How business culture drives
economic behavior in co-ops
By Julie A. Hogeland,
Agricultural Economist
USDA Rural Development
julie.hogeland@usda.gov
Editor’s note: The following article is
based on the author’s presentation at the
“Mapping Cooperative Studies in the New
Millennium” conference, held at the
University of Victoria, Victoria, British
Columbia, May 29, 2003.
Conference papers may be found at:
http://web.uvic.ca/bcics/map_conf_papers
.html
he premise of this article
is that culture affects
economic behavior. The
focus is on how the concept
of service, as offered
by regional and local farm supply and
grain cooperatives, has evolved during
the past 20 years.
Service started out as a producer-driven
concept, associated with cultural
expectations of entitlement. The institutional
framework for realizing these
expectations was created by multi-commodity
cooperatives, such as Farmland,
Countrymark and Agway. The producer’s
needs were foremost in this setting.
Service ended up becoming defined as a
market-driven concept, where the needs
of the customer become paramount.
The institutional framework has
evolved into an industrialized system of
agriculture, in which producers have
faded more into the background as
cooperative identity has coalesced
around participation in value-added
food chains. In this context, being a
low-cost supplier or getting a high price
becomes the key definition of service.
Typically, economists have not paid
much attention to culture. They tend
to treat most decisions as a matter of
price and quantities, or as financial
considerations, such as interest rates.
Cooperative management, members
and directors also have not explicitly
considered culture. When decisions
diverge from economic considerations,
the cooperative community typically
regards the decision-making process as
“political.” This does not mean a
political party, but refers to the variety
of commodity interests, geographic
interests or farm organization affiliations
that can subtly influence cooperative
agendas on a day-to-day basis.
Characteristics of
cooperative culture
There is an underlying, more fundamental
and unified aspect of cooperative
culture that reflects common
understandings of what cooperatives
should be and the values and duties
they should encompass. These typically
include:
- Emphasizing service over making
money;
- Being altruistic not exploiting
the business for a profit;
- Attaining self-sufficiency to minimize
farmer dependency on those
perceived as outsiders;
- Emphasizing a hierarchical style
of leadership and dependence;
- Often displaying an unwillingness
to let go of relationships, things
or places;
- Valuing the “small and personal”
over the “large and impersonal”;
- Preferring to subordinate individual
goals to the good of the
whole; and
- Valuing equality (treating everyone
equally).
Collectively, these are the social
mores of a group that is more like a
family than a business. Together, they
form a framework for understanding
multiple dimensions of cooperative
behavior.
These themes were drawn from
some 30 interviews conducted with
regional and local cooperative management
during the past two years.
During the interviews, managers
were asked to provide examples of
expressions or language that represented
traditional ways of talking about
cooperatives. Managers were also
asked how they would respond to such
traditional thinking. This give and take
provides a useful compendium of
how local cooperative managers
who are on the front lines of cooperative
activity, because they interact
directly with farmers are gradually
reshaping cooperative culture.
Cultural road map
The primary cultural road map followed
by most co-ops (other than bargaining
cooperatives) is the competitive
yardstick model of Edwin Nourse
(Nourse 1992). But in some important
ways, this is probably an outdated
script. Nourse established the “competitive
yardstick” in the 1940s. He
believed farmers should form cooperatives
only when needed to offset
monopoly power, or to compensate for
inadequate services.
After cooperatives had disciplined
potential monopolists through the
yardstick of competitive efficiency,
Nourse believed they should simply
maintain watchdog status over an
industry, not try to dominate it themselves.
He even suggested cooperatives
might consider abandoning industries
where they had been particularly successful
in establishing competition.
Leave it to others to compete and let
farmers go back to their traditional
activity of farming, he advised. This
was a very passive vision of cooperation
that left unanswered many of the questions
that concern cooperatives today.
For example, it is not clear how big
cooperatives should get, how long they
should stay in a particular industry and
whether their relationship to other
industry participants should be one of
competitor or partner. The main prescription
of Nourse’s competitive-yardstick
model was that cooperatives
should provide “an extra bid” or “extra
competition” to “keep everyone honest.”
But this cultural model was
formed in response to concerns about
market concentration and farmer
exploitation during the first part of the
20th century.
Today, the concerns of farmers and
their cooperatives are much different.
These concerns include: getting access
to information, finding a place within a
value-added system, negotiating an
equitable ownership role within that
system and addressing food safety and
other product specification issues
which are integral to the success of
those systems.
Recent severe financial pressures,
including the bankruptcies of the
Farmland Industries, Agway and
TriValley cooperatives, suggest that the
culture may be pointing cooperatives
in the wrong economic direction, at
least in some respects.
