DIFFERENCES BETWEEN NEW GENERATION COOPERATIVES AND TRADITIONAL COOPERATIVES David Coltrain
Extension Assistant, Arthur Capper Cooperative Center
Department of Agricultural Economics, Kansas State University
For information call 785-532-1523 or e-mail coltrain@agecon.ksu.edu
David Barton
Director, Arthur Capper Cooperative Center
Professor, Department of Agricultural Economics, Kansas State University
Michael Boland
Assistant Professor, Department of Agricultural Economics, Kansas State University
Arthur Capper Cooperative Center TABLE OF CONTENTS
INTRODUCTION.1 EXAMINING SPECIFIC DIFFERENCES .1
1.21 Cash Patronage Rate .5 1.22 Investment or Retained Profits .5 1.23 Pooling Distributions .5
1.31 Initial Investment .51.33 Liquidity or Exchangeability .6
1.36 Business Expansion Investment .6
1.41 Eligibility Restrictions .7 1.42 Voting Power.7
INTRODUCTION
chain, NGCs take advantage of this opportunity
Significant changes in the agricultural economy
are having profound effects on the viability of rural
Both traditional cooperatives (TC) and NGCs
communities that are dependent on profitable and
are a form of vertical integration with similar
innovative agricultural businesses. The trend
objectives. However, they are very different in
toward fewer, larger and increasingly corporate
the way they manage the marketing and finance
farms has created a concern among rural residents
business functions. Understanding the difference
that many small and midsize family-owned farms
is critical for those producers who choose to
participate in value-added activities through
One way for small and midsize farms to remain
viable businesses is to increase income to their
operation by participating in profitable value-added EXAMINING SPECIFIC DIFFERENCES processing and marketing activities. A popular
A cooperative is defined as a business operated
strategy being used by producers to achieve this
primarily to provide benefits to members through
goal is to pool their limited resources through
marketing transactions and through a distribution
cooperative development. Cooperatives can play a of earnings from these transactions. In return,
greater role by helping producers earn a larger
members have a responsibility to provide equity
share of the consumer’s food dollar. While
capital and govern the business. Both TCs and
producers are examining alternatives for continued NGCs fit the definition. A NGC, or closed
success, consumers are challenging the food
cooperative, is more restrictive in terms of
industry to tailor food products for precisely
marketing and finance. The NGC’s members or
defined market niches – niches that individual
users are (1) customers who have a contractual
producers cannot always fill, but are attainable
right and obligation to deliver a particular quantity
with the coordination of producer groups and
and quality of product as specified in a marketing
alliances. This coordination has led to producer-
agreement and (2) owners who are required to
owned processing and marketing cooperatives
purchase shares of equity stock, as specified in the
with the potential to generate rural wealth and
stock subscription agreement, which conveys the
right to deliver a certain quantity of product
Most of these cooperatives have used the New
consistent with the marketing agreement. For
Generation Cooperative (NGC) model. NGCs
example, a member may be required to buy one
vertically integrate and provide producers larger
share of stock at $3.00 per share for each bushel
earnings by selling processed products instead of
of grain the member delivers annually to the
cooperative. Current members may transfer or sell
In other words, NGCs have been established by
equity stock to new members at an agreed upon
producers to increase their share of the consumer
price. Transfers must be approved by the
dollar and to add value to their basic commodities
through processing and forward linking to the
Many specific characteristics of NGCs are
market place by selling processed products instead different than TCs. Table 1 summarizes the
of raw commodities. NGCs are expanding into
characteristics that differ between NGCs and TCs.
value-added enterprises and forming creative joint The differences can be categorized into four
ventures and strategic alliances with successful
groups based on the producer’s role or
marketing companies. NGCs allow farmers to
relationship with the cooperative and the
work together in marketing, while maintaining
associated cooperative business functions. The
independence on their own farms (Cropp). Many
consumers prefer and trust food that is produced
transactions, (2) patron profit distributions, (3)
and sold by farmers. By moving up the food
owner investment obligations and (4) member voting control.
