Why aren't American Farm Cooperatives more Ambitious?
In this final edition of my mini-series looking at historical examples of collaborative farming, we are turning our attention to the farmers’ cooperative. American agricultural cooperatives are some of the largest examples of collective organizations in rural America, controlling large swaths of crop and dairy marketing and providing a wide range of farm services. In this post, I will examine the history of the cooperative movement, assess structural and operational issues that have built up over time, and explore efforts to modernize the model.
Theory and Origins of Agricultural Cooperatives
American agriculture has a number of persistent issues baked into its economic structure. Markets are heavily consolidated, with only a few firms selling equipment and inputs and purchasing farm outputs. This lack of competition has significantly limited farmers' economic agency, hampering their ability to seek more agreeable prices and flex power in the marketplace (McCracken, 2022). Additionally, persistent oversupply has suppressed commodity prices, and rural prosperity, since the 1910s. The only way to earn more money with slumping prices is to plant more, but if every farmer does that prices dive even lower. These twin issues, along with a number of other problems, would be solved with greater coordination between farmers to control production and set favorable prices (this would be particularly favorable for smaller farms).
Cooperatives seem like the ideal platform to execute such an effort. By combining farmer market power producers would be able to confront market makers on a more even footing and demand fairer prices. Democratic oversight of this power would ensure that receipts are distributed more fairly among farmers, reinvigorating rural economies. In short, cooperatives could be the answer to many of agricultures woes.
Confoundingly, there is already a well-developed cooperative ecosystem in rural America, providing agronomic services, discounts on inputs, and robust sales channels. Most American agricultural cooperatives were established during the 1920s and 30s to improve market access and stabilize incomes. (Hogeland, 2006). By 1950, 33% of grain was marketed through cooperative channels, growing to more than half by the mid-2000s (Demko, 2018). There was even a plan, promoted by reformer Aaron Sapiro, to unite every grain farmer into a national cooperative federation! One might think, that with this system, farmers would be well positioned to address the wayward market, protect small farmers, and keep revenues circulating locally. This begs the question, why haven’t cooperatives been able to maintain a vibrant farm economy?
Structural Constraints
There are two sets of issues that have prevented cooperatives from reaching their full potential in the marketplace. Several structural contradictions between different goals have effectively nullified cooperative power. One of these is the trend toward consolidation among cooperatives themselves. Between 1980 and 2012, an average of 66 mergers between cooperatives occurred each year, and in the same period, 2,580 went out of business (Demko, 2018). On the surface, there is a logic to this. Industrialization and shifting market forces incentivize scale, and to properly compete with larger grain trading firms or food companies, it was necessary to coordinate cooperative action nationally. Simply founding a bunch of small, independent cooperatives across the country was not enough to secure a power base, and merging small cooperatives into larger groups seemed like a reasonable approach. Unfortunately, chasing scale may have weakened cooperatives overall. Two outcomes of this trend, delocalization and the implementation of industrial norms, have kneecapped cooperative capacity to advance farmer interests.
As cooperatives consolidated, a professional class emerged within these organizations. Technical staff and managers were brought in to manage the day-to-day affairs and implement the decisions of farmer-owners. As cooperatives consolidated, a corporate bureaucracy emerged, with distant directors ostensibly appointed by a farmer-elected board, directing financial and strategic decisions. What this meant for farmers, however, is that they were unable to engage meaningfully in decision-making beyond occasional elections (Hogeland, 2006). This isolation from governance allowed for new priorities to take hold.
Industrial logic also played a role in denying the cooperative mission. In attempting to compete with the wider market, cooperatives were forced to bend to the will of the market and the demands of consumers. This is where the initial impetus to consolidate came from; other players were merging, so it followed that cooperatives should as well. This led to a widespread focus on efficiency, homogeneity, and standardization to fit into existing supply chains (Hogeland, 2006), standards that were themselves set by the corporations cooperatives are meant to stand against. Meeting these expectations introduced new priorities that, in some ways, conflicted with the economic agenda of the average farmer.
This was especially true for cooperatives that pursue vertical integration, specifically pursuing the sale of inputs and even launching food production enterprises. While in some ways these moves were necessary to check the power of food companies, the linking of different nodes of production under one entity became another way of adding more stakeholders and objectives to the cooperative portfolio (Hogeland, 2015). In launching a pork production effort, Land O’Lakes had to manage not only the interests of member pork farmers but also a feed production enterprise they had established (PR Newswire, 1998). Instead of being singularly concerned with the needs of pork producers, Land O’Lakes was managing factories and expanding sales channels, purloining resources from producers, and introducing potential conflicts of interest. This continual scope creep, initially designed to play to the needs of a market that demands scale, has effectively muddled cooperative priorities to the detriment of farmer interests. Small farmers in particular have been severely disadvantaged by the cooperative turn towards a scaled and standardized business model that fails to effectively accommodate their needs.
