"The most distinct and significant movement in American Agriculture in this decade is the almost universal trend toward cooperation in the marketing and distribution of farm products. . . A movement of this magnitude, with its tremendous economic and social significance, must be analyzed and guided so that its highest possibilities may be realized." Secretary of Agriculture's Report to the President 1925

A year following this statement, Congress passed the Cooperative Marketing Act of 1926 which established the Cooperative Services unit in the Department for purposes of rendering services to associations of agricultural producers. Missions of the unit identified in the Act include research, technical advisory assistance, keeper of the history and statistics of cooperatives, assistance to groups interested in organizing new cooperatives, education/information promoting knowledge of cooperative principles and practices, and special studies of cooperation for lessons to learn both at home and abroad. Research on cooperative marketing issues is also authorized by the Agricultural Marketing Act of 1946. Key to work of the Cooperative Services unit is analyzing and guiding cooperatives so that they become more efficient and effective business organizations. Alan Johnson, former USDA financial officer, once described the Cooperative Services program as a "mini-USDA" in the social sciences. The Cooperative Services program today is part of the Rural Business-Cooperative Service in the Rural Development Mission area.

Since being transferred from the Marketing and Regulatory Mission area to Rural Development in 1993, Cooperative Services has picked up a number of other programs for administering, in addition to the missions identified in authorizing acts. One of the reasons for this is that the farm loan programs of Farmers Home Administration were transferred to the Farm Service Agency during the Departmental reorganization. This has meant that the Cooperative Services unit is the only group in the entire Rural Development mission area with a primary orientation to agriculture. The housing and rural utilities agency personnel largely felt that they had no more program responsibility for production agriculture after this transfer occurred. New programs that Cooperative Services assists include funding: (1) the Appropriate Technology Transfer for Rural Areas (ATTRA) program which provides advice to farmers on best sustainable production practices; (2) the Rural Cooperative Development Grant (RCDG) program which funds centers for cooperative development; (3) the National Sheep Industry Improvement Center which is helping to rebuild the infrastructure of the sheep and goat industries after the wool and mohair price support programs were terminated; and (4) an assistance program to 1890 universities for purposes of information transfer to underserved communities regarding the Department's rural development programs. Cooperative Services continues its long term funding of cooperative agreements in support of Research on Rural Cooperative Opportunities and Problems (RRCOP) program with 1862 and 1890 colleges and universities.

Clientele To Whom Programs Are Directed

There are 3,651 farmer-owned cooperatives that had a business volume of $104.7 billion in 1998. There were 3.3 million memberships in these cooperatives indicating that many farmers belong to more than one cooperative.

So everyone is on the same page, we define a cooperative as a user-owned and democratically controlled business in which benefits are received in proportion to use of the organization's services.

Cooperatives have a strong legal foundation for group action. In addition to State laws under which cooperatives are usually incorporated, there are Federal laws such as the Capper-Volstead Act of 1922, the Cooperative Marketing Act of 1926, the Agricultural Marketing Act of 1929, the Farm Credit Act of 1934, the Rural Electrification Act of 1934, the Agricultural Marketing Agreements Act of 1937, and the Agricultural Fair Practices Act of 1967.

Farmers historically belong to two basic types of organizations. Professional farmers' associations, both general farm and commodity specific, represent members as an occupational group. They offer producers a forum for influence and protest, including what are minimally acceptable farm gate prices for their products. They also have a history of involvement in product promotional activities, and encourage the development of cooperatively-owned businesses. While general farm organizations were active developers of cooperatives in the early part of this century and continue this function, commodity associations like those representing corn, pork and wheat growers have been particularly active in the 1990s.

The second basic type of organization is the cooperative which represents an off-farm extension of the farm firm that is active in marketing, purchasing, credit and/or other service functions. Cooperatives exist to supply inputs and services to farmers and to efficiently handle and process farm produced goods and garner returns for members commensurate with their investment in them. Many have well known brand names for their products.

The strength of producers' group action efforts is often measured by how effectively these two basic forms of organizations work together in furthering producers' interests.

Challenges in the Economic Organization of Agriculture

Farm operators today are feeling threatened by low commodity prices and changes in the economic organization of agriculture. Some are even wondering if they are becoming an extinct species as they suffer in quiet desperation. A systems perspective of the economic organization of the marketing channel represents a good way of assessing the changing makeup of production agriculture.

Commercial farmers typically use open markets, cooperative bargaining associations and integrated marketing cooperatives as a method of pricing and moving products off the farm and into the marketing channel. Varying degrees of producer ownership exist as product advances downstream. Open assembly markets continue to experience a reduction in volume of products handled as more integration occurs. Considerable interest is found among commercial producers in cooperative bargaining and marketing. In contrast, piece-wage contract growers are essentially offering their management services unit to corporate integrators for a fee.

Corporate ownership of production and distribution typified by Smithfields and Tysons ultimately displaces farm operators entirely. Farm policy generally has not addressed issues in the structure of production agriculture. However, a neutral policy on the subject, has led to more corporate involvement -- enticed by the growing state of aggregate demand for food. Corporate factories in the field are increasingly worming their way into production agriculture.

