Agricultural cooperatives are a quiet but massive force in our national economy, producing nearly $4 billion annually and serving millions of owner-members. In the Pacific Northwest, most of our major dairy, fruit, grain and vegetable processing companies are cooperatives. You may have heard of a “co-op,” but what is it, really? At its core, a cooperative functions as a capital-funding structure to allow people to pool resources for something they need but cannot afford alone. But in contrast to for-profit corporations, the cooperative economics are measured on a member’s use or “patronage.” Examples of common co-op facilities are fruit-processing facilities, creameries and grain transport equipment. The members pay the co-op for its services, but nearly at cost and the co-op distributes losses or profits back to its patrons based on how much product each delivered, not how many shares are held.
Cooperatives in America trace back to Ben Franklin, and were primarily the result of farmers’ desire for some control over crop delivery, wholesales and sharing risk. Certainly the inherent desire of farmers and growers to have a bit more predictable control over their lives and not subject to middleman supplier margins is still real.
I have had the privilege to learn agricultural co-op law from our senior partner in Seattle, Don Franklin. Don is the “guru” and helped draft the current Washington co-op statute. Under that law, RCW 23.86, you will find special incorporation provisions for agricultural associations that do business on a cooperative basis. Many agricultural co-ops are traced to the time around World War II, but several have been consolidated or dissolved over the past 20 years because of dwindling rural membership. Long-term growers realize value and several co-op tax and operating benefits, including an exemption from federal antitrust price-setting for direct agricultural producers.
A new generation is stepping into co-op membership and seeing long-term value of controlling at least part of the food chain, even if it means a long-term investment in co-op assets, to help keep smaller local producers competitive.
Within the world of agricultural cooperatives are two primary groups:
- Ag Marketing: A marketing co-op markets and sells its members’ crops. Some are vertically integrated and may process a member’s crop into some value-added product (such as cheese or canned fruit). Most members sign a “marketing agreement” under which they agree to deliver some or their entire crop to the co-op facility for marketing and sale.
- Ag Supply: The other primary type of agricultural cooperatives is a “supply co-op.” Such a co-op supplies its members with products they need (petroleum, fertilizer, chemicals, equipment, etc). Essentially, a supply co-op is a retailer of farm supply and hardware products that sells to farmers (and anyone else who walks in the door). The members usually sign a membership agreement and receive a “patronage” rebate or distribution when the co-op has excess revenue based on how much each member purchased.
Until recently, co-ops have faced a decline in membership or patronage use because the food-distribution system is designed for larger and fewer sources of supply, not smaller local farmers. This may be changing with modest but high-profile growth in organic, sustainable, local-sourcing and farmer’s market delivery. Co-ops can also face difficulty finding and keeping top-quality management at compensation that competes with non-co-op businesses.
To meet and survive these challenges, cooperatives are seeking ways of “adding value” or reducing costs that are currently being captured by others in the food-distribution chain and ways of engaging more directly with consumers such as:
- Expanding through mergers or joint ventures to get bigger or compete with larger producers;
- Helping members navigate modern customer certification and food safety laws;
- Taking full advantage of pass-through tax benefits of “patronage income” and “T” corporation treatment; and
- Serving a sustainable mission beyond only maximizing profits, and covering some of the same objectives or “social benefit” as certified “B” corporations.
The future and value of co-ops is strong, especially as consumers take greater interest in the quality and local sources of food and understand that an Ag Co-op is just a user-owned company that serves its members, not outside investors.
Dustin Klinger, a partner at Miller Nash, concentrates his practice on real estate, business transactions and finance. He can be reached at 360.699.4771 and at dustin.klinger@millernash.com.
