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Part 1 Cooperatives and their environment

Agricultural service cooperatives have generally been set up for either defensive or proactive purposes. Defensive strategies have focused on protecting small producers from unfair competition and otherwise helping to keep them on the land. This is often difficult because agriculture is a highly competitive industry, which is occupying less and less of the global workforce over the long run. In contrast, proactive cooperatives have been formed either to respond to new business opportunities as new markets open, or when government-sponsored activities are discontinued or privatized.

In all cases, the goal of agricultural service cooperatives has been to enable rural people to improve their economic condition by working together in ways that are more productive than working individually. This tradition, still very much alive, has promoted the spread of democratic values, local economic and social development, and entrepreneurship, creating important social capital at the community level.

1 The changing cooperative environment

Currently, there are a number of changes in global economic conditions that confront and challenge the viability of agricultural cooperatives in the developed and developing world. These include:

2 Cooperative principles and business practices in the early years

Cooperative principles have inspired cooperative leaders and members throughout the world for more than a century. These principles are also the starting point for an exploration of cooperative capital because they define the unique identity that distinguishes cooperatives. They answer the question, “what is a cooperative?

The main principles on which cooperatives are based are:

Cooperative principles were first devised and successfully implemented in the 1800s in Europe and in the early 1900s in North America, in situations where markets were much less efficient. Inefficiency occurs when at any given time the prices of identical goods (adjusted for transport costs) vary widely, as they often do in poor countries today. Lack of information and high transport costs imposed high transaction costs, and low levels of competition further placed small individual producers or sellers of “commodity” products at a disadvantage.[1]

Even though small producers of commodity products cannot easily differentiate their product, collective action partially overcomes this limitation. Product differentiation and higher returns to producers become possible when more value is added to the commodity, e.g. when milk is turned into cheese, or when coffee can be branded by origin, or when organic produce creates a new consumer clientele. To add value, capital is usually required.

Collective action enabled early cooperatives to exert more market power by combining their members’ produce in bulk thus reducing per unit costs, and also by adding value through processing operations. While the effort to form and manage cooperatives increased their transaction costs, it also increased their net returns. Cooperative retail shops likewise commanded loyalty by fair pricing and good service. Members were typically poor in the early years of cooperation, and the capital of their cooperatives was typically small.

The principles of cooperatives are different from those of private businesses such as corporations (see Box 1) and they create particular problems for cooperatives in raising capital.

The situation now though, is rather different. Proactive cooperatives have learned to adapt in order to survive, which means continued benefits to members through the patronage and investment of all members. These innovative and successful cooperatives have found new ways of interpreting or applying cooperative principles that make it worthwhile for their members both to use and to invest.

Box 1 Comparison of cooperatives and private businesses



Limited Company*


Service to members;
Collective action;
Member participation in democratic processes

Competitive power;


By members who join to use services;
Emphasis on member patronage (usage) rather than investment

By investors who may or may not be involved in the operation of the enterprise


One member, one vote, regardless of shares held;
Elected members constitute the board;
Government oversight and intervention in many countries

One share, one vote;
Board members and managers are not necessarily shareholders

Nature of

Shares purchased and redeemed at par;
Redemption is time-consuming;
Capital revolves as new members join and old members leave;
Member shares may be issued for patronage;
A low cost source of finance

Shares are bought and sold freely, unless otherwise agreed by shareholders;
Redeemable only in liquidation, or through merger or buy-out;
Price determined by negotiations between buyers and sellers or bid/offer;
The most expensive source of finance because it bears the most risk


Shares often dominate where debt is difficult to obtain;
Dominated by debt when foreign or government loans are readily available;
Institutional capital from retained surpluses is costless

Varies by industry and by firm;
Influenced by financial markets expectations of risks and returns or profits

Value of
to Owners

Shares issued and redeemed at par value;
No appreciation of share value is possible;
Return on shares limited by laws, tax considerations or custom;
Benefits from use of services that provide savings, i.e. favourable prices offered by the coop on services used by members

Market value of shares (with an expectation of increasing value over time);
Dividends decided by the board of directors

of Net

In proportion to member patronage or use of coop services measured in financial terms

In proportion to shareholding

* This comparison is based on classic cooperative models and on medium and large corporations in the private sector.

3 The diversity of modern agricultural cooperatives

Successful agricultural cooperatives have come up with a variety of innovative ways to address the dual roles of the cooperative member as user and as investor.

These new strategies for raising capital and remaining viable differ according to the orientation of different cooperatives and their opportunities. In discussing capital, it is useful to distinguish between different types of agricultural service cooperatives and how they deal with the challenge of raising funds. As a broad generalization, member funding opens the way to progress, and two varieties of cooperatives may be identified for this purpose: traditional or colonial cooperatives, and commercial cooperatives. (This typology is expanded later in this booklet.)

