-
ing over our own growth closely and have adopted a guideline for
grasglloans to net worth that would encourage each bank to fol-
low.
This guideline that each bank would have to follow suggests that
the debt capital that agricultural cooperatives can hope to raise is
governed by the magnitude of the equity capital they can muster. Thus,

banks for cooperatives would not extend loans without any reference to

91

the equity capital of the agricultural cooperative. To ensure that
the loans would not be exposed to unacceptable financial risks, these
banks would insist that the cooperatives maintain a certain level of
debt to equity capital ratio as a maximum. If loans continued to
expand without such a corresponding increase of equity capital,agri-
cultural cooperatives would soon approach the maximum level of debt
to equity capital ratio, and after such a point it would be difficult
to raise any more loans without raising equity capital. Accordingly,
to the extent that the possibility of raising debt capital is depen-
dent upon the equity capital that has already been mustered, the fin-
ancial problem of agricultural cooperatives resolves itself into a
problem of raising equity capital.

Agricultural cooperatives could raise their equity capital
either internally or externally. The internal source of equity cap-
ital takes the form of savings retained in the cooperative, while the
external source takes the form of sale of capital stock to the cooper-
ative's members. But these two sources of equity capital are not
independent of each other: the internal source is dependent upon the
external source of equity capital. In order to generate the savings
that will have to be used as an internal source of equity capital,
capital stock will have to be raised to finance the investment that
will make this generation possible. But to rely on savings as a
strategy of raising equity capital is like putting the cart before
the horse. In this regard, savings cannot be a substitute for capital
stock. Thus, if agricultural cooperatives are to operate on the basis
of cooperative rationality. they will have no choice in raising equity

capital other than the sale of capital stock to their members.

92
Indeed, farmers are called upon to make additional investments
in their agricultural cooperatives. Knuston argued that "to develop
the kind of cooperative system needed to compete and grow, a new

62 The question

round of producer—investment capital may be needed."
then becomes whether agricultural cooperatives are able to raise
their equity capital by selling capital stock.

The financial plight of farmers is such that not onIy would they
be unable to provide the equity capital required by agricultural coop-
eratives but, as it has already been shown in the preceding chapter,
they themselves expect financial assistance from the agricultural coop-
eratives. And the pressure on agriclutural cooperatives to help farm-
ers finance their operation is reported by a cooperative executive in
this manner:

I believe that regional cooperatives are and will be under

greater pressure to extend agricultural credit to local cooper-

atives and, in turn, to the farmer members... No ordinary

young man can acquire the capital to do a good job of farming

unless he has the capital to manage it. Therefore, he will

look to farm credit agencies, his cooperative, and private

dealers to furnish great amounts of capital through credit.63

Under such circumstances, it is rather unrealistic to expect
agricultural cooperatives to raise their equity capital by selling
capital stock to their members. In fact, agriclutural cooperatives
find it difficult to convince their members to buy additional capital
stock. a difficulty attested to by an executive of an agriclutural
cooperative who reported that "creating an increasing sense of obliga-
tion for participation in cooperative affairs by members in furnishing

64 And according to Howard

more ownership capital is a real problem."
Elson. the biggest problem of selling capital stock is the reluctance

of farmers to commit their resources to their cooperatives for a long

93

period of time.65

The agriclutural cooperatives and the family farm compete for
the same resources. And inasmuch as the resources at the disposal
of the farmer are limited, an attempt to satisfy the financial require-
ments of the agricultural cooperative would involve a reduction of
investment in the family farms and vice versa. Accordingly, farmers
must, in the final analysis, choose between investing in their cooper-
atives or in their farms. And according to Merle Betts. farmers--par-
ticularly the young ones--choose to invest in their own farms and
not in their agricultural cooperatives.66

The inability and unwillingness of farmers to provide the equity
capital that would enable their cooperatives to undertake operating
functions has created a conflict between cooperative rationality and
the organizational competence of agricultural cooperatives. If coop-
erative rationality has to be observed, the required equity capital
should be raised from the members. As their capital requirements
continue to escalate, however, agricultural cooperatives can no longer
hope to raise their required equity capital from their members. Thus.
to persist in limiting the sources of equity capital to the patrons
necessarily compromises the competence of agricultural cooperatives
to undertake their new role; On the other hand, if agricultural coop-
eratives are to have the organizational competence that would enable
them to assume this role, they will have to raise their equity capital
(from non-patrons, a measure which is inconsistent with cooperative
rationality. After all. the unity of patronage and ownership in one
person is fundamental to the concept of the cooperative form of bus-

iness organization.

94

The dilemma that agricultural cooperatives are facing
involves choosing between observing cooperative rationality at the
expense of organizational competence, or developing their organ-
izational competence at the expense of cooperative rationality.
Whichever way the choice may go, the cooperative form of business
organization is increasingly proving to be anachronistic for the in-
dustrializing American agriculture. A strict adherence to cooper-
ative rationality is making it difficult for agricultural cooperatives
to carry out their operating functions. And if agricultural cooper-
atives were to violate cooperative rationality in order to develop
their organization competence, then they could no longer be considered
a cooperative form of business organization.
Faced with such unpleasant alternatives, agricultural coopera-
' tives are making a desperate effort to raise the required equity
capital internally. Willian F. Allewert has argued that
...if we were to remain an independent cooperative, an addi-
tional growth investment must essentially come from the patron-
age of future years and recognizing that processing-marketing
cooperatives like ours inevitably must be heavily invested in
land and facilities in terms of member equity levels, we care-
fully searched all possible ways of the accumulation of addi-
tional capital. Frankly, we could find nothing new or adequate
within the confines of legal limitations and historical philo-
sophies of cooperatives. We could find only the standard
devices--revolving funds, and similar systems, borrowing from
members including loans and, with varying degrees, other fin-
anacing opportunities usually related to the general business--
short- and long-term obligations. We could find no counterpart
for cooperatives to the public eguity investment readily avail-
able to the proprietary company. 7
Melvin E. Sims equally emphasized internally generated funds as the
last resort of raising equity capital. He presented the problem that

FS Services is facing:

95

If it is to gear up to provide the supply needs of its members
so that they will have a greater control over their destiny,
approximately $160 million dollars of new capital will be needed
in the next five years. If farmers are to own and control this
FS System. they will have to provide most of the equity capital...
this new equity capital can be raised through a program of reten-
tion of earnings. This, of course, assumes that there will be
earnings sufficient to provide for the new capital and still

flow a reasonable amount of cash of the present members.53

As indicated previously, however, the strategy of relying an
internally generated funds as a bulwark of equity capital is putting
the cart before the horse. To expect income before making the invest-
ment is rather paradoxical. In the next chapter we will explore
how agricultural cooperatives generate the required equity capital

internally.

96

FOOTNOTES

1Joseph G. Knapp. The Rise of American Cooperative Enterprise:
1620-1920. Danville, Illinois: Interstate Printers and PUBlisHErs.
Inc., 1969, pp. 71-90.

2Edwin G. Nourse. "The Economic Principles of Cooperation in
Agricultural Cooperation," in Martin Abrahamsen and C. L. Scroggs
(eds.), Agricultural Cooperation. Minneapolis: University of Minn-
esota Press. 1957, p. 180.

3Don Paarlberg. "Family Farmers Can Compete," News For‘Farmer
Cooperatives, Farmer Cooperative Service, U. S. Department ongricul-
ture, May. 1973, p. 5. '

 

 

 

 

4Howard Elson. "How a Cooperative Serves One Member," American
Cooperation, 1970. p. 147.

5Marshall R. Godwin and L. L. Jones. "The Emerging Food and
Fiber System: Implications for Agriculture," American Journal of
Agricultural Economics, December, 1971, p. 807.

6Ronald D. Knuston. "Fit In or You May Be Left Out." News For
Farmer Cooperatives, Farmer Cooperative Service, U. S. Department of
AgricuTture, October, 1974, p. 4.

7

 

 

 

 

Joseph G. Knapp. Op. cit., pp. 46-47.

8William T. Manley and Donn A. Reimund. "Organization and Control
of the Food System," Marketing and Transportation Situation, Economic
Research Service, U. S. Department of Agriculture, February, 1973, p. 4.

9James D. Thompson. Organization in Action. New York: McGraw-
Hill Book Co., Inc., 1967, p. 54. -

 

15

16Ronald D. Knuston. " A Full Service Cooperative Concept," News
For Farmer Cooperatives, Farmer Cooperative Service, U;S. Department of
AgricuTture, August, 1975, p. 16.

William T. Manley and Donn A. Reimund. Op. cit., p. 18.

 

97

17Arlo J. Minden. "Changing Structure of Farm Input Industry:
Organization, Scale, and Ownership," American Journal of Agricultural
Economics. December,1971. p. 680.

18

19Willard F. Mueller and Normal R. Collins. "Integration of
Production, Processing and Marketing," American Journal of Agricul-
tural Economics, December, 1957, p. 1474.