The primacy of service
The primary cultural value that drives
economic behavior in cooperatives is
service. The way service dictates choices
within cooperatives is demonstrated
when managers or directors say, “We
take care of our members.” Or, if managers
want to cut costs, and so cut back
on services, they may say: “I can’t do it
because my members won’t let me.”
As part of this service culture, there
is a broad definition of member needs
because farmers are continually asked
what they want their cooperative to do.
This leads to an “add-on” mentality, in
which the mindset is: “let’s add on this
and add on that.” This attitude is reinforced
by certain expectations, which
local cooperative managers describe as:
“Farmers like to go into every location
and get everything they want.” Or,
“Farmers like to see their equity
investment spent at their own location,
where they can see it.”
The service culture gives primacy to
member needs above all other factors.
The fact that members want something
and the cooperative exists to serve their
needs makes other factors secondary,
including what the service costs, how it
fits in with the other services offered by
the cooperative, whether the service is
already offered by competitors and so
on. The economic consequence is that
the cooperative can become a multipurpose
business that lacks a clear customer
definition.
The expression, “Cooperatives are
all things to all people,” reveals the
fundamental loss of purpose created by
the add-on mentality, which other
cooperatives (discussed later) are
attempting to recover. With the “addon”
mentality, the cooperative defines
itself as it goes along, by accumulating
a wide number of product lines, which
are often not clearly related.
Ultimately, it becomes very difficult
for such cooperatives to achieve the
critical mass and scale economics that
would enable them to compete with
more efficient and focused suppliers.
“Add-on” mentality
leads some to ruin
The “add-on” mentality brought
Agway, the largest cooperative in the
United States in the 1980s, to bankruptcy
in 2002. Despite a strict policy
that it would not get involved in dairy
processing, the New York-based supply
cooperative in 1980 purchased H.P.
Hood, a fluid dairy company, in order
to help members of Northeast dairy
cooperatives stabilize milk markets
(Anderson & Henehan 2002:3).
“Agway had no prior experience
running a fluid milk business,” which
is “very competitive, and operates
much differently than an agricultural
supply company,” according to
Anderson & Henehan. In the following
decade, Agway was able to pay a
patronage refund only twice.
Intense member support for a particular
service, sometimes just the
highly vocal support of a few members,
can be sufficient to dilute or override
the importance of economic factors.
“Members, at times, asked Agway to
do too much on their behalf without
thoroughly understanding the costs
involved” (Anderson & Henehan
2002:11).
The management of the cooperative,
particularly a regional cooperative,
then has the responsibility to
build an organization around member
choices. Gold Kist used the slogan
“Diversification is Our Strength” to
reflect its interests in poultry, agronomy,
cotton, poultry and peanuts. “By
shedding its non-core businesses, Gold
Kist Inc. is fast becoming a lean, mean
poultry machine,” according to the
May 2002 issue (page 16) of
“Refrigerated & Frozen Foods.”
Farmer attrition limits
diversification strategy
If there are a large number of farmers
to be served by the cooperative, the
cooperative may be able to make a
diversified service strategy work.
However, there are particular economic
stressors that make it particularly
hazardous for cooperatives to follow
this strategy.
Chief among these factors is farmer
attrition. As the number of farmers
declines, fewer will want any particular
service. When agriculture began leaving
the Southeast, Gold Kist’s diversity
became a weakness. Farmers also have
become increasingly specialized, so
their demands have become more oneof-
a-kind. Consequently, the service
culture can set the cooperative up for
dying a slow economic death, insofar
as the assets accumulated to serve
members in a variety of ways are slowly
and painfully sold off, one by one.
To maintain cash flow, Agway shed
two profitable businesses, Telmark
leasing and its North Dakota sunflower
business. But this did not save it
from bankruptcy.
Some service cooperatives have
turned to “bundling” grouping a
particular service within a group of
related products or services and pricing
them as a unit. As economic pressures
force many producers out of
farming, those that remain are forced
to examine costs more closely.
Cooperatives that have bundled items
together may be forced to decouple
them so that producers can compare
prices individually.
Cooperatives that have built an
administrative or overhead system
around providing service packages or
production systems may find that producers
prefer to assemble their own
systems, piecemeal, from different vendors
because it is cheaper. Appealing to
customers through a broad product
array may make a cooperative vulnerable
to transient consumer loyalties.
Farmers may pick and choose, but
the cooperative is stuck with the overhead.
Cooperatives may have invested
in costly assets, such as feed mills, and
assumed that farmer desire was equivalent
to farmer use. Managers refer to
this cultural concept as: “We will build
it, and they will come.”
Large producers demand bargains
Consolidation among suppliers and
farmer-customers has resulted in large
producers driving hard bargains, and
agribusiness conglomerates are often
willing to do what is necessary to capture
the business of these customers.
