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Dissecting Co-Operatives’ Demise

With several large agriculture co-ops facing the same issues at roughly the same time frame, one has to ask – are these isolated events or are they part of some larger pattern?

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. 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 co-ops were not alone. Other Prairie agricultural co-ops (Dairyworld, Lilydale) and several U. S. co-ops also faced bankruptcy or converted to investor-owned firms during the same period.

The underlying financial pressures included mounting debt loads, fierce new competition, need for new 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.

CO-OP STORIES

Were these isolated events or 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 Knowledge in Society (KIS) project approached researchers throughout Canada and the U. S. to build upon their existing research on restructured agricultural co-operatives. The result is a book titled Co-operative Conversions, Failures and Restructurings featuring 13 research cases by 22 researchers.

The stories provide several 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.

Many of the co-operatives were affected by classic co-op problems, including:

Lack of capital: co-ops often cannot 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.”

TRANSITION

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. Converting 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 competition against dominant players. Markets have since evolved with changes in technology, consumer preferences, and policy reform. Some agricultural co-ops became just another player in an increasingly competitive world market. As the co-ops took on new strategies for growth, they reached a point where maximizing earnings replaced co-op principles and the co-op began to operate like an IOF.

While market forces and co-op structure certainly played a large role in the massive restructurings, the members also had an impact.

In some cases it was their commitment to the co-op that lapsed, while in others 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 Co-operative Conversions, Failures and Restructurings or to purchase a paperback copy of the book, visit www.kis.usask.ca/CoopBook.html.

From the Illative Blog, an initiative by the Knowledge

Impact in Society (KIS) Project based at the University of Saskatchewan

www.illativeblog.ca

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