20Peter G. Helmburger. "Markets, Farm Size, and Integration,"
in Gordon A. Ball and Earl O. Heady (eds.), Size, Structure and Future
of Fanns. Ames, Iowa: The Iowa State University Press,“1972, p.—120.

21

22Stanley K. Seaver. "An Appraisal of Vertical Integration in
the Broiler Industry." American Journal of Agricultural Economics,
December, 1957, p. 1487.

23

 

Marshall R. Godwin and L. L. Jones. Op. cit.. pp. 809-810.

 

Ronald D. Knuston. Op. cit., p. 4.

Marshall R. Godwin and L. L. Jones. Op. cit., p. 807.
24

25

26Ronald D. Knuston. "Cooperative Strategies in Imperfectly
Competitive Market Structures - A Polity Perspective,“ American Jour-
nal of Agricultural Economics, December, 1974, p. 906.

27

28Berry L. Flinchbaugh and Richard S. Fenwick. "Who Will Control
U. S. Agriculture," American Cooperation, 1974-75, p. 18.

29Eugene B. Pickler. "The Incidence of Large Farming Units,"
American Journal of Agricultural Economics, December 1970, p. 761.

30aaie c. Dahl. "Public Policy Changes Needed to Cope With
Changing Structure," American Journal of Agricultural Economics, May,
1973, p. 211.

31

William T. Manley and Donn A. Reimund. Op. cit., p. 15.
Don Paarlberg. Op. cit., p. 4.

 

Don Paarlberg. 0p. cit., p. 4.

Ronald D. Knuston. "Fit in or You May Be Left Out," Op. cit.,

32Ibid., p. 4.

33William T. Manley and Donn A. Reimund. Op. ci ., p. 14.
34

35Ronald 0. Aines. "Linkages in Control and Management with Agri-

business," in Gordon A. Ball and Earl O. Heady (eds.), Size, Strubture,

Marshall R. Godwin and L. L. Jones. Op. cit., p. 807.

 

98

and Future of Farms. Ames, Iowa: The Iowa State University Press,
1972, pp. 171-172.

36D. S. Department of Agriculture. "Cooperatives in Global
Processed-Food Trade Face Question: Partner or Servant," News For
Farmer Cooperatives, Farmer Cooperative Service, U. S. Department of
Agriculture, November, 1974, p. 9.

37

38Ronald D. Knuston. "Cooperative Strategies in Imperfectly
Competitive Market Structures - A Policy Perspective," Op. cit.,
p. 905.

39William Black and Ronald D. Knuston. "Let's talk about Mar-
keting Agreements," News For Farmer Cooperatives, Farmer Cooperative
Service, U. S. Department of Agriculture, September, 1974, p. 4.

40Ronald D. Knuston. "Cooperative Strategies in Imperfectly
Competitive Market Structure," Op. cit., p. 911.

41Paul Hill. "Does the Cooperative Help Young Farmers," Amer-
ican Cooperation, 1971, p. 67.

42

 

William T. Manley and Donn A. Reimund. Op. cit., p. 14.

 

Ronald D. Knuston. "Fit In or You May Be Left Out," Op. cit.,

43Ronald D. Knuston. "Family Farmers can earn Membership in
Tomorrow's Industrialized Agriculture," News For Farmer Cooperatives.
Farmer Cooperative Service. U. S. Department of Agriculture, February,
1974. p. 4.

44

45Louis P. F. Smith. The Evolution of Agricultural cooperation.
Oxford: 8. Blackwell, 1961, p. 159.

46Howard Elson. "How a Cooperative Serves One Member," American
Cooperation, 1972, p. 149.

47William F. Allewert. "What are Long Range Financing Alterna-
tives for Cooperative Growth,“ American Cooperation, 1974-75, p. 472.

48Gordon W. Leith. "Emerging Needs of Farmer give Clues to Coop-
erative Horizons," American Cooperation, 1972, p. 13.

49Harold Breimyer. Bargaining Perspectives: Proceedings of the
20th National Conference of Bargaining Cooperatives. Farmer Cooper-
ative Service. U. S. Department of Agriculture, July, 1976, p. 24.

50Harvey Ebert. "An Operating Cooperative. What it is," Bargain-
ing Perspectives: Proceedings of the 18th National Conference of Bar-
gainiog_Cooperatives. Farmer Cooperative Service, U. S. Department of
Agriculture, July, 1974, p. 11.

 

Dale C. Dahl. Op. cit., p. 210.

 

 

 

 

99

5'Ibid., p. 9.
52When F. Allewert. Op. cit., p. 472.
53

Robert W. Lang. Perspectives on Research and Education for
Commercial Agriculture," American Journal of Agricultural Economics,
December, 1974, p. 1006.

54Melvin E. Sims. "Controlling our own Destiny," American Coop-
eration, 1970. p. 31.

55Thomas F. Ellerbe Jr. ”Cooperative Unlimited - A Concept of
Cooperation," American Cooperation, 1972-73, p. 150.

56Lee Kolmer. "Agriclutural Decision Making in a New Environ-
ment," News For Farmer Cooperatives, Farmer Cooperative Service, U. S.
Department of Agriculture, May, 1972, p. 5.

57

58Noel. W. Stuckman. "Which Cooperative Best Serves Farmer's
Interest," Bargaining Perspectives: Proceedings of the 18th National
Conference of Bargaining Cooperatives, Farmer Cooperative Service,
U. S. Department of Agriculture. July, 1972, p. 24.

59Nelda Griffin. Financial Profile of Farmer Cooperatives in the
USA. Farmer Cooperative Service, U. S. Department of Agriculture,

1972. p. 24.
6O

618. H. Schuttle. "Complexities to Mount in Financial Packages,"
News For Farmer Cooperatives. Farmer Cooperative Service, U. S. De-
partment of Agriculture, December, 1975, p. 8.

62Ronald D. Knuston. "A Full Service Cooperative Concept,"
News For Farmer Cooperatives, Farmer Cooperative Service, U. S. Depart-
ment of Agriculture, August, 1975, p. 17.

63Joseph G. Knapp. Farmers in Business. Washington, D. C.:
American Institute of Cooperation, 1963, p. 383.

64Ibid., p. 385.
65

66Merle Betts. "Farmers and B. C.'s both have Responsibilities,"
American Cooperation, 1972-73. p. 193.

67
68

 

U. S. Department of Agriculture. Op. cit., p. 9.

 

John A. Hopkin and J. E. Doyle. 0p. cit., p. 324.

 

Howard Elson. Op. cit., p. 148.

 

William F. Allewert. Op. cit., p. 473.
Melvin E. Sims. 0p. cit., pp. 33-34.

CHAPTER IV

THE INTERNAL SOURCE OF EQUITY CAPITAL
AND COOPERATIVE RATIONALITY

The inadequacy of capital stock as a source of equity capital
has made it imperative for agricultural cooperatives to rely on in-
ternally generated funds or retained savings as a last resort.
Joseph Knapp1 has reported that the managers of agricultural cooper-
atives have come to the conclusion that there is no easier way of
raising equity capital than retaining savings. As a result, the
retained savings constitute an increasingly important source of
equity capital for agricultural cooperatives. In a study of 448

2

regional cooperatives, Nelda Griffin discovered that about 60% of

the total equity capital is in the form of retained savings. In-

deed, according to Howard Elson,3

the most important source of money
for agricultural cooperatives is retained savings.

Despite its growing significance, however, retained savings
cannot be the answer to the problem of raising equity capital in
agricultural cooperatives. And to appreciate the limitations of
this source of equity capital, we have to examine the nature of

savings in agricultural cooperatives.

The Nature of Savings in Agricultural Cooperatives
The nature of savings can be traced to the administrative

difficulties involved in implementing the principle of service at

100

101

cost. Agricultural cooperatives would show no savings at all if
members were charged with exactly the cost of services they receive.
But this presupposes that the cost of services could be ascertained
with precision at the time the services are rendered. Unfortunately,
this is not the case.

The cost of services cannot be determined with precision at the
time they are rendered to the members. And it is not the variable
costs associated with these services which present the problem for
they can easily be ascertained at the time the services are rendered.
Rather it is the allocation of fixed costs that creates the problem
because these costs cannot be allocated until the volume of service
rendered in a fiscal period can be ascertained. This means that the
fixed costs cannot be allocated to these services until the end of
the fiscal period. And yet, agricultural cooperatives have to charge
a price for the services they render to their members. The price
they charge cannot be the same as the cost of the services; for such
a cost could not have been ascertained at the time the services are
rendered. Accordingly, agricultural cOoperatives have no choice but
to charge prices that eventually prove to be either above or below
the cost of services they render to their members.