Table 1: Characteristics of Traditional (TC) and New Generation (NGC) Marketing Cooperatives
PRODUCER ROLE BUSINESS FUNCTION CUSTOMER MARKETING TRANSACTIONS Delivery Rights Unlimited Limited to purchased Delivery Obligation Required Quality Accepted Identity Preserved Usually not Usually is Initial Payment Market price Contract price PATRON PROFIT DISTRIBUTIONS Cash Patronage Rate Investment or Retained Profits Pooling Distributions OWNER INVESTMENT OBLIGATIONS Initial Investment Very high Proportionality to Use Low to high Very high Liquidity of Exchangeability Exchange Value Fixed at par Variable at market Redemption Obligation Ability to pay Business Expansion Investment High for delivery rights MEMBER VOTING CONTROL Eligibility Restrictions Voting Power Usually one vote Variable number
All types of businesses engage in activities
three of these four relationships. To represent
related to the four business functions of
reality and to better understand the nature of a
marketing, income or profit distribution, equity
cooperative it is useful to identify separate roles
investment, and control or governance. Each
function includes a collection of related activities.
The four roles are (1) customers, (2) patrons,
Cooperatives differ from investor oriented
(3) owners and (4) members. Customers are those
businesses in the way they operate with respect to
who use the cooperative by buying inputs or by
these four business functions. TCs and NGCs also selling products. Patrons are those eligible to differ from each other with respect to the nature
receive a share of the profits, usually as patronage
of the activities in each business function. The
refunds. Owners are those who invest in or own
relevant activities for each function are listed in
equity. Members are those who have voting
power to govern or control the cooperative, elect
Associated with each business function is a
directors, adopt articles of incorporation and
unique stakeholder role or relationship. In the
bylaws, and vote on other major member issues
simplest view, members (or sometimes patrons)
such as mergers, acquisitions and dissolution.
Traditional or open cooperatives often have
cooperative, receive a share of the income (based
users who have various combinations of these
on use), and own and control the cooperative. It is roles. For example, many users may be generally true that a member engages in all four
customers; but not patrons, owners or members.
functions, so using one term (member) is
These users are called nonpatronage customers.
sufficient to refer to all four relationships. In
Other users may be customers, patrons and
reality, some stakeholders have only one, two or
owners, but not members, and are called non-
member customers or patrons. In contrast, new
elsewhere, possibly from other members, or a
generation or closed cooperatives usually require
penalty is imposed. Most often, members only
contract a portion of their total planned production
1.1 Customer Marketing Transactions
There are five characteristics that differentiate
1.13 Quality Accepted
how cooperatives perform marketing transactions
with individual customers when comparing
agreements with members, the quality accepted
traditional (open) and new generation (closed)
normally covers a broad range. A TC is expected
cooperatives. The five characteristics are (1)
to find a market for all qualities of product that
delivery rights, (2) delivery obligation, (3) quality are delivered. NGCs usually have a much accepted, (4) identity preserved and (5) initial
narrower range of quality that can be delivered
since they usually are processing or marketing a
1.11 Delivery Rights
In a TC, delivery rights are normally unlimited.
Most traditional cooperatives allow any amount of 1.14 Identity Preserved product to be delivered by customers and the
With a wide range of quality accepted, TCs
cooperative then markets the total amount
typically have not handled identity-preserved (IP)
customers. Some TCs have contractual marketing
Increasingly, an opportunity is available to market
agreements with members that control the amount
IP commodities along with non-IP commodities in
of product each member can deliver, but they are
In contrast, the delivery rights of customers of
identity-preserved product as a means to ensure an
NGCs are limited to the level of stock each
acceptable quality product is produced. However,
member has purchased in the cooperative. As an
some large grain-oriented NGCs “trade” member
example, each share of common stock in the 21st
deliveries for other grain that is procured in a
Century Grain Processing Cooperative entitles a
member to deliver 2,850 bushels of wheat.