Current trends that are leading to a renewed interest in cooperatives include industrialization and concentration, increased contracting, phase-out of farm price supports in the Federal Agricultural Improvement and Reform Act, Administration commitment to assisting the socially disadvantaged and underserved, and the "new generation" cooperative phenomena.

Two methods of achieving market power for producers are: (1) horizontal organization of producers and/or cooperatives, and (2) vertical integration into value-added processing and distribution. We can observe evidence of activities on both fronts taking place. Under the first, many producers are expressing interest in organizing to negotiate contract terms for identity preserved crops or livestock. A third method or an extension of (1) and (2) is the merger or consolidation of cooperatives in many sectors in an orderly process to become global competitors. The Food Institute suggests this merger boom across the food industry is happening because bigger is better in the global marketplace, the U.S. economy continues to boom, relatively low interest rates continue, and firms are motivated by the rule of three -- there is only room for two or three big fish in the corporate pond. If they don't eat they will be eaten or simply starve to death.

In the current trend for developing more effective market power, we can observe emphasis on the value-added strategy. Farmers and ranchers are saying that in order to survive as independent entrepreneurs they need a piece of the marketing margin between the farm gate and consumers' purchases. This approach to using cooperatives not only gives them a share of marketing margins, but it also enables them to build markets for their products, preserve and enhance their position as independent producers/entrepreneurs, and gives them a stronger voice in industry affairs. Much of this latter thinking is found among the proponents of the "new generation" cooperatives. The "New Generation" Cooperatives

Some distinctive characteristics can be found in the new generation cooperatives. Member investment is tied to "delivery rights" in the cooperative. The member is obliged to deliver and the cooperative, to receive delivery and add value to the crop or livestock marketed. Membership is limited. And delivery rights are transferable to other bonafide producers and may appreciate or depreciate depending on the cooperative's performance. Members put their money on the table up front when purchasing delivery rights. High levels of cash patronage refunds are issued annually due to this up-front capitalization of the business.

Among the pioneers of this form of cooperative organization in the 1970s-80s were American Crystal Sugar, Minn-Dak Farmers Cooperative, Southern Minnesota Beet Growers, and Minnesota Corn Processors. New cooperatives of this type formed in the 1990s include Dakota Growers Pasta Cooperative, North American Bison Cooperative, Spring Wheat Bakers, U.S. Premium Beef, and Mountain View Harvest.

One of the attractive features of this approach from an economist's perspective is that the cooperative, properly managed, can tailor supplies to effective demand. They do not take delivery on all that a member might wish to deliver because the amount delivered is fixed in the delivery right. Purchase of commodities on the open market by the cooperative is authorized in the agreement if a member fails to deliver. The cooperative under these conditions can maximize processing throughput and guarantee customers delivery of end products. Producers are clearly involving themselves in a committed system of value added beyond the farm gate.

Some estimates are that as many as 75-100 of these new generation cooperatives are in various stages of development.

Next Generation Cooperatives?

This past spring, Under Secretaries Jill Long Thompson and Gus Schumacher appointed a multi- agency working group to assess a more proactive policy role for cooperatives. I had the privilege of chairing this working group which developed a report on cooperative-based farm policy. Under Secretary Thompson plans to use ideas from this report and some of her own in a presentation before the House Agriculture Committee chaired by Congressman Combest early in the next session of Congress. The report has not been released.

There are opportunities to build on cooperative structure and services in delivering USDA programs in such areas as crop insurance and farm program loans. In addition, greater use of cooperatives can be made in meeting farm operator health insurance needs similar to the Federal workers' group health insurance programs.

Cooperatives have historically been viewed as antimonopolistic, or competition enhancing, tools available to farm operators competing in a world of bigness. At a time when Congress is considering a moratorium on agribusiness mergers and consolidations, it is also appropriate to assess the benefits of greater growth and presence of cooperatively-owned businesses as a means of maintaining a dispersed ownership agriculture throughout the country.

New legislation encouraging negotiated pricing through horizontal organization of farm operators or service providers is also receiving increased attention. There is recognition that legislation is required to assist atomistically structured contract growers in this process. New provisions, among others, would go beyond the Agricultural Fair Practices Act (AFPA) by including good faith bargaining, dispute resolving mechanisms, civil enforcement authority by USDA for violations, and elimination of the disclaimer clause in the AFPA.

Another dimension of next generation cooperatives is a legislative proposal by the Department to expand the authorities of Cooperative Services to include programs to all types of rural cooperatives. The same bundle of services currently offered to farmer cooperatives would be extended, with proper budget support and staffing, to rural nonfarm cooperative businesses such as those in housing, health care, child and elder care, credit, rural utility, purchasing and worker-owned.

As you can see from this portfolio, these are exciting times to be working in the group action field. What we lack in current staffing is made up in enthusiasm for the task of helping people to help themselves through development of self-standing business organizations that they own and control. The future makeup of American agriculture and rural communities will be greatly aided by these model USDA programs.

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