Whether the price that agricultural cooperatives have to charge
should be below or above the cost of services is a matter of adminis-
trative convenience. To charge a price below cost means that the
cooperative would have to collect the difference between the price
and the cost of services from its members; and to charge a price above
cost means that the cooperative would have to refund the difference

between the price and cost of services to its members. Inasmuch as

102

refunds to members are easier to manage than collections from members,
agricultural cooperatives pursue a policy of charging prices higher
than the costs of the services they render. And it is as a result of
such a policy that savings could emerge in agricultural cooperatives.

Savings in agricultural cooperatives are no more than
the difference between the cost of services rendered and the price
members have to pay for them. And this means that savings can be
increased by either raising the price or reducing the cost of ser-
vices to be rendered. If the increase of savings is due to an
appreciation of prices, it cannot be argued that such an increase is
an internal source of equity capital. Rather the source of such an
increase in savings is obviously the patrons which makes it an exter-
nal instead of an internal source of equity capital. Thus, savings
generated through price appreciation cansitute an indirect way of
raising equity capital from the members. Instead of using the sale
of capital stock to raise equity capital, agricultural cooperatives
can achieve the same result by raising the price of services they
render. But such a course of action leads to the same problem of
raising equity capital from the members. Accordingly, if savings are
to constitute an internal source of equity capital, they would have
to represent a reduction of cost and not an appreciation of price.
And, indeed, such is the way savings are perceived in agricultural
cooperatives.

Emphasizing the nature of savings as a reduction of costs,
Gordon Leith has maintained that "Farmers want efficient, well man-
aged cooperatives that produce savings. Savings is the name of the

game--any way you slice it. Cooperatives must do everything possible

103

to keep costs down."4

If agricultural cooperatives are to keep
costs down, they have to be operated efficiently. Thus, in the final
analysis operating efficiency is the source of savings and the inter-
nal source of equity capital. And it is in this regard that Melvin
E. Sims defended the legitimacy of savings in agricultural cooper-
atives when he argued that:
...if cooperatives price competitively at the time of sale and
remain efficient in their operation, the members have no rea-
son for concern regarding a high level of income in their
cooperative. Actually they should not be defensive or even
apolegetic about generating a high level of profit and should,
in fact, be proud of the performance--it gives them a concrete
way of judging the economic benefit of their cooperative.5
If members are to use savings as a basis of assessing how well
off they have become as a result of patronizing their agricultural
cooperatives, then, the source of savings cannot be price apprecia-
tion, for such savings would represent a contribution from the mem-
bers in the form of higher prices rather than the economic benefit
that members could expect from their cooperatives. The only way
that savings can represent a measure of how well off the members
have become as a result of patronizing their agricultural coopera-
tives is if the source of savings is operating efficiency. Accord-
ingly, if cooperatives are to raise their equity capital internally,
then improvements have to be made on the efficiency of their oper-
ations. But the constraints and contingencies that cooperative
rationality imposes on the operation of agricultural cooperatives is

such that operating efficiency cannot constitute a significant source

of equity captial.

104

The Limits of the Internal Source of quiry
Copital andoneratinngfficienoy

The level of efficiency of operation that agricultural cooper-
atives can achieve is inferior to that of the corporations against
which they compete. An optimal use of resources in agricultural coop-
eratives would be considered suboptimal in corporations. The kinds
of constraints that cooperatives operate under are such that they
cannot use their resources as efficiently as corporations can. The
limited financial base and the principle of democratic control as
a basis of managing agricultural cooperatives constitute the con-
straints which make it difficult far agricultural cooperatives to
attain the same level of operational efficiency as the competing
corporations do. And the effectiveness of these constraints increases
as the operations that cooperatives undertake become more complex and
require a higher magnitude of financial outlay.

The nature of activities that agricultural cooperatives initi-
ally undertook required neither significant financial outlay nor
sophistication in their management. Indeed, the narrow financial
base could not have been a serious constraint when cooperatives were
primarily engaged as bargaining agents of the farmer. Nor was the
operation of the small local cooperatives complex enough to make demo-
cratic control incompatible with their management. In this regard,
the constraints that inhere in agricultural cooperatives were then
only a possibility, not a reality.

As agricultural cooperatives continued to undertake activities
that required a large amount of financial outlay and sophistication

of management, however, the constraints that were originally mere

105

possibilities became realities. Both the limited financial base and
the principle of democratic control as a basis of management became
increasingly incompatible with the financial and managerial require-
ments of contemporary American agricultural cooperatives. The lim-
ited financial base became more effective in restricting the tech-
nological options that cooperatives could choose from as well as in
making them more susceptible to the constraints of the task envir-
onment,while the emphasis on democratic control became a constraint
in the cooperatives' decision making process. And the combination of
the constraints of limited financial base and the principle of demo-
cratic control increasingly made it difficult for agricultural coop-
eratives to obtain competent personnel to manage them. Thus, as
the constraints that were initially mere possibilities increasingly
became realities, the operational efficiency of agricultural cooper-
atives began to be compromised more and more.
The Limited Financial Base of Agricultural
Cooperatives and Operating Efficiency

Unlike corporations, agricultural cooperatives have no access
to capital markets. The unity of patronage and ownership in the mem-
ber limits the financial base of agricultural cooperatives to the
patrons. And this constraint makes it imperative for cooperatives
to settle for a lower level of operating efficiency than the competing
corporations would have to do.

In comparison with the competing corporations, the narrow fin-
ancial base of agricultural cooperatives increases the constraints
that the task environment presents to their operations and restricts

the technOlogical options that they can choose from. Regardless of

106

the magnitude of savings that they could produce, technologies that
would require a large financial outlay would be effectively excluded
from adoption. The agricultural cooperatives cannot afford to finance

6 for

the adoption of capital intensive technologies. Robert Bryne,
example, reported a study which showed that fourteen agricultural
cooperatives could have saved almost a million dollars a year if they
had moved their grain and fertilizer ingredients in their own barge
and towboat equipment. But it was the inability of the agricultural
cooperatives to finance the acquisition of the barge and towboat
equipment that foreclosed such a saving. And inasmuch as technology
is becoming increasingly capital intensive, the technological options
that agricultural cooperatives can choose from become fewer, thus
eliminating many of the possibilities of upgrading their operational
efficiency.

The narrow financial base of agricultural cooperatives also
reduces the savings that might otherwise be realized in their trans-
action with their task environments; Because of the much more limited
financial resources at their disposal, agricultural cooperatives
have to place a higher premium on the financial aspect of their trans-
action with their task environment than do the competing corporations.
But a more favourable financial arrangement would involve a cost.
Thus, in a transaction between agricultural cooperatives and the cor-
porations that constitute the task environment, the latter has to
offer attractive financial arrangements in exchange for higher savings
than would have been the case otherwise; and the former has to offer

attractive savings in exchange for receiving a more attractive finan-

cial arrangement than would have veen the case otherwise. And such

107

an arrangement is akin to what Ronald Aines calls "linked permanent
capital" in which the task environment would finance the transaction

7 Accordingly,

that is involved in exchange for price advantage.
satisfactory terms of trade between the agricultural cooperatives
and their task environment would reduce the savings that they would
have been able to realize under a situation where the financial con-
straints were less severe. . I

In the exchange relationship of agricultural cooperatives and
financial institutions, for example, cooperatives would have to incur
higher costs in order to take advantage of debt capital. And since
it is difficult to raise the equity capital that would serve as a
cushion for the interest of debtors, debt capital could be raised
only at the cost of either higher interest rates or allowing the
creditors to assume more control over the operation of agricultural
cooperatives or a combination of both. The higher interest rates
would obviously reduce the magnitude of savings that cooperatives
could otherwise have generated; and the share of control in the man-
agement of cooperatives by the creditors constitutes a constraint
that would ultimately result in the reduction of savings. Thus, the
terms under which debt capital would be made available to agricul-
tural cooperatives reduce the possibility of generating savings of
comparable magnitude to those of the corporations against which they
compete.

Inasmuch as the operation of agricultural cooperatives requires
an increasing amount of financial outlay, the effect of the narrow
financial base on their operating efficiency will continue to be in-

creasingly severe. Savings will continue to be last from a failure

108

to adopt more efficient technologies as well as from shifting the
cooperatives' financing role to their task environment. And if
agricultural cooperatives are to overcome this problem, they will
have to consider the possibility of widening their financial base.
Cooperative leaders have already started advocating such an
expansion of financial base. Thus, Paul Hill8 and E. H. Fallon9
argued that agricultural cooperatives have to expand their finan-
cial base beyond their patrons if they are to compete successfully
against the corporations. However, if agricultural cooperatives
are to expand their financial base, they will violate the unity of
patronage and ownership in the member, thus abandoning cooperative
rationality. On the other hand, if they are to operate on the
basis of cooperative rationality, they will have virtually no choice
but to operate at a lower level of operating efficiency. And so

far, agricultural cooperatives have chosen to compromise their oper-

ating efficiency rather than sacrifice their cooperative rationality.