1.12 Delivery Obligation 1.15 Initial Payment
Delivery obligations and delivery rights are
usually paired together. They either exist in a
commodities marketed through or sold to a
marketing agreement or they do not exist. TCs
cooperative is an important aspect that differs
normally do not have delivery obligation
between TCs and NGCs. A traditional “buy-sell”
agreements with their customers. Customers may
cooperative pays the current market price at the
market their products elsewhere because of higher time the commodity is marketed since it is not prices, more convenience or personal
relying on a marketing agreement or pooling
relationships. However, delivery obligations are
program. In contrast, NGCs pay the contracted
price stipulated in the marketing agreement
obligation is coupled to the total supply of product between members and the cooperative. The that will be needed by the NGC in its value-
contracted price could be either lower or higher
adding processing and marketing. NGC members
than the current market price. Producers should
are expected to deliver the amount specified in
recognize that they are not just producing raw
their delivery rights. If extenuating circumstances
commodities, but are really producing processed
prevent sufficient production, NGC members or
goods. Total revenue or income is based on the
their agent usually purchase the contracted amount initial payment and other payments, usually as
income distributions based on returns from further cooperative less sell their stock to members processing and/or marketing of raw commodities.
1.2 Patron Profit Distributions
Many important differences between TCs and
NGCs become evident in the activities relating to the income or profit distributions by cooperatives to their members. Three characterizing activities are (1) cash patronage rate, (2) investment or retained profits and (3) pooling distributions. 1.21 Cash Patronage Rate
A patronage refund is a payment cooperatives
make to members from total patronage income or margins based on the quantity or value of business done by each member. Part of the refund is paid in cash and part is retained as an equity investment by the member. In TCs, the cash patronage rate is relatively low. Payments of 20 to 35 percent are common. The retained patronage refund amount is then redeemed later based on the cooperative’s redemption program.
The cash patronage rate is often much higher in
NGCs. Cash rates are usually 65 to 85 percent. Since each member has invested equity in the cooperative “up front” to purchase marketing rights when the cooperative is established, a high cash patronage rate can be paid each year. 1.22 Investment or Retained Profits
Equity investment can be from external sources
or from internal cooperative operations including retained patronage refunds, retained earnings and per unit retains. In TCs, most new equity comes from internal operations, especially retained patronage refunds. Therefore, a high percentage of the income distributed to patrons is retained and invested to finance assets including business expansion and improvement and to replace the “old” equity of those using the cooperative less with “new” equity of those using the cooperative more.
This contrasts with NGCs, which usually invest
a small percentage of the members’ profit distributions back into the cooperative. NGCs usually have a high proportion of their equity from directly invested, permanent capital when they are established. Members intending to use the
1.23 Pooling Distributions
their shares. Often NGCs limit the total amount of
Pooling is an alternative way to set and pay the
price for the products each cooperative member
1.32 Proportionality to Use
markets through the cooperative. Pooling is based
Proportionality to use is the extent to which
on using a marketing agreement and then setting
members have invested equity in proportion to the
the price paid after the pool has been marketed
use of the cooperative. For example, if a producer
and a net margin has been determined. In effect, a did one percent of the business, they would be delayed pricing or payment mechanism is used.
expected to have an investment equal to one
An initial or advance payment is made upon
percent of total producer allocated equity. In
delivery and then one or more progress payments
traditional, open cooperatives, a member might
are made until the pool is closed and a final
choose to employ the cooperative as the marketing
margin is known and paid. A pooling distribution
agent for a great deal of their products or, at the
in TCs is relatively rare, but more common in
other extreme, to not use the cooperative. From
one year to the next, the range of use and
proportionality could vary as the member chooses.
1.3 Owner Investment Obligations
Even if the amount of business is uniform each
In a cooperative, users who are patrons and
year, over time proportionality is low because
members are also expected to be the owners.
equity investment comes from operations and
Many significant differences surface when
accumulates during the “life cycle” of the
comparing the investment obligations that
members (owners) are responsible for in TCs and
However, NGCs have a contractual delivery
NGCs. Six ownership activities or characteristics
obligation with members who are required to
can be used to describe the differences in TCs and market their products at a steady, agreed upon NGCs. The six are (1) initial investment, (2)
amount. Furthermore, marketing rights are
proportionality to use, (3) liquidity of
purchased with equity investments and so
exchangeability, (4) exchange value, (5)
investment is proportional to use in the beginning.
