Reprinted with the permission of Mr. Root and High Plains Journal, www.hpj.com 

Is Farmland-ADM venture best for members?

Editorial by Ken Root

The recent agreement between Farmland Industries and Archer Daniels Midland to form a partnership and allow ADM to manage all Farmland grain elevators has renewed the complaint that cooperatives are not working in the best interests of their members.

A cooperative, by definition, is created to provide competition in the marketplace and serve its members needs. The Capper-Volstead Act gave farmers the means to form competitive business entities, in order to buy inputs at lower prices and to sell outputs for higher prices. How can a decision by a co-op, to limit competition by partnering with a competitor, serve its members?

I contend that a co-op entering into a partnership that limits competition is a violation of the basis for its existence. If Farmland Industries grain division and ADM compete in any marketplace, local or national, then their arrangement does not serve the interests of the cooperative's members.

Even though Farmland is a cooperative, it operates like a corporation. It sees itself in peril, because it has a high debt load and recent quarterly earnings statements show that it is not financially healthy. If it were a corporation, then selling off a portion of its assets to reduce debt makes sense, even finding an income stream by establishing a partnership is a good decision, but Farmland is not a corporation and its mission is to serve its members, not itself. It is interesting how a number of cooperatives have taken the word "co-op" out of their name. Is it a part of the mindset to be "corporate," or is there some other reason to blur the line between them and other businesses?

An organization founded and voluntarily funded by farmers usually remains on the verge of bankruptcy. That is because farmers demand more services than their contributions will support. When a cooperative takes a major step to save itself, and insulate its operations from its member's goals, then we have to question whether the members still are in charge.

The private sector condemns the cooperative system, because it functions differently than a proprietorship or corporation and has a different tax structure. The local farm supply dealer says the co-op doesn't have to make a profit, so it can undercut him on price. The independent dealer compensates by offering less bureaucratic service than the co-op, cuts his margins or adopts new technology to keep customers. This is the way the system is designed to work. A farmer should have no loyalty to the cooperative, other than the awareness that he would pay higher prices if it weren't there. Pricing things on both sides of the street is good business and pledging allegiance to buy only from a cooperative is baloney.

There should be no shame in a cooperative losing money from its operations, if it is making money for its members. Even if a co-op has to retrench, it should keep its members well being as its primary goal. Regrettably, there is a 30-year trend toward co-ops becoming corporations, in the way they function. The regional co-ops have grown immensely and now are the size of the largest companies. They attempt to control the local co-ops that own them by blocking compliant locals from going outside the system to secure lower input prices or greater bargaining power.

Local cooperatives have merged aggressively and tried to put other retailers out of business. This may look like a good business practice, but it is counterproductive, because a business without competition begins to get "fat" and keep its prices artificially high to justify higher salaries, new construction or more employees. Some critics compare the cooperative system to communism. There are some parallels: Both work best when all members are equal. Both fail when power and privilege distort them.

I believe that professional management of a cooperative is essential, but beware of its downside. A co-op manager must be accountable to the board of directors and they have to keep their oversight honest and their objectives clearly defined. The tendency is for the manager to gain power and bring in a board that gets favorable treatment and unwittingly approves his decisions, even when they aren't in the best interest of the member owners.

There are a lot of critics of Farmland's decision right now, but there are few who will attempt to re-establish control of their cooperative? It is simple to start and very difficult to finish. You have to run for the board, get elected, determine the financial shape of the entity, reset the goals of the co-op and make sure that management carries them out. You can't complain from the sidelines and get anything accomplished.

A small farmer has a greater need to keep a cooperative in business than a large one. Both must use all advantages wisely. Cooperatives give a great advantage to farmers who wish to form their own buying and marketing groups, but it is being given away by farmers who are not staying in control of the system developed to serve them.

(Comments to Ken Root, regarding his commentary, may be sent to him at AgriTalk, 634 Hall of Fame Drive, Bonner Springs, KS 66012, faxed to 913-489-4051, or e mailed to [email protected] .)

Editor's note: Mr. Root's commentary is his and may or may not represent the views of this publication

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