Democratic Control and Operating Efficiency

Even if agricultural cooperatives were to operate without the
constraints of limited financial base, they would still have to can-
tend with the effect of democratic control on operating efficiency.
The level of competence of the decision makers and the process of
decision making that the principle of democratic control makes imper-
ative is such that agricultural cooperatives would have to settle
for an increasingly lower level of operating efficiency.

The principle of democratic control is designed to ensure that

agricultural cooperatives cater to the interests of the members.

109

According to Paul Hill "members exercise control over their
cooperative by electing directors from their own members. This
assures that the cooperative will always be operated in their inter-

est."10

But as the complexity of the operation of the agricul-
tural cooperative increases, such a control can only be achieved at
the expense of operating efficiency. In spite of the technological
imperatives that makes it necessary to shift the control of coopera-
tives' operations to management, the boards of directors of agricul-
tural cooperatives continue to exercise a degree of control over
operations which is becoming increasingly incompatible with the re-
quirements of efficient operation of contemporary American agricul-
tural cooperatives.

The boards of directors of agricultural cooperatives exercise
more control over the operations of their cooperatives than do those
of the corporations. Decisions that would have to be made by manage-
ment in the corporations are made by the boards of directors in agri-
cultural cooperatives. Contrasting the domain of decision making of
the boards of directors of agricultural cooperatives with that of
the corporations, Paul Hill had this to say:

In commercial corporations, top management is part of the board,

and in many cases, the major part of the board... This is not

true in cooperatives; not even the chief operating executive

is a board member. Therefore, it is sometimes easy for the

board to give management such detailed directions that manage-

ment is not really free to turn the business around.11

Although the board of directors of an agricultural cooperative
assumes a larger role in decision making than does that of the corpor-

ation, the level of their competence to make decisions is inferior to

that of the board of directors in a corporation. This inferiority is

110

due to the fact that the universe from which the cooperative's board
of directors is chosen is limited only to farmers. The agricultural
cooperative does not have the same opportunity to tap talented indi-
viduals for membership of their board as does the corporation.

As the operation of agricultural cooperatives has grown more
complex. the level of competence of the board has become an increas-
ingly serious problem. As a result. cooperative leaders have started
advocating the cooptation of outsiders into the board. Arguing in
favor of augmenting the board with people whose occupation is not
farming, Paul Hill noted that "the boards of our commercial campe-
titors include highly qualified professionals in finance, law, bus-
iness administration and the like. Why shouldn't our cooperatives

have the benefit of two or three similar experts on their boards.12

E. H. Fallon”

agreed. However, there is also a general fear that
such an arrangement would undermine the control of agricultural
cooperatives by their members. According to one cooperative leader,
for example, many farmers are afraid that "the expert might tend to
dominate the discussion and the decision process. If the rest of
the directors are going to defer to this so called expert, it would

"14 Such a state of affairs makes it obvious that

be a bad thing.
the principle of democratic control constitutes an impediment for
agricultural cooperatives to upgrade the competence of their boards
of directors.

Not only is the competence of the decision makers questionable,
but the decision making process itself is also of such a nature that '

it has a compromising effect on the quality of the decisions that

eventually emerges. The decision of the board of directors is often

111

15 The emphasis on democratic control makes it imper-

a compromise.
ative that decisions be made by a consensus. And such a decision
often falls short of the optimum from the standpoint of operational
efficiency. Because the proposals that are to succeed will have to
win acceptance by the board, they have to be less controversial in
nature and thus decidedly conservative. Indeed, proposals that re-
quire bold initiative on the part of the agricultural cooperative
are virtually ruled out. No wonder. then. that the board is often
accused of conservatism in its decision making.16
The decision making process that has to be consistent with the

'7 It takes

principle of democratic control is also time consuming.
time to bring the board together. and it takes time to carry out the
discussions and persuasions that inhere in democratic decision mak-
ing.‘8 Since such democratic decision making is time consuming, de-
cisions that have to be made within a short period of time inevit-
ably have to be delayed; and when these decisions are made, they are
too late to be effective. Accordingly, the belatedness of democrat-
ically arrived at decisions compromises the level of operating
efficiency that agricultural cooperatives could achieve. And the
effect of such belatedness becomes more significant as the complex-
ity and scale of operations of cooperatives increase.

Such increased complexity and Scale of operation of agricul-
tural cooperatives make it imperative that they become increasingly
sensitive with respect to the delay of decisions. The growing com-
plexity of operations increases the number of belated decisions to be‘

made by the boards. while the increased interdependence that charac-

terizes complex operations makes the effect of these belated decisions

112

rather pervasive. And the increased scale of operations makes the
cost of delays in decision making increasingly unbearable to the
cooperative. If the growing cost of delays in democratic decision
making is to be mitigated, then, more and more of the operating de-
cisions that are made by the board of directors will have to be
made by the managers of agricultural cooperatives. Indeed, the man-
agement of agricultural cooperatives has already begun to articulate
the increasing incompatibility of democratic decision making with
the managerial requirements of contemporary American agricultural
cooperatives.19
The principle of democratic control makes it difficult for
agricultural cooperatives to achieve a high level of operating
efficiency. The restriciton of membership on the board to farmers
poses a problem in upgrading the competence of the board; and the
fact that the domain of decision making of the board is rather wide
makes the effect of such a level of competence rather pervasive in
the cooperatives' management. Moreover, the delays and compromises
that characterize the democratic decision making process in agricul-
tural cooperatives further compromise their level of operating effi-
ciency. And inasmuch as the complexity of the operations that cooper-
atives undertake is increasing, the compromising effect of the prin-
ciples of democratic control on Operating efficiency will grow to

be more severe.

The Cooperative Manager and Operational Efficiency
The cooperative manager lacks both the competence and the re-

quired authority to carry out his managerial tasks. The concentration

113

of decision making power in the hands of the board of directors re-
duces the role of the cooperative manager to virtually that of a
glorified clerk; and the financial constraints that agricultural
cooperatives face make it difficult for them to compete for manager-
ial talent with the corporations. As a result. the capability of the
cooperative manager to effect operating efficiency is rather limited.
Agricultural cooperatives cannot afford to pay as much for their
management team as the competing corporations do. Consequently, they
are not only deprived of a sophisticated team of management but are
also understaffed. Sidney Haas dramatized the managerial problem of
agricultural cooperatives in this manner:
Too often, the depth and breadth of management personnel is so
thin that, if the first, second or third leading man passes on
to his higher rewards over the weekend, there is a chaos at the
office Monday morning because second and third lines of manage-
ment personnel defense have not been adequately prepared. Per-
haps, in agricultural cooperatives, some one should wait at
the stage doors of the best institutes of technology and the
best graduate schools and liberal arts colleges to attract their
most brilliant graduates entering the business world. To do so,
cooperatives have to compete for the best brains.20
The limited financial base of agricultural cooperatives does
not permit them to compete for the best managerial talent. Instead,
they develop their managerial team through promotions from within. As
Gene Ingalsbe noted, agricultural cooperatives do not have to pay a
manager brought up from within as much as they would have to pay a

2] Accordingly, what differentiates top

professional from outside.
management from the rest of the employees of agricultural cooperatives
is not so much their talent but rather their seniority. And on this
Score, Paul Hill noted that "cooperatives lack depth in management.

They place too much reliance on seniority. They tend to be highly

114

inbred. Few people are brought in from outside at the middle manage-
ment or higher levels. They do not move soon enough or hard enough
to solve a sticky problem in personnel."22
Even if agricultural cooperatives could afford the salary of
competent managers, the background of the board of directors is such
that they often fail to see the justification for what they consider
to be an exorbitant salary. Travis Jamison pointed out that the back-
ground of most of the directors is such that "they find it difficult

23 And

to evaluate the salary of a manager with a proper perspective."
Gene Ingalsbe noted that "many times the board is reluctant to pay
a manager brought up through the system as much as they know they

2¢ Thus, it is not

would have to pay a professional from outside."
only the limited financial base of agricultural cooperatives but also
the lack of foresight on the part of the board of directors that has
subjected them to an incompetent management team.

The incompetence of the managerial team of the agricultural
cooperatives is a source of frequent complaints from the farmers. In
their interview of young farmers, Walter Jacoby and Gene Ingalsbey en-
countered complaints of the following order: "why cooperatives hire
such poor management... Hire a manager with ability to handle bus-
iness and the people under him. They are afraid to hire enough people
to serve our needs and fulfill their commitments."25

The problem of a cooperative manager is not only one of incom-
petence. however, but also one of lack of authority to carry out
managerial tasks. Managers of cooperatives complain that they have

not been able to secure the necessary authority to match their respon-

sibility for efficient operation of agricultural cooperatives. At a

115

recent national meeting. a representative of cooperative management
argued for increasing the authority of management. He cited the ad-
vantages as: "it will save us a lot of time and discussion, and it

will be much easier and faster to make decisions."26

Any yet, there
is a general concern that management is assuming too much decision
making power.

