To Co-operate or not

by Allan Nation

There are two basic kinds of farm co-operatives.

One is the buying co-operative whereby farmers pool their orders in order to secure volume discounts and lower freight rates. This form of co-op originally known as a “boxcar co-op” has been very successful.

The reason it is successful is that it requires no particular expertise to buy something. In the original “boxcar co-op,” the County Agent held the farmers’ money and then paid for the product and the freight. What could be simpler?

The enabling legislation allowing for farm co-operatives envisioned them as being temporary short-lived entities.

The other type of co-operative is the marketing co-op.

In this type of co-op farmers hire someone to market their production in order to get a higher than commodity price.

This form of co-op has been as spectacularly unsuccessful as the first form has been successful.

This is because a marketing co-op is as complex as a buying co-op is simple.

Perhaps, the biggest reason for the general failure of marketing co-ops is that they are predicated on an unworkable business model.

Producers form marketing co-ops because they want a higher price for their production. This higher price to the producer is the primary “profit” goal of the co-op. However, this flies in the face of economic reality.

No real business has as its primary goal to pay a premium price for its production inputs.

True businesses are structured to maximize the return to their owners’ capital. This means it will always try to pay as low a price for its inputs as competitively possible.

While farmers and ranchers often feel victimized by this, they do exactly the same thing to their own input suppliers.

The previously mentioned “boxcar co-op” was not formed to maximize payments to the farm supplier but to minimize them.

Because maximizing the sales price of their production is their primary goal, there is no loyalty to the co-op if it cannot pay a premium price over the commodity market.

This is known as the “incentive trap.”

If supply loyalty is solely dependent upon price, the producer can demand an ever higher price or refuse to sell.

Consider the power difference between being a producer with a steer gaining two pounds a day on grass and a co-operative abattoir with a dozen highly paid people needing something to do.

This is why true businesses rely upon contract or their own production for a good portion of their daily input needs. They cannot count on producers being willing to sell when they need them to sell in order to maintain plant and marketing chain throughput.

However, a “captive supply” is considered a terrible idea by producers who want to retain the freedom to market for the highest price possible.

In other words, they want the co-op to be there when they need it but want to be able to ignore it if they can get a better price elsewhere.

As a result of this lack of guaranteed supply, co-ops tend to form during periods of low commodity prices and quickly go out of business during periods of high commodity prices.

THE NEED FOR A DICTATOR

Another basic problem is that new co-ops tend to be formed around democratic ideals whereby everyone’s input is considered equally important.

If the management maxim is to do nothing until we all agree, nothing will get done.

Successful businesses are always dictatorships. Hopefully, benevolent dictatorships, but dictatorships nevertheless.

This means everyone in a business must submit and follow one person’s vision. As the saying goes, “All institutions are the lengthened shadow of one man.”

Being independent folks, farmers and ranchers have a real problem with this.

As my Dad said, “There is no problem with the lack of leadership in farming and ranching. The problem is in the lack of followership.”

Another problem is the basic psychological conflict between producers and marketers.

As I said earlier, a buying co-op does not require a lot of specialized skill. A selling co-op does.

People who are skilled in selling tend to be short-term, results-oriented individuals who are highly motivated by money.

Such people inevitably grate on the nerves of production-oriented people.

Producers get a lot of satisfaction from doing of the job whether it pays well or not. Sales people don’t sell for the fun of it.

SELLING IS HARD WORK

Selling is devilishly hard work and hard on the ego due to the frequent rejection. The only people who think selling is easy are people who have never done it.

For a sales person to keep his enthusiasm up, there has to be a short time period between action and result. The result here being a commission check.

If the co-op is offering credit to its customers, the sales person will typically be paid his commission 30 to 60 days before the co-op collects its money for the sale. This results in the co-op running a negative cash flow.

The more successful the salesman is the more money the co-op members have to cough up just to pay the sales person.

The sales person does not see this negative cash flow as his problem. He thinks he is doing his job and doing it well. With a good salesman, it’s peddle to the metal 24/7 and the sky is the only limit to growth.

Negative cash flow is not the only problem a good salesman creates.

Because sales people typically don’t understand the many nuances involved in production, they can’t comprehend the stress a rapid growth creates for producers.

A biological process just cannot be ramped up as fast as a good salesman can sell. This creates a high agitated sales person who seems to always be badgering and belittling the producers. He is doing his job. Why can’t they do theirs?

Also, good sales people reflect the values and manners of the people they sell to. This means they tend to be more urban in their dress, manners and attitudes than the producers they work for. Again, this is a source of conflict.

It could be said that producers are from Mars and marketers are from Venus. They seldom gee and haw together well. In a true business, a big part of management’s job is making sure that good sales people don’t bankrupt the company by growing it too fast.

However, in most small farm co-ops, there is no one performing this very necessary task of reigning in the sales people for the good of the whole.

In fact, quite often in new small co-ops the sales people are given the job of management as well by the co-op members. This invariably sets the co-op up to fail.

Because few farmers and ranchers understand that a successful company typically generates a negative cash flow in its early stages, they are ready to cut and run at the first request for more capital and write the co-op off as a failure.

If a farm marketing co-op survives all of these startup problems and becomes somewhat successful it will face its biggest challenge of all.

SUCCESS IS HAZARDOUS

It is extremely dangerous to make more money than your boss.

As we previously pointed out, in a business, management’s job is to ride herd on the sales force. It is also management’s job to protect the sales force from the envy of the producers.

Sales people typically make a lot more money than the producers and this really sticks in a lot of peoples’ craw.

While they don’t personally want to sell, they don’t want to see sales people make a lot of money selling either. Again, this is because they have no idea of how hard it is.

As a result, unless protected by a benevolent dictator, a lot of good sales people will get fired for the sole sin of being too successful.

In conclusion, co-operative efforts start with the best of intentions but often ignore basic business realities.

The more simple a co-op idea is, the fewer the people involved and the less long-term commitment it requires on the part of its members, the greater the chance is that it will succeed.

If a co-op needs a complex business plan, highly specialized skills and permanent management, it probably should be structured as a for-profit business and not a co-op.

© by The Stockman Grass Farmer

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