redemption obligation and (6) business expansion
Proportionality may decline over time if
significant amounts of patronage refunds are
1.31 Initial Investment
One of the most significant differences between
1.33 Liquidity or Exchangeability
TCs and NGCs is the initial equity investment. In
Liquidity or exchangeability refers to the extent
TCs, the initial investment is usually very low,
to which ownership can be transferred between
often less than $100. However, each member of
owners. In publicly held companies, an open
many NGCs typically invests $10,000 to $12,000
market exists for stock on a stock exchange. In
to purchase marketing rights. For example, to
become a member of United Spring Bakers,
companies that are closely held, no open market
Fargo, North Dakota, a minimum of 800 delivery
exists and transfers are highly restricted. TCs are
right shares at $6 per share plus $200 in
much more restrictive than NGCs. Members
membership stock, or $5,000 total, was required.
increase equity in TCs primarily through retained
patronage refunds and per unit retains. Members
minimum amount. As another example, the 21st
decrease equity through equity redemptions made
Century Ladder Creek Dairy, Tribune, Kansas,
by the cooperative. These are transactions with
offered a minimum of five shares at $1,000 each.
the cooperative and are at the discretion of the
In lieu of cash stock purchases, this cooperative
board of directors. Transactions between members
also allowed farmers to transfer ownership of
corn, grain sorghum or alfalfa hay in exchange for
NGC members increase equity primarily by
purchasing stock that represent or convey
transferable delivery rights. NGC members can
decrease equity by selling their stock to other
1.36 Business Expansion Investment
members, approved by the board, at a negotiated
When a business expands by adding assets, a
price. NGC members therefore have much more
portion of those assets is usually financed with
ownership flexibility or liquidity than TC
additional equity. When a TC business expands,
members. At the same time, NGCs have a much
there is usually no immediate investment
higher proportion of allocated equity that is
obligation by individual members. This is because
“permanent” capital than TCs because NGCs have TCs do not directly link volume of business by more purchased stock that does not get redeemed.
members with up front direct equity investment by
members. However, equity investment will come
1.34 Exchange Value
from operations by retaining more equity from the
One of the major differences between TCs and
revenue or income stream and over time, total
NGCs becomes apparent when examining the
equity investment of a member will increase if no
exchange value of equity investment when equity
redemptions are made. This will gradually
is transferred or exchanged. The exchange value
increase the equity investment of those members
of TC equity is fixed at the par value at the time
who continue to do business with the cooperative.
of purchase or retention. In TCs the par value is
On the other hand, when a NGC expands in a
the value used when equity is redeemed or
significant way it usually sells stock and creates
purchased by the cooperative from members. New marketing rights to utilize this additional capacity. members are able to join TCs whenever they
This process is similar to the process used when
desire and their equity investment is valued at par. the NGC initially was formed. Therefore, there is
an immediate investment obligation by those
variable and depends on the market price
members who want to utilize the additional
members obtain if they sell their delivery rights to capacity. another member. The price members pay for
stock sold by the NGC is usually a set price at par 1.4 Member Voting Control value and provides equity so the business can be
Businesses are controlled by those who have the
established. This exchange value feature of NGCs
right to make decisions. Proprietorships,
has the potential to increase (or decrease) the
partnerships, LLCs and corporations each have
value of each member’s equity stock compared to
governing mechanisms. Corporations, including
the price they paid. The value is highly correlated
cooperative corporations, vest those rights in
voting stockholders or members. Voting members
of cooperatives approve articles of incorporation
1.35 Redemption Obligation
and bylaws, elect directors and may approve other
Redemption obligation refers to the expectation
actions such as mergers, acquisitions and
dissolution. TCs and NGCs may differ in terms of
ownership under specified conditions. For
two control aspects (1) membership eligibility
example, some cooperatives redeem the equity of
those members who die or reach a certain age.
