February 2010 Archives
Co-ops are one of our shopping options -- Co-op Marketplace grocery stores, credit unions, Co-op Gas Bars and C-stores, Mountain Equipment Co-op -- and they are an important part of our economy. Co-ops were also once a major player in western Canada's grain handling industry. At the turn of the 21st century, however, something changed. The grain handling co-ops across the Prairies - Saskatchewan Wheat Pool (SWP), Alberta Wheat Pool, Manitoba Pool Elevators, United Grain Growers - were forced to merge or to restructure into investor-owned firms (IOFs) to salvage their existence. The grain handling co-ops were not alone. Other agricultural co-ops across western Canada (e.g., Dairyworld, Lilydale) and the United States (e.g., Rice Growers Association, Tri Valley Growers, AgWay) also faced bankruptcy or converted to investor-owned firms during the same timeframe. The underlying financial pressures included mounting debt loads, fierce new competition, the need to access capital, the need to reduce member production and price risk, the need to grant members access to their equity and the need to realize the co-op's market value.
With several large agriculture co-ops facing the same issues at roughly the same timeframe, one has to ask -- are these isolated events or are they part of some larger pattern? What can be learned from these events that can be useful to other co-ops? To answer these questions the KIS project approached researchers throughout Canada and the United States to build upon their existing research on restructured agricultural co-operatives. The result is a book titled Co-operative Conversions, Failures and Restructurings featuring thirteen research cases by twenty-two researchers.
Aggregating the stories of thirteen agricultural co-ops provides a number of insights into the strengths and weaknesses of the co-operative business structure. First, some of the conversions were simply due to poor management, or to excessive control by management, problems that can affect all business enterprises. A case in point is the Saskatchewan Wheat Pool (watch the blog site for an upcoming entry on SWP).
Many of the co-operatives were affected by classic co-op problems, including:
· lack of capital -- co-ops often cannot not raise, from their members, the funds required to expand operations
· property right problems -- without clear ownership, co-op members do not have an incentive to provide capital or to exercise control
· portfolio problems -- members were reluctant to put all their investment capital in their co-op, particularly when its fortunes rise and fall with that of their farm operation.
Another key driver for the structural change in many of the co-operatives was the so-called "industrialization of agriculture". The need to move their business further away from the farm gate and into processing and marketing requires capital that co-ops typically do not have; the transition to an IOF means access to capital that can be used for growth and expansion. As some of the co-ops found out (a good example is SWP), gaining access to capital can create another problem -- overspending and unmanageable debt.
In other instances, the role of the agricultural co-op appears to be no longer required. Co-ops often formed initially to provide competitive pressure in strongly oligopolistic markets. Over time, however, markets have evolved with changes in technology, consumer preferences, and policy reform. In this evolution, some agricultural co-ops became just another player in an increasingly competitive world market competing for member patronage (market share). As the co-ops took on new strategies for growth and expansion, they reached a point where maximizing earnings replaced co-op principles and the co-op began to operate like an IOF.
Adding to the dynamics of market evolution is the evolution
of the individuals that own and operate the co-ops. While market forces and
co-op structure certainly played a large role in the massive restructurings that
took place, the members also had an impact. In some cases it was their
commitment to the co-op that lapsed, while in other cases the members simply
failed to carry out due diligence. In other cases it appears that the members -- and the boards they elected -- may not have had the tools and perspective to
oversee the increasingly complex and capital intensive operations that were
increasingly becoming the norm.
To read the ebook Cooperative
Conversions, Failures and Restructurings or to purchase a paperback copy of the
book, visit: http://www.kis.usask.ca/CoopBook.html
This blog entry was authored by Murray Fulton and Kathy Larson. To read additional Illative Blog entries or to leave comments on this entry, please visit www.illativeblog.ca. The Illative Blog is an initiative by the Knowledge Impact in Society (KIS) Project based out of the University of Saskatchewan. Email correspondence can be sent to kis.project@usask.ca