Kelsey B. Gardner reported that many members of agricultural
cooperatives complain that the effort of management is concentrated
on improving business operations at the expense of being responsive
to the needs of the members.27 And according to Gene Ingalsby,
"directors and management of some cooperatives are striving so hard
to become just like all other business that they fail to recognize
and captialize on the unique characteristics of a cooperative business
organization and basic principles that distinguish it from other types

of business firms."28

Here again we observe a conflict between the
imperative of operating efficiency and that of the principle of demo-
cratic control.

The growing complexity of cooperatives' operations make it
imperative that management should have increased power in decision
making if the agricultural cooperatives are to be operated efficiently.
On the other hand. the delegation of such a power could make the prin-
ciple of democratic control increasingly superfluous. Thus, agricul-
tural cooperatives have to choose once again between cooperative
rationality and operating efficiency. And so far, they have stead-
fastly insisted on observing the principle of democratic control even

at the expense of operating efficiency. Ralph Hafstad, the president

of one of the largest agricultural cooperatives in the United States,

116

unequivocally supported the principle of democratic control when he
declared that "if cooperative control has moved away from the farm,
if management has abrogated power at the expense of traditional de-
mocracy, then it is time we restore basic principles to their right-
ful place."29
The reaction against the power of management is so strong that
members of agricultural cooperatives prefer to put up with the in-
efficiencies that are associated with the long tenure of the board
than to incur a possibility of conceding power to management. Roger
Aberle underscored the inefficiencies associated with the board mem-
bers' long tenure and, hence. with their old age in this manner:
Older directors tend to be more conservative and Slower in
making decisions. Further, if their tenure extends too long,
they tend to become jealous of their position--guarding it

from a political view rather than from a position of trying
to do what is best for their organization and community.30

3] has argued that shortening the tenure of the board

But E. H. Fallon
would give the appointed manager undue power in the running of the
cooperative. Such reluctance to shorten the tenure of the board of
directors suggests that agricultural cooperatives prefer to

live with the inefficiencies that are associated with the board's
long tenure rather than face the possibility of management having

more power of decision making resulting from a fast turnover in board

members.

Summary
Agricultural cooperatives cannot depend on operating efficiency
as a source of equity capital. Indeed, the imperatives of cooperative

rationality are such that they cannot achieve a high level of operating

117

efficiency. And as the operation of these cooperatives continues to
be more complex and require an increasing amount of financial outlay,
their Capability to operate at a high level of efficiency is being
compromised.

The limited financial base of agricultural cooperatives is in-
creasingly foreclosing the adoption of efficient technologies as well
as making the transaction between cooperatives and their task envir-
onments more expensive. The continued emphasis on Observing the prin-
ciples of democratic control makes it imperative that decisions be
made by a rather incompetent bOard of directors as well as rendering
the process of decision making rather inefficient. And as a result
of the limited financial base of agricultural cooperatives and their
continued emphasis on observing the principle of democratic control,
agricultural cooperatives can not afford to employ competent managers.
Nor are they willing to delegate to their managers the authority
required to manage the increasingly complex operations of agricultural
cooperatives. Such a state of affairs is making it increasingly
difficult for cooperatives to achieve a high level of operating
efficiency. And if they can not achieve a high level of operating
efficiency. the source of retained savings that they have been increas-
ingly depending upon in recent years cannot be a reduction of costs.

The Internal Source of Equity Capital
and Price Policy

 

In spite of their limitations on operating as efficiently as
the corporations against which they compete, agricultural cooperatives
are increasingly relying on retained savings as a source of equity

capital. And inasmuch as the source of these savings could only be

118
either a reduction of cost (a high level of operating efficiency)
or an appreciation of price, such a phenomenon cannot occur unless
agricultural cooperatives pursue a policy of charging higher prices
for the services they render than the competition warrants.

To argue that agricultural cooperatives can continue to rely
on retained savings by charging the same price as the competing
corporations do presupposes that the prevailing market price is high
enough to permit cooperatives not only to generate substantial savings
to be used as a source of equity capital, but also to cover the cost
of their relative operating inefficiencies. And if this is to happen,
then the rate of return on investment that corporations can make in.
agriculture must be rather substantial. Inasmuch as corporations
operate at a higher level of operating efficiency than the agricul-
tural cooperatives against which they compete, a level of price that
could make it possible for cooperatives to generate substantial savings
should allow carporations to make a substantial rate of return on
investment. Such a situation cannot continue to prevail, however.

The high rate of return on investment would attract other corpor-
ations to enter agriculture, thereby forcing the price to go down

to such a level that the rate of return on investment that corpor-
ations could make in agriculture would not be, on the average, grea-
ter than that they could make in the other sectors of the economy.
The prevailing price would thus not be high enough to permit agricul-
tural cooperatives to continue generating substantital savings as a
source of equity capital and at the same time cover their cost of
operating inefficiencies. Accordingly, if cooperatives are to rely
an retained savings as a source of equity capital, it becomes imper-

ative for them to charge higher prices for the services they render

119

than the competition permits. And, in fact, such is the policy that
agricultural cooperatives pursue.

In their interview with young farmers, Walter Jacoby and Gene
Ingalsbe found out that the price policy of agricultural cooperatives

32 Young farmers repeatedly

is what farmers complain about foremost.
pointed out that cooperatives are not competitive in their price
policies. A few examples should illustrate the bitterness of these
farmers towards such policies. One farmer complained "my coop is not
competitive in grain bids. I can haul 80 miles and get more than
enough to pay for any trucking." Puzzled by the high prices that
agricultural cooperatives charge, another farmer raised this ques-
tion: "we need to know why they feel we should patronize our cooper-
atives and support them when their prices are way above any one
e1se's?"33 And Paul Hill expressed his indignation with the price
policy of agricultural cooperatives in the fallowing manner:

Most young farmers are sick and tired of walking into their

local coop or going to their regional coop and listening to

the line we will be competitive. It is high time that co-ops

stop meeting competition and be the competition. If they do

not start being the competition they are going to find them-

selves taking a distant second.34

The indignation of farmers is not limited to the price policy
that their agricultural cooperatives pursue. They also complain about
the cooperatives' policy of patronage refund.

The Internal Source of quity Cepital and
the Policy of Patronage Refunds
The reliance of agricultural cooperatives on retained savings

as a source of equity capital involves not only a problem of genera-

ting savings but also one of retaining them within the cooperatives

120

as well. Agricultural cooperatives attempt to solve the former prob-
lem through a price policy and the latter through a policy of patron-
age.refund.

The policy of patronage refund involves a decision as to what
portion of the savings should be declared as patronage refunds and
in what form these patronage refunds will be made available to the
patrons. Hard-pressed for the creation of equity capital, the boards
of directors of agricultural cooperatives pursue a policy that min-
imizes the flow of resources from the cooperatives to the patrons.
Accordingly, a substantial portion of the patronage refund is paid
out not in the form of cash. but rather in the form of certificates
of ownership and indebtedness. This means that the cooperatives'
patrons not only pay high prices for the services that their cooper-
atives render, but they also fail to obtain the amount they were
initially overcharged.

The effect of the policy of patronage refund on the patrons is
further aggravated by the fact that patrons have to pay taxes on the
savings of their agricultural cooperatives regardless of whether or
not these savings are made available to them. The law recongizes
agricultural cooperatives as non-profit organizations. And the sav-
ings that the agricultural cooperatives report belong to the patrons.
As ;a- result, it is the patrons and not the cooperatives that have
to pay taxes on these savings. When such a situation is combined
with the policy of patronage refund that agricultural cooperatives
pursue. the patrons end up paying more for taxes than the amount of
cash they received in the form of patronage refund. And because of

this possibility. agricultural cooperatives are required by law to

121

pay at least 20% of their patronage refund in cash.

