Photo by: Daniel Parks
Grain marketing cooperatives are an important part of the U.S. grain marketing system, accounting for over $22B in sales in 2001 (USDA, 2001). The traditional role of these firms was to enable their farmer members to capture economies of scale and size in grain assembly, storage and cleaning. In pursuit of further economies, a system of federated regional grain cooperatives also developed. Under the federated system local cooperatives had the opportunity, but not the obligation, to merchandize grain through the regional. This structure forces the regional cooperative to compete with other buyers for the local cooperative’s grain. The system lacks any formal coordinating mechanism. A few centralized regional cooperatives also exist. Centralized regional cooperatives have direct ownership and control of the down-line country elevators and can obtain increased coordination and efficiency. However, it is difficult to bring a large number of autonomous local cooperatives together into a single, centralized firm.
In recent years the federated regional system has experienced a number of challenges. The voluntary business relationship between the local elevator and the regional forces the regional elevator to match bids with other suppliers or grain handlers. Local elevators often see the value of the regional cooperative in its ability to provide an additional bid to enhance market competition for commodities. However, the lack of a coordinated system makes it difficult for the regional cooperatives to create and maintain the appropriate infrastructure to meet the local elevators needs. Regional and local cooperatives also often pursue separate goals. Local cooperatives have remained focused on production inputs and handling unprocessed commodities. Many federated regional cooperative have developed value added food products. These structural differences have led to conflicts over the goals, commitment, and performance of the federated system (Hogeland).
Local cooperatives have pursued the advantages of centralization through mergers and expansions. Seventy-nine percent of the cooperatives responding to a 2000 study (Hudson and Herndon, 2000) indicated that they had evaluated a merger or acquisition. The majority of this activity involved cooperatives at the same stage of the marketing system with the participants seeking economies of scale and geographic expansion. Unfortunately, cooperative mergers are often controversial. Members object to the loss of local control and identity (Kenkel, 2003).
Another alternative that has been used by cooperatives to capture marketing economies of scale has been the creation of marketing agencies in common (MAC). MAC can be organized as either a cooperative or an investor owned firm. In contrast to the traditional regional marketing cooperative, MAC tend to be focused on information transfer and on coordinating marketing. The MAC may not take title to the commodity during the market transactions. MAC also have limited assets relative to federated regional cooperatives because they do not own the physical assets associated with handling, transporting or processing the commodity.
While it is difficult to precisely distinguish MAC from other forms of cooperatives, only a minority of marketing cooperatives are structured as MAC. In his 1994 study Reynolds classified federated regional cooperatives on the basis of their assets to sales ratio. He classified 19 out of 63 (30%) as MAC. He also identified common problems with MAC including poorly structured marketing agreements, divergence of interests among the member cooperatives, and insufficient volumes. This exploration of the MAC concept was based on federated marketing cooperatives. In recent years local cooperatives have rapidly adopted alliances, joint venture and other horizontal linkages. These structures provide another interesting dimension to the MAC concept.
Grain Alliances
Under the typical grain marketing alliance only the grain marketing functions of multiple local cooperatives are combined under a separate firm, often organized as a limited liability company. The alliance members continue their grain origination, cleaning, drying and storage functions. The alliance members generally receive formula payments for origination and storage functions and also receive a pro-rata share of the alliances merchandizing profits. A grain alliance provides economies of scale in future market transactions, borrowing and merchandising, and greater market power. The alliance’s increased geographic scope may also offer transportation advantages.
Phil Kenkel, Bill Fitzwater Cooperative Chair, Oklahoma State University
Amy Hagerman, Research Assistant, Oklahoma State University
References
Henson, Darren and Cary W. Herndon. Mergers, Acquisition, Joint Ventures and Alliances in Agricultural Cooperatives. Research Report 2000-009 Dept. of Agricultural Economics, Mississippi State University, Sept. 2000.
Hogeland, J.A. “The Changing Federated Relationship Between Regional and Local Cooperatives, USDA Rural Business Cooperative Service, RBS Research Report 190, August 2002.
Kenkel, P. “Post Merger Financial Performance of Oklahoma Cooperatives” Cooperative Accountant, July 2003.
Reynolds, B.J. “Cooperative Marketing Agencies in Common” USDA Agricultural Cooperative Service, ACS Research Report 127, January 1994.
USDA. Farmer Cooperative Statistics, 2001. Rural Business Cooperative Service. RBS Service Report 61, 2001.