In this context, the service strategy
puts cooperatives in a particularly vulnerable
position. More and more farmers
may be seeking the one-time-only
“best deal.”
So, local cooperative managers are
beginning to revise the way they
approach the concept of service. Some
are asking: “Who do we serve? Who is
our customer? Will they still be there
in the future? Is that the business we
want?” There’s good business and bad
business.
These managers are starting to look
at how much it will cost to serve a
group of farmers. Some are saying:
“Hey, we can’t do that. Let’s walk
away. Let someone else serve them.”
This is the sort of approach a corporation
operating for profit would
take. Instead of serving all customers
being all things to all people the
cooperative “cherry-picks” by pursuing
the most attractive customers.
Co-ops: a family business?
Looking at their farmer-patrons in
terms of their potential profit to the
cooperative introduces a form of “distancing”
into what may have been a
personal or social relationship. In some
rural communities, the relationship
between management, directors and
cooperative members has been so personal
and closely linked that the cooperative
is more like a family, in some
ways, than a business.
This is shown in the way managers
of small-town, locally owned grain elevators
and farm supply stores go out of
their way for their farmer-members.
When a farmer pulls up at the co-op
elevator at closing time with a truckload
of grain, the manager will stay
late, even though elevators operated by
multinational corporations have probably
closed. Similarly, the co-op will
spray the farmer’s fields at night
because that is when the winds have
died down.
Why do managers do this? “Because
our kids go to school with their kids,”
they say.
In such communities, there is an
intertwining of economic, social,
neighborhood, kinship and political
dimensions within the cooperative
bonds. While this has given cooperatives
their cohesiveness and unity, it
has also established certain expectations
among farmers that may be resistant
to change.
If managers charge for advisory services
previously provided as a free service,
farmers have objected, saying: “You
never charged me before. You want my
business? You better do it [for free].”
Yet managers cannot attract the skill
level of technical help farmers need
without paying a particular salary level.
So, they have to become, in their
words: “more of a business than a
cooperative.” This linguistic distinction
shows the extent to which cooperatives
have been put in a class apart
from other businesses and held to different
rules and expectations.
As managers try to revise these
expectations, they anticipate their
cooperatives will become less personal
than what their father’s co-op was,
more of a business (“arm’s length”)
than family relationship. Long-term
margins will be in technical support
services, not in the bulk commodity
products that have been the traditional
source of income for local cooperatives.
Regionals must also adjust
Regional cooperatives have a similar
adjustment to make. Their task as
manufacturers is to answer the question:
“What are we good at?”
For Gold Kist, the answer was poultry,
which co-op leaders defined as the
co-op’s core business. This decision
led them to divest their operations in
agronomy, pecans, catfish, farm supplies
and peanuts. Similarly, Land
O’Lakes recently announced
a phased
reduction of its involvement in the
pork industry, due to the displacement
of family farmers by integrators and
increased market volatility.
By streamlining and narrowing their
commodity focus, these cooperatives
are approaching the question of service
from the standpoint of: “Who do we
serve?” and “What are we good at?”
They are using a dual focus that
allows them to take more than just
producer interests into account. Agway
essentially looked at the question of
service from the standpoint of, “Who
do we serve?” That is, of producer
interests. “What are we good at?” is a
question that addresses the economic
efficiencies of the cooperative.
The multi-commodity cooperative
has to balance different producer interests,
which can be a difficult task.
Farmland and Countrymark were two
such cooperatives. These cooperatives
had portfolios that, between them,
included grain, pork, turkeys, fertilizer,
beef, agronomy and petroleum. The
portfolios were built from the standpoint
of anticipating that a good year
in one commodity would offset a bad
year in another.
So, an expectation of loss was built
into the cooperative’s culture. At some
point, a commodity cycle was going to
hit the cooperative hard. And, in fact,
when particularly severe losses
occurred for one commodity, as in the
case of Farmland and fertilizer, it hit
sufficiently hard to push the entire
cooperative into bankruptcy.
The case of Farmland is particularly
interesting because it represents a mix
of cooperative values of self-sufficiency
and service. Self-reliance may be a
value that can be traced to pioneer values
and distrust of outsiders. It also has
figured prominently in farmers’ desire
for a source of domestic fertilizer supplies
so they can undertake spring
planting on schedule.
During the 1970s energy crisis,
farmers were able to accomplish this
critical task because cooperative
resourcefulness maintained sufficient
natural gas reserves, a seedstock for fertilizer.
This accomplishment became an
established cultural model for a later
period of high natural gas prices.
During 2001-2002, a period of particularly
high natural gas prices,
Farmland Industries tried to assure
farmers of self-sufficiency for fertilizer
supplies, following the example set by
cooperatives 30 years earlier. At the
recommendation of members,
Farmland went into considerable debt
to buy domestic manufacturing plants.