4 New challenges and insights

Cooperatives become more complex as they grow and respond to competition. At the same time, members become more demanding, as freer and more efficient markets increase their opportunities. These changes challenge traditional mechanisms of solidarity, and require the adoption of new financial strategies that encourage members to patronize the cooperative and become involved in democratic decision-making in its business operations.

Today, information is increasingly available cheaply and rapidly, transport is faster and competition more intense. Insights from the New Institutional Economics help explain why the current environment produces conflicts arising from cooperative principles.[2] These economic insights also provide strategic tools for cooperative enterprise and its governance. They suggest that members’ interests and the interest of the cooperative as a commercial entity may diverge, while in former times it was believed that cooperative practices were to a very high degree in harmony with members’ interests.

Harmonizing members’ interests and the cooperative’s interests is the key to effective capitalization. The core problem of capital formation in cooperatives is the inherent conflict between: a) members’ interests as users or suppliers and b) their interests as investors. This conflict creates at least three important problems: the Horizon Problem, the Portfolio Problem and the Internal Free Rider Problem:

5 Improved strategies that help cooperatives to compete

Cooperatives need to adapt, finding new ways to finance their operations and compete, while maintaining their cooperative “identity”. As new approaches to generate more member capital increasingly resemble mechanisms used by limited companies, they may become increasingly controversial. Do these mechanisms constitute a useful road map to stronger cooperation, or is it a question of destroying solidarity and joining the competitor?

The answer depends on market conditions and the responses selected by cooperatives. The great majority of modern cooperatives that succeed in addressing competitive situations choose to adapt and innovate, moving away from a strict interpretation of traditional cooperative principles towards definition of a more modern cooperative identity. This identity is based on recognition of the equal importance of the member both as user and as investor, and driven by a new emphasis on independence and autonomy.[3]

Many changes in cooperative financing are under way and others (covered below) have been under way for decades in Europe, North America and Australia and New Zealand. Familiar features reappear: democratic control remains important, and open membership is preserved in most new forms. Members are very likely to be users, but their role as investors is usually more prominent. For this to be effective, members as shareholders have to receive returns that give them incentives to invest. A more even balance between these roles reduces or eliminates the Horizon, Portfolio and Free Rider Problems that so often arise when traditional cooperatives face capital shortages.

One reason for this tremendous social and economic progress achieved in rich countries is the historic effort of cooperatives to create markets in which more people can participate. On a broad scale, cooperatives have historically created more efficient markets by competing with other forms of enterprise, and have done so largely by empowering common people as producers. Agricultural service cooperatives control significant market shares in the food economy of many countries, and this is likely to continue. However, maintaining or improving upon these achievements in the future will require even more capital to reap the potential gains.

New developments in cooperative financing include the issue of new classes of shares in addition to member shares. These may be weighted on the basis of one share, one vote. This may attract additional members and capital from those who would otherwise not be willing to contribute. Their unwillingness reflects their relative lack of control when control is based on one member, one vote, regardless of the amount of members’ investment in the cooperative. Other changes involve the use of deferred payment revolving funds, base capital plans and limited company forms of organization for certain activities undertaken for the benefit of cooperatives and their members. The variety of methods used by modern commercial cooperatives in developed economies to mobilize member capital may surprise many who work with cooperatives. (For more details, see Part 2 Section 2.2 “Innovative forms of member capitalization.”)

6 Legal framework and support

Many regulations governing the operation of cooperatives were established long before the emergence of current trends in the world economy. Laws providing legal protection were enacted to justify and control cooperatives’ special business status and tax privileges. Control follows privilege, and whether some of these laws have done more harm than good is debatable. Some cooperative regulations from the past are still appropriate, others less so.

Examples of laws and regulations that restrict cooperatives in their business activities and discourage capital accumulation include those that require:

On the other hand, many other current business laws and regulations are appropriate and benefit cooperatives. These include those that:

However, evidence also shows that in developing countries financial support and privileges for cooperatives are decreasing, and cooperatives are increasingly obliged to compete with conventional businesses. Without their former privileges, many of the above regulations put cooperatives at a competitive disadvantage in the marketplace.

A review of existing laws and regulations governing agricultural cooperative businesses is therefore urgently needed in many countries to enable farmer cooperatives to participate successfully in increasingly competitive markets. Support organizations such as the Plunkett Foundation in the United Kingdom and international bodies such as the International Labour Office and the International Cooperative Alliance in Geneva, and the Food and Agriculture Organization in Rome, can provide guidance to movements and governments willing to encourage cooperatives through regulatory reform.

[1] Unbranded and unprocessed agricultural commodities of similar quality are identical, such as grain of a certain grade and moisture content, or raw milk with a certain fat content, and therefore cannot be differentiated. In contrast, tractors are differentiated by maker and by special features.
[2] See Cook, n.d.
[3] In 1995 the International Cooperative Alliance adopted a statement of cooperative identity based on seven points: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training and information; cooperation among cooperatives; and concern for community. (see

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