This requirement cannot be expected to solve the problem, how-
ever. Agricultural cooperatives have been able to circumVent this
spirit of the law by satisfying just its minimum requirement--paying
just 20% of their patronage refund in cash. And such a level of
cash patronage has not proven to be adequate to cover the amount of
tax that the patrons have to pay on their share of the savings that
their cooperatives report. Paul Hill complained abOut the whole
situation in this manner:

Our tax laws are such that young farmers cannot afford to re-

ceive a dividend (patronage refund) of 20% in cash, have the

rest deferred 7 to 10 years, and then pay tax on the full
amount the year it is declared. The plain facts of the situa-
tion are that it actually costs the young farmer out-of-the-
pocket cash to receive a dividend in many cases.35

The requirement that agricultural cooperatives should pay at
least 20% of their patronage refund in cash also makes it necessary
for them to increase the price of goods and services they sell. Be-
cause they find it imperative to retain their savings as a source of
equity capital. the requirement that they pay at least 20% of their
patronage refund in cash makes it necessary for them to increase the
total reported savings so that the increase in savings offsets the
cash patronage refund required by law. And this means that agricul—
tural cooperatives have to increase the price of goods and services
they sell to their patrons. Again, they have to face the complaints
of their patrons. Thus, David Smith could report that the most fre-
quent complaint of the patrons of agricultural cooperatives is that
net margins are too high and the portion returned in cash is not

enough.36

122

Agricultural cooperatives certainly face a dilemma with respect
to the price policy and the policy of patronage refund they pursue.
If they are to rely on retained savings as a source of equity capital,
it is imperative that they pursue a policy of charging high prices
for the goods and services they sell, while at the same time mini-
mizing the cash patronage refund they have to pay to their patrons.
On the other hand, if agricultural cooperatives were to abandon the
strategy of relying on retained savings as a source of equity capital,
their financial plight would be so overwhelming that it would be
highly doubtful whether they would be ableto carry out their activ-
ities on the basis of cooperative rationality. Nor is the strategy
of relying on retained savings that attractive. The continuing com-
plaint of patrons about the high prices they pay for the goods and
services they buy and the low cash patronage refund they receive will
eventually make it imperative for them to discontinue patronizing
their agricultural cooperatives.

The Internal Source of Equity_Copital and the Commitment
of Patrons to Agricultural Cooperatives

 

 

The policies that could enable agricUltural cooperatives to
rely on retained savings as an internal source of equity capital are
making it increasingly difficult for farmers to continue patronizing
them. Indeed, the sacrifice that farmers have to make in order to
patronize their agricultural cooperatives is growing unbearable. The
effect of these policies is particularly severe on young farmers.

According to Gene Ingalsbe. "the capital needs of farmers are
greatest when it is difficult to get a credit rating established."37

And young farmers fall into this category. As a result, their

123

capital needs would be expected to be greater than those of the estab-
lished farmers. And this means that the effect of the financial
sacrifice that patronizing agricultural cooperatives involves is more
severe for young farmers. Accordingly, young farmers are likely to
be the least prepared to patronize agricultural cooperatives. Such
is indeed the case. A young farmer spoke of the attitude of his
peers in this manner:
I know some young farmers feel they get an advantage going to
the non-coop for a cash discount, rather than trading with the
coop whose patronage refund is particularly tied up in a revolv-
ing fund. The young farmers need the cash to get established.38
The availability of volume discounts to young farmers is increas-
ingly exacerbating the opportunity cost of patronizing agricultural
cooperatives. Inasmuch as the scale of operation of the young farm-
ers is large. corporations are making volume discounts available to
them. Such discounts are not offered by the agricultural cooperatives.
And to the extent that the structure of farms is increasingly changing
into a large scale operation, the farmers' temptation to patronize
corporations in order to take advantage of volume discounts has be-
come a rather pervasive problem for agricultural cooperatives. George
L. Capel characterized the problem thus:
As farms become larger and fewer, it is possible that cooper-
atives may find themselves at an increasing disadvantage in
attempting to hold their present share of the market. Many
large farmers are able to obtain their major inputs at lower
prices from non-cooperative business. What the future holds
far cooperatives depends upon the adaptibility of the cooper-
ative to institute new pricing policies related to the volume
of business conducted by individuals.39
The competition that agricultural cooperatives face from corpor-
ations is not limited to volume discounts. The change in the struc-

ture of the family farm has necessitated a new farm of relationship

124

between corporations and the farmer. The increasingly large scale
operations of the family farm are making it economically feasible

for corporations to undertake a direct sell of packages of goods and
services to the farmer; and the growing complexity of the operation
of the contemporary American family farm is making it more and more
imperative that the farmer purchase his goods and services as a pack-
age. Corporations are thus adjusting their mode of operation such
that they will be able to provide more effectively and efficiently
the package of services that farmers are increasingly demanding. Arlo
Minden has indicated that corporations in the farm input industry

are not only decentralizing their operations to be closer to the farm-
er, but are also conducting an aggressive merchandising campaign to

sell their service-product package.4o

And Joseph H. Marshall charac-
terized the effect of the change of operations in corporations on
agricultural cooperatives in this manner:

With farm units getting larger and buying in large quantities

the cooperative is faced with the possibility of working out

an arrangement to provide efficient service at competitive

prices. This is necessary to remain competitive with other

major agricultural supply organizations who have streamlined

their distribution systems and have either totally or partially

bypassed the local dealership.41

If agricultural cooperatives are to increase or even hold on to
their share of the market. it is imperative that they offer the package
of goods and services that their members require at competitive prices.
The increasingly aggressive campaign of the corporations to sell their
package of goods and services at attractive prices on the one hand,
and the continued deterioration of the-financial problems of the family
farms on the other are making cooperatives' policies with respect to

price and patronage refund increasingly repulsive to the members.

125

Consequently, the commitment of members to patronize their agricul-
tural cooperatives is deteriorating. Melvin Sims has complained
that members take their agricultural cooperatives as just another

42 The gravity of this problem is further articulated by

business.
Ronald Knuston in the following manner:
Producers by and large lack commitment to their cooperatives.
They will market their grain with a proprietary concern despite
the fact that they have hundreds or frequently thousands of
dollars invested in their local cooperatives.- Such a lack of
commitment cannot persist if cooperatives are to compete in
the agriculture of the future.43
The lack of commitment to patronize agricultural cooperatives
is worse among young farmers. Robert Child reported that:
Nearly every major cooperative I know anything about is troubled
by what seems to be an unfavourable set of attitudes and view-
points on the part of many young farmers with regard to the
support and use of their cooperative.44
And such a state of affairs is not surprising since young farmers are
the ones that suffer the most from the policies of price as well as
patronage refund pursued by agricultural cooperatives. By patroniz-
ing these cooperatives, young farmers not only bear the burden of
the high prices of goods and services that the cooperative offers
but also, as large farmers do, forego the volume discounts that would
have been made available to them by corporations. And, the
financial plight that young farmers face is such that the effect of
these sacrifices is more severe on them than it is on large scale
farmers.
Farmers have repeatedly pointed out that the cooperatives' price
policy is the principal cause for the deterioration of farmers' com-
mitment to their agricultural cooperatives. E. H. Fallon reported

that young farmers generally agree that about 90% of their loyalty to

126

their cooperative is primarily a function of the price policy.45

And in the interview that Walter Jacoby and Gene Ingalsbe conducted,
one of the farmers pointed out to them that all farmers would do
their business with the cooperative if they were offered competitive

46 It is rather ironic that the price policy

prices and services.
made imperative by the agricultural cooperatives' requirements for
equity captial could end up undermining the volume of business that
they generate. Thus, the strategy that is adopted to solve the cooper-
atives' financial problem may very well bring an end to their sur-
vival.

The strategy of agricultural cooperatives to use policies of
price and patronage refund as a device of generating equity capital
is counter-productive. Because the direct approach of raising equity
capital hasnot been successful, these policies are indirect means of
raising equity capital from the farmers. Farmers have already un-
equivocally expressed their unwillingness to contribute equity capital
to their agricultural cooperatives. And their refusal to patronize
them is an indirect answer of refusal to an indirect means of coercion
to contribute equity capital to their cooperatives. But this refusal
to patronize their cooperatives is the last resort available to farm-
ers against the coercion that cooperatives are exerting on them to
contribute equity capital.

The Internal Source of Equity Capital
and Cooperative Rationality

The significance of retained savings as a solution to the mount-

ing financial problems of agricultural cooperatives cannot be over-

emphasized. Inasmuch as equity capital has become a bottleneck in the

127

cooperatives' operation and to the extent that the farmers have un-
equivocally refused to contribute the equity capital that cooper-
atives are increasingly requiring, retained savings is becoming a
last resort that could be used to raise equity capital without doing
violence to the essential attributes of the cooperative form of bus-
iness organization. However, the constraints that cooperative ration-
ality imposes on the operation of agricultural cooperatives makes it
difficult for them to achieve a level of efficiency of operation that
would make the generation of the required savings possible. And the
severity of the constraints becomes increasingly acute as agricultural
cooperatives undertake activities that are requiring a large amount
of financial outlay and complexity of operations. As a result, they
cannot rely on their operating efficiency as a source of the equity
capital that they so desperately need.

The retained savings of agricultural cooperatives are a result
of the policies that they pursue with respect to price and patronage
refund. Agricultural cooperatives generate their savings by raising
the price of their goods and services beyond what the competition
permits; and they retain a substantial portion of these savings by
restricting the amount of cash patronage that could be declared.
Neither of these policies is inconsistent with cooperative rationality.
AgricUltural cooperatives are not expected to charge their patrons
the price that would enable them to just break-even, for such a
price cannot be ascertained in advance. Nor are they expected to re-
turn all of their savings to their members: a portion of the savings
would have to be retained as reserves far contingencies. Agricultural

cooperatives have the discretion to set their prices and determine

128

the amount of cash patronage refund they can declare. But this dis-
cretion is being increasingly used to raise the equity capital that
they could not muster through direct solicitation of their members.

