When do
Cooperatives Work?
Joan Fulton
Department of Agricultural Economics
Purdue University
Why Cooperatives Form
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Market Failure
Benefit from Economies of Size
Capture Profits from Another Level
Desire to be part of the Food Chain
Gain from Coordination
Why Cooperatives Form
• Overcome Imbalance of Market
Power
• Competitive Yardstick
• Provide Missing Services
• Assure Supplies or Markets
• Benefit from Risk Reduction
Why Cooperatives Form
• Intrinsic Value of Ownership
• Social Issues
• Rural and Community Development
Challenges
• Growth
– Is Cooperative Growth Constrained?
• Financing
– Lack of Outside Equity
– Challenges if you allow for Outside Equity
• Equity Redemption
• Employees/Management
– Incentives
– No opportunities for Stock Options
Challenges
• Slow Decision Making
• Inability/Unwillingness to Pay Competitive
Salary for Management and Employees
• Equal vs. Equitable Treatment of Members
• Mix of Goods and Services to Offer
• Member Commitment
• Free Riders
When Cooperatives Don’t Work
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Unfavorable Market Conditions
Poor Management
Inadequate Financing
Inefficient Operations
Not Progressive
Don’t Deliver Value
Lack of Member Commitment
Free Riders
Keys to Cooperative Success
• Economic Need Exists
• Efficient Operation
– Organizational
– Operational
• Dealing with Equity Redemption
• Must be as Good as the Competition
– Competition is Broadly Defined
Keys to Cooperative Success
• Member Commitment and the Free
Rider Problem
– Long Term Delivery Contracts (NGCs)
– Establish and Maintain a Culture of Strong
Member Commitment
– Establish a “Common Property” not and
“Open Access” Environment
– Members Know and Appreciate Value of
Cooperative