Why Don’t We Start More Cooperatives?

The cooperative business model has been very successful in the U.S. and cooperatives are particularly successful in the agricultural sector.  Many U.S. agricultural cooperatives are approaching or exceeding 100 years of existence.   Despite that historical success we are starting relatively few new agricultural cooperatives.  Many of our existing agricultural cooperatives started with a handful of producers joining together to address a common need.  We don’t see that same type of activity today or, if we do, it is not structured as a cooperative business.  That raises the question of why we don’t start more cooperatives.

The first reason for the infrequency of new cooperatives is lack of understanding of the cooperative business model. Even producers who are members of a cooperative likely do not know that a cooperative is a corporation, how to incorporate a cooperative or all the details of the cooperative financial model. Even if a producer knows that incorporating as a cooperative is an option, they likely feel that the process is more opaque, mysterious, and complicated relative to other options.  That leads to the second impediment to cooperative development, most producers and professional advisors are more familiar with Limited Liability Companies and investor-based business forms. A student could graduate with a business degree and go on to get an MBA while never hearing the word “cooperative”.  Advisors, attorneys, and accountants are more likely to understand LLCs relative to cooperative corporations.  That makes LLC formation the path of least resistance.

The final factor limiting new cooperative development is access to capital.  Most existing U.S. agricultural cooperatives are capitalized from decades of retained profits.  New opportunities for cooperatives often require substantial amounts of up-front capital.  There are cooperative models, such as the closed membership cooperative and the hybrid member-investor model that address those issues.  The formation of those types of cooperatives requires not only an understanding of their structures but also the ability and willingness to make substantial up-front investment.  

I can think of many agricultural situations from machinery sharing, to condo grain storage to feral hog trapping operations where small scale cooperatives could be logical and successful. Those small cooperatives could be formed under the closed membership cooperative model with members receiving a usage right (bushel of grain stored, acre of machinery use, one week usage of trapping equipment) for a share of membership stock.  By receiving patronage in proportion to use the members would achieve services at essentially an at cost basis and the cooperative could issue stock patronage to fund any necessary re-investment in equipment and infrastructure.  Members wishing to exit the cooperative could sell their share and usage rights to another eligible producer with approval of the cooperative board.  The cooperative model would provide economies of scale and let the members receive a service at much lower cost than they could achieve on their own.   Opportunities for new agricultural cooperatives exist but we rarely hear them discussed.  Perhaps we just need to recycle some good old ideas!

Kenkel, Phil. “Why Don’t We Start More Cooperatives?Southern Ag Today 4(20.5). May 17, 2024. Permalink