Inasmuch as retained savings are a result of the policies that
agricultural cooperatives pursue with respect to price and patronage
refund, the source of retained savings is the members themselves.
Accordingly, the distinction between capital stock and retained sav-
ings is becoming increasingly artificial. The source of the equity
capital in both cases is becoming the members. but while capital stock
is raised by a direct solicitation of members to contribute equity
capital to their agricultural cooperatives, retained savings are
raised by indirectly coercing members to contribute equity capital.
Thus, retained savings constitute neither savings nor an internal
source of equity capital: they are increasingly becoming an external
source of equity capital as much as capital stock is.‘ And to the ex-
tent that the members have unequivocally expressed their reluctance to
make contributions of equity capital to their agricultural cooper-
atives, there is no reason to expect members to respond faVourably to
an indirect means of raising equity capital. In fact, members are
answering in the negative to such an indirect call. Indeed, the re-
luctance of farmers to patronize their agricultural cooperatives is
an indirect refusal to submit to the policies of price and cash pat-
ronage refund that their cooperatives pursue to raise their equity
capital.

Although these policies are consistent with cooperative ration-
ality. their consequences for the survival of agricultural cooper-

atives as a viable form of business organization are rather far

129

reaching. As members become increasingly reluctant to patronize
their cooperatives, not only will these cooperatives lose their

share of the market, but their financial base will also become more
narrow. And the resulting narrower financial base exerts further
pressure on the agricultural cooperatives to raise equity capital

by pursuing the policies of raising prices and lowering their cash
patronage refund which makes the problem more acute. The dynamics

of this process of market erosion and the financial base of the agri-
cultural cooperatives will inevitably lead to the dissolution of agri-
cultural cooperatives as a form of business organization. Such is

the consequence of their increasing reliance on retained savings as

a solution to their financial problems; and such is the consequence
that contemporary agricultural cooperatives will have to face if they

are to continue operating on the basis of cooperative rationality.

130

FOOTNOTES

1Joseph G. Knapp. Farmers in Business. Washington, D. C.:
American Institute of Cooperation, 1963, p. 380.

2Nelda Griffin. Financial Structure of Regional Farmer Cooper-
atives.“ General Report 133. Farmer Cooperative SerVice, U. S. ae-
partment of Agriculture, 1966, p. 14.

3Howard Elson. "How a Cooperative Serves One Member," American
Cooperation, 1970, p. 148.

4Gordon W. Leith. "Emerging Needs of Farmer give clues to
Cooperative Horizons," American Cooperation, 1970, p. 15.

5Melvin E. Sims. "Controlling Our Own Destiny," American Coop-
eration, 1970, p. 35.

6Robert J. Byrne. "Managing Transportation," News For Farmer
Cooperatives, Farmer Cooperative Service. U. S. Department of Agricul-
ture. May, 1973, p. 15.

7Ronald D. Aines. "Linkages in Control and Management with Agri-
business," in Gordon A. Ball and Earl O. Heady (eds.), Size, Structure,
and Future of Farms. Ames Iowa: The Iowa State University Press, 1972,
p. 181.

8Paul Hill. "Does the Cooperative Help Young Farmers," American
Cooperation, 1972-73, p. 71.

9E. H. Fallon. "Can Yesterday's Cooperatives meet Tomorrow's

Needs." News For Farmer Cooperative. Farmer Cooperative Service.
U. S. Department of Agriculture, April, 1972, p. 8.

10
11
12

 

 

 

 

 

 

Paul Hill. Op. cit., p. 67.
311.4.-

Ibid., p. 68.
13

14Gene Ingalsbe. "Co-op Leaders Respond to Young Farmers' Ques-
tions," ArericaooCooperation, 1972-73, p. 75.

15

E. H. Fallow. Op. cit., p. 6.

 

Paul H111. Op. cit., p. 66.

16Walter Jacoby and Gene Ingalsbe. "Young Farmers Speak Out on:
Services We Need," News For Farmer Cooperative, Farmer Cooperative
Service. U. S. Department of Agriculture, March, 1976, p. 16.

 

131

17Ralph Hofstad. "How We Structure and Run is The Basic Ques-
tion," American Cooperation, 1975-76, p. 152.

18Ibid.

19Ibid.

20Sidney Hoos. "Trouble is Intellectual Stagnation," News For
Farmer Cooperatives, Farmer Cooperative Service, U. S. Department of
Agriculture, May, 1973, p. 3.

21Gene Ingalsbe. "Cooperative Strength Depends On Resolving
Internal Issues," News For Farmer Cooperatives, Farmer Cooperative
Service. U. S. Department of Agriculture, December,-1975, p. 12.

22

 

Paul Hill. Op. cit., p. 68.

23Travis Jamison. "Takes Team Work For Good Board-Manager Re-
lations," American Cooperation, 1975-76, p. 128.

24

 

Gene Ingalsbe. Op. cit., p. 12.

25Walter Jacoby and Gene Ingalsbe. "Give Us Stronger Management
and Marketing," News For Farmer Cooperatives, Farmer Cooperative Ser-
vice. U. S. Department of Agriculture, February, 1976, p. 13.

26

27Kelsey B. Gardner. "Matching Cooperative Principles With
Today's Operating Practices," American Cooperation, 1971, p. 162.

28Gene Ingalsbe. "Cooperative Strength Depends On Resolving.
Internal Issues." Op. cit., p. 2.
29

30Roger W. Aberle. "Strengthening Leadership with New Blood, "
American Cooperation, 1974- 75, p. 288.

31

Ralph Hofstad. Op. cit., p. 152.

 

Ralph Hofstad. Op. cit., p. 152.

 

E. H. Fallon. Op. cit., p.6.

32Gene Ingalsbe. "The more you give the more you get," News
For Farmer Cooperatives, Farmer Cooperative Service, U. S. Department
ongriculture, October, 1974, p. 18.

33Ibid.

34

35Ibid.

Paul Hill. Op. cit., p. 66.

132

36David L. Smith. "Member Relations Emphasis Needed in Good
Times, Too." News For Farmer Coaperatives,_Farmer Cooperative Service,
U. S. Department of Agriculture, May, 1975, p. 20.

37Gene Ingalsbe. "The More You Give The More You Get,“ Op. cit.,
p. 18.

38mm.

39

George L. Capel. "The Role of Cooperatives in the Input
Industries," American Journal of Agricultural Economics, December, 1970,
p. 693.

40Arlo J. Minden. "Changing Structure of the Farm Input Indus-
try: Organization, Scale, and Ownership," American Journal of Agricul-
tural Economics. December,1970, p. 678.

41Joseph H. Marshall. "Hot Points Needing Cooperative Action,"
American Cooperation, 1974-75, p. 71.
42

43Ronald D. Knuston. ”Fit In Or You May Be Left Out," News For
Farmer Cooperatives, Farmer Cooperative Service. U. S. Department of
AgricuTiUre. October. 1974, p. 5.

44Robert B. Child. "Can Cooperatives Serve Large Young Farmers
in the Seventies," News For Farmer Cooperatives, Farmer Cooperative
Service, U. S. Department of Agriculture, September, 1970, p. 14.

45

46
p. 18.

 

 

 

 

Melvin E. Sims. Op. cit., p. 32.

 

 

E. H. Fallon. Op. cit., p. 6.
Gene Ingalsbe. "The More You Give The More You Get." Op. cit.,

CHAPTER V

CONCLUSION

The ultimate test for the viability ryf the cooperative form of
business organization is the extent to which it can attract patrons.
Agricultural cooperatives cannot be expected to survive if family farm-
ers refuse to patronize them. The recent experience of American agri-
cultural cooperatives makes it obvious, however, that it is becoming
increasingly difficult to induce family farmers, particularly the
young, to patronize them. Indeed, executives of agricultural cooper-
atives have been expressing their alarm with growing frequency. The
question thus becomes what can be done to reverse the situation.

The course of action that can be taken depends upon the diag-
nosis of the problem. In the final analysis, however, the increasing
reluctance of family farmers to patronize agricultural cooperatives
is attributable either to their ignorance about the virtues of cooper-
atives, or to the inability of cooperatives to provide goods and
services at prices family farmers are willing to pay. or a cambination
of both. For the true believers in agricultural cooperatives, the
source of the problem is that contemporary family farmers, particu-
larly the young, do not understand the philosophy and virtues of the
cooperative form of business organization. Therefore, the solution
they suggest is that agricultural cooperatives undertake a program
of educating family farmers about both philosophy and virtues of the

cooperative form of business organization. But such a course

133

134

of action fails to address the specific complaints that family farm-
ers make about agricultural cooperatives.