Ultimately, the cooperative complex has accumulated a number of contradictions between scale, democratic engagement, and the role farmers play in the market. Scholar James Rhodes put it well, writing “When a cooperative becomes large enough to compete with a corporate giant, is it really responsive to farmers or is it beyond the farmers’ capability to control it?” (Rhodes, 1972). In pursuing a size that would threaten the dominant food system, cooperatives have adopted many of the qualities of that system, namely the logic and pattern of industrialization and managerialism. This has resulted in cooperatives that are shadows of the industrial food companies, reacting to the demands of the market and failing to meaningfully address core issues.
Operational Constraints
Beyond issues baked into the cooperative structure, several operational issues are also preventing cooperatives from reaching success, even within their current diluted role. These constraints are also what gives rise to the motivations that drive the creation of the structural constraints, and resulting contradictions, outlined above.
Financial challenges are large and persistent for cooperatives. Acquiring capital is a major roadblock for expansion and maneuverability. The legal structure of most cooperatives prevents outside investors from being able to invest beyond the issuance of loans or purchase of bonds. This leaves many cooperatives perpetually undercapitalized and playing financial catchup with their better-funded private competitors (Barton et al., 2011). Keeping equity levels stable is also tightly linked to profitability since earnings are the main source of capital. This forces managers to keep high rates of investment under unfavorable fundraising conditions, all within the context of volatile input and commodity prices.
Governance capacity and talent are an additional issue. Recruiting board members is incredibly difficult, especially given the rural brain drain and a general lack of interest among farmers who are focused on their own operations (Kenkel and Park, 2011). Likewise, leadership succession is often an open question when key managers are approaching retirement. These issues combine to make long-term planning difficult.
An Attempted Rebirth
As the issues outlined above became apparent, groups have sprung up across the country attempting to innovate on the cooperative model. One of these efforts took the form of the New Generation Cooperative (NGC), which evolved the cooperative model in a number of key ways. Spurred on by low commodity prices during the Farm Crisis, NGCs worked to establish enterprises higher up on the value chain, including meatpacking, sugar refining, pasta manufacturing, and even ethanol production. By establishing farmer ownership over these enterprises, they could capture additional revenue that is normally appropriated by other players in the market.
Moreover, NGCs modified the legal structure of cooperatives to encourage the raising of capital. Unlike traditional cooperatives, shares in NGC’s are closed, non-redeemable, and transferable (Grashuis and Cook, 2018). This means that only a set amount of shares can be in circulation at a time, you can’t cash it in to have your equity returned, and you can sell it to other farmers if you wish to exit the enterprise. Additionally, possession of a share is what entitles you to sell your crop to the cooperative, with the amount defined by the number of shares you own. For example, one share may entitle a farmer to sell one bushel of grain to the cooperative. By linking delivery and ownership rights and requiring more commitment to withdraw, this model encourages more investment from members and keeps them engaged with the enterprise.
The NGC model has shown mixed successes. 23% of NGCs from the “cooperative fever” era of the 1990s survived to 2018 (Grashuis and Cook, 2018). Modes for failure were mundane: bankruptcy, dissolution, and takeover. A few NGCs converted into traditional LLCs, rejecting the cooperative structure to allow members an easier avenue to cash out and to open new opportunities for non-farmer investment. Unfortunately, many NGCs couldn’t outrun the persistent issue of constrained capital.
Another model attempted to resolve the investment issue – the Limited Cooperative Association (LCA). This cooperative form has two types of members, farmers and investors. By bringing in non-farmers, kept in check by a stipulation that a minimum of 50% of profits must go to farmers, more investment could be brought into the business, resolving the equity issue (Grashuis, 2018). While more obscure than the NGCs, this model seems to have had some success in building specialty enterprises, such as cranberry processing or specialty grain milling. While the model doesn’t seem particularly optimized for commodity crops within well-developed markets, it has found its niche in supporting the commercialization of crops in less sophisticated markets.
Synthesis
Given the structural and operational issues outlined above, it does not seem that farmer cooperatives are well-positioned to build new agricultural enterprises. The marketplace that squeezes farmers is the same marketplace that squeezes their cooperatives. While farmers are undoubtedly better off by having these institutions, their structural and organizational issues belie any notion that they will be at the forefront of a renaissance of collaborative farm enterprises.
For those seeking to launch collaborative farming enterprises, focusing on the NGC, LCA, and similar models in strategy and form may be more fruitful. However, equity issues seem to follow cooperatives whenever they may form – so keeping these limitations in mind and planning around them is critical for success. Additionally, other corporate forms, like LLC’s or Social Benefit Corporations, can be bootstrapped to pursue a cooperative mission. Moreover, defining a cooperative strategy that is not a mirror of corporate food systems is another critical lesson for creating truly innovative enterprises.
It seems to me that cooperatives, reformed or rebirthed, may not be where the fight for market power is won. No matter how powerful a cooperative becomes, it’s still operating in an environment defined by large commodity traders, integrated food companies, and other powerful economic players. Input and food markets are simply too consolidated to ever wrest away large chunks of the supply chain, and cooperatives are forced to, at some level, march to the drumbeat set by the corporate food system. Changing the rules of the marketplace, particularly with aggressive anti-trust enforcement, may be a necessary precondition to seeing cooperatives truly flourish.
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A really excellent, concise and well-written summary. i suggest you submit this to Communities Magazine. I circulated to my friends.