Imported fertilizer would have
been much cheaper, possibly less
available and sometimes it even
looked odd, because it was colored
black instead of white. Farmland was
the largest U.S. farmer cooperative,
but the fertilizer debt helped pitch it
into bankruptcy.
What was different between the
energy crisis of the 1970s and 2002
was that new suppliers, such as Russia,
had come on stream. The need for
cooperatives to respond to the mandate
“We take care of our members”
was suddenly an anachronism in the
context of the wider availability of supply
on the world fertilizer market.
New service model needed?
Rethinking conventional notions of
service means that some demands
made by farmers have to matter less
than others. Some demands have to go
by the wayside. The rules of the game
have changed.
The expectation that farmers will
automatically be loyal to their cooperatives
is no longer true. Someone
else may be cheaper. Someone else
may have a better product. The cultural
obligation that cooperatives
should go out of their way to provide
service to their farmer-members
may no longer be valid.
Farmland and Agway experienced
problems in part because their definition
of service was so producer driven
that the overall health of the cooperative
became secondary.
For the local cooperatives that are
members of Ag Processing Inc. (AGP),
a regional cooperative, service is
defined as getting a better price for
their soybeans. AGP, as a regional
cooperative, is focused only on soybean
processing. That dedication allows
AGP to be a low-cost supplier to
industry users of soybean oil and meal.
If there is a lack of demand for soybean
oil or some other setback in the
soy-processing industry, the local
cooperatives that own AGP accept this
as a consequence of their ownership.
The lines of accountability are clear.
This clear demarcation of boundaries
seems to be one of the evolving characteristics
of cooperation.
The intensive specialization followed
by Gold Kist and AGP was triggered
by recognition that consolidation
has happened within interdependent
parts of the food chain.
Cooperatives that lack the critical
mass, focus and capitalization will be
locked out of desirable value-added
opportunities, such as instant meals.
To qualify as players in this highstakes
game, cooperatives often need
to be low-cost producers, which
requires high product volumes and
dedicated, efficient handling.
Cooperatives such as Farmland
and Countrymark that pursued a
counter-cyclical, diversified portfolio
had to spend considerable attention
managing the divergent commodity
cycles and any resulting complications
in member relations. Their definition
of service was necessarily producer-
driven.
With specialized cooperatives,
such as Gold Kist or AGP, the relationship
with the investment partner
becomes paramount, whether the
partner is another cooperative or a
corporation, as they jointly develop
their respective contribution to a
value-added system. What becomes
important in defining service is not
what Farmer Joe wants, but what the
customer wants. The definition of service
is market driven.
Re-evaluating Nourse
The cultural model of Nourse’s
competitive yardstick was a negative
one, skewed toward countering
monopolistic exploitation and power,
not the pursuit of opportunities for
cooperative growth and influence.
Nourse wanted to see that farmers
were served well. His cultural legacy
may have been a sense of “farmer
entitlement” that has overburdened
the economic capacities of cooperatives.
With the industrialization of agriculture,
the pendulum is swinging back
the other way. Farmers are often now
regarded in a more detached way as
“the most efficient managers of land”
within an industrial management system
(Urban 1996:70). Attention has
shifted from farmers per se, to the drivers
of the value-added systems found
in agriculture today, including cooperatives.
These systems could offer an
economically healthier cultural environment
for cooperatives to flourish in
than the Nourse-influenced setting of
a previous era.
References:
Anderson, Bruce L. and Brian M.
Henehan. “What Went Wrong at Agway”
Occasional Paper, Cornell Cooperative
Enterprise Program, Dept. of Applied
Economics and Management, College of Ag.
and Life Sciences, Cornell University, Ithaca,
NY. October, 2002.
Refrigerated & Frozen Foods, May 2002
Vol. 13 (5), 16. ISSN: 1061-6152.
Fulton, Murray, “Traditional versus New
Generation Cooperatives,” in Merrett,
Christopher D. and Norman Walzer, eds.,
A Cooperative Approach to Local Economic
Development, Westport: Conn.: Quorum
Books: 2001.
Hogeland, Julie A., “The Culture of
Cooperation,” Presentation to the Annual
Meeting of the American Anthropological
Association, November 24, 2002, New
Orleans, Louisiana.
Nourse, Edwin G, “The Place of the
Cooperative in Our National Economy,”
Reprint from American Cooperation 1942
to 1945. Journal of Agricultural Cooperation
1992 Vol (7) 7:105-111.
Urban, Thomas. ”Agricultural
Industrialization: It’s Inevitable.” The Best of
Choices- 1986-1996. (Reprinted from
Fourth Qtr. 1991, pp. 70-72). Ames, Iowa:
American Agricultural Economics Assn.,
1996.