Farmers have repeatedly articulated that their reluctance to
patronize agricultural cooperatives is a result of the fact that
cooperatives pursue a policy of high prices and low cash patronage
refund. The veritableness of such a claim cannot be dismissed. Nor
can executives of agricultural cooperatives deny that they charge
higher prices than the competition permits or that they restrict the
cash patronage refund. The fact of the matter is that these execu-
tives have virtually no choice but to pursue such policies. Indeed.
if agricultural cooperatives are to observe the unity of patronage and
ownership in the family farmer, the only way they can raise the equity
capital they need is by pursuing a policy of high prices and low

cash patronage refund.

Price Policy and Cooperative Rationality

 

The price policy that agricultural cooperatives pursue is, in
the final analysis, made imperative by the need to raise a growing
amount of equity capital without violating the unity of patronage and
ownership in the family farmer. The tasks that cooperatives have to
undertake in contemporary American agriculture have been of such a
nature that they require a large amount of financial outlay to be
carried out effectively and efficiently. An increasingly large amount
of such outlay are required to finance both the growing number of activ-
ities that have been transferred from family farmers to agricultural
cooperatives as well as the processing of farm products and the manu-

facture of farm supplies that cooperatives have been undertaking.

135

Raising this increasingly large amount of financial outlay is one of
the most pressing problems that agricultural cOoperatives are facing
in contemporary American agriculture.

This problem is essentially one of raising equity capital. In-
sofar as the extent of debt that agricultural cooperatives can incur
is limited by the amount of equity capital they can raise, their
financial problem cannot be solved unless they develop the capability
of raising equity capital. And because of the requirement of the unity‘
of patronage and ownership in the member, agricultural cooperatives
can raise the equity capital they need only from the members: the
family farmers who patronize them. However, the financial plight of
family farmers is such that the possibility of raising the required
equity capital through contributions is insignificant. As a result,
the only option that agricultural cooperatives have to raise their
equity capital without violating the unity of patronage and ownership
in the member is by raising the price of goods and services they sell
beyond what the competition permits. But such a policy is proving
counter-productive in that it has made the opportunity cost of patron-
izing agricultural cooperatives so unbearable that family famrers are

increasingly becoming reluctant to patronize them.

 

The Qpportuni;y_Cost of Patroniziog
Agricultural Cooperatives

 

The strategy of agricultural cooperatives to raise their equity
capital by increasing their prices beyond what the competition permits
can be effective only if family farmers are willing to continue patron-
izing cooperatives in spite of the high prices. However, the increas-

ingly acute financial problem of these farmers together with the

136

growing amount of financial sacrifice that is involved in patroniz-

ing agricultural cooperatives make it difficult for family famers to

continue their patronage. Because of the increasing scale of opera-

tion of the family farns, the sacrifice of a small price advantage

results in a sacrifice of a substantial amount of money. And such a

sacrifice is hard to make far the family farmers whose financial

plight is becoming more and more acute. The problem becomes even

more serious when it is recognized that the opportunity cost of patron-

izing agricultural cooperatives will have the tendency to increase in
the future.

As the industrialization of American agriculture continues, the
pressure on agricultural cooperatives to raiSe their prices becomes
more intensified, the scale of operation of family farms becomes larg-
er, and the financial plight of family farmers becomes more acute. As
a result, the opportunity cost of patronizing agricultural cooperatives
is likely to increase. And so long as this cost continues to grow,
agricultural cooperatives will find it difficult if not impossible to
win the patronage of family farmers. If agricultural cooperatives are
to survive it becomes imperative that they reduce the opportunity
cost of patronizing them.

Unless agricultural cooperatives abandon their strategy of raising
equity capital by increasing the price of their goods and services, they
cannot bring about a significant reduction in the opportunity cost of
their patronage. At the same time, they cannot renounce their price
policy if they are to insist on observing the unity of patronage and
ownership in the family farmer. Indeed, if they were to renounce this

policy. they would have to abandon the unity of patronage and ownership

137

in the family farmer so that they would be able to raise their equity
capital from the capital market.

The desirability of abandoning this unity of patronage and owner-
ship in the family farmer brings cooperative rationality in contem-
porary American agriculture to an end. For the other essential attri-
bute of the cooperative form of business organization is not observed
in the operation Of agricultural cooperatives. The activities of agri-
cultural cooperatives are no longer considered to be an extension of
the family farm; on the contrary, it is the activities of the family
farm that are becoming subordinated to the activities of agricultural
cooperatives.

The Changinngole of Agricultural Cooperatives
and the Imperatives of Coordination

 

One of the two fundamental attributes of the cooperative form
of business organization is that the activities of agricultural cooper-
atives becomes subordinated to the activities of the family farm. How-
ever, contemporary American agricultural cooperatives find it expen-
sive to undertake their operations under such an arrangement. Indeed,
the scale and complexity of the operation of the tasks that these coop-
eratives have been undertaking are such that a substantial cost of
coordination would have to be assumed if their activities were to be
subordinated to those of the family farms.

This high coordination cost of subordinating the increasingly
large scale and complex activities of the agricultural cooperatives
to those of family farms essentially stems from the increase in the
number of family farms to which agricultural cooperatives have to

adjust and the cost of adjusting to each of them. Each adjustment

138

that the agricultural cooperative makes to the requirements of each
family farm affects not just a simple activity but triggers an adjust-
ment of wide range of interdependent activities of the cooperative.
And the higher the degree of interdependence among activities, the
more difficult it becomes to manipulate one activity without affecting
the others; the larger the number of activities that are interdepen-
dent, the higher is the cost of manipulating the whole group of activ-
ities. Inasmuch as the complex operations of agricultural cooperatives
constitute a large number of highly interdependent activities, an
attempt by the agricultural cooperative to adjust to the activities

of the family farm would involve a high cost of coordination. And

the heavy amount of investment that is associated with these complex
activities only aggravates the situation.

The cost of coordinating the activities of the agricultural
cooperatives with those of the family farms is further escalated by
the increasing number of family farms to which the agricultural cooper-
atives would have to adjust. Because of the continuing merger of agri-
cultural cooperatives, the number of family farms that each cooperative
caters to has substantially increased. And if these large cooperatives
adjust their activities to the requirements of each family farm, they
incur a substantial cost of coordination.

The increase in both the number of family farms to which the
agricultural cooperative would have to adjust and the cost involved
in the porcess of adjustment to the requirements of each farm make the
subordination of the cooperative to the family farm a rather costly
arrangement for the operation of contemporary American agricultural

cooperatives. On the other hand, the continuing transfer of the

139

functions of the family farm to the agricultural cooperative has
reduced the complexity of the operation of the family farm so much
so that the farm activities can be subordinated to those of the cooper-
ative without causing a significant increase in the cost of coordin-
ation to the farmer. Such a situation makes it imperative that the
activities of the family farm become subordinated to those of the ag-
ricultural cooperative. Indeed, such has been the nature of the re-
lationship between the family farm and the agricultural cooperative
in contemporary American agriculture. In this regard, the relation-
ship is not essentially different from the relationship of the family
farm to corporations. In fact, family farmers often complain that
agricultural cooperatives have become just another business: agricul-
tural cooperatives and corporations treat family farmers in the same
manner.

Once the activities of the family farm become subordinated to
those of the agricultural cooperative. the unity of patronage and 1
ownership in the family farmer becomes superfluous. After all, the
unity of patronage and ownership in the member is meant to ensure that
agricultural cooperatives cater to the interests of the family farmer.
However, the subordination of farm activities to those of the agricul-
tural cooperative suggests that no purpose is served by restricting
the locus of control of agricultural cooperatives to the patron-owners.
Nor would the family farmer be able to control the operation of agri-
cultural cooperatives effectively. Indeed, family farmers do not have
the competence nor the required motivation to control the increasingly
large scale and complex operations of agricultural cooperatives. The

unity of patronage and ownership in the patron-farmer has thus lost

140

its usefulness; it has only become an impediment for agricultural
cooperatives in their effort to raise their equity capital.

It is the economic imperatives that make it necessary for agri-
cultural cooperatives to operate outside the constraints and contin-
tencies that arise from the cooperative character of the organization.
The requirements for efficient coordination make it necessary that
the activities of the family farm become subordinated to those of the
agricultural cooperatives; and the increasing opportunity cost of
patronizing cooperatives makes it necessary that they abandon the
unity of patronage and ownership in the member. I

It is thus clear that contemporary American agricultural cooper-
atives do not have the capability of carrying out their tasks effec-
tively and efficiently. The tasks they do undertake can be performed
effectively and efficiently only if they operate outside the con-
straints and contingencies that characterize the cooperative form of
business organization. On the other hand, agricultural cooperatives
lose their cooperative character when they fail to operate within
these constraints and contingencies. And there lies the growing in-
compatibility of the cooperative form of business organization with the

tasks it has to perform in contemporary American agriculture..

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