The redemption obligation is based on the ability
1.41 Eligibility Restrictions
to purchase members’ equity and the policies of
TCs commonly have low eligibility restrictions
the cooperative’s board of directors. If the funds
for membership. In general, agricultural
are available, member equity may be redeemed.
cooperatives require members to be producers or
In NGCs there is no redemption obligation or
associations of producers. Some TCs require
expectation of members for previously purchased
equity stock. The transferable delivery rights of
stipulating certain conditions, such as growing or
NGCs allow for the sale of equity stock in
quality requirements, for membership. This type
of marketing agreement is the rule and not just an
exception in NGCs. In addition, NGCs require the profits from processing are then distributed back purchase of marketing rights or stock. This results to the members in proportion to their share of in high eligibility restrictions for membership in a
equity stock in the NGC. However, their equity
stock does not just convey membership rights, but
also conveys and allocates delivery rights. A dual
1.42 Voting Power
contract is established between each member of a
The voting power for members in TCs is usually NGC and the cooperative business. The producer
one vote per member, regardless of the patronage
member must deliver the units he has contracted
volume done by each member or the level of
and the cooperative must compensate each
variable amount of voting power for members
A major difference between TCs and NGCs is
based on stock owned. However, laws in many
that a high percentage of the cash patronage from
states only permit one vote per member. By far,
NGCs are returned to members each year. In
most TCs and NGCs follow a one member, one
TCs, cash patronage rate is relatively low. The
vote rule, but NGCs are more likely to depart
retained patronage refund amount in TCs is then
One of the most significant differences between
CONCLUSION
TCs and NGCs is the initial equity investment. In
TCs, the initial investment is usually very low,
Traditional Cooperatives in that NGCs focus on
often less than $100. However, each member of
value-added products instead of raw commodities, many NGCs typically invests $10,000 to $12,000 which is usually one focus of TCs. A strategy that to purchase marketing rights. distinguishes NGCs from TCs is a restricted or
Another important difference between NGCs
closed membership, which stems from the market-
and TCs is that equity stock may be traded; either
driven nature of NGCs. This market-driven
among established members, or, usually with the
strategy often targets niche markets that desire
board of directors’ approval, to outside producers.
The market value for equity stock is reflected by
There are many identifiable differences between
traditional open cooperatives and closed new
Another distinction between NGCs and TCs is
generation cooperatives. The differences can be
observed in business expansion, which is usually
categorized into four groups based on the
financed by additional equity. When a NGC
producer’s role or relationship with the
expands, it generally sells additional stock and
cooperative and the associated cooperative
creates more marketing rights. However, when a
business functions. The categories are (1)
TC expands, usually no immediate investment
customer marketing transactions, (2) patron profit
from members occurs. Over time in TCs, equity
distributions, (3) owner investment obligations
investment will come from normal business
operations if relatively small or no redemptions
NGCs process their members’ products in
cooperatively owned processing plants and the
http://www.wisc.edu/uwcc/info/ngconf.html
REFERENCES
Morris, R. 1996. A presentation edited by G.
Cropp, B. 1996. A presentation edited by G.
Cooperatives Information.” Available online
Cooperatives Information.” Available online
Feb. 1, 1999. http://www.wisc.edu/uwcc/info/ngconf.html
Nilsson, J. 1997. “New Generation Farmer Co-
ops.” Review of International Co-operation,
Patrie, W. 1998. Creating ‘Co-op Fever’ A Rural Devloper’s Guide to Forming Cooperatives. USDA RBS Service Report 54.
Stefanson, B. and M. Fulton. 1997. New Generation Co-operatives: Responding to Changes in Agriculture. Centre for the Study of Co-operatives, University of Saskatchewan.
Stefanson, B., M. Fulton and A. Harris. 1995.
New Generation Co-operatives: Rebuilding Rural Economies. Centre for the Study of Co-operatives, University of Saskatchewan.
Antonio E. Puente Personal Data University: Born: February 14, 1952; La Habana, Cuba Family: Married, three children Education Institution Field of Concentration Florida Junior College Jacksonville, Florida University of Florida Appointments and Positions Position/Rank Institution Dates Teaching Assistant Northeast Florida State Hospital 1979
SPECIFIC CONDITIONS and PROCEDURES for the U-1105 SITEThe U-1105 site has been designated an Historic Shipwreck Preserve and markedwith a buoy to facilitate the preservation of the vessel. Although diving at the site isdifficult and can be dangerous, it was reasoned that active, experienced divers wouldattempt to locate and dive on the site regardless of what policy the State of Maryland orth